Research and analysis

Quarterly survey for Q2 (July to September) 2022 to 2023 - summary

Published 24 November 2022

Applies to England

Introduction

1 - This quarterly survey report is based on regulatory returns from 205 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 2022 to 30 September 2022.

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 - Figures have been rounded to the nearest £billion to one decimal place. This can result in rounding differences in totals and percentages as the individual returns are denominated in £000s.

Summary

Liquidity

Refinancing at lowest level in six years – Short term aggregate liquidity remains sufficient

• £119.7 billion total facilities in place at the end of September, up slightly from £119.3 billion in June.
• New finance of £1.4 billion agreed in the quarter; the lowest amount in six years. 58% of new facilities were from capital markets.
• Loan repayments of £0.8 billion made during the quarter, compared to an average of £1.1 billion per quarter over the last 12 months.
• Total cash and undrawn facilities total £34.9 billion; sufficient to cover forecast expenditure on interest costs (£3.7 billion), loan repayments (£2.7 billion) and net development (£15.3 billion) for the next year.
• Swap market volatility results in a large reduction in mark-to-market (MTM) exposure on derivatives, down from £0.9 billion to £0.2 billion. This is the lowest MTM exposure recorded since the data has been collected.

Performance in the quarter

A further reduction in 12-month cash interest cover – Capitalised major repairs below forecast – Current tenant arrears deteriorated

• £581 million capitalised major repairs expenditure in the quarter; 27% below forecast, but 15% higher than previous quarter.
• Expenditure on non-capital repairs and maintenance amounts to £1.0 billion during the quarter. This brings total repairs and maintenance spend in the quarter to £1.6 billion.
• 62% of providers experience delays to repairs and maintenance programmes during the quarter - material and labour shortages alongside cost increases having a major impact.
• Aggregate interest cover (excluding all sales) for the year to September 2022 was 111%. Forecast interest cover over the next year to September 2023 is 92%. Both the outturn and forecast 12-month figures are the lowest reported since we started collecting cashflow data in the QS.
• The anticipated reduction is due to increases in projected spend on capitalised repairs and maintenance of £1.0 billion and increases in interest payable amounts of £0.4 billion.
• Income collection indicators consistent with previous performance and seasonal trends. Current tenant arrears have increased partly due to the cost-of-living crisis and void losses remain above long-term averages.

Investement in new and existing stock

12-month development and major repairs spend forecasts remain high as delayed works are reprofiled into future periods

Outturn development expenditure below forecasts for committed schemes - Unit completions fall during the quarter

• Capitalised repairs and maintenance expenditure was £2.4 billion in the 12 months to September 2022. Expenditure forecast to reach £3.4 billion over the next 12 months.
• £3.0 billion invested in new housing properties in the quarter; 15% below forecasts for contractually committed schemes.
• Development schemes continue to be delayed due to labour and material shortages, as well as contractor insolvencies.
• Market sale completions fall 35% compared to the previous quarter. AHO completions reduce by 5%.
• Development expenditure forecast to reach £17.3 billion over the next 12 months, of which £11.4 billion is committed.
• Uncertainty over the 2023 rent settlement and wider economic conditions has led to some providers pausing or reviewing uncommitted development.
• 18-month pipeline for AHO units stands at 36,414 units and 9,961 units for market sales.

Sales

Unit sales exceed completions during the quarter – this results in a reduction in the number of unsold AHO and market sale properties

• AHO sales total 4,345 units (June: 3,759), and market sales total 1,313 units (June: 1,495).
• Total unsold AHO units reduce by 8%, and unsold market sale units reduce by 26%. Unsold market sale units reach their lowest level since June 2016.
• Margins on AHO sales are 19.6% in the quarter (June: 20.3%). Market sale achieved margins of 14.5% (June: 12.7%).
• Current asset sales total £1.1 billion; 11% below forecast. Market sales in line with averages over the last three years. At £562 million, AHO sales are the highest ever recorded.
• Fixed asset sales totalled £0.6bn. Bulk disposals to other organisations amounted to just £0.1 billion of this; the majority relates to staircasing and Right to Buy / Acquire sales.
• Fixed asset sale forecasts continue to increase; a total of £4.1 billion worth of sales forecast for the next 12 months, including £2.3 billion bulk sales.

Operating environment

5 - The quarter to September 2022 has been a challenging and turbulent period for PRPs, with inflationary pressures and economic uncertainty continuing to affect the housing sector. Changes in Government have led to the announcement, and reversal, of new fiscal policies, and assumptions that were included in business plans at the start of the year are now being reviewed. Uncertainty has continued after the quarter-end, resulting in the outlook for the UK Government and Bank of England’s credit ratings being changed from stable to negative [^1].

