Fitch forecasts improved sector finances but London landlords will take longer to recover

Experts at a social housing briefing held by Fitch yesterday (5 March) also warned that the impact of conflict in the Middle East could reintroduce uncertainty and risk for the sector.

Akhil Shah, assistant director at Centrus, said “risk is now going to come back again to the table” for all housing associations (HAs) due to events over the past week, and that this will be “at the forefront of boards’ minds” during this period of business planning. 

He said: “I think over the last couple of years, HAs expected falling rates, a nice sort of gradual decline back to rates of 3%... I think, really, that’s been potentially blown out of the water over the last week.

“I think we’re going to see HAs come back to a position where they’re going to look at the cost base again, they’re going to look at interest rates.”

On the government’s series of recent policy announcements, the ratings agency said: “These changes should result in an improved financial position for most registered providers over the next five years but will not affect all of them equally.

“We anticipate a longer recovery period for registered providers based in London due to the significant impact on both operating and capital spending from fire remediation, as well as significant hurdles to future development with high-rise buildings remaining broadly unviable.”

The Fitch report identified “greater strategic divergence across providers”, particularly between London and non-London landlords, as a key theme in the sector.

It said: “Development has ceased in London for most registered providers, due to the challenging environment (e.g. cost of finance, high-rise regulation, limited market returns, eroding borrowing headroom), but continues in other locations unabated. 

“There are more mergers to develop capacity and financial resilience outside London, with the mergers in London considered rescue acts in most cases.”

The credit rating agency said London providers are relying less on sales and private rental, which is leading to “less diversified revenue streams”.

This could be a challenge “if the capacity to change revenue strategy is removed as a cost-saving measure”, Fitch said.

Michael Brooks, director at Fitch, told attendees at the agency’s briefing that many London providers “have started to lose some of that development expertise” due to viability issues and stunted development pipelines.

“From a credit perspective, it’s a little bit of a concern in terms of the ability to diversify your revenue streams,” he said.

Fitch also expects stock disposal to increase over the next five years, which will be a “continuation of existing practices” for some providers but for others will mark a “significant increase”.

Mr Brooks said that this is a “risk area” from Fitch’s perspective, and that the agency will be “monitoring that quite closely going forward”.

“It’s really a question mark for us around: ‘how reliant are you on disposals to be able to fund investment that’s [required by the regulator], and if you can’t afford that regulatory investment without disposing, then what’s your plan if you can’t dispose?’” he said.

Michael Figg, head of social housing at Barclays, said that from a lender perspective, a lot of housing associations “still have a piece to do in terms of really understanding their stock”.

“That’s what we’re starting to look for in plans: a general move from ‘we’ll spend this much... to 2050’ to ‘well actually, we’ve got a better understanding of our stock, this is where we think the spend profile is going to be’ with some maths and some calculation behind it,” Mr Figg told attendees at the briefing this week.