Weathering the storm

This year’s global accounts show just how far the sector has come since the credit crunch. In 2008/09 the sector’s aggregate interest cover ratio (its ability to pay its interest costs out of net operating cash flow) was just over 60%, which meant that in parts of the sector, organisations were not generating enough cash to meet interest costs. This in part reflected the economic shock the sector suffered and highlighted its vulnerability. However, by 2014/5 the sector’s aggregate interest cover was almost 160%. This was a remarkable turnaround and shows a sector that has used a prolonged period of benign operating conditions to build margins at an aggregate level and to fund significant investment in new housing stock; the balance sheet grew by £7 billion in 2014/15 alone. It has done this by borrowing an extra £20 billion in the same period. 

After Leicester City’s recent triumph, one can never say never, but it seems unlikely that we will ever see such a prolonged ‘bull run’ again. During this period the sector has benefited from exceptionally low interest rates on variable rate debt, new capital market funding sources, rent rises driven by an RPI+ forumla and a housing market that bounced back quickly in many parts of the country. In addition, most large scale voluntary transfer (LSVT) organisations have now pasted peak debt and are beginning to generate surpluses which are contributing to the overall sector performance and the supply of new homes. 

However, this period of growth has coincided with some significant changes in the sector’s operating model and the series of policy announcements in 2015 mean providers will have to adapt again to a rapidly changing world. Grant rates for rental homes reduced with the introduction of affordable rent in 2011 and the announcement of the new programme means the focus of new funding has shifted from rental homes. Moreover, the announcement of rent reduction from April 2016, combined with other changes in welfare, mean that providers are thinking hard about whether and how to provide sub-market rental accommodation. At the same time providers are already delivering homes for sale and the latest global accounts confirm that providers are now making more money from sales than they did before the credit crunch. 

Governnment has been very clear it wants to see significantly more supply for home ownership in all forms and is expecting registered providers to contribute significantly. From talking to providers we know that many of them are ready and willing to help deliver this agenda and are putting in place significant plans, building on the delivery already in the pipeline. Our quarterly survey shows that on average the sector raises £1 billion cash per quarter from all asset sales. We also know that many providers wish to continue delivering a programme of low cost rental accommodation as that fits with their, often, charitable, objectives.  

The challenge for board members and providers is to ensure that delivery happens in a way that works across a range of market conditions and that providers are able to be successful whatever the economic weather. Having built its interest cover so significantly over the past few years, providers will want to make good use of it and learn the lessons of 2008/09. 

Fiona MacGregor is the Homes and Communities Agency’s director of regulation