Housing associations are facing a £1bn hit to costs in the coming years due to a combination of inflationary pressures and the rent reduction, with a potential knock on for development ambitions, according to new research.
Savills estimates that if costs increase by forecast inflation from 2017/18 until the end of 2019/2020, this would add almost £1bn to operating costs, reducing the average margin from 34.5 to 28.5 per cent.
The warning comes despite a strong financial performance in the first year of the government’s rent reduction policy, which sees providers having to cut rents by 1 per cent per year for four years.
Savills has analysed the audited accounts of over 200 housing associations as part of an exclusive piece of research that will be presented at today’s Social Housing Finance Conference.
It finds that their 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.
It said its research shows “a clear correlation” between a higher core margin and increased development output.
Helen Collins, head of housing consultancy at Savills, said: “To achieve margin improvements in the face of rent cuts is a significant achievement.
“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.”
The uplift has so been 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 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.
The report says 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 Tower 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.
The findings show that 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).