Research and analysis

Quarterly survey for Q3 (October to December) 2020 Summary

Published 5 March 2021

Applies to England

Introduction

1 - This quarterly survey report is based on regulatory returns from 214 private registered providers and PRP groups who own or manage more than 1,000 homes. One provider submitted a return for the first time this quarter, and additional narrative has been included in the report to highlight where quarter on quarter comparisons have been skewed due to an intra-group transaction relating to this provider.

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 October 2020 to 31 December 2020.

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. We have assurance that all respondents are taking appropriate action to secure sufficient funding well in advance of need.

4 - Since the staged easing of lockdown measures which occurred between May and July 2020, the Prime Minister announced in October a new three-tier lockdown system for England with different parts of the country split into three coronavirus alert categories. A second national lockdown came into force for four weeks starting 5 November, followed by a third national lockdown on 4 January 2021 until further notice.

Summary

5 - The position reported at the end of the quarter showed that the sector remains financially strong with access to sufficient finance:

• Debt facilities of £113.1 billion were in place at the end of December, of which £28.7 billion was undrawn. Undrawn facilities have increased by £6.8 billion since the start of the financial year.

• Available cash balances increased by £0.1 billion during the quarter to reach £6.9 billion at the end of December.

• New finance of £3.0 billion was agreed in the quarter, including £1.9 billion from capital markets and £0.8 billion from banks.

• Mark-to-market exposure has decreased slightly since September, reflecting an increase in swap rates. In aggregate, providers with free-standing derivatives continue to have headroom available.

6 - Performance in the quarter continues to reflect some of the challenges arising from the coronavirus pandemic. However, this has not destabilised the sector’s overall strong financial position:

• Cash interest cover, excluding current asset sales, stood at 145% in the quarter to December 2020 compared to a forecast of 104%.

• The improvement in interest cover was a result of net cashflows from operating activities being £204 million (14%) higher than forecast, and capitalised repairs and maintenance expenditure being £140 million (24%) lower than forecast.

• Expenditure on capitalised repairs and maintenance in the quarter amounted to £455 million (September: £299 million); 24% lower than the £595 million forecast in September. Providers have reported ongoing delays as a result of lockdown restrictions; however, outturn spend was more in line with levels seen before the start of the coronavirus pandemic.

• Investment in housing supply was £3.4 billion in the quarter to December 2020, an increase of 42% from the previous quarter. Expenditure on development was higher than the £3.1 billion forecast for contractually committed schemes, however lower than the total forecast for the quarter.

• Including both current and fixed asset sales, total sale receipts were £1.7 billion in the quarter, generating surpluses of £0.4 billion. In aggregate, asset sale receipts were 17% above the forecast made in September, reflecting the uncertainty and caution exercised by providers when producing sales forecasts.

• During the quarter 4,667 affordable home ownership units were developed, and 4,665 were sold. This compares to the 3,652 units developed and 3,823 sales in the previous quarter. The total number of unsold units remained in line with previous quarter with only a slight decrease of 0.6% and stood at 7,634 at the end of December.

• AHO units unsold for more than six months reduced by 25% during the quarter, reaching 2,994 at the end of December, following the highest number recorded last quarter since data was first collected in 2009, although still higher than pre-coronavirus figures.

Margins on AHO sales averaged 18.6% in the quarter, slightly lower than the margin of 19.3% achieved in the quarter to September, and below the three-year average of 23.5%.

• During the quarter 1,495 market sale units were developed, and 1,663 were sold. This was the highest number of market sales achieved since the data was first collected in 2014. The number of units completed was almost a 50% increase on the previous quarter, however still below the levels seen immediately before the coronavirus pandemic.

• The high volume of market sales achieved during the quarter has resulted in the number of unsold units decreasing by 6% to 2,194, and the number of units unsold for over six months decreasing by 13% to 1,273.

• Mean arrears, void rent loss and rent collection rates initially deteriorated at the start of the coronavirus pandemic; however, performance has remained stable since then and improved very slightly in the last quarter.

7 - Forecasts for the next 12 months indicate that performance and plans are continuing to return towards levels seen before the coronavirus pandemic; however, this could be impacted by the uncertainty of the length of the current lockdown.

