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Sales revenues forecast to surpass grant and debt as finance source for new development

English housing association are forecasting for the first time that the majority of funding for future development will come from sales receipts, instead of grant or debt.

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The forecast emerged in the 2017 sector risk profile, published by regulator the Homes and Communities Agency.


The sector is forecasting a total investment in new supply of £55bn over the five years to 2021, the risk profile report states. It anticipates that £31bn of this will be funded by sales revenue.


The HCA’s report also reveals that the sector is planning to build more than 280,000 new homes over the next five years – equivalent to roughly 10 per cent of existing stock. Associations are predicting that they will building 65,000 homes next year.


As the funding figures suggest, registered providers are predicting a significant shift in the proportion of homes they build for sub-market rent.


It states that in 2012, registered providers delivered 1,300 homes for sale on the open market and around 800 homes for market rent – less than 5 per cent of the sector’s development that year.


The most recent forecasts suggest that by 2019 less than half of all homes developed will be for sub-market rent. The sector predicts it will build roughly four times more properties for sale (outright and shared ownership) by 2019 than 2012.


In its report the HCA states that this means organisations will be ‘more exposed to sales risk and their business models will be more pro-cyclical’.


It points out that absolute levels of market sale activity are concentrated in a small number of registered providers.


‘In 2016, the sector’s ten largest registered providers generated 80 per cent of the sector’s turnover from outright sales, and the majority of the forecast increase in sales activity also sits with these organisations,’ the HCA’s risk profile report states. ‘However, there are also many registered providers who will either be new entrants or growing their exposures to market rent, market sale and shared ownership markets over the next five years.’


Jonathan Walters, deputy director strategy and performance with the regulator, said that a lot of this activity was ‘heavily focused in 40-60 organisations’.


‘You’re talking about one-fifth of those [the just over 200 organisations with more than 1,000 homes] who are doing the heavy lifting when it comes to this.


‘The key for us is do boards understand what happens if they can’t sell – if, for example, you get a hiatus like you got in 2008/09.


‘The people that the regulator is worried about most are not the really big ones, it is the ones that are trying to play catch-up. The ones that are a bit smaller and really want to be part of the game.


‘For us the warning sign is the volume of sales activity compared to your development pipeline and your strong balance sheet.’


Mr Walters added that although the sector had been talking about the shift in focus for some time in truth the ‘activity has been concentrated in the hands of relatively few organisations’. He added that it now feels like the sector is ‘reaching a tipping point.’


The report adds that a small number of associations are planning to develop homes equivalent to more than 20 per cent of their existing stock over the next five years – and that that regulator will want assurance that they ‘have the appropriate skills and risk mitigation strategies in place in the event that development does not proceed as planned’.


Elsewhere, the report states that as of March 2017, 141 registered providers have investment in, or lending to, non-registered subsidiaries, special purpose vehicles or joint venture companies. ‘The total value of this indebtedness is reported to be £5.4bn, an increase from £3.2bn in March 2016,’ it states. ‘Half of the exposure is within three registered providers; almost one-third of the exposure is within one registered provider.’


Following the tragic fire at Grenfell Tower, the report also reminds providers that meeting health and safety obligations is a core responsibility.


‘Boards and councillors must be aware of their on-going obligations when contracting out delivery of services and should not assume because a service is undertaken by a third party that there is no inherent risk to their business,’ it adds.

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