HRA business planning: learning from housing associations

However, there are some fundamental differences to HAs – all of which arise from the fact that the HRA is part of the local government accounting system, public-funded, statutory reporting frameworks that have been in place for decades. Here are seven of the more important differences:

• Separate accounting and financing for revenue and capital: the HRA must balance revenue income and expenditure (a statutory requirement since 1990) and cannot be deficit budgeted; capital expenditure must be separately accounted for and explicitly financed – some sources of finance can only be used for capital, such as capital receipts and borrowing.
• Depreciation is ‘cash backed’, the equivalent of an HA’s ‘major repairs charged to income and expenditure’: a charge to the HRA representing depreciation is credited to a major repairs reserve and funds from that reserve are released for major repairs expenditure on the stock.
• HRA debt is almost exclusively borrowed from the Public Works Loan Board (PWLB) at low rates linked to gilts; as for registered providers, most loans are maturity loans on fixed rates and interest rate risk is mitigated effectively through having a range of loans at various lengths, allowing refinancing to take advantage of rate movements.
• HRA debt is usually pooled with other council debt: interest charged to the HRA is based on an average across the entire borrowings of the authority, rather than on the basis of specific loans. Although this is changing, particularly since the 2012 self-financing debt settlement, the majority of HRA debt is pooled, and this means interest rate exposure is further mitigated across a larger pool of borrowing.
• HRA debt is measured through the Capital Financing Requirement (CFR): this is the underlying need to have borrowed to finance capital expenditure, not the actual loans in place; this is akin to an offset mortgage where, for example, the actual loan might be higher than the net indebtedness, or where the council has used cash from the rest of its services to ‘internally’ lend to the HRA – interest is charged on the CFR.
• There is not a separate ringfenced balance sheet for the HRA; the valuation basis for dwellings is Existing Use Value (as for HAs) but rather than being cash flow based, it is based on a discounted open market valuation – the discounts are on a regional basis and periodically published by the Ministry of Housing, Communities and Local Government.
• Debt is not raised against asset values – councils borrow based on the Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code under which authorities set prudential indicators (PIs) relating to the prudence of their borrowing – PIs are akin to HA covenants but do not operate in the same way as the code is self-regulated with auditors rather than dependent on the view of external funders.

When looking across both sectors, it is essential that the points above are factored in. Fundamentally, however, as the HRA for a council is doing the same job as the income and expenditure account for an HA, an HRA has debt just as an HA does, we are able to make meaningful comparisons on many levels – and we hope that this helps to expand the thinking around HRA business planning.

Introducing the table

The table (titled ‘Local authorities with HRAs’, see below) shows authority-level data extracted from CIPFA’s HRA statistics relating to the year ended 31 March 2018 – they cover the same period as the 2018 HA global accounts published in December.

In presenting the data, we have made some assumptions about grouping headings together to enable comparability. We have excluded two authorities that have private finance initiative stock only. Readers will note local and individual factors at play for some authorities – we will do more work to understand the impact of these.

The table sets out the following main factors.

• Total stock: as at 31 March 2018, virtually all traditional social housing but with some shared ownership and some affordable rent provision and conversions under the Shared Ownership and Affordable Homes Programme.
• Turnover 2017/18: gross rents less voids loss plus all tenanted and leaseholder service charges for dwellings plus rents on non-dwellings (including garages and shops on estates); turnover also includes contributions made by other council services (for example for grounds maintenance) and some revenue grants.
• Operating expenditure 2017/18: covers housing management, service costs, day-to-day repairs and maintenance, cyclical and planned repairs, plus the amount of money moved to the major repairs reserve; also includes contributions to bad debt provision, lease costs and the cost of council tax on empty properties.
• Operating surplus and operating margin 2017/18: turnover less operating costs compared to turnover.
• Gross asset value: as at 31 March 2018, this includes dwellings at Existing Use Value and fair value of other assets, typically garages, shops and offices; asset value per housing unit is shown from the gross value because the relative value of other assets is low.
• Debt and debt per unit: the level of indebtedness as measured by the CFR as 31 March 2018, per unit at the same date.
• Interest and interest cover: interest costs for 2017/18 compared to operating surplus over the same period.

Interest cover is a key metric/covenant for the HA sector and funders. It is a primary way of measuring the potential capacity for further borrowing but also the resilience of HAs to changes in government policy, inflation and interest rates. Comparisons can usefully be made between the two sectors.

Other key covenants for HAs include gearing, asset cover, loan to value etc. Here, comparisons with the HRA are more difficult as the ability of an authority to borrow is not explicitly constrained by asset value cover. We will aim to do some more work with individual councils on the figures in a subsequent feature, and to report on asset cover and gearing in an HRA context.