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HA finances to strengthen as CPI+1% returns but Brexit poses ratings risk, say credit agencies

News28 Nov 2019Luke Cross

Housing association (HA) operating margins will come under further pressure in 2020 before bouncing back in the years that follow on the back of a return to a Consumer Price Index (CPI) plus one per cent rent regime, according to the ratings agencies.

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Housing association finances to strengthen as CPI+1% rent regime returns – but #Brexit poses risk to their credit ratings. Moody’s and S&P publish sector outlooks #ukhousing

But the UK’s departure from the European Union is a risk to HA credit strength, with one agency saying around 10 HAs are vulnerable to a downgrade on the back of a change to the UK sovereign rating.

Both Moody’s and Standard & Poor’s (S&P) published sector outlooks this week.

Moody’s said the outlook for the UK social housing sector is stable next year, “based on a return to inflation-linked rents, effective cost controls and proactive management of elevated economic risk”.

S&P also painted a positive picture, citing the return to a CPI plus one per cent rent regime in April 2020 over five years for increased income certainty and stronger EBITDA levels, which it said should strengthen housing providers’ financial performance and debt ratios.

Neither have forecast a sustained impact of safety costs on financial capacity – as set out by some sector leaders this week – but social housing letting margins are expected to dip further in 2020 before recovering thereafter.

Both agencies cited Brexit as an ongoing risk for the sector. S&P said that a sovereign downgrade could lead it to lower its ratings on about 10 UK HAs. Despite uncertainties linked to Brexit continuing “to weigh” on English providers, it anticipates that most credit ratings will remain in the ‘A’ category.

And it said there could be a smaller number of negative rating actions in 2020 than in 2019, as HAs report declining debt-to-EBITDA from 2021, with revenues from traditional activities on the rise.

“Combined with their proven ability to secure relatively cheap funding from the market and their respective governments, this could help them offset the pressures weighing on their creditworthiness.”

Political pressure to increase development output – exchange for inflation-linked social rent increases and slightly increased capital grants on more flexible terms – will lead to higher borrowing and capital expenditure, but growing reserves will mean stable gearing (debt to assets) of nearly 50 per cent, it said.

Moody’s added: “Proactive management to strengthen liquidity will provide resilience against elevated economic uncertainty, with most rated housing associations able to cover more than two years of cash needs.”

However, the agency added that sales turnover will continue to grow in order to fund more development, reaching a peak of 25 per cent of turnover in 2021, and therefore increasing the volatility of operating cash flows.

In the context of Brexit, it flagged key economic risks in relation to lower house price inflation through market sales exposure, higher cost inflation and higher cost of debt, given the substantial borrowing requirements across the sector.

But it added that HAs’ management teams have proactively strengthened liquidity to protect against elevated economic uncertainty, with the majority of rated HAs holding sufficient liquidity to cover more than two years of cash outflows.

S&P view: 41 publicly rated UK housing associations

S&P also said it anticipates revenue to grow faster than costs, supporting the financial performance of housing providers.

It said the sector’s interest rate risk is “very low” because a high proportion of the sector’s drawn borrowings carry fixed interest rates and we forecast that inflation will not exceed two per cent in 2020.

It said that since 2016, English RPs have “controlled costs tightly to absorb the rent cuts imposed on them”, adding that RPs “anticipate catching up on maintenance spending as the policy environment becomes more supportive”.

Key factors that could impact its forecast remain the outcome of the general election, which it said could trigger changes to government policies and support for the industry, and the “evolution of the Brexit process”, which could influence the performance of the housing market.

S&P added that HAs sector has a track record of adjusting their strategies and financial policies when needed.

“We anticipate that [their] commitment to long-term financial planning and the stress tests they run will help them to preserve adequate financial ratios, including interest coverage.

“They could, for example, postpone development projects, including those for outright sales.”

Referencing a record level of issuance in the first quarter of 2019 that has further strengthened liquidity, S&P said that even if HAs were to use their current funds to pay for their development programmes, they would not suffer a liquidity shortfall.

Housing providers in Scotland, Wales and Northern Ireland will continue to benefit from more supportive policy environments and higher grant, which helps mitigate their “higher debt burdens”.

Taking a global view, S&P said that social housing providers generally face strong demand for affordable housing and a backlog of maintenance spending in 2020.

It added: “The need to house increasing populations, and the question of how to pay for it, will remain hot topics into 2020.

“S&P Global Ratings anticipates that [RPs] globally will increase their capital and maintenance spending over the next few years, to address the persistent demand.”

Social Housing special reports

Each month Social Housing focuses on a specific aspect of housing finance and collates and scrutinises the data for hundreds of housing organisations.

The reports below contain unparalleled commentary and analysis along with detailed sortable and searchable data tables.

Unit costs 2019 Our analysis of data from the English regulator has found that unit costs have risen among all types of housing association, with overall maintenance costs seeing the highest weighted average increase of nearly seven per cent

Impairment 2019 Housing associations’ impairments rise almost 40% in a year, driven by fire safety costs, contractor insolvencies and reduced land values

Global accounts 2018/19 Housing associations’ surplus for the year before tax decreased by five per cent to £3.76bn, driven by a 6.6 per cent drop in England

Affordable rent profile 2018/19 The level of affordable lettings dropped for the third year in a row

Staff pay Data from audited accounts of 206 housing associations shows that average staff pay in 2018/19 was £31,787 – a rise of 3.2 per cent over a 12-month period

Professionals’ league Our exclusive professionals’ league finds that activity continued apace in 2019, when housing associations increasingly looked to private placements

Sales proceeds Despite a 10 per cent rise in housing associations’ income from development sales in the last financial year, sales revenue is likely to remain flat over the coming years as a result of the property market downturn

Capital commitments The total capital commitments of 200 housing associations rose by 15 per cent in the past year, analysis by Social Housing has found

Reliance on sales surplus Social Housing finds that the total sales surplus of 150 English registered providers has dropped by nearly 10 per cent, as a result of lower market sales surplus

Stock dispersal How many council areas does your housing association operate in? How concentrated is its stock?

Accounts digest 2018/19 How does your housing association’s finances compare to others?

Housing Revenue Account part two How do councils compare in their 2018/19 Housing Revenue Account positions? Steve Partridge of Savills takes an in-depth look

Diversi fication of income We look at how housing associations are diversifying their income, and finds that they made 10.3 per cent more revenue from shared ownership and non-social housing activity

Impairment 2017/18 Social Housing takes a close look at the accounts of the 130 largest housing associations, and finds that impairments rose by nearly a third to £78.4m in 2018

Global accounts Social Housing’s analysis of the sector’s global accounts finds that housing associations’ pre-tax surplus fell last year – driven by drops in England, Scotland and Wales (August 2019)

Affordable rent profile We find that the number of affordable rent lettings recorded last year by housing associations in England has dropped for the second year in a row, suggesting that the sector is shifting away from the tenure

Capital commitments We scrutinise the capital commitments of the 208 largest housing associations in the UK (June 2019)

Housing Revenue Account part one Steve Partridge of Savills takes a look at the financial factors councils should consider in their Housing Revenue Account business planning (May 2019)

Reliance on sales surplus Our analysis reveals that profits form 42 per cent of 150 English housing associations’ total surplus (April 2019)

Sales proceeds We look at housing associations’ build-for-sale income and find a two per cent increase in 2017/18 (March 2019)

Shared ownership sales England, excluding London, has seen a four per cent rise in shared ownership sales – much lower than last year’s 16 per cent increase (February 2019)

Stock dispersal We show that housing associations’ general needs stock is becoming more concentrated within their local authority areas (January 2019)

Click here to find more special reports