Two-thirds of sector could get V2 rating as regulator signals wave of downgrades

Currently, 60 of the 202 registered providers with a regulatory judgement have a V2 rating. Between 100 and 140 landlords could end up with a V2, Mr Walters said. 

V2 is a compliant rating, but means that a provider needs to “manage material risks to ensure continued compliance”. 

Mr Walters said: “Clearly providers have got significant pressure on the cost base with inflation and scarcity of labour and materials. The cost of capital for new debt is having a big impact. And the elephant in the room is what will happen in terms of future rent policy.” 

The sector is awaiting the outcome of a government consultation on a tightening of the rent cap, which will lead to a significant loss in revenue for landlords.

Three options have been proposed for capping social housing rent increases: three per cent, five per cent and seven per cent. Five per cent has been indicated as the government’s preferred option. 

But “even seven per cent is going to have a significant impact on business plans”, Mr Walters pointed out, although he stressed that no one issue is “dominant” for the sector. 

The planned action by the regulator comes shortly after credit ratings agency S&P this month handed a “negative” outlook to eight housing associations, meaning around 40 per cent of the landlords the company rates are in this position. 

Mr Walters expected a series of announcements regarding the regrades to V2 from mid-November. 

However, he said providers should not be overly concerned by a V2 rating. “We have long said that you can be V2 forever.”

But he added: “G2 [for governance] is definitely not a good thing and you need to sort out the problem.” 

Asked if he expected governance downgrades too, Mr Walters said: “No. I think we’d be really worried if we were seeing governance downgrades as well. We still think the sector has good risk management in place, generally speaking, across the board.” 

Asked about comparisons with the 2008/9 financial crisis, Mr Walters said: “To me it feels like we’re not quite there yet.

“We have all these indicators flashing red, such as the housing market, borrowing costs and inflation. But what is different this time, is associations are better prepared in terms of risk management. People are very alive to the situation.” 

But he cautioned: “In 2008/9, balance sheets were probably stronger, there was more financial capacity. So organisations are now better managed, but margins have come down.” 

Asked if he expected to see more V2s in 2023, Mr Walters said: “I think it’s a really interesting question. I think a lot will depend on what happens to the macroeconomic economy.”

The RSH published its annual sector risk profile last week, warning that landlords faced “difficult decisions” to ensure their financial resilience.