Sector warned of ‘greater weakening’ of credit, as 20% of S&P’s HA portfolio at ‘negative’

Mr Ejgel believes the dip in creditworthiness is happening because the effect of the rent-setting agreement that allows providers to increase rent at the rate of Consumer Price Index (CPI) plus one per cent had not improved the sector’s financial indicators as it had earlier been expected to. The rent rises, which were permitted from April 2020, followed a four-year government-imposed rent cut.

Mr Ejgel said: “We assumed around two years ago that with a better rent regime with a move from -1 per cent to CPI plus one per cent, all financial indicators would improve – performance would improve, debt burden would go down, liquidity would improve.

“What we can see now is that at best, performance would weaken and stabilise, and debt would increase and stabilise.

“And this is excluding, of course, recent developments with potentially high inflation staying for longer… and that would add additional pressure to the metrics. So that’s why we are concerned about what’s going on.”

However, Mr Ejgel believes the sector would still be able to invest in new development while increasing maintenance and existing stock costs.

In November 2021, S&P released a report that said it had downgraded eight social housing providers during the year, and that improving the quality of existing stock, combined with cost inflation, is likely to hit profitability in the sector.

Mr Ejgel was joined by Mark Davie, director of private credit at asset manager M&G Investments, who said that credit quality in the sector is “deteriorating”, but that funding would continue to be available – albeit on different terms.

“If we go back 10 years, we had quite a few housing associations with double A ratings,” said Mr Davie. “That has now slipped and they are typically in the A rating category range, so credit quality has deteriorated. The reason for that is increased development and market-facing activity.

“So will they continue to go down if debt levels rise? Yes, I think there’s a good chance they will.

“If this sector slips from being a single A-rated sector, which it currently is more or less, into a triple B sector, still investment grade, will there be money for you to buy? Yes, absolutely.

“Would you get it on the same terms as you’re getting now? Probably not. You will pay more for it, you may have to take shorter duration, and you may get slightly different or tweaked governance.

“But will there be money? Yes.”

Imran Mubeen, director of treasury at Bromford, also spoke at the conference and said he would like to see the methodology of credit rating agencies change to accommodate the ambitions of the social housing sector.

Mr Mubeen also wants investors to take a “fair view” of the sector as it provides an “essential service, benefits from regulation and a solid business plan underpinned by a strong credit-worthiness”.

He also highlighted an “institutional ego” that he believes makes housing associations “covet” credit ratings over development.

He said: “When I joined Bromford, we were A1. We’re now A2, in the Moody’s rating at least. So, we’ve very much embraced rating downgrades to accommodate development given the importance of delivering new and additional homes.

“I think there is a balance between the sort of weight of delivery in new homes and that credit-worthiness.

“There is clearly a balancing of equation there. But we have demonstrated in the recent past that we are willing to countenance a rating downgrade in order to develop more homes. And I think that is the right thing to do.”

Earlier this week (on 14 March), sector credit ratings agency Moody’s set out its expectation that English housing associations would scale back development and increase their debt in response to the growing requirement for investment into stock.

The agency referred to an anticipated £20bn spend over the next decade to meet fire safety requirements and decarbonisation targets.