Research and analysis

Quarterly survey for Q2 (July to September) 2023 to 2024 - Summary (accessible version)

Published 23 November 2023

Applies to England

Introduction

1 - This quarterly survey report is based on regulatory returns from 204 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 2023 to 30 September 2023.

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, or there is an increasing exposure to risks from activities carried out within non-registered entities. Further assurance may also be required on covenant compliance.

4 - From the data presented in this report it is evident that the sector is still experiencing the effects of ongoing economic challenges and is in a weaker financial position now than it has been in the recent past. Outturn and forecast investment in existing stock have continued to increase.

5 - In general, we have assurance that PRPs are taking appropriate action to manage risks as they arise, however there is increasing evidence that providers are already making choices between investment priorities and deploying mitigations such as reducing uncommitted development or obtaining loan covenant waivers. This will mean that capacity to manage further additional costs will be limited.

6 - We will continue to monitor and engage with individual providers as necessary and reflect findings in regulatory judgements where appropriate. With the passing of the Social Housing (Regulation) Act into law and subsequent increased focus on consumer issues that will follow, boards must ensure that they maintain strong and effective control over financial performance.

7 - 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

Cash balances have further reduced and remain at the lowest in over eight years. In aggregate 12-month liquidity including undrawn facilities remains robust

New finance of £2.6 billion agreed in the quarter, an increase on the £1.8 billion agreed in the previous quarter and in-line with three-year average of £2.7 billion per quarter

• Cash balances decreased from £4.6 billion to £4.4 billon in the quarter. Forecasts show this reducing further to £3.0 billion by September 2024.
• £125.3 billion total facilities in place at the end of September, up from £123.9 billion in June.
• 57% of new finance relates to new bank facilities, the majority of which related to refinancing of existing facilities and new revolving credit facilities.
• Total cash and undrawn facilities total £33.7 billion; sufficient to cover forecast expenditure on interest costs (£4.6 billion), loan repayments (£2.3 billion) and net development (£14.2 billion) for the next year.
• Loan repayments of £1.0 billion made during the quarter; back in line with the three-year average of £1.1 billion. A further £2.3 billion forecast over the next 12 months.
• Mark-to-market exposure on derivatives remains low, with current gross exposure of £0.1 billion.

Performance in the quarter

A further reduction in 12-month outturn cash interest cover which remains at historically low levels, individual providers have less financial headroom than usual and their capacity to absorb further downside risk is reduced

• £1.9 billion total repairs and maintenance spend in the quarter (previous quarter £1.8 billion); £1.2 billion relating to revenue works and £0.7 billion relating to capital works.
• Revenue repairs and maintenance works were 5% higher than forecast, and 4% higher than expenditure incurred in the previous quarter.
• 55% of providers reported delays or changes to repairs and maintenance programmes during the quarter, with almost 60% of this cohort stating increased demand in damp and mould issues, reactive works and void repairs.
• Aggregate cash interest cover (excluding all sales) for the year to September 2023 reduced to 74%, the lowest ever recorded. Interest cover for the year to September 2024 is forecast to increase slightly to 76%.
• Cash interest cover in the quarter was 87%, in line with forecast however, still remains below 100% for the fourth consecutive quarter.
• Interest payable is forecast to reach £4.4 billion over the next 12 months, compared to an actual figure of £3.7 billion over the previous 12 months.
• Income collection indicators generally following seasonal trends although rent arrears have marginally increased.

Investment in new and existing stock

12-month outturn spend on all repairs and maintenance was £7.6 billion and the 12-month forecast is £8.5 billion

Market sale and Affordable Home Ownership unit completions both below the three-year average – Market sale pipeline sees further reductions

• 12-month expenditure on capitalised repairs totalled £3.0 billion. A further £3.8 billion investment is forecast over the next 12 months - both the highest on record due to building safety and energy efficiency works.
• £3.7 billion invested in new housing properties in the quarter; slightly above the amount reported in the previous quarter but 18% below the total forecast.
• Development expenditure forecast to be £16.7 billion over the next 12 months, of which £11.5 billion is contractually committed; 12-month outturn development spend was £14.6 billion.
• Completions of both market sale (1,095 units) and AHO (4,032 units) properties are below the three-year average, but above levels achieved in the same quarter of 2022.
• Further reduction in the pipeline of market sale properties, down to 7,026 units; the lowest in over eight years. 18-month pipeline for AHO stands at 33,371 units.

Sales

Market sales remain low, leading to increases in unsold units and units unsold over six months – AHO sales return to average levels

• Market sales remain significantly below average; 785 sales achieved compared to 1,266 three-year average.
• AHO sales of 4,319 units achieved; 16% higher than the previous quarter and slightly above the three-year average.
• Total unsold market sale properties increase by 19% to reach 1,584 units, and unsold AHO units reduce by 5%.
• Units unsold for over six months increase for both AHO and market sale; AHO units increase by 10% to 2,808 (June: 2,549 units) and market sale units by 18% to reach 631 (June: 535 units).
• Margins on AHO sales reached 20.7% in the quarter (June: 19.3%). Market sale achieved margins of 16.1% (June: 14.7%).
• Current asset sales totalled £0.8 billion; 19% below forecast. Non-social housing sales income remains low at £324 million, reflecting the low levels of market sales.
• Fixed asset sales totalled £1.0 billion, including a single bulk transfer of units worth £0.5 billion.

