England: Stable outlook for housing associations in 2019 reflects more stable policy environment

A more supportive policy environment as well as effective management and strong governance have resulted in a “stable” outlook for the creditworthiness of English housing associations, Moody’s Public Sector Europe said in a report today.

The 1% annual social housing rent cut is entering its final year, with return to rent growth of CPI +1% forecast from FY2021. Recent supportive government announcements have highlighted the sector’s importance in delivering housing. In September, the UK government announced an additional £2 billion in grant funding up to 2028-29, on top of the existing £9bn already pledged. While utilisation of grants is still lower than historic levels, increased grant availability is credit positive and could lead to the sector reducing its forecast debt or reducing its use of market sales to fund development.

Effective management has slowed housing associations’ cost growth, mitigating much of the impact from the reduced rents. Although they are declining, margins remain strong and are projected to stabilise following the return to rent growth in FY2021.

Housing associations plan to increase development compared to last year, with market sales increasing and expected to make up 45% of planned development between FY2019-FY2020.

HA business plans forecast continued growth in aggregate debt - which reaches GBP44.3 billion at FYE2020 - to fund expansive growth. However, revenues are expected to grow at a faster rate, reducing the debt burden.

Increased borrowing will raise interest payments and revenues will remain under pressure from the rent cut next year, tightening social housing letting interest cover.

Moody’s said the report, ‘Housing Associations — England, 2019 Outlook’, is an update to the markets and does not constitute a rating action.

“The credit profiles of English housing associations will be supported in 2019 by the more stable policy environment and housing associations’ effective management, which has mitigated much of the impact of adverse government policies, maintaining margins and strong liquidity coverage,” said Edward Demetry, a Moody’s analyst and co-author of the report. “Housing associations face challenges, however, with increasing leverage and potential headwinds from the softer housing market and uncertainty around Brexit.”

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