Business Plan 2011 - 2016

PROVIDING

QUALITY

HOMES

THROUGHOUT

WALES

Business Plan 2011 - 2016

DARPARU

CARTREFI

O

ANSAWDD

TRWY

GYMRU

Business Plan 2011-2016

Introduction

Page

Our mission and values

Context

3 4

Themes and priority actions

5

6

Key Risks

10

Financial Comments

14

Conclusion

17

Income and expenditure

18

Cashflow

18

Balance sheet

19

Net borrowings

19

Cash balance reconciliation

19

Assumptions

19

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Introduction...

Welcome to the Association's Business Plan for the period 2011 - 2016

Once again we and our residents have to contend with a difficult economic climate, which poses both challenges and opportunities for the coming years. Our underlying business strength has been aided in recent years by our focus on making the organisation as efficient as possible so that all available resources are channelled to frontline services. We continue to pride ourselves on the quality of our housing and the support we offer our residents to live in safe, secure and pleasant neighbourhoods. Our services are tailored to the specific needs of customers, and helping them sustain their tenancies.

Our financial strength is also more apparent since we changed the way we account for replacement components such as new kitchens and bathrooms. This change was brought about by a new standard that would have been compulsory for us from 2012 but which we decided to adopt early in our 2010 financial accounts. Our financial results and projections show that we are achieving, and expect to continue to make, healthy surpluses in each financial year. This is important so that we generate enough cash to keep re-investing in our existing

housing stock and have the financial strength to take on increasing amounts of debt to finance growth.

We remain on track for our housing stock to be compliant with the Welsh Housing Quality Standard by the end of 2012, and are making inroads into achieving environmental sustainability.

The advent of the new regulatory regime for housing associations in Wales has led to a fundamental review of our service planning arrangements. As a result we have implemented a new process which is more evidence based and dynamic in responding to changing demands from customers and stakeholders.

It is also more forward looking, and we have moved away from annual cycles in favour of rolling plans which are reviewed and refreshed by the Board on a quarterly basis in the light of new evidence and changing circumstances. In this way our planning is always up-to-date and at the forefront of our thinking.

Our business and financial planning are seamless, ensuring we have the resources to achieve our ambitions and that we remain in a strong position to address unforeseen opportunities when they arise.

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Our mission and values ...

Our previous mission and aims served us well for many years but, with increasing diversification of the business and the desire to reflect more clearly our ambition for the future, we have redefined our mission statement to reflect our vision for the future, which is: Strong, sustainable growth to make a difference in people’s lives and communities This new vision makes a clear statement of the organisation’s ambition to grow without limiting this to the development of new housing.

‘Growth’ is intended to be broad enough to reflect the potential for growth across the Group in areas such as emergency alarm and out of hours services, maintenance services through our Cambria subsidiary, as well as through property development.

The vision also recognises the geographical context in which the Association operates and the dispersed nature of our housing stock. We are financially strong with the ability to be a significant housing developer and deliver high quality landlord services. Whilst our stock is not as concentrated geographically as that of some providers, we look to maximise the opportunities to ‘make a difference’ in the delivery of services in the communities in which we operate.

4

The feedback we have received on the new vision has been very positive. People like the clarity around growth of the business and that “making a difference” is so prominent.

Our mission may have changed but our values have not. These are of great importance to us and hold us to account. In all of our dealings we aim to be: • Fair Balanced, giving praise where due and constructively critical.

Inclusive in our approach, respecting the dignity and individuality of everyone.

• Open Open to change, committed to continuous improvement and learning. Transparent, honest and trustworthy.

• Responsible Professional, challenging existing arrangements, taking ownership of issues and using our initiative to see them through to resolution.

•

Supportive Easy to deal with, approachable and accessible. Welcoming, caring, listening and responsive.

• Efficient Make best use of resources and maximise the impact of our activities.

