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Why do Housing Associations need surpluses?

At a time when central and local Government are implementing massive cuts and essential services are strapped for cash, Chief Operating Officer Anne Turner explains why it’s quite right that we should be asked what we do with our profits.

Orbits accounts last year show that we made a £67 million profit: a strong financial position is absolutely vital to our long-term success. We have some huge targets to reach to ensure we deliver our mission of ‘Building Communities’.  We will build 12,000 new homes by 2020 and, in a time of reduced funding, we need money to develop. Last year we were the third largest developing housing association with a pipeline of 4,364 homes at March 2014. Last year we invested £1.6 million into community investment activities, and by 2020 we want 20,000 people to have received energy or financial advice.  All our money is reinvested into our social purpose and always will be.

1. The past is paying for the present

There was a golden age for housing associations. In the 1970s and 1980s the government gave us grants worth 90% or more of the cost of building a new home. Rents from these homes started generating profits almost straight away as we had to borrow very small amounts to top up the grants we received. Now these homes are generating profits because the loans have been paid off some time ago. But since the late 1990s, grant rates have been falling year on year. Housing associations have had to borrow more and more of the money needed to build each new home. For the first 10 years or so of the life of each of the homes built in the 1990s and early 2000s, the money collected in rent was not enough to cover the cost of the mortgage payments and managing and maintaining the home. The profits generated from our older homes helped pay for the mortgage until rents had risen high enough for these homes to also be making a profit each year.

These profits are used to subsidise the costs of the homes we are building now.

2. The present will not fund the future

Grant rates are now so low (covering less than 20% of the cost of building a home) and the amount we have to borrow to build each new home is so much higher, that it may now take 30 to 40 years before the rental income we’ve collected has covered all the mortgage payments, management costs and major repairs for each new home.  Homes we build now should make a profit eventually, but not for many years into the future.

3. The future looks worse than the present

We believe the homes we build now will make a profit eventually but we have made lots of assumptions about what the future will look like. All the indications are that in almost every aspect of the housing association business, things in the future will be worse:

  • As our homes get older, more of them will need major repairs and investment  such as new kitchens, bathrooms, windows and roofs. 
  • Welfare reform will have an impact on the ability of our customers to pay their rents and the costs we incur in collecting them will go up.
  • Interest rates will not remain at their current very low levels indefinitely.
  • Housing association loans are like a mixture of a repayment and an interest only mortgage. We pay off the interest every year and the capital in larger amounts every few years. These capital payments increase towards the end of each loan period so Orbit will see much higher loan payments hitting our accounts as older loans reach the end of their terms. 

Orbit will celebrate our 50th birthday in 2017. We want to make sure we are still around to meet peoples’ needs in another 50 years. That’s our long-term responsibility.

To try and reduce the potential impact of the worsening future environment, we try to operate as efficiently as we possibly can; we think about how we spend our money to add the most value for our customers; and we limit the amount of money we have to borrow to build new homes.

So how's it spent?

The profit we make is not paid out to shareholders or locked away in a bank vault. It is used as working capital to reduce the amount we need to borrow to build new homes. Last year we spent £174m on 796 new homes and only received £34 m in grant - the rest came from loans and cash surpluses. Using these surpluses reduces our interest costs so creates a virtuous circle of higher profits. If we didn’t have this cash available we would quickly get into a downward spiral of increased interest costs and ever lower profits that would seriously restrict our ability to build new homes.

The chart below gives a broad overview of where our cash came from last year:

Cash -pie -2013_14

 And here you can see what we spent last year:

Cash -out -pie -2013_14

Overall in 2013/14 we received £344m of cash and spent £356m, so we reduced our cash holdings by £12m.

So, despite the £67m profit shown in our accounts, in real cash terms we spent more last year than we received. Housing Association profits don’t show this because the money we spend on new homes and some investment in existing homes doesn’t show up on our income and expenditure accounts but on our balance sheets and cash flow statements.

Let’s not forget too that housing associations are increasingly offering far more than just a set of keys to a home. Many, like Orbit, are delivering services that create huge social value such as money advice, access to training, the creation of apprenticeships and services to help people find employment. Orbit is only able to provide these services that help people unlock their potential because we are financially sound – now and for the future.

For more information

During 2014-15, Orbit has targets to hit as part of our 2020 Vision. These are:

Housing Choice

  • Delivered 2,175 new homes of our targeted 12,000 (cumulative)
  • Develop and deliver a flexible housing model and market a flexible housing offer
  • Develop Orbit’s first private rented scheme

Community Investment

  • Provide 1,450 training places, 235 employment outcomes (cumulative 2013-15)
  • Invest £1.8 million into our communities and attract external funding to help us do this.
  • Secure ECO funding, invest up to £5 million from Orbit into energy efficiency programmes

Customer Offer

  • Have 10% of customers accessing our services online
  • Achieve 82% customer satisfaction.
  • Provide fuel poverty and financial inclusion advice to 2,000 customers (750 fuel poverty, 1,250 financial inclusion)