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Development suffers as Housing Associations struggle financially
Bringing external capital into the sector provides a real opportunity to unlock greater development capacity at a time where it is desperately needed. Housing Associations (HAs) remain under significant financial pressure, as increased spending on existing stock has combined with higher build costs and a higher cost of debt. Many have scaled back their development programmes as a result.
Financial pressures
Two years ago, when we last wrote about equity investment into affordable housing, we spoke of a sector which was shifting its priorities in the face of financial strain. In the last two years, that position has intensified, and the focus on existing stock over new development has become more evident.
EBITDA MRI interest cover ratios, the measure by which the financial health of HAs is usually assessed, have fallen sharply in the last three years to a sector average of just 88% in 2024, according to the RSH Global Accounts. This means that HAs did not bring in enough money in the year to pay the interest on their debts, for the first time since the 2007/08 Global Financial Crisis. While this position can be managed in the short term, it is ultimately unsustainable.
Higher spending and lower real earnings
Sector spend on repairs and maintenance has increased by 63% since 2021, reaching £8.8bn in the year to March 2024, reflecting the growing investment requirements for existing homes. This is forecast to increase further and average £10bn per year over the next five years, according to the 2024 Global Accounts. This has been necessitated by the drive to improve energy efficiency, increasing standards on fire and building safety and a continued focus on damp and mould issues, among wider concerns about the quality of stock in the sector.
Almost all HAs will have seen maintenance costs rise to some degree, but those most exposed are providers with a larger share of high-rise buildings such as in London. Unlike private sector developers, HAs cannot access the Building Safety Fund to support their remediation works. While the sector average interest cover is 88%, amongst those organisations with more than 5% of their homes in high rise blocks, the median is 51%, compared to 128% for those with less exposure to high rise.
Development falls but with regional variation
No wonder then, that HAs are increasingly looking inwards to their existing stock rather than looking to expand their portfolios. Weaker appetite for development is now becoming clear in the data, with starts falling sharply and planned development by HAs reducing. Appetite also remains low for Section 106 homes amongst HAs with weaker financial capacity, alongside a mismatch between what developers are building and what all Registered Providers are looking to buy. More detail on the challenges around Section 106 can be found here.
But there is considerable geographical variation within this overall picture. Affordable housing starts in London have fallen by -88% in the last year as a result of viability challenges for high rise buildings, given fire and building safety regulations. Across the rest of England, viability is less stretched, and starts have not fallen off of a cliff edge in the same way. While all the HAs we spoke to are expecting to reduce their development output over the next five years, it is clear that each organisation’s requirements for investment in existing stock are very different, depending on the type, age, geography and energy performance of their homes. This will mean some HAs can continue to bid for development opportunities, while others will remain absent.