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Context The economic climate continues to be diffi cult for our residents and the communities in which they live, where remaining in work is hard enough let alone getting new employment. Those fortunate to be in work are seeing little in the way of pay increases, if any at all, whilst high infl ation makes it increasingly more diffi cult for them to pay their way. With low investment returns, older people in particular are having to eat into their savings to keep up with cost increases. This is resulting in more individuals becoming reliant on benefi ts, whilst at the same time there is immense pressure on the Government to curb public spending.

Whilst the majority in our society may still aspire to home ownership, increasingly this is out of reach for many, with house prices disproportionate to their income and little prospect of being able to save a suffi cient deposit. Even at record low interest rates, many who already have a stake in their home are struggling to meet existing mortgage payments, and this is set to get even worse when interest rates inevitably rise at some time in the future.

House building volumes are well below average as traditional house builders experience diffi culties in selling and the amount of government subsidy available to providers of social housing has been substantially cut. Whilst the demand

Sharon Touse with her niece in her new home at Brewery Court, Merthyr TydďŹ l

for affordable homes always outstrips supply, in the current environment the gap is widening, making it ever harder for people to fi nd an affordable and secure long-term home.

This is the context in which we have set our priorities.

Anne Hinchey Chief Executive

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Themes and priority actions This plan has been devised through an analysis of our strengths, weaknesses, opportunities and threats in the light of our new vision and the present economic context.

A self-assessment against regulatory delivery outcomes has substantially informed our plan, which has been ‘tested’ with staff, residents and local authority partners. This process has resulted in actions that have naturally fallen within five themes:

• To provide homes for people in housing need

• To continually improve the quality of landlord services

• To maximise the potential of the Group structure

• To minimise the impact on the environment by WWHA and its residents

• To work with residents and communities to make a positive impact

6

These themes or areas of activity provide further explanation of what the Association will do to achieve its overall vision. These themes are both inward and outward facing reflecting the focus on growth while being mindful of existing customers and the need to continually improve.

Neither the themes nor the actions to achieve them have been given completion dates quite deliberately.

The intention is a flexible plan that is responsive to changing priorities and demands from stakeholders and customers. Artificially setting dates or trying to prioritise one action over another would be wasteful as they would need to change so frequently.

The plan is reviewed and monitored by the senior management team each month and by the Board following the end of each quarter.

These reviews inform the pace at which different actions are being progressed at any point in time, authorise the removal of actions once satisfactorily completed or no longer relevant, and ensure new priority actions are added in a timely manner in response to changing circumstances.

Some of the key actions are summarised overleaf.

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1. To provide homes for people in housing need •

Identify the strategic areas where development is both viable and sustainable

•

Develop a WWHA standard for new build

•

Review procurement arrangements to ensure value for money

2. To continually improve the quality of landlord services •

Redesign the delivery of estate management services

•

Redesign the delivery of the repairs service

•

Launch a new website

•

Design and implement a new rent setting policy

Resident Lee Cribb enjoys his hi-tech adapted kitchen in Greenfield, Flintshire

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3. To maximise the potential of the Group structure • Re-brand the organisation to refl ect its new mission and focus •

Embed Cambria Maintenance Services

4. To minimise the impact on the environment by WWHA and its residents •

Introduce a green travel plan

•

Reduce the number of residents in fuel poverty through advice and further improvements to properties

Craig, Rob and Wayne are part of Cambria’s area-based workforce

8

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5. To work with residents and communities to make a positive impact •

Develop and extend the use of area improvement plans

•

Explore opportunities to make low cost broadband available to residents

WWHA’s Board donated £3,500 to help Clubs for Young People Wales

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Key risks...

There are a number of risks (some of which are outside our control) which impact upon our business and which affect the way in which we manage and deliver our services. The key risks are highlighted below.

Rent levels

Maintenance costs

Around 80% of the Association’s income is derived from rents. Rent levels are regulated by the Welsh Government which permits increases at 1% above general inflation.

Around 50% of our total cash receipts are required over the plan period to meet maintenance and component renewal costs. To ensure good value and adequate supply of contractor resource the Association has longterm partnerships with a number of contractors. Since 5 January 2011, the day to day maintenance of approximately two thirds of the Association’s housing stock has been undertaken by Cambria Maintenance Services Limited, a 100% owned subsidiary of WWHA, affording greater control over quality and cost of works. For other properties and works, the Association has in place term maintenance service contracts up to the end of 2013. These long term partnerships are with established local contractors who are used to supporting our residents, and they work on an open book basis.

