RPs Suffering In The Property Market Crash

Author:Ms Emma Brett
Profession:Smith & Williamson
 
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We look at the effect the downturn in the housing market is

having on RPs' accounts

As property sales plummet, what measures can RPs take to

minimise the impact?

The global credit crunch has hit the UK property market hard,

with Nationwide and Halifax stating that house prices have fallen

nearly 11% in the past year. Lack of mortgage availability and a

fall in consumer confidence has led to a downturn in the housing

market, the effects of which could be far worse than those

encountered in the 1990s. The demise of Lehman Brothers, HBOS and

Bradford & Bingley has also added to the misery.

Many larger registered providers (RPs) are increasingly

financially dependent on the sale of property (via outright sale or

shared-ownership) to make their business models work, and until

recently, few RPs had assumed that there would be any downturn in

their anticipated revenue from property sales.

Predicted effect on RP accounts

Property sales

The sector's reliance on property sales is clearly

illustrated in the global accounts published by the Housing

Corporation, which show an increasing deficit before tax and

property sales for the years 2005 to 2007. In 2007 the surplus

generated from the sale of properties was £542m, compared to

the overall surplus before tax, £270m.

The balance sheet

RPs have been developing to a greater extent over the last few

years and are likely to be holding properties on the balance sheet

that have experienced impairment.

In addition, RPs trying to sell properties, either through

shared-ownership, HomeBuy or outright sale, will be holding

significant amounts of property on the balance sheet as current

assets. These assets are valued in the accounts at the lower of

cost and net realisable value, and RPs may need to make significant

write-downs to these assets to reflect the reduction in the

achievable selling price. Also, contractors are increasingly facing

financial difficulties and taking longer than planned to complete

developments ? making matters worse in a market where

prices are continuing to drop.

The global accounts in 2008 and 2009

The 2008 global accounts are yet to be published, so we have

made some simplistic assumptions to show how the 2008 and 2009

global accounts might appear when taking into account the effects

of the slowdown, impairment of housing stock and increased interest

rates.

The assumptions we have used for 2008 are:

an increase in rental income of retail price index (RPI) of

0.5% plus 3% for growth

an increase in operating costs of RPI of 2% plus 3% for

growth...

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