Cost of servicing debt exceeded net earnings last year, RSH report says

Aggregate EBITDA MRI interest cover has fallen from 190% in 2018 to 125% in 2023, and is forecast to stay at 111% for the next five years.

More than a quarter of providers have forecast that their interest cover will be below 100%, including 12 of the 17 providers with more than 40,000 homes.

Fiona MacGregor, chief executive at the RSH, said: “Most housing associations are investing record amounts in new and existing homes without threatening their financial viability.

“However, some individual landlords face particular pressures, and we expect those to sustain for some time before the position eases.”

The report sets out why the previously projected recovery in interest cover in landlords’ business plans has consistently failed to materialise. This is because of higher-than-expected interest rates, building remediation costs, and the impact of the cap on rent increases.

Financial pressures are currently particularly acute for landlords in London and other urban areas, where they own a large number of flats in need of building safety work.

The RSH said it is assured that mitigating action is being taken through the deferral of uncommitted development and the arrangement of loan covenant waivers.

This is in addition to substantial reductions in new development plans alongside a “substantial forecast increase in fixed asset disposals”.

Receipts from fixed asset sales by non-profit private registered providers now account for 21% of the sector’s planned capital spend on capitalised major repairs and development over the next five years, up from 14% in the previous year.

On development, estimates for new home delivery in the same period across all tenures come in at 300,000, 12% lower than in 2023.

Outright sale has seen the greatest reduction in delivery, at 21%. At the same time, the number of new homes forecast by for-profit providers has fallen from 33,000 to 18,000.

The report also highlighted the mounting spend on repairs and maintenance, which is forecast to reach £50bn over the next five years.

“There is very little margin for error, and it is absolutely critical that landlords are well run, with robust systems for identifying and mitigating risks,” Ms MacGregor said.

“Boards must maintain a real clarity of purpose to successfully navigate these competing demands while remaining financially viable.”

The sector’s liquidity was praised as being “strong”, but the report noted that a number of landlords would soon need to refinance at higher rates or have “material proportions of debt at variable rate”.

The report set out a range of measures housing providers can take to bolster their financial viability, including making sure they understand how skills and labour shortages affect delivery, the impact of insolvency and impairment costs, plus advice on fraud and cyber security.

Part of the RSH’s Sector Risk Profile echoes recent research by the District Councils’ Network, which found that workforce shortages at councils due to budget cuts are putting Labour’s housebuilding ambitions at risk.

The regulator’s report also urged housing providers that have environmental, social and governance-linked facilities to “ensure they fully understand the implications of the associated covenant requirements”.