• For the 12 months to December 2021 the sector has forecast capitalised repairs and maintenance expenditure of £2.6 billion; an increase on the £2.5 billion 12-month forecast made in September and on the £2.4 billion forecast from December 2019.

• Over the 12-month forecast period, expected investment in new housing supply is forecast to be £17.1 billion, of which £11.2 billion is contractually committed. This is a 2% increase on the previous quarter and projected spend is now greater than the last pre-coronavirus 12-month forecast of £16.9 billion from December 2019.

• For the 12 months to December 2021, the sector has forecast £4.5 billion worth of current asset sales and £1.8 billion worth of fixed asset sales. Forecast current asset sales remain below the levels expected before the start of the coronavirus pandemic (December 2019 12-month forecast: £5.4 billion).

• In the next 18 months, including committed and uncommitted development, providers are forecasting the completion of 35,998 AHO units (September: 35,221) and 11,323 market sale properties (September: 11,406).

• Pipeline AHO units are at their highest level ever reported, having now exceeded the numbers being forecast before the coronavirus pandemic.

Operating environment

8 - In response to the coronavirus pandemic, the UK was put into lockdown on 23 March 2020. A second national lockdown came into force on 5 November lasting for four weeks, followed by the introduction of the third national lockdown on 4 January 2021 until further notice. The latest announcement was made prior to providers submitting returns towards the end of January, therefore there may be some implications reflected in the forecast.

9 - Gross domestic product rose by 1.2% during December 2020 but was still 6.3% below February 2020 levels. This follows a drop in GDP of 2.6% in November, the first monthly fall since April 2020 as business restrictions impacted economic activity. The International Monetary Fund estimated that global economic growth contracted by 3.5% in 2020, however a more optimistic forecast is projected for 2021 with a 5.5% growth.

10 - In light of the expected economic impact of coronavirus, the Bank of England reduced interest rates to 0.25% on 11 March 2020. In a further emergency response this was reduced for a second time on 19 March to 0.10%, where it currently remains.

11 - Construction output fell by 2.9% in December, due to falls in both new work (3.8%) and repair and maintenance (1.5%); this is the first decline in monthly growth since April 20205. The continued restrictions and social distancing measures has meant the capacity and level of work of construction sites were 3.5% below pre-coronavirus levels.

12 - In a bid to boost the housing market the Chancellor announced a temporary rise in the Stamp Duty threshold, effective from 8 July 2020. This contributed to an increase in UK average house prices by 8.5% over the year to December 2020, up from 7.1% in November. This is the highest annual growth rate the UK has seen since October 2014.

13 - Overall inflation, as measured by the Consumer Prices Index (CPI), stood at 0.6% in the 12 months to December 2020, a slight increase from the 0.5% recorded in September last quarter. CPI rose by 0.3% between November and December 2020 compared with a rise of 0% in the same period of 2019.

14 - Estimates from the Office for National Statistics suggest that the number of pay rolled employees in the UK reduced by around 828,000 in the period between March and December 2020, with the universal credit claimant count increasing by nearly 113%, or 1.4 million, in the same period. From September to November, around 1.72 million people were unemployed, 418,000 more than a year earlier [^8]. Redundancies remained high in November 2020 with peak levels of around 437,000; however, this was a drop from the peak in September of 508,000.

15 - The Coronavirus Job Retention Scheme, which allows employers to claim grant to cover the salary costs of furloughed workers, was expected to end on 31 October 2020, however this has been extended until 30 September 2021, with claimants receiving 80% of their usual salary for hours not worked10. The latest Economic and Fiscal Outlook from the Office for Budget Responsibility suggests that unemployment will peak at around 6.5% in quarter four of 2021.

16 - There continues to be material uncertainty over the future course of the coronavirus pandemic and the economic conditions that will follow. The second wave of the virus is currently evolving, with the enforcement of the third national lockdown currently in place. Providers will need to constantly monitor performance and forecasts and be ready to react as necessary to the rapidly changing environment.

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RSH regulates private registered providers of social housing to promote a viable, efficient and well-governed social housing sector able to deliver homes that meet a range of needs.