Housing Corporation survey on state of UK property market - key findings

Published by Jon Land for 24dash.com in Housing

With the UK housing market currently in a state of turmoil, the Housing Corporation has carried out a survey seeking the views of the country's top 100 developers.

The report from the Corporation's second survey , undertaken in April 2008, is published here:

"The emergence of serious problems in international credit markets over the past year, combined with the slowdown in the UK residential property market, means that housing associations are facing challenging times.

"However demand for affordable homes is at an all time high – a fact recognised by the Governments £8.4bn three-year investment programme which should raise the number of homes for rent built each year from 30,000 in 07/08 to 45,000 by 10/11.

"We believe that the sector overall and the vast majority of associations are well placed to weather any downturn, however, the significant levels of private finance and the increased importance of shared ownership sales means that some organisations could be significantly exposed.

"It is our view that this will not lead to failure or insolvency but could result in some restructuring in the market leading to new mergers, consolidations and/or, we could see a slow down in development activity until the housing market achieves stability.

"In April 2008 the Housing Corporation undertook a second survey of the 100 largest developers. As with our earlier survey in January we sought to ascertain views on the funding and housing markets.

"The immediate concern for housing associations remains the performance of the housing market, rather than their ability to obtain finance at a reasonable
price.

"There is now evidence that margins on variable rate debt are increasing, and the number of potential funders is dwindling. But as we observed in January one of the paradoxes of the current situation is that long term debt (25 years) is still relatively cheap.

"Our April survey confirmed that most associations have facilities that stretch for almost two years worth of projected drawdowns. A small number of associations are intending to raise new debt.

"Our survey shows that of the £4.7 billion associations intend to spend in the next 12 months, only £0.7 billion is new debt which has still to be arranged. We have followed up this work with individual discussions with associations and lenders.

"From a position a year ago where there were seven active lenders all competing to offer finance at rates of 30 basis points or less above LIBOR we now have a situation where the number of lenders has reduced and LIBOR has become dislocated from the Bank of England base rate – at the current time by nearly 100 basis points.

"Associations have not seen the further reductions in Bank Base rate result in keener pricing.

"Credit committees are now taking a much tougher line in their dealings with the sector and associations should not be overly relaxed about having facilities in place unless they are certain that the conditions precedent in loan agreement are met at the point when finance is needed.

"Despite this there remains evidence that associations are still able to access new borrowing albeit raising new money from existing funders seems to be easier than accessing funds from new lenders.

"The longer term outlook for raising private finance for affordable housing remains positive – this after all offers investors the opportunity to invest in bricks and mortar in an asset class that enjoys consistent RPI linked income growth with over 60% of that income being Treasury backed in the form of housing benefits.

"We cannot predict where the price of finance will eventually settle but the underlying attractions of investing in affordable housing
remain.

"So with nearly £10bn of credit already in place to help fund the next 3 years business plans of associations (for new build and major repairs works) the second major risk facing the sector is how a fall in house prices would reduce the surpluses associations are able to generate from Low Cost Home Ownership sales.

"The associations most at risk here are those that are not generating sufficient cash from ongoing activities to meet interest cover payments without the inclusion of sales proceeds. In January we reported that some associations were seeing a slowdown in staircasing sales.

"In April there is some evidence that sales of first tranches are also slowing. There is clearly a regional and quality dimension to this pattern.

"At present London associations are experiencing the least problems with demand for shared ownership homes holding up well. All associations are reporting that the length of time taken from initial viewing to completion is longer and prospective purchasers are experiencing more difficulty in putting finances in place.

"Despite this we are aware that some associations are still able to sell off plan and at the full asking price. In other cases associations are offering incentives to ensure the sale of completed properties.

"Without strong management action, organisations could be exposed if they cannot sell properties in sufficient volumes and at appropriate prices. We expect good boards and management teams to be stress testing their business plans and scenario scanning to confirm what actions they would take if a combination of adverse factors came in to play at the same time.

"For instance from our analysis we believe a 20% fall in sales values is a risk
that could be tolerated by most providers – but for some this also offers an opportunity to consider whether there are better ways to achieve their growth strategies through new partnerships that could help shield construction cost or sales risks from the association.

"For others a reduction in development activity would be a rational response to the current conditions. We remain of the view that the control of management and maintenance costs is the most significant medium term prize.

"Significant savings have already been made here and the Gershon targets have been exceeded More money is spent by the sector in this area each year than on new development, and the costs per home can vary by 100% between associations.

"With no correlation between expenditure and tenant satisfaction the opportunities for action here remain significant.

"It is through consideration of responses such as these that Boards can manage “heightened risk” and with good governance increasing risk should not lead to failure – but appropriate and proportionate response."