PI's: Gearing
Regulator for Social Housing: Gearing
RSH 203 : Gearing (RSH and Scorecard measure)
Rationale, Definition & Worked Example
Below you can find information regarding the rationale, definition and formula for this performance indicator. This includes a worked example to demonstrate how this indicator should be calculated.
Rationale
Each provider will have an optimal gearing ratio, informed to some extent by its appetite for risk. Narrative could provide some indication of whether the current gearing level is considered appropriate.
Caution should be applied when comparing different providers, as higher debt levels are associated with recent stock transfers. The accounting policy applied to housing properties (historic cost/deemed cost/valuation) can also result in differences in gearing.
Definition
Gearing measures the proportion of a provider’s housing assets that are funded by debt. It compares net debt to the carrying value of housing properties and indicates the level of reliance on borrowing and capacity for future investment.
Net debt includes loans and finance obligations less cash balances. The carrying value of housing properties is based on their net book value at the end of the reporting period.
Formula
A = Net debt
B = Carrying value of housing properties
“Net debt” = Short term loans
+ Long term loans
– Cash and cash equivalents
+ Amounts owed to group undertakings
+ Finance lease obligations]
“Carrying value of housing properties” = [Tangible fixed assets: Housing properties at cost (Period end) / Tangible fixed assets: Housing properties at valuation (Period end)]
Important note: Cost is the net book value after any depreciation rather than just the cost of properties if the intention is to use the word cost as it is used in the Global Accounts.
If you use different version of cost, you must indicate in the profile data for your organisation whether properties are held at historic cost, deemed cost or valuation
NB: The regulator recognises that there is a wide variety of different gearing measures in use across the sector; different organisations will use different metrics to reflect the nature of their business and their existing loan covenants.
This variety was reflected in the range of feedback that the regulator received on this metric. In order to reflect the growing number of providers who operate through the capital markets in which to access funding, this metric measures gearing on a net debt basis.
This will provide a more meaningful measure of the financial position of the significant minority of providers who have recently raised funding from the capital markets and therefore hold a significant amount of cash, in preparation for a range of investment programmes. The regulator recognises that registered providers can be restricted by lenders covenants and therefore may not have the ability in which to increase the loan portfolio despite showing a relatively average gearing result.
Worked Example
Net debt = £50,000,000
Carrying value of housing properties = £200,000,000
Calculation:
£50,000,000 ÷ £200,000,000 × 100 = 25%