Moody’s: HAs to scale back development and lever up amid £20bn safety and decarb costs

Moody’s said the “considerable uncertainty” around how future decarbonisation costs will be financed elevate risks for the sector, while the impact on housing associations’ credit quality will depend on the condition of their existing housing stock and the amount of debt they take on.

London-based housing associations appear most exposed to negative impacts to credit, according to the ratings agency.

Housing associations rated by Moody’s plan to spend £2bn on fire and building safety over the next five years – around 20 per cent of their 2021 turnover – and £1bn on retrofitting.

The agency expects spending on building and fire safety to peak in financial year 2023, while decarbonisation costs are expected to triple between 2022 and 2026, suggesting housing associations will attempt the majority of retrofitting works closer to 2035.

The government’s £3.8bn SHDF, which is to be dispersed over a 10-year period, has already allocated £179m of funding through a first wave in January 2022, following an earlier £61m demonstrator phase. A second wave of £800m, running over three years, is expected to be released this year.

However, Moody’s said that fund’s total only covers 42% of the estimated cost to reach EPC Band C, and only tackles “fabric-first” measures.

The SHDF also only covers 11 per cent of the lower sector estimates to achieve decarbonisation, at £36bn, and seven per cent of the highest estimate, which is £58bn.

Elsewhere, the government’s Building Safety Fund, totalling £5.1bn, and an additional £4bn promised by secretary of state Michael Gove, cover two-thirds of the total estimated costs of removing unsafe cladding – £10bn for social housing units and £5bn for the private sector.

However, Moody’s said it expects most of the grant funding to go to the private sector despite housing associations carrying the lion’s share of the costs. As of 31 January 2022, housing associations had only received 12 per cent of the pledged grant funding, the report noted.

The agency expects the impact of these trends on operating margins to be contained in the near future, with the median operating margin among housing associations it rates to stabilise at 26 per cent until 2023.

More than half of housing associations rated by Moody’s plan to borrow more as a result, which will weaken their debt and interest coverage ratios.

Meanwhile, 39 per cent of Moody’s rated housing associations plan to scale back their development plans. It said that this was particularly the case in view of the stricter standards on new build units expected as part of the upcoming Future Homes Standard in 2025, which will make development “even more expensive”.

London-based landlord L&Q, which is rated A3 with a stable outlook by Moody’s, recently reduced its yearly building target to 3,000 units a year from 10,000 because of the new standards.

“A scale-back would slow their debt growth, a credit positive, but it would also weigh on future turnover,” said Moody’s.

The report noted that London faces the highest share of older housing units, suggesting that housing associations based in the capital are likely to face the highest retrofitting costs.

The agency said: “We anticipate leverage to increase across the sector, a credit negative, with London associations likely to concentrate the risks with high-rise buildings and older stock.

“However, the associations we rate benefit from strong liquidity profiles, above the 18-month requirement set by the Regulator of Social Housing thanks to prudent management, solid access to low-cost finance and sophisticated and long-tenured management, which will mitigate the risks presented by the new standards.”