Research and analysis

Quarterly survey for Q2 (July to September) 2020 - Summary

Published 1 December 2020

Applies to England

Introduction

1 - This quarterly survey report is based on regulatory returns from 214 private registered providers and PRP groups who own or manage more than 1,000 homes.

2 - 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 July 2020 to 30 September 2020.

3 - The regulator continues to review each PRP’s quarterly survey. It considers a range of indicators and follows up with PRP staff in 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.

4 - Since the staged easing of lockdown measures which occurred between May and July, the Prime Minister announced in October a new three-tier lockdown system for England with different parts of the country split into three coronavirus alert categories. A second national lockdown came into force between 5 November and 2 December.

Summary

5 - The position reported at the end of the quarter showed that the sector remains financially strong with access to sufficient finance:

• Debt facilities of £111.3 billion were in place at the end of September, of which £28.0 billion was undrawn. At the end of June undrawn facilities were £24.8 billion.

• Available cash balances increased by £0.3 billion during the quarter to reach £6.7 billion at the end of September.

• New finance of £4.5 billion was agreed in the quarter, including £3.7 billion from capital markets and £0.8 billion from banks.

• Mark-to-market exposure has decreased slightly since June, reflecting an increase in swap rates. In aggregate, providers with free-standing derivatives continue to have headroom available.

6 - Performance in the quarter continues to reflect some of the challenges arising from the coronavirus pandemic. However, this has not destabilised the sector’s overall strong financial position:

• Cash interest cover, excluding current asset sales, was 183% in the quarter to September 2020 compared to a forecast of 123%.

• The improvement in interest cover was largely a result of capitalised repairs and maintenance expenditure being £190 million (39%) below forecast.

• Expenditure on capitalised repairs and maintenance in the quarter amounted to £299 million (June 2020: £243 million, September 2019: £458 million).

• Investment in housing supply was £2.4 billion in the quarter to September 2020, an increase of 30% from the previous quarter, but 18% lower than in the same quarter of the previous year. Expenditure on development was below both the total forecast for the quarter of £3.3 billion, and also the £2.6 billion forecast for contractually committed schemes.

• Including both current and fixed asset sales, total sale receipts were £1.4 billion in the quarter, generating surpluses of £0.3 billion. In aggregate, asset sale receipts were 24% above the forecast made in June, reflecting the uncertainty felt by providers when producing forecasts.

• During the quarter 3,652 affordable home ownership units were developed, and 3,823 were sold. This compares to the 1,663 units developed and 1,963 sales in the previous quarter. The total number of unsold units reduced by 3%, to reach 7,676 at the end of September.

• AHO units unsold for more than six months increased by 15% during the quarter, reaching 3,973 at the end of September. This is the highest number recorded since the data was first collected in 2009.

• Margins on AHO sales averaged 19.3% in the quarter, slightly higher than the margin of 18.3% achieved in the quarter to June, but below the three-year average of 24.5%.

• During the quarter 1,005 market sale units were developed, and 1,461 were sold. The number of units completed was almost three times higher than in the previous quarter, but still below the levels seen immediately before the coronavirus pandemic.

• The high volume of market sales achieved during the quarter has resulted in the number of unsold units decreasing by 17% to 2,344, and the number of units unsold for over six months decreasing by 4% to 1,460.

• Of the unsold market sale stock at the end of the quarter, 62% had been unsold for over six months; the highest proportion recorded since the data was first collected in 2014.

• Mean arrears, void rent loss and rent collection rates improved slightly in the quarter. All three income collection indicators remain at levels not previously seen since data was first collected in 2013.

7 - Forecasts for the next 12 months indicate that performance and plans are beginning to return towards levels seen before the coronavirus pandemic.

• Over the 12-month forecast period, expected investment in new housing supply is forecast to be £16.6 billion, of which £10.9 billion is contractually committed.

This is an increase of 7% on the £15.5 billion investment included in 12 month forecasts in the June QS.

It is just 2% less than the £16.9 billion included in 12 month forecasts in the December 19 QS (pre-COVID-19).

Current 12 month forecast committed expenditure is greater than the £10.6 billion invested in new supply in the 12 months to September 2020.

• For the 12 months to September 2021, the sector was forecasting £4.6 billion of current asset sales and £1.7 billion of fixed asset sales.

