L&Q warns surplus will be lower than expectations

Housing association giant L&Q has warned its forecast surplus for the financial year will be lower than expected after reporting “material challenges” in the first nine months of trading to December.

The 121,000-home social landlord said it now expected to report a surplus for the year to March of between £240-260m, £20m lower than previously predicted. It said it had also slightly reduced its expectations for the ratio of its operating income to its interest payments on debts – known as Ebitda interest cover – a key metric of financial soundness.

In an unaudited third quarter trading statement release today, the organisation blamed the reductions on higher interest rates, cost inflation, and the fact it had uncovered more defects in its homes through its intrusive inspection programme, which it said was “increasing development operating costs”.

However, the news came as L&Q reported another year-on-year increase in housing completions, with 3,007 homes built so far this financial year, up 5% on the first three quarters of last year. The last financial year saw L&Q build more than 4,000 homes, thought to be the most ever built by a single housing association in a year.

L&Q said it is on a trajectory to wind down its development programme after giving up in 2021 on its previous target to build 10,000 homes per year, but the update said it is nevertheless still contractually committed to £3.4bn of development in its 28,345-home development pipeline.

Waqar Ahmed, group director, finance said: “The first nine months of the year has seen L&Q face material challenges as we seek to address our strategic priorities of health & safety, quality of homes and improving services.”

He said L&Q had made significant progress on fire safety works, but that “through our intrusive inspection programme we continue to uncover defects, therefore increasing development operating costs”.

“In addition, our commitment to major works investment programme, which will improve the quality of our existing homes and address issues including damp and mould, combined with higher inflation is adding pressure to operating costs and higher interest rates have weakened interest coverage ratios,” he said.

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He added the situation had been compounded by “negative sentiment on the UK housing market”, albeit that income from market sales for the year to date had been marginally ahead of expectations.

This had put in danger land sale transactions from L&Q’s land-trading business, which if not completed, posed “a downside risk to meeting our EBITDA [operating income] projections”, he said.

L&Q started work on 1,974 new homes in the first three quarters of the year, 40% up on last year, despite its professed aim of winding back its development activity, stating that the majority of starts were “later phases of existing developments”.

Ahmed said: “To address weaker sentiment [in the housing market] and our commitment to lower gross capital expenditure and our risk profile, L&Q continues to focus on its existing development pipeline rather than new approvals as evidenced by our stabilised net debt and strong liquidity position.

“This means we expect to continue to reduce the number of sites that we are operating from and homes in the development pipeline.”

L&Q has previously forecast building as many as 5,000 homes in the current financial year, which it views as its likely peak of development, before reducing its homebuilding rate to around 3,000 homes per annum from next financial year onwards.

The news comes after L&Q in September admitted in its full year accounts that its initial estimate of its full year surplus for 2021/22, made in a trading update, was £53m too optimistic, meaning it had to make significantly larger writedowns than initially anticipated.