The directors present the strategic report for the year ended 31 March 2023.
This is the fourth set of financial statements produced by Capital Letters (London) Limited (“Capital Letters”) since the company was established in December 2018 by 13 London Boroughs.
Capital Letters exists due to the determined efforts of London Boroughs, London Councils and the Ministry of Housing, Communities and Local Government (MHCLG) to establish a pan-London vehicle to address the implications of the introduction of the Homeless Reduction Act in 2017 and the systemic issues facing London in managing the challenges of homelessness. The Department of Levelling Up, Housing and Communities (DLUHC) has continued to support Capital Letters throughout the subsequent years. These challenges have continued to build up ever more since Capital Letters’ inception in 2018.
The Company has been fully grant funded since inception, although it was always intended that Capital Letters would become self-sustaining by 2025. The Board and the Boroughs Representative Body (BRB) undertook a wholesale business review during 2022/23 in order to build a credible plan to achieve this, notwithstanding the increasingly challenging operating environment.
Our operating environment
The UK rental market has changed beyond recognition, and that is magnified in London. Capital Letters is committed to change with the market, to be agile, responsive, and intelligent in order to find new ways of supporting our members and helping families in London. In July 2023, Savills and LSE published a report into the London Private Rented Sector (PRS) which jointly commissioned by London Councils, Trust for London and Capital Letters to understand the underlying factors affecting the sector so significantly. Their evidence that the PRS has changed beyond recognition since Covid restrictions were lifted is immutable; during 2023 it has continued to get worse severely restricting our member Boroughs and Capital Letters ability to find affordable (LHA) homes for those who need them. The research showed that in 2022/23 there was:
• 41% reduction in PRS listings
• 20% increase in rents
• Only 2.3% of properties were at or below LHA
• Landlords exiting the market, particularly at the lower end
We also know that the rent advertised when listing properties does not reflect the actual rent paid. Competition between prospective tenants to secure scarce properties is resulting in a bidding war with those most able to pay being successful. This puts further pressure on the ability to find affordable homes for those most in need.
The latest homelessness statistics published in July 2023 show that the number of households in Temporary Accommodation (TA) at the end of March 2023 increased by 10% compared to the same time in 2022. Of these households, 1 in 4 had someone in work. This unprecedented homelessness situation has been compounded by the cost of living crisis, mortgage interest increases affecting both householders and landlords, inflation and the need to also find homes for refugees fleeing warzones.
TA is anything but temporary. Homeless households stay in hotels, B&B and unsuitable accommodation for months and years; most local authorities are unable to find suitable homes for such households let alone within legislative timescales and there is insufficient social housing to meet the competing demands which compounds this situation.
Capital Letters has its finger on the pulse of the London PRS market. We have built relationships with landlords and their representatives and understand landlord sentiment. We know what works for them as well as for our members and use this knowledge for the benefit of both. It is this unique combination which means that Capital Letters has positioned itself as a voice of authority on issues contributing to the housing and homelessness crisis facing London, the PRS and affordability issues.
Strategic approach and our operating model
In March 2023, the Board and BRB approved the new five year 2023 – 2028 Corporate Strategy, which the Company commenced implementing with effect from April 2023.
The Corporate Strategy took several months to develop in consultation with our member Boroughs. With London Councils we also jointly commissioned a review of our future plans by Campbell Tickell to evaluate their viability, understand member commitment and highlight any options that Capital Letters had not yet considered. The outcome was confirmation that Capital Letters’ plans were well considered and relevant to our business and our operating environment. No additional options were identified although the review confirmed the continued relevance of Capital Letters to our members. Notwithstanding this, the new Corporate Strategy was deliberately conceived on the basis of contracting to ten member Boroughs – a coalition of the willing – as a more effective way of working effectively and in concert to manage the negative impact of our shared operating environment.
The underpinning financial plans were developed with the support and advice of Centrus, the Company’s financial advisors and was prompted by the changes in the housing market, compounded by the cost-of-living crisis. These have seriously impaired Capital Letters’ ability to continue to deliver its services during 2022/23 in the same way as previously, necessitating the Company to be creative in its responses and rethink its operating model.
In July 2021, Capital Letters submitted a successful Spending Review bid for an additional two years of grant funding until 2024. This meant that grant from DLUHC continued to be available in 2022/23 and will be in 2023/24 to fund the core services for members (procurement and tenancy sustainment) as well as the Company’s new housing and property management and commercial lettings agency services, established to develop the new business streams essential to secure financial independence from the end of 2024/25 and beyond.
