Research and analysis

Quarterly survey for Q2 (July to September) 2019 to 2020 - Summary

Published 26 November 2019

Applies to England

Introduction

This quarterly survey report is based on regulatory returns from 218 private registered providers and PRP groups who own or manage more than 1,000 homes.

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 2019 to 30 September 2019.

The RSH reviews each PRP’s quarterly survey. It considers a range of indicators and follows up with PRP staff in all 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.

Summary

The quarterly survey findings are:

The sector remains financially strong with access to sufficient finance:

• £21.6 billion of undrawn facilities are in place. Debt facilities total nearly £100 billion.
• Cash balances total £5.2 billion; this is forecast to reduce over the next 12 months to £3.4 billion, as cash is used to fund planned capital expenditure.
• New finance of £2.8 billion was agreed in the quarter, including £1.6 billion from banks and £1.0 billion from capital markets.
• Loan repayments of £0.6 billion were made in the quarter.
• Cash interest cover, excluding current asset sales, was 149% in the quarter to September 2019 against a forecast of 136%. Interest cover is forecast to average 128% over the next 12 months as expenditure on capitalised repairs and maintenance is expected to increase.
• Income collection data continues to show a stable performance consistent with seasonal trends.

Performance in the quarter reflects some challenges with regards to sales receipts and margins. However, this has not destabilised the sector’s overall strong financial position:

• Including both current and fixed asset sales, total sale receipts were £1.4 billion in the quarter, generating surpluses of £0.4 billion. Current asset sales receipts were 23% below the forecast of £1.2 billion.
• Investment in housing supply was £2.9 billion in the quarter to September 2019. This was below the June forecast contractually committed spend for the quarter of £3.3 billion.
• During the quarter, 3,576 Affordable Home Ownership units were developed and 3,773 units were sold. There was a 5% decrease in the number of unsold units to reach 6,688 at the end of September. Half of the unsold AHO units were held by 16 providers.
• During the quarter there was a 23% increase in the number of AHO units unsold for more than six months, which reached 2,614 at the end of September. This reflects a peak in development activity in the quarter ending March 2019.
• Margins on AHO sales averaged 23.3% in the quarter, the lowest rate achieved in the last three years.
• During the quarter 1,561 market sale units were developed and 1,404 were sold. The number of unsold properties increased by 8% to 2,229, the highest level recorded since the data was first collected in June 2014. Over half of the total unsold market sale units were held by six providers.
• The number of market sale properties unsold for more than six months increased by 59% to 883. As with AHO units, this reflects a peak in development in the quarter ending March 2019.
• The sector’s spending on capitalised major repairs in the quarter was around £450m, 19% below forecast. The main reasons for variances relate to delays in repair programmes and the re-profiling of planned works.
• Providers making use of free-standing derivatives reported mark-to-market exposure of £2.6 billion, a 15% increase since June, reflecting a decrease in swap rates at the quarter end. In aggregate, providers continue to have headroom on available collateral on MTM exposures.

Forecasts for the next 12 months indicate that the sector is planning to increase its development and housing market exposure, supported by drawing additional debt. There is some flexibility in these plans:

• In the 12 months to September 2020, the sector is forecasting £5.5 billion worth of current asset sales and £1.7 billion of fixed asset sales. By comparison, in the 12 months to September 2019, current asset sales were £3.4 billion and fixed asset sales were £1.8 billion. Net debt is forecast to increase by £5.3 billion.
• Over the 12-month forecast period, expected investment in new housing supply is £16.8 billion, of which £11.0 billion is contractually committed. In the 12 months to September 2019, total investment in new supply was £12.4 billion.
• Development of for-sale properties (both AHO and market sale) is forecast to continue to increase. In the next 18 months, including committed and uncommitted development, plans include the completion of 34,827 AHO units and 13,256 market sale properties. This compares to 21,842 AHO units and 7,650 market sale properties developed in the last 18 months.

Regulatory expectations

PRPs are expected to manage their resources effectively to ensure that their viability is maintained. The regulator continues to follow up cases where financial indicators such as interest cover are weak, to ensure that PRPs are managing their risks effectively. The regulator also continues to monitor developments in the housing market closely and engage with providers with significant exposures to market and AHO sales. PRP boards should be aware of the flexibility in their plans, and deploy it as necessary.

Before contractually committing to development spending, the regulator expects PRP boards to: carefully consider market conditions; model cashflows and viability impacts and stress-test these using a range of economic assumptions; and ensure that access to any external finance required is in place. This is particularly important where housing market exposure is involved. The regulator expects providers to have contingency plans in place for market and AHO sales falling short of forecasts.

The regulator also expects PRP boards to ensure that its properties are in a good state of repair and meet all applicable statutory health and safety requirements.

Key risks faced by the sector are considered in the Sector Risk Profile published annually by the regulator. Boards of PRPs are expected to be actively engaged in responding to emerging risks.