Research and analysis

Quarterly survey for Q1 (April to June) 2019 to 2020 - Summary

Published 12 September 2019

Applies to England

Introduction

This quarterly survey report is based on regulatory returns from 218 private registered providers and PRP groups who own or manage more than 1,000 homes.

The survey provides a regular source of information regarding the financial health of PRPs, in particular with regard to their liquidity position. The quarterly survey returns summarised in this report cover the period from 1 April 2019 to 30 June 2019.

The Regulator reviews each PRP’s quarterly survey. It considers a range of indicators and follows up with PRP staff in all cases where a risk to the 12-month liquidity position is identified. We have assurance that all respondents are taking appropriate action to secure sufficient funding well in advance of need.

Summary

The quarterly survey findings are:

The sector remains financially strong with access to sufficient finance:

• £20.4 billion of undrawn facilities are in place. Debt facilities total over £97 billion.
• Cash balances total £5.3 billion; this is forecast to reduce in the next 12 months to £3.4 billion as cash is used to fund planned capital expenditure.
• New finance of £1.4 billion was agreed in the quarter, including £1.2 billion from banks and £0.2 billion from capital markets.
• Loan repayments of £0.7 billion were made in the quarter.

Performance in the quarter indicates that the operating environment was challenging in some respects, reflecting wider economic uncertainties particularly around Brexit. However, this has not destabilised the sector’s overall strong financial position:

• Cash interest cover, excluding current asset sales, was 107% in the quarter to June 2019 against a forecast of 126%. The shortfall is due to an increase in working capital requirements in quarter 1. This seasonal effect has been observed in previous years. Interest cover is forecast to improve to 134% over the next 12 months.
• Including both current and fixed asset sales, total sale receipts were £1.1 billion in the quarter, generating surpluses of £0.3 billion. However, current asset sales receipts were more than 40% below forecast at £0.7 billion.
• Investment in housing supply was £3.1 billion in the quarter to June 2019; slightly lower than the March forecast contractually committed spend for the quarter of £3.3 billion.
• During the quarter 3,275 Affordable Home Ownership units were developed and 3,218 units were sold. There was a 2% increase in the number of unsold units to reach 7,031 at the end of June; the highest level in ten years. Half of the unsold AHO units were held by 17 providers.
• During the quarter there was a 56% increase in the number of AHO units unsold for more than six months, which reached 2,133 at the end of June.
• During the quarter 1,193 market sale units were developed and 1,015 were sold. The number of unsold properties increased by 7% to 2,073, the highest level recorded since the data was first collected in June 2014. The number of properties unsold for more than six months reduced by 13% to 554. Over half of the total unsold market sale units are held by six providers.
• The number of AHO and market sale completions, and the increase in the number of unsold units, reflects an overall trend of increased development activity. Total completions, under these tenures, during the quarter were 17% higher than the corresponding quarter of the previous year.
• The sector’s spending on capitalised major repairs in the quarter was around £400m, 20% below forecast. The main reasons for this variance relate to delays in starting new contracts for works and to the re-profiling of programmed works. Quarterly variances in cashflows are to be expected in large programmes of major repair works.
• Providers making use of free-standing derivatives reported mark-to-market exposure of £2.3 billion, a 3% increase since March reflecting a decrease in swap rates at the quarter end. In aggregate providers continue to have headroom on available collateral on MTM exposures.
• Income collection data continues to show a stable performance consistent with seasonal trends.

Forecasts for the next 12 months indicate that the sector is planning to increase its development and housing market exposure, supported by drawing additional debt. There is some flexibility in these plans:

• In the 12 months to June 2020 the sector is forecasting £5.4 billion worth of current asset sales and £1.7 billion of fixed asset sales. By comparison, in the 12 months to June 2019 current asset sales were £3.2 billion and fixed asset sales were £1.8 billion. Net debt is forecast to increase by £4.7 billion.
• Over the 12-month forecast period expected investment in new housing supply is £16.1 billion, of which £11.2 billion is contractually committed. In the 12 months to June 2019 total investment in new supply was £12.1 billion.
• Development of for-sale properties (both AHO and market sale) is forecast to continue to increase. In the next 18 months, including committed and uncommitted development, plans include the completion of 32,936 AHO units and 13,165 market sale properties. This compares to 22,053 AHO units and 7,429 market sale properties developed in the last 18 months.

Regulatory expectations

PRPs are expected to manage their resources effectively to ensure that their viability is maintained, particularly during a period of significant uncertainty. The Regulator continues to follow up cases where financial indicators such as interest cover are weaker to ensure that PRPs are managing their risks effectively. The Regulator also continues to monitor developments in the housing market closely and engage with providers with significant exposures to market and AHO sales. PRP boards should be aware of the flexibility in their plans, and deploy it as necessary if the operating environment deteriorates.

Before contractually committing to development spending, the Regulator expects PRP boards to: carefully consider market conditions; model cashflows and viability impacts under a range of economic assumptions; and ensure that access to any external finance required is in place. This is particularly important where housing market exposure is involved. The Regulator expects providers to have contingency plans in place for market and AHO sales falling short of forecasts.

The Regulator also expects PRP boards to ensure that its properties are in a good state of repair and meet all applicable statutory health and safety requirements.

Operating environment

The housing market is currently challenging in some parts of the country, including reductions in house prices. Inflation and construction costs remain relatively stable.

Key metrics for the period covered include the following:

• The average house price in England (ONS) increased by 0.7% in the year to June 2019. Along with the annual increase to May which also stood at 0.7%, this is the lowest annual increase to have been experienced since 2012. The greatest level of growth was in the East Midlands, where prices increased by 3.2% over the year. London experienced the lowest annual growth, with prices falling 2.7% over the year. There were also reductions in annual prices in the South East of 0.6%, and in the South West of 0.2%.
• The Consumer Prices Index (ONS) rose by 2.0% in the year to June 2019 (year to March 2019: 1.9%). Forecasters currently predict that inflation will be at 1.8% for the year ending December 2019 and 2.1% for the year ending December 2020 (HM Treasury).
• Construction Output Price Index figures (ONS) for all construction showed that costs increased by 3.0% in the year to June 2019.

The survey results demonstrate that the sector is in a strong position in terms of liquidity, and has sufficient cash and undrawn facilities to respond to further changes and challenges within the wider economic environment.

Some of the results for this quarter in respect of sales of newly developed housing stock are indicative of challenging conditions in which to operate the cross-subsidy model of development. This is where profits generated from developing homes for sale are used to subsidise development of social tenures. While forecasts show that the sector intends to pursue the cross-subsidy model at an increased scale in the next 12 to 18 months, there is flexibility within forecast spending commitments.

The key risks faced by the sector are considered in the Sector Risk Profile published annually by the Regulator. The Regulator will continue to monitor key market trends and to seek assurance that boards of PRPs are actively engaged in responding to emerging risks.