Lime Legal

Building blockage

Published 01 March 2024

Rising building costs and maintenance costs are the biggest risk area for housing associations say finance chiefs

Building cost inflation is the single biggest risk area for housing associations, according to finance directors in the ROOF survey. Half identified increases in building or maintenance costs as their main concern, with various sources predicting prices will rise by between 3.5 and 7.5 per cent in the next 12 months. This is two or three times the current rate of retail price inflation (RPI), to which association rents are pegged.

‘It’s the fact that costs are unknown,’ explained one. ‘Meeting the decent homes requirement is just a question of digging deep and discovering.’

Another explained the problems for transfer associations in particular. ‘Maintenance cost inflation is the biggest risk area for all registered social landlords. Because of their funding structure and having less reserves, largescale voluntary transfers (LSVTs) would be at the top of the list. If things continue as they are we could have real problems. Perversely what we want for our business case is a recession!’

One LSVT finance boss works out that if the gap between funding continues to increase at the same rate and maintenance cost inflation stays the same for the next decade, the result will be a £12 million deficit on maintenance. Meanwhile, the average cost of development is up from £65,500 to £92,000 in just two years.

Associations are trying to inject some certainty into their business plans, but this is not an easy job. ‘We’re building a 7 per cent increase in real terms over the next five years into our business plan,’ said one director. ‘Two years ago the RICS was suggesting 2.5 per cent in real terms per year for the next five years. Volatility here is one of our biggest risks.’

Another turned the problem on its head. For him the main problem is low inflation. ‘If costs are rising 1 per cent more than revenue, with inflation at only 2 per cent it hurts much more than if it was 5 per cent or 6 per cent,’ he explained.

But another saw land prices as the real concern. ‘The biggest risk in terms of delivering our business plan is access to land at prices that enable affordable homes to be generated.

‘We are competing with big players in the housebuilding market and with other RSLs. Most of the other risks we can respond to by becoming more efficient and cutting costs or accessing different streams of funding.’