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Guinness slashes development pipeline by 8,000 homes
A 65,000-home housing association has reduced its development pipeline from 20,000 homes over 10 years to between 12,000 and 13,000, amid pressure to invest more in existing stock and falling income from sales.
The planned reduction in development at the 65,000-home landlord was revealed in a credit report by ratings agency Standard & Poor’s (S&P) that said it reflected “a less consistent long-term strategic planning”.
It came amid a credit downgrade from A to A- from the agency, which was said to reflect a decision to reduce exposure to the sales market combined with higher investment weighing on its bottom line.
On the development plan change, the judgement said: "This significant change to the development plan reflects a less consistent long-term strategic planning than we had previously anticipated. We acknowledge this is driven largely by a strategic shift toward additional investment in existing homes, and changing market conditions."
However, it added that the reduced reliance on income from selling homes – which will drop from a projected 40% to 12% on average – made the business “less cyclical and more predictable than before”.
Housing associations across the sector have been forced to spend millions on improving stock and carrying out vital fire safety improvements as a result of the building safety crisis that has gripped the country since the Grenfell Tower disaster.
This, combined with a period of stagnation in the sales market – driven in part by the delay securing a Brexit deal over the past year – has meant that many large organisations have seen their financial margins sharply reduce over the past 12 months. This has led them to reduce their development aspirations.
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“The downgrade reflects our expectation that Guinness’ decision to reduce its exposure to sales – both first tranche and outright – while increasing investment in existing assets, will put pressure on its EBITDA interest coverage,” the agency said.
S&P said that Guinness’ stock remains a ratings strength, with its average age of just 29 years and an “exceptionally low vacancy rate” of just 0.7%.
But it added that capitalised repairs spending would almost double in 2020 and that “a large proportion of these costs are rising in anticipation of higher and more stringent building safety standards following the review into the Grenfell Tower fire”.
It also suggested that the landlord’s economic fundamentals are “slightly weaker” than its London-based peers as only 10% of its stock is in the capital, with the majority in some “less dynamic” areas in the North West of England. The report said it planned to rationalise its stock, focusing on London, the South and the North West “when the opportunity arises”.
On debt, S&P said it expects Guinness to increase this by around £200m by 2022 from the current position of £1.2bn to fund its development plans.
However, the agency noted Guinness’ “very strong liquidity position” due to undrawn facilities of around £550m. S&P retained its ‘stable’ outlook on the landlord. The agency said this reflects its view that Guinness will “successfully complete its new levels of development and investment while managing its cost base”.
A spokesperson for Guinness said: “S&P’s credit rating is a reflection of our significant planned investment in our existing homes, including our investment in building safety, as well as the new affordable homes we will deliver.
“S&P have commented that they, like us, are confident that we will deliver on our investment in new and existing homes and our debt service obligations.”
Update: at 4.20pm on 29.1.2020
This story was amended from a previous version to include more detail about the agency’s views and remove a previous assertion that the credit downgrade was a direct result of the decision to reduce development.
Update: at 3.10pm on 9.3.2020
This story originally said Guinness was planning to reduce its development pipeline by 14,000 homes to 6,133 over five years. This was based on the original S&P report issued in late January, which Inside Housing accurately reported.
However, subsequent to the publication of the article, Guinness contacted S&P requesting a correction to the figure to 12,000 to 13,000. A revised judgement was issued by S&P correcting the figure and Inside Housing has therefore updated this report of the judgement.
S&P also removed a reference to Guinness reducing investment in homes during the period of rent reduction which appeared in Inside Housing’s original article and has since also been removed.
