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Large London housing association downgraded over market sale exposure

Large London housing association A2 Dominion is facing a “high level of exposure to sales”, the Regulator of Social Housing has said.

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Large London housing association A2 Dominion has been downgraded over a “high level of exposure to sales” #ukhousing

The regulator downgraded the 37,000-home housing association for financial viability from V1, the highest grade, to V2, which indicates that it still meets the regulator’s requirements but faces greater financial risk than V1 organisations.

In its narrative judgement, issued along with judgements on 28 housing associations (see table below), the regulator said: “As a consequence of a large and diverse development programme, A2 Dominion is facing a range of risks and a high level of exposure to sales.

“Its latest plan is based on a re-profiled development programme, which recognises that schemes are taking longer to complete than previously assumed.

“As a result, forecast interest costs are proportionately higher with a consequent weakening of financial ratios, including interest cover.”


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Darrell Mercer, chief executive at A2 Dominion, said: “We recognise that having one of the sector’s largest development pipelines comes with a certain amount of risk, but we have a strong risk management framework in place to support this activity.

“We have also retained our G1 rating for governance and are confident of our resilience to effectively manage any adverse impact, while ensuring continued compliance with the regulator’s standards.”

London housing associations in particular have faced increased sales risk recently, with credit ratings agency Standard & Poor’s downgrading five of them in July over such concerns.

Rural housing association Hastoe also saw its V1 rating move to V2, with the regulator similarly noting an increased sales risk.

The regulator’s judgement noted of the 7,000-home association: “Its current projections indicate a greater exposure to sales risk as market sales and shared ownership sales increase. The provider’s debt burden is also forecast to rise in order to fund the expanded programme.”

A spokesperson for Hastoe said: “This revised rating shows we continue to meet the viability requirements and we remain vigilant in managing our risk profile.”

Meanwhile, specialist housing association Habinteg had its governance rating upgraded from G2 to G1, meaning it again meets the regulator’s requirements.

It was downgraded last February after a previous management team of the association, which manages homes for people with disabilities, deleted a large batch of emails.

After an in-depth assessment, however, the regulator stated: “Since our previous assessment, Habinteg has strengthened its overall risk management and assurance framework to ensure that it enables the board to manage its affairs effectively.

“It has also reviewed its internal audit framework and implemented recommendations from independent reviews to establish effective control and internal audit functions.

“Habinteg has a new leadership team and we are assured that it now has the infrastructure and organisational capacity and capability, at executive and board level, to lead and manage the organisation.”

Habinteg now has the top ratings for governance and financial viability.

Meanwhile, the regulator issued three other narrative judgements on associations whose ratings stayed the same.

It said Christian Action (Enfield) (CAE) still had a financial viability rating of V2 because its forecasted operating margins are “well below sector averages”.

The regulator added: “While this is not untypical of providers with a similar service offer, it does mean that CAE has limited capacity to absorb financial shocks and other adverse scenarios.”

Mark Hayes, chief executive of CAE, said: “We think this is a fair judgement which confirms our current governance and viability gradings following an in-depth assessment.

“In our case, we have an ongoing development programme of affordable rented housing together with a significant percentage of supported housing including highly successful housing and support services for young people.”

Meanwhile, the regulator changed the basis of its rating of East End Homes (EEH), which also has a V2 rating for financial viability.

It said: “EEH continues to have material risks which it needs to manage to ensure regulatory compliance. Performance of EEH’s core social housing business remains comparatively weak in its latest business plan due to significant major repair costs.”

It added that the 3,800-home housing association has a financial covenant with “a relatively low level of forecast headroom”, making it harder for it to absorb risk.

A spokesperson for EEH directed Inside Housing to a statement it issued in July when the regulator first gave it its V2 rating.

This said that EEH “welcomes the outcome of the in-depth assessment by the Regulator of Social Housing which confirms we are an effective and financially sound community based independent housing association”.

Cumbria-based Eden Housing Association also kept its V2 rating for financial viability, with the regulator noting that its interest cover and liquidity ratios are low.

It added: “Interest cover in particular is forecast to be below the sector norm over the next five years. Eden’s financial profile combined with its current treasury strategy means that it has limited capacity to deal with downside risks.”

John Clasper, chief executive of Eden, said: “I think the regulatory judgement is a fair and accurate assessment of the association.

“It is pleasing to receive confirmation that we continue to be fully compliant with the regulator’s standards.”

Habinteg has been contacted for comment.