Operating environment

8 - The quarter to September 2023 remained a challenging period for PRPs, with inflationary pressures as well as economic challenges and high expenditure requirements on both new and existing stock in the sector. Following the credit rating agency Moody’s outlook for the UK sovereign changing from negative to stable, it also increased the outlook for dozens of housing providers from negative to stable, as a result of the projected easing of inflation as well as the mitigations adopted by PRPs in the face of the challenging economic environment ^{[footnote 1]}.

9 - Overall inflation, as measured by the Consumer Prices Index, stood at 6.7% in the 12 months to September 2023 ^{[footnote 2]}. The Bank of England is forecasting inflation to fall sharply to 4.75% in Q4 of 2023, and continue to fall to reach the 2% UK target by the end of 2025 ^{[footnote 3]}. Post quarter-end, annual inflation reduced further to 4.6%, the lowest level since November 2021.

10 - In August, the Bank of England increased interest rates to 5.25%; the 14th consecutive increase since December 2021. Since then base rate has been held at the same level, although the Bank of England have reiterated that further increases may still be needed to ensure inflation returns to the 2% target ^{[footnote 4]}.

11 - The average interest rate for a typical 5-year mortgage stood at 5.23% at the end of September, increasing from 4.95% at the end of June. Rates jumped to 5.61% in October 2022 and had been reducing gradually, however since May 2023 rates started to rise again and peaked at 5.72% in July ^{[footnote 5]}. Mortgage approvals for house purchases fell to 43,300 in September from 54,700 in June ^{[footnote 6]}, markedly below the monthly average of 62,700 during 2022.

12 - Overall construction output increased by 0.1% in the quarter to September 2023 when compared to the previous quarter. The growth resulted solely from repair and maintenance works which increased by 0.7% and was partially offset by a reduction in new works of 0.3% ^{[footnote 7]}.

13 - Annual price growth in the construction industry slowed further over the quarter and is estimated to have stood at 3.9% at the end of September 2023. This includes annual increases in the prices of new works of 5.2%, and in repairs and maintenance works of 1.3%^{[footnote 8]}. Annual price growth had peaked in May 2022 at 10.4%.

14 - House prices in England fell overall by 0.5% in the year to September 2023, reaching an average of £310,000 ^{[footnote 9]} with regional variation recorded. The largest annual decrease was recorded in the South West (1.6%), whereas the North East saw with the largest annual growth (1.6%).

15 - The unemployment rate for the quarter to September remained unchanged at 4.2% ^{[footnote 10]}, and the number of job vacancies fell for the 15th consecutive period; reducing by 43,000 to reach 988,000 ^{[footnote 11]}. The total number of people claiming Universal Credit in England was over 5.3 million in September, compared to around 5.0 million in December 2022 ^{[footnote 12]}.

16 - Under the 2019 rent settlement the maximum permissible rent increase for existing tenants is determined by CPI as at the September prior to the financial year, plus 1%. Assuming there is no change to this policy, as September 2023 CPI stood at 6.7%, this will result in a maximum permissible rent increase for the financial year 1 April 2024 to 31 March 2025 of 7.7%. This applies to general needs Social Rent and Affordable Rent homes but excludes specialised supported housing.

17 - Although inflation is predicted to ease over the coming months, interest rates are likely to remain elevated, and providers must be prepared to handle further increases in interest payments and operating costs, particularly if they have previously benefitted from relatively low fixed-price contracts or debt. The challenge of balancing stock decency and remediation requirements with the need to invest in decarbonisation measures and the construction of new homes will continue, and providers must be able to identify areas where covenant headroom or liquidity may be restricted and ensure that contingency plans and mitigations remain robust.

1. Social Housing - News - Moody’s raises outlook for 33 housing associations ↩

2. Consumer price inflation, UK - Office for National Statistics ↩

3. Monetary Policy Report - November 2023 - Bank of England ↩

4. Monetary Policy Report - November 2023 - Bank of England ↩

5. Quoted household interest rates - a visual summary of our data - Bank of England ↩

6. Money and Credit - September 2023 - Bank of England ↩

7. Construction output in Great Britain - Office for National Statistics ↩

8. Construction output in Great Britain - Office for National Statistics ↩

9. UK House Price Index summary - September 2023 - GOV.UK ↩

10. Labour market overview, UK - Office for National Statistics ↩

11. Labour market overview, UK - Office for National Statistics ↩

12. Total number of people on Universal Credit in England - LG Inform ↩