L&Q and Swan downgraded by S&P over sales as two other HAs put on negative outlook

S&P cut the ratings on London & Quadrant (L&Q) and Swan, and lowered the outlook for Metropolitan and Hyde, but retained their A+ ratings.

In a separate report on the sector-wide impact of the UK vote to leave the EU, S&P said it had lowered ratings on 24 of the 25 social housing issuers its rates, although all of them remain at A grade or above.

It said the most recent revisions were for HAs with the biggest exposure to market sales, which it expects will increase volatility in their income.

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S&P added that it did not expect HAs to fall below the A category and that the strong regulation, large asset bases and access to long-term funding gave them an advantage over housebuilders and real estate companies.

L&Q - which is planning to build 100,000 homes over 10 years - saw its rating came down from AA- to A+, with S&P saying a higher dependency on sales and private rent markets for income could hamper the quality of its earnings and prevent growth in its operating margins.

The report said L&Q will develop 50 per cent of its new homes for sale - including 33 per cent market sales, and the rest for low cost home ownership - and 50 per cent for rent, including 33 per cent for social lettings and the rest for market rent.

It said: ‘While we understand the strategic reasons for increasing development for sale, we continue to view such activities as more cyclical.

‘They are sensitive to general business cycles, broader macroeconomic conditions, residential property valuations, and income growth in an area. In our opinion, this potentially more volatile stream of income reduces the quality of earnings for a housing association.’

But it said it had strong management, well established risk mitigation and a proven ability to switch tenure types.

Waqar Ahmed, group director of finance at L&Q, said: ‘While we understand this decision, we believe that L&Q’s robust approach to risk management, governance and performance management ensures that L&Q is best positioned to meet those potential challenges.’

Mr Ahmed said the position would be further strengthened by its merger with East Thames Group.

S&P lowered Swan HA’s rating to A from A+ and gave it a negative outlook because it said increased market sales made its income more volatile. Swan had already been downgraded from AA- to A+ after the EU referendum and as a result of the downgrade to the UK sovereign rating.

It said Swan’s smaller size compared to its peers and exposure to market sales made it more vulnerable to a possible downturn in London’s housing market if the Brexit process is lengthy.

It said Swan has a pipeline of about 1,500 homes to be delivered over the next three to four years, of which about 900 units have been committed. A bout 65 per cent of the homes under development are for sale on the open market.

S&P added that it also considers first-tranche sales of shared ownership as a non-traditional source of income in that it carries an element of sales risk. Swan plans to sell a further 20 per cent of units under construction via shared ownership.

But it said it had a strong financial process and ‘significant mitigating plans’ in case of a market downturn, such as pausing or rescheduling development schemes, converting tenures from private sales to social rent, and a concerted effort on pre-selling. In addition, regeneration development generally comes with local authority support and is carried out in small phases, of about 150-200 units at a time.

A Swan spokesperson said: ‘We have a strong track record in this area and the risks associated with these activities are well understood and closely monitored by the board.

‘We will monitor the impact of Brexit on the London property market and adjust our plans accordingly.’

Hyde and Metropolitan retained their A+ credit ratings but had their outlooks shifted to negative.

S&P said Metropolitan’s build for sale work exposed it to post-EU referendum market volatility but that its financial profile remained strong.

The ratings agency also continues to acknowledge ‘the moderately high likelihood’ of receiving extraordinary support from the UK government.