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L&Q wipes £170m from projected surplus due to ‘market downturn’ and rising costs
London’s largest housing association has warned its staff its surplus will be cut in half this year due to a “downturn” in the property market and cost rises, Inside Housing can reveal.
L&Q told staff yesterday that it expects its 2018/19 surplus to be cut from the £342m it had based its financial plan on to £170m. This is down more than 50% from the record £348m booked in 2017/18.
In an email, obtained by Inside Housing, the 102,000-home behemoth said “a downturn in the property market” would leave its income from open market sales £50m below projections.
The association said it had also been hit by the cost of “health and safety, and improving the quality of our existing homes”. This includes Portway House, which hit the headlines last week, and “15 other challenging schemes”, the email said.
In a statement, below, the organisation referred to “unprecedented political and economic uncertainty” and said it is in “active discussions with government” over the issues.
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In the email, chief executive David Montague told staff L&Q’s “balance sheet remains strong, which allows us to survive the financial pressures we face”.
He said the organisation would look for “a higher financial return” from its development pipeline, among other steps it is taking to mitigate the impact.
Large housing associations have become increasingly exposed to the sales market in recent years, particularly in London, and experts warned other providers may struggle if L&Q proves to be a bellwether for the sector.
Howard Webb, a director at Link Asset Services, said: “There has been a steady stream of bad news from the market and from housing associations suggesting that sales programmes weren’t progressing as planned.
“When things start to slow down, they can be reflected in the results pretty quickly. If this coincides with other unexpected cost increases elsewhere in the business, surplus can shrink quite dramatically.
“I have no doubt that L&Q has the financial strength to manage this, but there will be other housing associations that have slimmer margins and have started preparing later that could be more severely impacted.”
A second expert source, who preferred not to be named, added: “L&Q has the biggest exposure to market sales, but also better risk management than other organisations.
“With the others, the sums might be smaller, but they could be more mission-critical.”
Half-year results for 2018/19 from other large London housing associations have shown dips in surplus, but not to the same degree as L&Q is now forecasting.
A senior source within the London housing association sector played down the impact on other associations, saying not everyone was experiencing the same health and safety cost pressures.
L&Q committed to improve its repairs performance last week after a report revealed defects in the service provided at Portway House, an 85-home scheme in south London.
It is not known what “challenges” it faces at the other 15 schemes, but associations across the sector have been investing heavily in fire safety works since the Grenfell Tower fire in 2017.
Last year, L&Q reported record results for the housing association sector, clearing a surplus of £348m on turnover of more than £1bn. Of this turnover, £120m came from open market sales.
A surplus of £170m would be the lowest figure reported by the association since 2014.
In the email to staff, Mr Montague said: “Things have proved a lot tougher than we thought. A weaker, more uncertain economy has led to a downturn in the property market. As a result, the money we get from sales of our new homes is £50 million less than we expected.
“We’re also spending more on investing in health and safety and improving the quality of our existing homes. This includes investing time, resources and money in fixing problems at Portway House and 15 other challenging schemes. While this takes place, we continue to be under the magnifying glass of those outside our organisation who take an interest in what we do.
“Taking all this into account, it means that we expect to make a surplus of about £170m this year, rather than the £342m we based our plan on.”
He said the organisation would take four steps in response to the financial pressure: it was “most unlikely” staff bonuses would be paid this year, non-discretionary recruitment would be frozen except in health safety, some planned works to improve stock would move to the next financial year and “a higher financial return” would be sought on new schemes. It does not plan to reduce housebuilding.
Ratings agencies and the Regulator of Social Housing have consistently warned in recent years that associations’ growing exposure to the sales market will leave them more vulnerable to a market downturn.
The sector as a whole turned over £1.4bn from market sales in 2017/18, according to the regulator’s combined accounts for the entire sector. This is more than double the £734m recorded in 2013/14.
According to the regulator, 78% of this activity is concentrated among 20 providers.
L&Q's statement in full:
A spokesperson for L&Q said: “The UK is in an unprecedented period of political and economic uncertainty, and we want to be completely open and honest with our people about the implications for L&Q.
“As with any period where there are challenging conditions, we must look at our short-term priorities, adapt where necessary and act prudently to ensure our long-term corporate objectives remain achievable.
“While market conditions remain tough we will be more selective about new business opportunities, but L&Q has a strong balance sheet and our long-term ambitions are unchanged.
“Our underlying financial strength means that we remain absolutely committed to investing in our existing homes to ensure the health and safety of our residents; we remain absolutely committed to investing in services and improving resident satisfaction; and we remain absolutely committed to our plans to build 100,000 new homes.
“The short term challenges we face are not specific to L&Q, and so we are in active discussions with our partners and the government to ensure that we can overcome market obstacles and do everything we can to fix the housing crisis.”
