Moodys says financial position of 13 housing associations weakened, with market sales risk highlighted
Ratings agency Moodys has downgraded 13 social landlords, including a raft of major developers, citing fears over their exposure to the weakening economy, market sales risk and large development programmes.
The credit ratings firm said it had reduced the baseline credit assessments for 12 associations, including Sovereign, Great Places, Guinness, L&Q, Paragon Asra, and Yorkshire Housing by one notch, and Liverpool-based Riverside Group, which has recently merged with One Housing, by two notches.
However, in just six of these associations – Alliance, Citizen, Riverside, Sovereign, Newlon and Poplar HARCA – did the agency downgrade the “issuer” overall in terms of its ability to honour financial obligations. It said the outlook on all associations was “negative”.
The news came as the Regulator of Social Housing this morning heaped more pressure on the sector, calling on landlords to “act” as it published its initial findings from a survey of damp and mould in social housing carried out in the wake of the death of toddler Awaab Ishak in Rochdale.
The downgrades by Moodys come after a series of high-profile downgrades of the financial viability rating of major associations by the social housing regulator, reflecting the worsening economic climate.
Moodys said the 13 associations had been downgraded because of their “high exposure and lower resilience to weakening economic conditions, including prolonged high inflation, capped social rent increases, a housing market downturn and higher interest rates.”
Moodys’ Baseline Credit Assessments assess associations’ standalone intrinsic strength, without having to call on any support from parent or related organisations or government, while Moodys’ “issuer rating” is its ultimate view on how likely an entity is to actually default on a loan.
Moodys picked out some landlords as having lower operating margins or higher exposure to fire safety cost expenditure, but said that for some organisations the downgrades reflected their exposure to development risk and the housing market, with a 5% drop in prices expected this year.
It said: “HAs [housing associations] with higher exposure to market sales (first tranche shared ownership and outright sales) are unlikely to achieve forecast income, leading to lower surpluses and tighter interest cover covenants, as well as reduced funds to finance development.”
It said that Poplar HARCA and L&Q were the “most exposed” in its portfolio with 30% of turnover expected from market sales in the next three years “a very high exposure”. It added: “Similarly, Guinness, Great Places, PA Housing, Saffron, Sovereign and Yorkshire are more exposed than the rated peer median”.
Moodys said high levels of development risk drove higher indebtedness. It said: “Most rated HAs have scaled back development programmes due to rising interest rates and weakening market conditions. However, Great Places, PA Housing, and Sovereign continue to have substantial and ongoing capital spending needs due to their more ambitious development programmes.”
It said these landlords expected net capital expenditure to average more than 60% of turnover in the next three years, against an average of 40%. It added: “Alliance, Newlon and Saxon Weald also anticipate high net capital expenditure over the next three years, at 40% to 60% of turnover. Interest coverage ratios will weaken for these HAs, given higher interest rates.”
The RSH has downgraded the financial viability rating for 48 providers in recent months, including big developers Clarion, L&Q, Home Group, Places for People and Sovereign. The RSH has said that inflation and a weakening housing market were putting pressure on the headroom of providers, “as they continue to invest in new homes and carry out safety, decarbonisation and repair works.”
Today the RSH said the initial findings of its survey on the extent of damp and mould in social housing had found that up to one in 25 homes were likely to have “notable” damp and mould issues.
It said that while the “vast majority” of people living in social housing have homes that are free from damp and mould, the potential for a “serious impact on tenants’ health and wellbeing”, meant it was “essential that providers identify and address these issues promptly and effectively”.
The regulator said its best estimate was that 0.2% of social homes had the most serious damp and mould problems, with 1-2% having a serious problem, and 3-4% a notable one.
It found that a minority of landlords didn’t know how big a damp and mould problem they had, and provided incomplete data, and it promised further engagement and ultimately regulatory action if action isn’t taken.
Fiona MacGregor, chief executive of RSH, said: “Tenants deserve quality services and homes that are safe and of a decent standard. Where there are issues, landlords need to act now to put things right, before we start our active consumer regulation including inspections of providers.
“We expect all providers to continue to look at how they can improve the way they identify and address damp and mould”.
Sovereign’s interim chief financial officer Ken Youngman said in response to Moodys’ decision that it should come as “no surprise” that the economy was impacting the housing sector. He said: “Moody’s decision to downgrade six housing associations, shows that today’s decision is not just about Sovereign – but also about the sector in general.
“As a leading housing association, we […] will continue to invest in our existing homes, provide much needed new developments and manage the business to ensure we maintain sound finances.”
A spokesperson for Poplar HARCA said the board had critically appraised risks to ensure it could deliver its strategic plan. The spokesperson said: “We remain committed to maintaining the financial resilience of Poplar HARCA, and will continue to provide the highest quality community-led services and deliver the regeneration we’ve promised to our residents.”
Cris McGuinness, Riverside’s chief financial officer, said the downgrade was “disappointing” but “expected” given the “ever more challenging economic and regulatory environment.” He said the merger with One Housing had impacted the rating, but that the Riverside board was confident in the steps needed to return to a higher rating. He said: “Although our baseline credit assessment has been reduced by two notches, our issuer and debt rating has only been downgraded by one notch
“Our merger with One Housing has inevitably had an influence on the downgrade, specifically our higher-than-average planned spending on fire and building safety over the next five years combined with our ongoing commitment to care and support, together driving a lower operating margin.
“Investing in our homes to make them safe and secure for our customers is our priority. It’s important to highlight that we are at the beginning of a journey as a combined Group that will deliver significant benefits for our customers and communities as we become better and stronger together.
Phil Elvy, executive director of finance at Great Places, said he was “delighted” that Moody’s had retained its A3 rating, adding that he “recognise[d] the heightened risks around the housing market, construction inflation, supply chain issues and exposure to shared ownership sales.”
Andy Oldale, executive director of finance and governance at Yorkshire Housing said he was pleased to have retained an A3 negative rating. He said: “We do however recognise the impact that the current economic climate is having on all housing associations which is reflected in Moody’s decision to downgrade the Baseline Credit Assessment for ourselves and 12 other associations. Overall we remain in a strong position with good liquidity which will allow us to continue building new homes and delivering excellent services for our customers.”
Housing Today has contacted the other housing associations to have their credit rating downgraded by Moodys for their response.