A consultation on future rent regulation is underway and, if implemented as currently drafted, will enable WWHA to charge marginally higher rents on general needs housing units overall, and will permit greater discretion in the setting of rents on individual units.

The Welsh Government also intends to bring retirement (sheltered) housing stock within rent regulation at some point in the future, though currently there is no detail available as to when or how they intend to do that. Currently approximately 65% of the Association’s rents are subject to regulated rent ceilings.

10

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Diversification into intermediate market rentals The Association funds its development activity using a combination of social housing grant and loans. The amount of grant available to the housing sector as a whole has been substantially reduced, which will inevitably reduce capacity in the sector to deliver homes at social rents. At the same time there is an increasing demand for rented accommodation as the aspiration of home ownership can no longer be achieved by many households. The Association plans to develop around 700 homes over the five years to 2016, which it can do whilst keeping within gearing constraints contained in existing loan covenants.

Where social housing grant can be secured the Association will seek to maximise the number of homes that can be developed through a combination of social and intermediate market rents, and by seeking cost economies without compromising on standards. While the Association has only limited experience to-date of intermediate

market rentals, it is not envisaged that there will be particular difficulties in fully letting available units. So that even more homes can be provided for households in need, the Association will also seek to increase its future capacity to develop by renegotiating loan covenants if necessary, where it is cost effective to do so.

Interest rates and loan finance Following the implementation of component accounting, operating surpluses comfortably cover interest payable. For loan covenant purposes the Association can accordingly absorb a greater level of fluctuation in interest rates. As short term interest rates are expected to rise only gradually from their present low levels towards long-term fixed rates, it is intended that the overall interest charge will be held down by permitting a higher proportion of variable debt than has applied in previous years.

The appropriateness of this strategy is reviewed on a regular basis.

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The margins payable to lenders on some of the Association’s existing loans may be lower than the costs being incurred by those lenders.

Accordingly such lenders may seek to renegotiate the terms of existing loans under certain circumstances, for example on variation of a loan covenant, or on the granting of new loans.

The Association has suffi cient loan facilities in place to meet existing commitments but will require additional funding to meet growth ambitions over the period of the plan. Some banks are no longer willing to lend for long periods such as 25 years, and thus in future property investments may need to be refi nanced more frequently. Longerterm fi nance is still available through fi xed interest loans sourced in the bond markets. These loans generally result in a carrying cost until the funds are required and thus to keep costs down it may be necessary to raise smaller amounts more frequently.

Low demand Demand is good for the vast majority of our housing throughout Wales, resulting in low and manageable vacancies. The demand for retirement housing is more mixed with strong demand in some areas and low demand in others, particularly for smaller fl ats and studio apartments.

The proportion of properties which take more than six months to relet is however very small. Rental loss throughout the plan has been assumed at around 1%, which is commensurate with recent achievements.

In 2011 we opened our ďŹ rst Extra Care housing scheme in Prestatyn, Denbighshire

12

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Welfare Benefit Reform The Government’s proposals for welfare benefit reform are radical and far reaching though the impact for the Association and its residents is difficult to predict.

Some changes should not affect the Association at all, such as the overall household benefit cap and the maximum amounts of housing benefit for certain types of property.

The increase in deductions for nondependent residents introduced this year has not had an adverse impact on income as it affects relatively few of the Association’s residents and most have absorbed the change.

The other two major changes that will affect the Association; limiting benefit to the size of the property and universal credit are not due until 2013. The impact of the universal credit is hard to predict though research into the removal of direct payments of rent to landlords suggests that arrears will increase.

For the purposes of this plan it is assumed that direct payments to the Association will continue and therefore no adverse impact on income will occur.

In relation to the limiting of housing benefit to reflect the size of home a working household needs, the Association has examined which of its residents will be affected.

