Housing associations struggle on

Housing associations are being increasingly pressured into putting more resources into the development of new homes. In the last year the excess created by the housing associations across the UK was worth around £1 billion which is twice the figure that received the previous year. This means that the return of housing associations is around 8% which is a similar figure to the margin seen in the private sector.

A recent announcement by the Chancellor said that pension benefits will be based on the CPI inflation which has meant that the future liabilities of the sector have reduced. This means that housing companies have reduced the liabilities they are projected to experience the future and this means that there has been a serious gain on the books for this year. In a great many cases the increased gains were worth millions of pounds.

The most profitable area in the market this year was those who are letting properties for social housing and many surpluses came to landlords from their existing homes. The tenants are probably not going to be pleased with these increased profits by their landlords considering that their rates are high because of the increased rate of inflation. The cost of renting social housing is currently estimated to be at the highest level of affordability possible, around 30% of income.

Government officials will be very pleased with the surpluses that have been achieved as they will be able to use the money to encourage a drive to build more homes in the private sector. Grant Shapps is the housing minister and he said that the housing associations should be working harder to give those renting homes from them more for their money. Government targets are for 80,000 new homes to be constructed in the next three years.

The increased number of houses is going to put a strain on the financial ratios of landlords and this could lead them to breaking agreements with lenders in the private sector such as bond investors and banks. This is due to many loan agreements being based on performance. Gearing ratios might cause problems for landlords as the proportion of equity in relation to gains might be a problem. Currently this ratio is around 50% but it could change.

Landlords are going to have to find additional funding if they want to borrow more money in order to keep the performance gearing at an acceptable level. One of the biggest developers in the sector is London & Quadrant and the Chief Executive of this company is David Montague. The company made a surplus of over £40 million this year and their turnover was up £300 million. Social lettings alone generated a surplus of £105 million and this is going to be used to fund development programme by the company.

Mr Montague commented, “There is always the risk that the bottom will fall out of the financial market and this would be a disaster scenario for us. We have to plan carefully about what we can afford to spend.”