There’s a mixture of confusion and misrepresentation about Housing Associations – or HAs – when it comes to our surpluses and what we do with them. Sadly that confusion has caused some - particularly those who don’t know us well - to question our motives, our charitable status and our social purpose. This is deeply disappointing, because in my view those concerns are totally unfounded.
Social purpose remains at the heart of everything we do, and we’re finding more efficient and commercial ways to deliver new and better homes in the face of reduced government funding.
Surplus is not cash
At first glance, HAs can look like cash-rich organisations. We report positive and growing annual surpluses and reserves. However a ‘surplus’ is not the same thing as ‘cash’ - just like the word ‘reserves’ does not mean we have a stock pile of unspent money sitting in a bank account.
It’s also important to remember that, unlike publicly listed companies, we don’t pay dividends to shareholders; all our profits are reinvested back into the organisation.
So why, to the untrained eye, do our accounts look like we’re sitting on cash? While it’s true that the annual surpluses in our accounts reflect the balance once you taken all ‘expenditure’ away from all our ‘income’, not all of our expenditure is the same in accounting terms.
This is because when we spend money on something that prolongs the life of a property (say a new roof) or generates new rental income (a brand new home) it must be ‘capitalised’ for accounting purposes. In other words, the cost must be spread over the life of that home. So, if you spend £100k to build a new home and you think it will last you 100 years, then you would have to record that you spent £1k every year for the next 100 years. I know… not intuitive… not cash.
HAs that invest heavily in existing homes, or build new ones, can often spend far more than their annual income. This year, for instance, we have budgeted to spend £63m more than we receive from rents alone, so that we can build new homes.
Good landlords invest for the future. When we do, our spending leads either to new affordable rental homes or extends the life of homes we already own. Importantly, this investment money doesn’t normally come from the rent we receive, it comes mainly from private loans which need to be repaid, just like a mortgage.
Why is it essential to post surpluses?
If surpluses don’t give a simple snapshot of the actual spend on homes and services, why is it so important for HAs to post them in their accounts every year?
Well, there are two very important reasons why we have to record a decent surplus.
The first is that we have to in order to meet loan conditions. In our case, a mortgage of £366m. In fact we have to generate a surplus greater than our total annual loan repayments to remain compliant. The bigger the loans we have, the larger the surplus we need to make because of these conditions. This is very important. Without external loans from banks and other long-term investors, we would not be able to build new affordable housing, since Government grants no longer cover the full costs.
The second reason we have to generate surpluses is that we need to be able to cover unforeseen eventualities: sudden policy changes, economic downturns, contractor bankruptcies or non-payment of rents. If we assumed that all our income was always going to be received, or that all our costs would remain the same, we would almost certainly come a cropper. Good stewardship requires us to manage financial risks responsibly.
Curo is today a £100m turnover charitable business with ambitions to build thousands of new homes for local families over the next five years. To do this, we need to continue to manage our finances well. It’s only by posting annual surpluses that we can continue to build more affordable homes and make a greater contribution to solving the UK’s housing crisis. So surpluses should not be seen as a distraction or mission creep, rather they should be seen as a fundamental ingredient in today's world and the only way we can fulfil our social purpose longer term.