This is an increase of 10% on the £4.2 billion of current asset sales included in 12 month forecasts made in the June QS.

12 month forecast current asset sales are some way below the £5.4 billion forecast in the December 2019 QS (pre-COVID-19).

12 month forecast current asset sale receipts are greater than the £3.4 billion reported in the 12 months to September 2020.

• In the next 18 months, including committed and uncommitted development, providers are forecasting the completion of 35,221 AHO units (June: 33,230) and 11,406 market sale properties (June: 10,390).

• Pipeline AHO units are at their highest level ever reported, having now exceeded the numbers being forecast before the coronavirus pandemic.

• For the 12 months to September 2021 the sector was forecasting capitalised repairs and maintenance expenditure of £2.5 billion.

This is an increase of 7% on the £2.3 billion included in 12 month forecasts made in June QS.

12 month forecast capitalised major repair spend is in line with the £2.4 billion included in the December 2019 QS (pre-COVID-19).

In the 12 months to September 2020, capitalised expenditure on repairs and maintenance was £1.6 billion.

Operating environment

8 - In response to the coronavirus pandemic, the UK was put into lockdown on 23 March. An initial easing of restrictions was affected from May, with further easing in June and July. From September onwards infections began to rise again, introducing local lockdowns in high risk areas. In October the Prime Minister announced a new three-tier lockdown system for England with different parts of the country split into three coronavirus alert categories. A second national lockdown came into force on 5 November which will last for four weeks. However, these announcements were made subsequent to providers submitting returns at the end of September, therefore the implications will not be reflected in the forecast.

9 - Gross domestic product rose by 1.1% during September 2020 but was still 8.2% below February 2020 levels. Although September saw the fifth consecutive month of growth, the rate of recovery has slowed each month since the largest rise of 9.1% in June 2020. The International Monetary Fund has revised its forecast for global economic growth in 2020 from the increase of 3.3% that was expected in January 2020, to a contraction of 4.4% in October.

10 - In light of the expected economic impact of coronavirus, the Bank of England reduced interest rates to 0.25% on 11 March. In a further emergency response this was reduced for a second time on 19 March to 0.10%, where it currently remains.

11 - Following a record monthly growth in construction output of 21.8% in June, output has gradually slowed over the quarter, growing by just 2.9% in September, where it remained 7.3% below the February 2020 level. The continued restrictions and social distancing measures has meant the capacity and level of work of construction sites remains below pre-coronavirus levels.

12 - In a bid to boost the housing market the Chancellor announced a temporary rise in the Stamp Duty threshold, effective from 8 July. This led to an increase in UK average house prices of 4.7% over the year to September, up from 3.0% in August.

13 - Overall inflation, as measured by the Consumer Prices Index, increased by 0.5% in the 12 months to September 2020, down from 0.6% recorded in June last quarter. This indicates that providers may apply rent increases up to 1.5% in 2021/22. CPI rose by 0.4% between August and September 2020 compared with a rise of 0.1% in the same period of 2019.

14 - Estimates from the Office for National Statistics suggest that the number of pay rolled employees in the UK reduced by around 673,000 in the period between March and September 2020, with the claimant count increasing by nearly 121% in the same period. From July to September, around 1.62 million people were unemployed, 318,000 more than a year earlier. Redundancies reached a record high of 314,000, an increase of 73% from previous quarter.

15 - The Coronavirus Job Retention Scheme, which allows employers to claim grant to cover the salary costs of furloughed workers, was expected to end on 31 October 2020, however this has now been extended until 31 March 2021 with claimants receiving 80% of their usual salary for hours not worked. The government will review the policy in January 2021 to decide whether economic circumstances have improved enough for employers to contribute more. Latest forecasts from the Bank of England suggest that unemployment will peak at around 7.75% in quarter two of 2021.

16 - There continues to be material uncertainty over the future course of the coronavirus pandemic and the economic conditions that will follow. The second wave of the virus is currently evolving, prompting the second national lockdown, with potential to be extended beyond the four weeks. Providers will need to constantly monitor performance and forecasts and be ready to react as necessary to the rapidly changing environment.

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RSH regulates private registered providers of social housing to promote a viable, efficient and well-governed social housing sector able to deliver homes that meet a range of needs.