Update: at 11.19 on 31.10.18 This story was updated to include comments from EEH, Mr Clasper and Mr Hayes.

Regulatory judgments published on 31 October 2018

ProviderGovernanceViabilityExplanation
A2 Dominion Housing GroupG1V2Viability downgrade
Acis GroupG1V2No change
Bromsgrove District Housing TrustG1V1No change
Byker Community TrustG2V2No change
Calico HomesG1V1No change
Christian Action (Enfield) Housing AssociationG1V2No change
Coastline HousingG1V1No change
Community Gateway AssociationG1V1No change
Cottsway Housing AssociationG1V1No change
East End HomesG1V2No change
Eden Housing AssociationG1V2No change
Habinteg Housing AssociationG1V1Governance upgrade
Halton HousingG1V1No change
Hanover Housing AssociationG1V1No change
Hastoe Housing AssociationG1V2Viability downgrade
Havebury Housing PartnershipG1V1No change
Liverpool Mutual HomesG1V1No change
Livin HousingG1V1No change
Onward GroupG2V1No change
Railway Housing Association and Benefit FundG1V1No change
Sanctuary Housing AssociationG1V1No change
Saxon Weald HomesG1V1No change
Severn Vale Housing SocietyG2V2No change
Solon South West Housing AssociationG1V1No change
Thames Valley Housing AssociationG1V2Merger
Thirteen Housing GroupG1V1No change
Vale of Aylesbury Housing TrustG1V1No change
Walsall Housing GroupG1V1No change

Regulatory judgements in England explained

The Regulator of Social Housing publishes regulatory judgements for all providers owning 1,000 or more social housing homes.

These judgements set out whether the provider is complying with the regulator’s governance and financial viability standards.

The regulator carries out an assessment either through a scheduled in-depth assessment, or reactive engagement (in which the regulator acts following information about a provider).

It then awards the provider a rating from one to four for financial viability (V) and a separate rating from one to four for governance (G).

Providers must score two or higher in both categories to be judged as complying with the standards.

As providers have increasingly taken on more risk to cross-subsidise social and affordable housing delivery through market-facing activity, the regulator has changed a number of associations’ viability ratings from V1 to V2.

The regulator often categorises this kind of regulatory action as ‘regrades’ rather than downgrades. Click here to read more.

 

Key to ratings:

V1/G1: Compliant

V2/G2: Compliant

V3/G3: Non-compliant and intensive regulatory engagement needed

V4/G4: Non-complaint, serious failures, leading to either intensive regulatory engagement or the use of enforcement powers

 

Rating straplines in full:

Governance ratings:

G1: The provider meets our governance requirements.

G2: The provider meets our governance requirements but needs to improve some aspects of its governance arrangements to support continued compliance.

G3: The provider does not meet our governance requirements. There are issues of serious regulatory concern and in agreement with us the provider is working to improve its position.

G4: The provider does not meet our governance requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

 

Financial viability ratings:

V1: The provider meets our viability requirements and has the financial capacity to deal with a wide range of adverse scenarios.

V2: The provider meets our viability requirements. It has the financial capacity to deal with a reasonable range of adverse scenarios but needs to manage material risks to ensure continued compliance.

V3: The provider does not meet our viability requirements. There are issues of serious regulatory concern and, in agreement with us, the provider is working to improve its position.

V4: The provider does not meet our viability requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

Jargon-busting: some regulatory terms and what they mean

Jargon-busting: some regulatory terms and what they mean
  • Co-regulation: this means boards are responsible for deciding how to meet the regulator’s standards – the regulator does not prescribe how to do this
  • Gradings under review list: a public list of providers under investigation who are at risk of being judged non-compliant with regulatory standards
  • In-depth assessment: a planned inspection, in which the regulator assesses a providers viability, governance and approach to value for money
  • Narrative regulatory judgement: a detailed explanation of the reasons behind a regulatory judgement. Narrative judgements are published where a providers’ viability or governance ratings have changed, or where RSH has particular issues or concerns.
  • Reactive engagement: refers to the regulator reacting to complaints or allegations about a provider and taking action
  • Stability check: an annual assessment of all providers owning 1,000 social homes or more. RSH uses accounts and statistical return data to check for any changes in a providers’ risk profile.
  • Strapline regulatory judgement: where a provider is meeting the standards, and its governance or viability ratings have not changed since its previous judgement, the regulator does not publish a full judgement explaining its reasons for the gradings. Instead it just publishes the gradings themselves, in a ‘strapline’.

 

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