DLUHC commenced a strategic review of Capital Letters activities in March 2023 which satisfactorily concluded in July 2023.
In the financial year 2022/23, the impact of the PRS changes were evident, with 837 properties were offered to member Boroughs (2021/22: 2615) of which 669 were let to homeless households (2021/22: 1839) (a conversion rate of 79% for the full year against a target of 80% (2021/22: 70.3%)) .
Turnover for the period was £8.3m (2022: £12.4m). The majority of this comprised £5.2m grant income from DLUHC (2022: £5.9m), with the remaining coming from recharges to Boroughs for incentives and recruitment-related matters. Direct costs were £2.6m (2022: £6.7m) and administrative expenses of £5.8m (2022: £5.7m). As per 2022, the operating profit was £0. Cash in hand at the year-end amounted to £3.6m (2022: £3.0m).
With effect from 1 April 2023, the Company activated the long-approved Board and BRB decision to introduce membership fees of £50,000 per annum, meaning for the first time that the Company is not wholly grant funded. Until 2022, our primary activity was procuring individual PRS properties through negotiation with landlords principally, enabling member Boroughs to discharge their homelessness duties.
During 2022, it became evident that our usual operating model was no longer effective in the challenging environment we are operating within. We therefore redesigned and restructured our organisation to better implement our strategic plans based on what we know works, providing flexibility to meet individual borough’s requirements and respond to larger scale opportunities to increase supply and generate income when they arise whilst reducing core service costs.
We implemented the new Hub and Spoke operating model from 1 April 2023, which has been designed to provide core (Hub) services for the benefit of all members (procurement and tenancy sustainment) with the ability to provide discrete services for individual Boroughs and other partners (Spoke services such as management services, property supply, property inspections. lettings services for landlords and consultancy). This new approach is founded on the delivery of a range of cost effective services, designed to deliver members’ priorities and generate income for Capital Letters.
In 2022/23, Capital Letters became a landlord of a small portfolio of properties leased from social purpose ESG investor, Resonance. These have been let to member Boroughs, with three properties let as market rent through our new Lettings Agency as part of our plans to develop independent income.
In the next 12 months, Capital letters will be focussed on delivering the 2023 – 2028 Corporate Strategy priorities, continuing to provide core services for all members, with the addition of PSL transfers and bespoke management services as the foundation for future growth, building the company’s reputation as an excellent landlord and service provider and a firm base from which to further consolidate the company’s activities.
The Company plans to continue to procure 1,000 PRS properties each year for members to use for homelessness prevention, creating resilience, growing properties in management and services for partners in order to generate sufficient recurring income to enable the company to continue trading without reliance on grant income.
Risks and emerging risks
The Board review the Strategic Risk Register, Risk Management Policy and their appetite for risks annually. The Strategic Risk Register is approved by the Board. Controls and mitigations are reviewed at each Board meeting. The Board has delegated responsibility to the Audit and Risk Committee to review the Strategic Risk Register in depth at each meeting and report back to the Board on the outcomes of their deliberations. Consideration of emerging risks is undertaken by both Audit & Risk Committee and the Board, with agreement on the treatment of these risks where they are in the control of the business. The Executive Team review and update the Strategic Risk Register at their monthly meetings and report the outcome of these reviews to the Audit and Risk Committee and Board.
Underpinning the Strategic Risk Register are the Operational Risk Registers setting out the risks which are the responsibility of the respective Heads of Service. In 2023/24, Heads of Service commenced attending Audit & Risk Committee to report on their operational risks, how they are being managed and the controls in place to mitigate these in order to provide additional assurance to and information for the Board.
In 2022/23, the main risks facing Capital Letters were the systemic changes to the PRS resulting in the lack of LHA properties available for homeless households, compounded by the continued freezing of LHA rates, the challenging operating environment, inflationary increases affecting the cost of borrowing and thus making commercial deals to enter into leases and manage properties less financially viable and maintaining member Borough commitment to Capital Letters. Increasingly the Board have been concerned about the prospects of risks associated with IT security, fraud and money-laundering and monitor these risks, controls and actions to mitigate them closely.
