Housing associations are major providers of affordable homes, but their ability to increase the number of new homes they build to help solve the housing crisis could be dramatically undermined by limits to grant funding and a four year-long regime of rent cuts, according to the latest analysis by real estate adviser, Savills.
It is now widely accepted that it will take 300,000 new homes each year to meet housing need in England, of which 100,000 need to be sub-market affordable housing. Assuming an optimistic forecast of council housebuilding at 10,000 homes per year (compared to the 2,800 built in 2016/17, though activity is increasing), there is an enormous gap of 90,000 homes to be filled by other providers.
Many housing associations have a real appetite to do more to help achieve this. The sector already provides homes for some 2.4 million households and delivered about 23,000 new homes at sub-market rents in 2016/17, almost 90 per cent of the annual total.
This was achieved despite it being the first year of a centrally-imposed rent cut, set at -1.0 per cent per year for four years from April 2016. Housing associations made an impressive effort to make efficiency savings, which actually saw the sector increase margins over the year.
The sector’s core margin from social housing lettings increased by an average of over two percentage points in the first year of rent cuts, from 32.3 per cent in 2015/16 to 34.5 per cent in 2016/17, according to Savills analysis of the published accounts of over 200 housing associations. This performance was delivered by a small increase in receipts – with newly built homes more than offsetting the impact of the rent cut – along with reductions in cost per unit.
“To achieve margin improvements in the face of rent cuts is a significant achievement,” says Helen Collins, head of housing consultancy at Savills “However, many in the sector caution that they were able to make some large, one-off efficiencies. This low hanging fruit can only be picked once and keeping the focus on cost efficiency going forward will be key as the rent cut continues to 2020.
“Maintaining margin is important because it allows associations to borrow more to fund development. Development activity is capital-intensive and sales tenures carry market risks. The bigger the margin created by the core business, the bigger the safety net if things go wrong.”
Analysis by Savills also shows a clear correlation between a higher core margin and increased development output. The reverse is also true. Last year the sector’s housing delivery added the equivalent of 1.1 per cent of their existing general needs stock. But those with a core margin under 30 per cent delivered just 0.7 per cent of stock; those with margins over 35 per cent delivered at double the rate (1.4 per cent).
Inflationary pressures will add to the challenges the sector faces as rent cuts continue to bite. National Living Wage legislation could push up staff costs, while safety and build quality are increasingly under scrutiny in new build or regeneration projects since the Grenfell tragedy, adding costs to build and maintenance costs. Similarly, many landlords continue to report that the move to Universal Credit is reducing the amount of rent collected and increasing collection costs.
Savills estimates that if costs increase by forecast inflation from 2017/18 until the end of 2019/2020, this would add almost £1 billion to operating costs, reducing the average margin from 34.5 to 28.5 per cent.
But to keep the average social housing lettings margin at its current level of 34.5 per cent in the face of rent cuts would require the cost per home built in 2020 to be 2.4 per cent lower than today, in nominal terms. This would be a massive challenge for organisations on which we are very reliant to help address the housing crisis.
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