Approximately 1,000 residents are under-occupying their home by one bedroom or more and therefore could be affected by the change.

Discussions with a sample of these has revealed a mix of reactions with some willing to absorb the reduced benefit and others looking to transfer to a smaller home.

While the Government are still reviewing whether the criteria should be one or two or more bedrooms in determining under-occupation, the Association has started discussions with residents to help avoid any adverse impact.

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Financial comments...

Income and expenditure The implementation of component accounting has eliminated much of the volatility previously experienced through the income and expenditure account. The majority of income and expenditure items are now predictable within reasonable bounds.

Whilst healthy annual surpluses are predicted to arise each year within the period of the plan, the cash generated from those surpluses is required for reinvestment in components for the existing housing stock and to partially fund loan principal repayments.

Cash flows The projections show small positive free cash flows after replacement capital expenditure. This cash goes some way towards funding principal repayments on loans, though in the main those loans are essentially being refinanced by new loans.

14

Growth in the form of land purchases, property development and net property acquisitions are funded through Social Housing Grant and additional interest–bearing loans.

Over the five years to 2016 the plan shows an investment in land and property development of £76.6 million, net of Social Housing Grant, as the Association expands its housing stock by 699 homes to meet increasing demand.

The Association had in place £20 million of confirmed long-term loan facilities as at 1 January 2011, which is expected to be sufficient to meet the needs of the Association until the second half of 2012. Further new funding is being sought to meet ongoing growth ambitions beyond that time.

Reserves At December 2010 the Association had accumulated reserves of £20.4 million. By 2016 these reserves are expected to have increased to £53.6 million.

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Financial covenants

Financial assumptions

There are two principal financial covenants with which the Association must comply. Firstly surpluses must exceed 10% of net interest charges over each rolling three-year period.

Following the implementation of component accounting this covenant should be met comfortably over the period of the plan.

The financial projections are sensitive to changes in rents, maintenance prices, employment costs and interest rates.

Secondly a substantial minority of Association loans require gearing to be no more than 50%, while others permit 60% and 70%, or impose no restriction. Gearing is defined as the level of gross borrowings as a proportion of the sum of reserves and Social Housing Grant liabilities.

The Association’s gearing ratio is expected to increase from 35% as at 1 January 2011 to 48% by 2016 as the Association continues to grow its housing stock.

Whilst this is within the ceiling level of 50% applicable to certain loans the Association will consider renegotiation to permit a higher level of borrowing if such a change can be agreed at a reasonable cost.

The proposed new regulatory rent regime confirms that rent increases of RPI + 1% will continue to apply provided an association’s total income from regulated units is within 5% of a total target level of income. WWHA’s current income is below the indicative target level in the consultation documents and thus rent increases at RPI +1% are assumed to continue.

In addition it is also planned that a further 3% out of the permitted 5% additional allowance will be gradually introduced through rent increases.

The proposed regulation protects individual residents from facing increases greater than RPI +1% +£2.

Maintenance price changes have been below inflation over the last two years, whereas in earlier years increases had been around 2% above general inflation, in line with the building cost index. It is assumed that prices will follow RPI through to the end of 2012, and thereafter will gradually rise above inflation reaching 1% above RPI from 2015.

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Financial control The Association uses quarterly rolling forecasts to monitor income, expenditure and cash flow trends, and the drivers of financial performance. The rolling forecasts enable management and the Board to have an understanding of current financial performance in any given period relative to that in earlier periods and at the same time to have a view on future financial performance, and how that may be influenced. Reviews undertaken ensure that financial covenants can be met at all times, and that appropriate and timely action is taken to arrange loan facilities ahead of need.

Risks are regularly reviewed and a number of key risks are highlighted in this report. Social and intermediate market rent developments not only require cash up-front for land and building costs, but they continue to consume cash for many years afterwards until inflationary rent increases offset costs including, in particular, interest payments.

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While over the period of this plan it is believed that likely risk outcomes can be readily absorbed, should some major unforeseen event arise the Association would always have a fallback position of being able to curtail development activity to restore a satisfactory financial position. In the absence of development activity the existing property portfolio would generate annual income and expenditure surpluses and sufficient cash to maintain properties at the required Welsh Housing Quality Standard.