Governance and internal controls
Capital Letters has two tiers of governance: the BRB which comprised a voting representative from each member Borough and has certain matters reserved that only the BRB can make decisions on. The second tier is the Board of Directors. As a private company limited by guarantee, the Company falls under the aegis of the Companies Act 2006. All the Company’s business is undertaken in accordance with its Articles of Association, the Members Agreement and the legal requirements placed on Directors by the Companies Act.
The Board has adopted the 2020 NHF Code of Governance as the most relevant Code for the Company’s business and has completed a comprehensive analysis of its compliance with the requirements set out in the Code. The Board concluded that Capital Letters substantially complies with the Code requirements (where these are appropriate for business of the Company – as Capital Letters is not a Registered Provider, some requirements placed on housing associations are not relevant). The main change required is to the Directors terms of office – the Board approved the approach to succession planning and smoothing the introduction of the shorter maximum terms of office at their meeting in July 2023. The Board have also adopted the 2021 NHF Code of Conduct to accompany the Code of Governance.
The Board undertakes a governance effectiveness review annually, which is completed by an independent third party biennially. Any actions or continuous improvement outcomes are incorporated into the annual Governance Improvement Plan.
The BRB and Board have clear terms of reference, setting out their respective responsibilities. In 2021, the Board established three Committees: Audit & Risk, Remuneration & Membership and New Business. All three Committees have relevant terms of reference which are reviewed as part of the Governance Effectiveness Review. During 2022/23, the Board decided to stand down the New Business Committee as there was a risk that only a small number of Directors understood the detail of the Company’s new business deals. To allow time for all Directors to become familiar with the Company’s financial modelling and business assumptions, for the time-being, the Board meeting together considers the business cases for growth opportunities. This may revert back to the Committee in the future.
Capital Letters has a comprehensive system of internal controls, which is set out in the governance framework and includes Financial Regulations and Standing Orders which determine delegated authority levels for officers, monthly management accounts and performance reports, policies and procedures which set out how the Company operates and supported by an annual programme of internal audits. Progress against the actions arising from internal audits is monitored by the Audit & Risk Committee and is reported to the Board as part of the regular performance reporting arrangements. During 2022/23, internal audits identified some weaknesses in financial processes which have been corrected in 2023/24.
In 2022/23, the Board took the decision to appoint two Co-optees following open recruitment, one each to the Audit & Risk and Remuneration & Membership Committees, to augment the skills and experience of the respective Committees. Both Co-optees commenced in post from 1 April 2023.
The Chair, the Senior Independent Director, the Independent Non-Executive Directors and Co-optees (6 in total) are remunerated. Their remuneration is independently benchmarked biennially.
The Audit & Risk Committee meet quarterly and review the Fraud, Money Laundering and Gifts and Hospitality Registers and receive reports regarding any IT security incidents, data breaches, DSAR and FOI requests at each meeting.
The Executive Directors provide a quarterly statement of the effectiveness of internal controls in their area of responsibility to the Board, consolidating this into the annual Statement of Internal Controls. In 2023/24, Capital Letters commenced implementing its Information Governance Strategy, which enhances the control environment and extends the responsibility for regular reporting to the Senior Leadership Team (Heads of Service).
Capital Letters people
The Capital Letters’ team comprises a mix of directly employed staff and secondees from member Boroughs, all of whom have the same work experience although terms and conditions of employment vary between secondees and Capital Letters’ employees.
In November 2022 we moved to new offices, prompted by the ending of our existing office lease and the requirement for a more appropriate space to accommodate the workforce. The new offices have improved the working environment for colleagues whilst also realising cash savings compared to the previous office costs. The move also provided the opportunity to implement our new hybrid ways of working, conceived out of the Covid lockdown as a more flexible way of operating for the benefit of staff and Capital Letters alike. Our procurement team are now peripatetic, coming to the office less frequently for team meetings and other events. The remainder of the team split their time between the office and working from home on a 2/3 day split to suit their work requirements.
Capital Letters pays spot salaries which are independently benchmarked biennially.
The health, safety and welfare of our team is important and so we have implemented a range of activities to ensure that the workplace is safe and colleagues feel valued. We have an Employee Assistance Programme (EAP), introduced Westfield Health during the year, have established a Health & Safety group and offer a range of social events to engage staff and enable the whole team to get together at least quarterly.
