Low interest rates help average surplus increase 33 per cent
Associations’ spare cash soars towards £1bn mark
Housing associations have seen their average surpluses increase by 33 per cent in 2010/11 as the total across the sector heads toward the £1 billion mark.
An Inside Housing survey of the 30 largest English housing associations by stock owned and managed found that three quarters increased their bottom line surplus or decreased deficits. The associations increased their collective surplus by nearly £100 million (see table for full results).
An increase across the board matching Inside Housing’s sample would see the total rise above £800 million, with industry experts expecting further growth in the coming years. Last year, the total surplus across the sector in England jumped by 50 per cent to £609 million, according to figures published by the Tenant Services Authority in March this year.
Orbit Housing Group and Southern Housing Group saw the biggest percentage hikes in surplus, with both more than doubling their 2009/10 figures. New Charter Housing Trust, meanwhile, cut its deficit by two thirds over the course of the year.
Anne Turner, finance director at Orbit, said: ‘One of the reasons is that interest rates remain quite low so we’re not paying as much on our debt.’
But Ms Turner added that the Homes and Communities Agency’s £1.8 billion affordable homes programme, under which associations are expected to raise more private finance, coupled with a reduction in government subsidies, had created a new environment for housing associations.
She said: ‘Developing associations will have to show that they can generate funds from elsewhere.’
Orbit, which ran a surplus of £12.8 million at the end of March 2011, wants to grow its surplus levels to between £15 million and £20 million so it can secure funding to help pay for the development of up to 2,200 homes under the affordable homes programme.
London & Quadrant and Genesis Housing Group were among the top 30 associations which saw surpluses reduce. L&Q’s £20 million reduction this year was the result of one-off restructuring gains in 2009/10 that saw its surplus nearly double. Genesis, meanwhile, was affected by an impairment charge of £21 million due to the reduction in the value of undeveloped land bought before the credit crunch.
Rob Kerse, finance director at Genesis, said he expected the surplus both at his own association and across the sector to rise in the future.
‘People are being more prudent around their expenditure and investments to give more headroom for the unforeseen,’ he said.
Last year, several housing associations, including Affinity Sutton, said they needed to increase their financial base to mitigate against spending cuts and the risks associated with increased borrowing needed to develop under the affordable homes programme.
‘Good surplus just shows that these are well-run businesses,’ said Natalie Elphicke, a housing finance partner at law firm Stephenson Harwood. ‘This kind of discipline has got to be a good thing as it will be another way they can attract new investors.’
However, Jackie Bowie, a director at consultancy JC Rathbone, warned that building up surpluses could store up problems for landlords.
‘Associations do need to have more of a buffer than they had before, but boards, and tenants, should challenge the level of acceptable surplus - especially if these are cumulative; that tells us they are not reinvesting in stock/undertaking new projects,’ she said.
‘Generating ongoing surpluses should not be a priority, they are not-for-profit organisations, and cumulative surplus is effectively retained profit.’
James Tickell, a director at consultancy Campbell Tickell, said the increase in surplus would provide a ‘cushion’ against economic uncertainty and fears that reforms to housing benefit could increase the risk of rent arrears.
‘This is good news for the sector, given the hard times that are likely to come,’ he said. ‘The question now is how are they going to use this surplus?’
Going up: surpluses for the top 30 housing associations by number of homes owned
|HOUSING ASSOCIATION||NUMBER OF HOMES OWNED OR MANAGED||SURPLUS FOR YEAR 2010/11||SURPLUS FOR YEAR 2009/10|
|London & Quadrant||58,318||£41m||£61m|
|Places For People||49,508||Not provided||£2.2m|
|The Riverside Group||47,517||£18.4m||£14.9m|
|Orbit Housing Group||32,195||£12.8m||£5.5m|
|Metropolitan Housing Partnership||31,835||£9m||£4.9m|
|Sovereign Housing Group||31,354||£21.6m||£11m|
|Wakefield and District Housing||31,090||-£25.5m||-£48.4m|
|Bromford Housing Group||25,626||£18.2m||£14.1m|
|Southern Housing Group||24,404||£21.1m||£8m|
|Genesis Housing Group||22,976||£4.9m||£12.7m|
|Flagship Housing||21,518||Not provided||£14.4m|
|Family Mosaic Housing||21,077||£34m||£33m|
|Walsall Housing Group||18,903||£9.8m||£7.2m|
|New Charter Housing Trust||18,605||-£7.8m||-£21.7m|
£55 million - biggest surplus for 2010/11, reported by Affinity Sutton
£15.7 million - biggest surplus increase for 2010/11, reported by Circle
£22.9 million - biggest reduction in deficit for 2010/11, reported by Wakefield and District Housing
The economic crisis has had both positive and negative effects on associations’ finances
Housing associations’ 2010/11 financial results appear to show a mixed bag of performance. However there are some identifiable themes.
Those associations that have reported an increase in surplus for the year can point to several contributing factors, not least the current and continued financial crisis. As market forces and the view of the UK as a relatively safe haven continue to keep interest rates at historical lows, those organisations with a variable debt component have seen their cost of funds fall. This has in turn led to a broadly unchanged interest expense compared with 2009/10, despite an increase in drawn debt. This illustrates well the importance of a balanced debt portfolio to manage risks in all environments, and not just an environment of rising interest rates.
Reserves have seen a significant boost this year as a result of the government’s move away from a retail price index to consumer price index calculation basis for some pensions. This has resulted in significant one-off pension credits being recognised by many associations. For L&Q for example, this amounted to £13.4 million, while Circle’s liabilities reduced by £8.8 million.
These external factors have been complemented by internal reductions in development at some associations, and a fierce efficiency drive across the sector with a focus on procurement savings and pay increases well below current inflation.
Of course it isn’t all good news. Organisations continue to recognise impairment on both investments and housing properties in a very difficult environment.
Looking ahead, the continued very low interest rates across loan maturity dates, combined with rent increases forecast to be around 5.6 per cent will help to provide the necessary cushion as the impact of the affordable rent regime begins to bite.
Andrew Hart is managing director of Trade Risks. The piece was co-written by Paul Rickard, a director at the company