In December of each year the forecast for the year ahead is captured in the form of a budget, and any material variances from that budget are subsequently monitored, though the primary focus of management is on rolling forecasts.

The first year of the five year business plan is based on a mid-year Board approved reforecast for 2011, which is more current, and therefore relevant, than the budget set several months earlier.

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Treasury management

Conclusion

The Board reviews its fi nancial strategy at least once in every year and regularly receives reports on the performance of the loan portfolio and treasury investments. As at 1 January 2011, 56% of loans were at rates fi xed to maturity, 13% were at rates which were linked to infl ation and 31% were at variable rates.

With variable rates being signifi cantly lower than fi xed rates, coupled with an ability to absorb rate changes, the present strategy does not restrict the proportion of variable rate debt, and thus the proportion of variable rate debt might increase over the period of the plan.

The Association is well placed to meet its ambitions, grow its business to meet society’s increasing need for rented accommodation, and make a difference to the communities served.

With a likely shortage in development grant funding available to the sector over the plan period, fewer homes than desired can be delivered at social rents. Where feasible however, the Association will use its capacity to substitute properties at intermediate market rents.

Anne Hinchey Chief Executive

Ivor Gittens Chair

We are confi dent that this Business Plan will enable us to achieve our corporate aims over the next fi ve years.

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Financial Plan...

Income & Expenditure

2010 Actual £m

2011 Forecast £m

2012 Plan £m

2013 Plan £m

2014 Plan £m

2015 Plan £m

2016 Plan £m

for years ending 31st December Income Net rent/service charge

33.2

35.0

37.1

38.9

41.4

44.0

46.2

Other income

0.2

2.4

0.6

0.7

0.7

0.7

0.7

Total income

33.4

37.4

37.7

39.6

42.1

44.7

46.9

Salary & wages

(6.3)

(6.8)

(7.1)

(7.4)

(7.7)

(8.1)

(8.4)

Repairs

(7.5)

(7.8)

(7.1)

(7.8)

(7.7)

(8.1)

(8.4)

Expenditure

Property depreciation

(3.3)

(3.5)

(4.0)

(4.4)

(5.1)

(5.7)

(6.1)

Other costs

(7.2)

(7.3)

(7.8)

(8.3)

(8.7)

(9.0)

(9.4)

Total expenditure

(24.3)

(25.4)

(26.0)

(27.9)

(29.2)

(30.9)

(32.3)

Net interest

(4.5)

(4.5)

(5.5)

(6.7)

(8.3)

(9.0)

(9.5)

Net surplus

4.6

7.5

6.2

5.0

4.6

4.8

5.1

Interest cover

2.0

2.7

2.1

1.7

1.6

1.5

1.5

Cashflows

2010 Actual £m

2011 Forecast £m

2012 Plan £m

2013 Plan £m

2014 Plan £m

2015 Plan £m

2016 Plan £m

for years ending 31st December Net cash flows from operations

12.6

14.4

16.5

17.1

19.2

20.9

22.2

Net interest paid

(3.9)

(4.3)

(5.3)

(6.6)

(8.2)

(8.9)

(9.4)

Replacement capital expenditure

(8.8)

(8.9)

(9.0)

(7.9)

(10.7)

(7.0)

(8.0)

Free cash inflow/(outflow)

(0.1)

1.2

2.2

2.6

0.3

5.0

4.8

Development Expenditure

(18.7)

(14.0)

(24.3)

(22.0)

(21.0)

(19.3)

(15.1)

SHG

11.5

9.1

4.7

5.5

6.1

5.3

3.5

Sale of properties

2.9

Net property development expenditure

(7.2)

(2.0)

(19.6)

(16.5)

(14.9)

(14.0)

(11.6)

Net cash outflow before financing

(7.3)

(0.8)

(17.4)

(13.9)

(14.6)

(9.0)

(6.8)

5.5

5.0

15.0 3.2

16.7

17.6

12.1

10.1

Loan principal drawdown - existing facility -additional facility requirement

18

Loan principal repayments

(2.0)

(2.2)

(2.9)

(2.8)

(3.0)

(3.1)

(3.3)

Net increase/decrease in cash

(3.8)

2.0

(2.1)

0.0

0.0

0.0

0.0

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Financial Plan...