Changes to the Board of Directors
It was with much sadness that the Board learnt of the passing of Capital Letters’ former Chair, Jackie Odunoye, in May 2023. She was an indefatigable advocate for housing, homelessness and Capital Letters and is much missed.
As a consequence of the London Borough of Haringey leaving Capital Letters at the end of 2022/23, one of the Company’s inaugural Directors – Denise Gandy - stepped down from the Board. The Board of Directors extend their thanks to Denise for her commitment to Capital Letters and her contribution to the work of the Board.
Conclusion
Our overarching vision and objectives remain the same as they were at the company’s inception: to be the strategic, collaborative pan-London procurement and service delivery vehicle for member Boroughs, providing cost effective and efficient services to support members with the management of their homelessness responsibilities by securing homes for Londoners experiencing homelessness, and – importantly - generate income to secure a long-term sustainable future.
Our objective continues to be securing affordable private rented homes to support our member Boroughs to manage their responsibilities to prevent and relieve homelessness and reduce the burden on the public purse, building a sustainable and financially viable future.
Going concern
After making enquiries, the Board has a reasonable expectation that Capital Letters has adequate resources to continue operating for the forthcoming twelve months. For this reason the Board has adopted the going concern basis in the financial statements.
Auditor
Moore Kingston Smith LLP were reappointed as Capital Letters’ Auditors during the year ending 31 March 2023.
On behalf of the board
Capital Letters (London) Limited is a private company limited by guarantee, domiciled and incorporated in England and Wales. The registered office is Sierra Quebec Bravo, 77 Marsh Wall, London, England, E14 9SH.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.
Income and expenses are included in the financial statements as they become receivable or due.
Expenses include VAT where applicable as the company cannot reclaim it.
Government grants are recognised at the fair value of the asset received or receivable. A grant without specified future performance conditions is recognised in income when the grant proceeds are receivable. A grant that imposes specified future performance conditions is recognised in income when those conditions are met.
Government grants are presented separately from the assets to which they relate. Government grants recognised in income are presented separately in the notes. Government grants received before the income recognition criteria are satisfied are presented as a separate liability in the statement of financial position.
Incentives and void payments made to landlords recognised at cost when due and income from reimbursement charged to member boroughs is shown at cost less DLUHC grant when due.
Staff employed on behalf of boroughs who do not second staff are recharged at a fixed annual fee recognised when due each quarter.
No amount is recognised for those forms of government assistance that cannot reasonablyy have a value placed on them. However, the entity discloses information about such assistance.
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is credited or charged to surplus or deficit.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
In the application of the company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
As a company limited by guarantee Capital Letters is not designed to make profits, Therefore to ensure this is reflected in the financial statements all grant received in advance is treated as deferred income in the accounts and the balance is included in creditors due within a year on the balance sheet. This reflects the position that there is no requirement to repay the grant under the tripartite Memorandum of Understanding between Capital Letters, the Department of Levelling Up Homes & Communities, and Tower Hamlets provided it is spent in subsequent years in accordance with the companies’ objectives.
The average monthly number of persons (including directors) employed by the company during the year was:
The company is limited by guarantee, not having a share capital and consequently the liability of members is limited, subject to an undertaking by each member to contribute to the net assets or liabilities of the company on winding up such amounts as may be required not exceeding £1.
As the income statement has been omitted from the filing copy of the financial statements, the following information in relation to the audit report on the statutory financial statements is provided in accordance with s444(5B) of the Companies Act 2006:
The auditor's report was unqualified.
Included in the Income and expenditure statement are the following amounts relating to a grant agreement held with the Department of Levelling Up, Housing and Communities for the housing grants programme.
2023
£
Income recognised in respect to DLUHC grant agreement 5,760,900
Income recognised from other sources 3,086,922
Total income 8,847,822
Expenditure incurred in respect to DLUHC grant agreement:
Staff costs (4,189,148)
Operation costs (2,750,467)
IT costs (185,208)
Other overhead costs (1,116,316)
Total grant expenditure (8,241,139)
Under spend on grant 606,683
At the reporting end date the company had outstanding commitments for future minimum lease payments under non-cancellable operating leases, as follows:
During the year income of £2,926,479 (2022: £4,599,163) was invoiced to the London Borough councils who jointly set up Capital Letters (London) Limited. At year end there was an amount of £597,397 (2022: £1,096,099) that was still outstanding at year end.