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The state of the sector: five key takeaways from Moody’s analysis of landlords’ post-coronavirus finances
Credit ratings agency Moody’s has published an in-depth analysis of the impact of COVID-19 on the UK social housing sector. Inside Housing picks out five key points from the report
Lower market sales income will be the main economic issue for housing associations as result of coronavirus
Moody’s sees market sales exposure as the most “significant channel of economic risk” for housing associations. This is because housing market activity has been negatively impacted by lockdown restrictions and will continue to be impacted during the period of economic contraction that is predicted in the coming months.
The agency identified nine housing associations that relied on market sales for more than 30% of their turnover. Based on severe downside scenarios, Moody’s expects Orbit and Poplar Harca to see turnover reductions of up to 44% compared with pre-outbreak forecasts.
Under more severe conditions, the aggregate loss of income for the nine associations identified would be over £830m.
The nine housing associations are: Southern Housing Group, Newlon Housing Trust, Radian, Clarion, Moat Homes, L&Q, Yorkshire Housing, Poplar Harca and Orbit.
The findings come at a time when data shows that higher proportions of housing association revenues come from market sales. In 2018/19, the median proportion of rated associations’ revenues from market sales was 14% and was set to increase to 19%, according to pre-outbreak plans.
The government’s job retention scheme will not be enough to prevent a huge rise in rental arrears
Rising unemployment is another area of economic shock that housing associations will experience in the 2020/21.
Moody’s noted that the number of benefit claimants rose to 2.8 million in May – three times higher than the usual amount for a month. It said it expects this number to continue to rise when the Coronavirus Job Retention Scheme ends in October.
Unemployment will increase from its current rate of 3.9% to between 7% and 10% by the end of 2020, leading to an increase in rental arrears and bad debts, Moody’s has estimated.
The report said: “An increase in Universal Credit claimants is likely to lead to growth in rental arrears (currently at 4.7%) and bad debts – a secondary channel for the transmission of shock to the sector. However, the credit impact will be less material than that from reduced market sales income.”
The credit rating agency noted that associations already have “embedded processes” that allow effective engagement between staff and tenants, which it expects to continue.
Moody’s expects business plans to change and development targets to be delayed
For registered providers to mitigate losses through market sales, they will look to alter their business plans.
Moody’s noted that landlords which have a large stock of unsold properties will be able to mitigate the effects of impairments on income by changing the tenure of these units to general needs rental units or by undertaking a bulk sale.
However, these actions would generate “lower than expected” cash flows, Moody’s predicted.
Despite the reopening of development sites, the scale and pace of development has slowed as individuals adhere to social distancing.
Moody’s said this will likely lead to a lower number of new homes delivered compared with initial plans and that development may be further limited given supply chain pressures.
“We expect business plans to be changed and development plans adjusted such that units that were expected to complete in fiscal 2021 may not complete until the following year, which will impact pre-outbreak forecasts on income and cash flows,” the report said.
Strong liquidity and demand for housing association debt will support the sector through the pandemic
Moody’s believes the UK social housing sector has “inherent” strengths that make it attractive to investors, providing access to liquidity.
The agency noted that throughout the coronavirus pandemic, several housing associations have continued to secure funding via the public bonds market and through private placements at increasingly attractive rates.
This demand is due to underlying strengths of associations, which include strong governance, a counter-cyclical business structure and steady cash flows.
Moody’s said the sector has previously demonstrated strong planning by increasing liquidity in preparation for a potential no-deal Brexit in 2019. The nine housing associations used in the report held approximately £2.8bn of liquidity.
The agency said: “Increasing liquidity will enable housing associations to support their operations and weather the financial turbulence from the coronavirus.”
Losses will be manageable due to savings from less capital expenditure and repairs activity
Moody’s noted that during lockdown, most housing associations stopped their on-site construction activity and scaled back repairs work as recommended by the Regulator of Social Housing.
These actions meant that housing associations have made savings which can be used to offset losses through slower market sales.
For the nine associations analysed, Moody’s calculates that aggregate cash savings would equate to between £740m and £1.1bn. This compares with between £455m and £830m of income lost from weaker market sales.
The report said: “Taken together, the savings made in fiscal 2021 under our baseline scenario are greater than the combined adverse effects from reduced market sales income.”
Full responses to Moody’s report
Vimal Gaglani, director of treasury and financial planning, Radian Group: “The figures referred to are from the plans which were in place at a time when Radian and Yarlington were formalising our partnership.
“We regularly review our development programme, along with our business plan, including our tenure mix and market sales exposure.
“We are also closely monitoring our external operating environment and the impact it may have on us as a housing provider and are confident that our plans will mitigate the foreseeable risks ahead.”
Jonathan Wallbank, group finance director, Orbit: “We are confident that our robust governance framework, liquidity and the strength of our business give us the financial resilience we need in these uncertain times to deliver our strategy and continue to provide much-needed affordable homes.”
Mark Hattersley, chief financial officer, Clarion Housing Group: “We built a record number of homes last year to meet the needs of a range of groups failed by the market.
“As is the case with many fellow larger housing associations working hard to combat the housing crisis, this includes some increased exposure to market sales.
“We maintain a balanced development programme across a large geographical spread which is underpinned with our strong liquidity position.
“We are therefore well placed to manage the impacts of COVID-19 and ensure we continue to support those in housing need.
“These fundamentals were recognised in last week’s Standard & Poor’s report which reaffirmed our A rating, recognising the group’s capacity to fund investments and service debt obligations in these unprecedented times.”
A spokesperson for Newlon Housing Trust: “At Newlon we have stress-tested our business plan under various adverse scenarios and re-tested it following the outbreak of coronavirus.
“The plan, which is supported by strong liquidity, continues to demonstrate our resilience. In addition, we have clear mitigation plans and mechanisms for knowing when to trigger them.
“To date, our experience of housing sales activity over the past few months shows that the actual reduction in values is much less severe than we have assumed in our budget and business plan.
“Similarly, delays in sales are far less than we have planned for. We will continue to update and stress-test the plan and take remedial measures as appropriate.”
Barry Nethercott, director of finance at Yorkshire Housing: “We operate across a defined geographic area and our market sale properties are located within the areas of highest demand. COVID-19 has not changed our strategy to build a mixed portfolio of homes to help alleviate the housing crisis that exists and is arguably even worse post lockdown than before.
“New buyer interest for our homes remained high during lockdown and is currently running significantly above pre-lockdown levels. We are seeing sales successfully completing again with no reduction in price and very low levels of withdrawal. These combined factors have maintained our confidence levels in the short term.
“We remain mindful of the potential longer-term economic impact resulting from COVID-19, and our latest forecast for 2021 and future years business plan have market sales peaking at around 25%. This is also reflected in our extensive stress-testing.
“Through ensuring we maintain liquidity capacity to fund investments and the financial strength to service debt obligations, together with mitigating actions and triggers, we are confident our stress-tested business plan remains resilient to any changes in the housing market or wider economy.”