6 - Reported gross domestic product is estimated to have fallen by 0.6% in September, following a reduction of 0.1% in August. On a quarterly basis, GDP fell by 0.2% in the three months to September and is now estimated to be 0.2% below the pre-coronavirus levels recorded in February 2020 [^2].

7 - Latest forecasts from the International Monetary Fund estimate that UK GDP will grow by 3.6% in 2022, an increase of 0.4 percentage points since the previous forecast was issued in July. For 2023, GDP is now expected to increase by 0.3% compared to the previous estimate of 0.5% [^3].

8 - Overall inflation, as measured by the Consumer Prices Index (CPI), increased to 10.1% in the 12 months to September 2022 [^4]. On a monthly basis, CPI increased by 0.5% in September. The Bank of England has forecast inflation to reach around 11% in the final three months of this year before starting to fall in early 2023 [^5], and the latest inflation figures for the 12 months to October show that this level has already been reached, with CPI increasing to 11.1%.

9 - Under the 2019 rent settlement, September CPI would usually determine the maximum permitted rent increase that PRPs can apply from the following April. However, in response to the exceptional inflation levels being experienced, the Government ran a consultation on social housing rents which proposed a ceiling on the maximum increase that could be applied. Without this, rents could potentially have been increased by up to 11.1% from April 2023, adding considerable pressure to tenants’ finances.

10 - On 17 November the Government announced that the maximum permissible rent increase for existing tenants will be limited to 7% between 1 April 2023 and 31 March 2024. This will apply to general needs Social Rent and Affordable Rent homes but will exclude supported housing. It should be noted that the cashflow forecasts included within this report were made before the announcement of this revised rent policy.

11 - In a bid to alleviate rising inflation, further increases in interest rates were announced by the Bank of England during the quarter. Base rate rose from 1.25% to 1.75% on 4 August, and then to 2.25% on 22 September. Post quarter-end, a further increase to 3.00% was announced in November [^6]. Mortgage interest rates have been increasing in response to base rate changes, with the cost of a typical 5-year mortgage increasing from 1.59% at the start of the year to 3.96% at the end of September [^7].

12 - In response to rising energy costs, the Government has introduced a number of measures to support households, including a cap on the unit price payable for electricity and gas. The new Energy Price Guarantee [^8] will limit costs for an average household at £2,500 per year, compared to the £3,550 that would have been payable under the previous Ofgem price cap. This came into force on 1 October 2022 and will last for an initial period of six months. A similar support scheme for businesses will also be in place. The Energy Price Guarantee is expected to have a significant impact on inflation, reducing it by around 3 to 4 percentage points over the course of 2023 [^9].

13 - Construction output grew by 0.6% in the quarter to September 2022. This was driven by growth in new works of 2.4%, offset by a reduction in repairs and maintenance works of 2.2%. Total construction output in September was the highest level recorded since records began in January 2010 [^10].

14 - Prices in the construction industry are estimated to have increased by 10.1% in the year to September 2022. The overall increase includes growth in the price of new works of 11.8%, and in repairs and maintenance works of 6.8% [^11].

15 - House prices in England increased by 9.6% in the year to September 2022, reaching an average of £314,278 [^12]. The largest annual increase was recorded in the South West (11.9%), and the smallest was in the North East (5.8%). However, with recent increases in mortgage rates, house prices are predicted to fall by around 8% next year [^13].

16 - The unemployment rate for the quarter to September 2022 decreased by 0.2 percentage points, to reach 3.6% [^14]. The number of job vacancies in July to September stood at 1,246,000; a decrease of 3.6% from the previous quarter [^15], with estimates of the number of payrolled employees in September 2022 reaching a record 29.7 million [^16]. The total number of people claiming Universal Credit in England was around 5.0 million in September, compared to 4.9 million in June [^17].

17 - As risks begin to crystallise within the operating environment, providers will have reduced financial flexibility to respond to further challenges. This increasing pressure on sector finances is reflected in financial viability judgements recently published by the regulator. Providers are expected to closely monitor and update forecasts to reflect ongoing inflationary and interest-rate risks, along with the potential for increasing arrears as cost-of-living pressures impact upon tenants. Providers must be able to identify areas where covenant headroom or liquidity may be restricted, and ensure that contingency plans and mitigations remain robust.