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Moody’s issues credit warning for housing associations after rent cap proposals
Plans to cap social housing rents next year will weaken margins, reduce interest coverage and be credit negative for housing associations, a major credit ratings agency has warned.
In a note sent out on Thursday, following the government’s announcement on Wednesday that it plans to bring in a social housing rent cap next year, Moody’s warned that this would constrain revenue growth for housing associations and impact credit scores.
The note came following the government’s launch of a consultation looking at how much social housing rents should be capped next year to help ease the pressure of tenants coping with the rising cost of living.
The government put forward three options, with a 3%, 5% and 7% cap all being considered, and 5% being the preferred option.
However, despite the cap potentially protecting tenants from rent increases that could exceed 11% in April, it will have a significant impact on social landlords’ budgets, with the government estimating that a 5% cap could see over £7bn removed from budgets, compared with if nothing was done.
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In the note responding to the plans, Moody’s said the changes would be credit negative, constrain revenue growth and weaken margins and interest coverage metrics.
It said those associations with an A3 rating or lower would be most vulnerable to downside pressure due to their weaker margins and social housing lettings interest coverage.
In analysis carried out by the agency, Moody’s found that the median average for operating margin was 24% for A3-rated associations and 27% on average for those that have an A2 rating.
The median for social housing lettings interest coverage was just above 1.2 for A3-rated associations and over 1.6 for A2-rated landlords.
Moody’s said in the report that it expects to see trade-offs within the sector, such as reducing the investment in existing stock and developing new homes. It added that this is coming at a time when construction price inflation is already high. Between June 2021 and June 2022, prices for building materials and parts rose from 23% to 26% for new housing and repairs.
On Wednesday, the National Housing Federation and Local Government Association called for additional government funding in 2023-24 to make up for the lost revenue the cap would leave and to ensure that new homes could be built and services could be maintained.
Despite expecting new debt to pay for some of this work, particularly mandatory fire safety work, Moody’s said that rising interest rates would reduce the affordability of borrowing. The Bank of England’s current benchmark is 1.75%, this is up from 0.1% in September last year.
Sector figures have recently told Inside Housing about the growing cost of debt due to inflation and the effect of the Ukraine war.
Moody’s report added that it is unlikely the sector will find it affordable to completely compensate for lower net cashflows by increasing debt funding of development or retrofit costs.
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