Balance Sheet

as at 31st December

2010 Actual £m

2011 Forecast £m

2012 Plan £m

2013 Plan £m

2014 Plan £m

2015 Plan £m

2016 Plan £m

Gross property cost

376.5

398.0

430.5

459.4

490.3

515.6

537.6

Housing Grant

(233.5)

(242.4)

(247.1)

(252.7)

(258.8)

(264.0)

(267.6)

Depreciation

(33.7)

(37.1)

(41.1)

(45.5)

(50.7)

(56.4)

(62.5)

Net cost of property

109.3

118.5

142.3

161.2

180.8

195.2

207.5

Other fixed assets

3.3

3.6

3.7

3.7

3.5

3.1

2.7

Total fixed assets

112.6

122.1

146.0

164.9

184.3

198.3

210.2

Net borrowings

(87.6)

(88.7)

(106.3)

(120.5)

(135.4)

(144.7)

(151.8)

Other net liabilities

(4.6)

(5.5)

(5.6)

(5.3)

(5.2)

(5.1)

(4.8)

Net assets & reserves

20.4

27.9

34.1

39.1

43.7

48.5

53.6

Gearing Ratio

35%

34%

39%

42%

45%

47%

48%

Net Borrowings Reconciliation

2010 Actual £m

2011 Forecast £m

2012 Plan £m

2013 Plan £m

2014 Plan £m

2015 Plan £m

2016 Plan £m

Borrowings net of cash on 1 January

(79.7)

(87.6)

(88.7)

(106.3)

(120.5)

(135.4)

(144.7)

Capitalised interest on index linked loans

(0.6)

(0.3)

(0.2)

(0.3)

(0.3)

(0.3)

(0.3)

Net cash flow for year

(7.3)

(0.8)

(17.4)

(13.9)

(14.6)

(9.0)

(6.8)

Borrowings net of cash on 31 December

(87.6)

(88.7)

(106.3)

(120.5)

(135.4)

(144.7)

(151.8)

2012 Plan £m

2013 Plan £m

2014 Plan £m

2015 Plan £m

2016 Plan £m

Cash Balance Reconciliation

2010 Actual £m

2011 Forecast £m

Cash balance on 1 January

5.4

1.6

3.6

1.5

1.5

1.5

1.5

Net movement

(3.8)

2.0

(2.1)

0.0

0.0

0.0

0.0

Cash balance on 31 December

1.6

3.6

1.5

1.5

1.5

1.5

1.5

2012 Plan £m

2013 Plan £m

2015 Plan £m

2016 Plan £m

Rent

4.50%

4.00%

3.50%

3.50%

3.50%

Maintenance costs

3.50%

3.50%

3.25%

3.50%

3.75%

RPI

3.50%

3.00%

2.50%

2.50%

2.50%

New borrowings rate

5.63%

6.13%

6.63%

6.63%

6.63%

Grant rate

58.00%

58.00%

58.00%

58.00%

58.00%

Housing completions

69

194

195

141

100

Assumptions

for years ending 31st December

2014 Plan £m

Inflation

Funding

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Cardiff Office (registered) 3 Alexandra Gate Pengam Green Tremorfa

Cardiff

CF24 2UD Fax: 02920 415380

Flint Office Unit 2 Acorn Business Park Aber Road Flint Flintshire CH6 5YN Fax: 01352 736340

Tel: 0800 052 2526 Email: info@wwha.co.uk Website: www.wwha.net Follow us on @wwha If you would like this document in Braille, large print, or another language or format, or if you would like the services of an interpreter, please contact us on: Tel: 0800 052 2526 Minicom: 0800 052 5205

Wales & West Housing Association is registered as a charitable association under the Industrial and Provident Societies Act 1965 No. 21114R