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S&P warns of 'more volatile' housing association sector
Housing associations that increasingly rely on market sales and shared ownership to bring in income are exposing themselves to a “riskier and more volatile sector”, Standard & Poor’s (S&P) has warned.
In a report looking at the effect of the Brexit referendum on housing associations’ credit risk, the ratings agency said some associations are looking to “non-traditional activities” such as building homes for market sale to boost incomes, particularly in London.
The report stated these housing associations are “more likely to generate an increasing share of their revenues from market-related tenures… In our view, this shift is likely to expose SHAs to a riskier and more volatile sector, especially in the Greater London area”.
Inside Housing reported last week that housing associations generated more than £2bn through properties developed for sale last year and the vast majority of this activity was in London.
The ratings agency recently lowered the ratings of 24 housing associations following its downgrade of the UK following the Brexit vote in June.
Housing associations will also have to compete with private house builders on price “which is likely to dilute their operating margins at the group level”, the report concluded.
The “prolonged uncertainty” from a “complex and protracted” Brexit negotiation process combined with housing associations’ “relatively ambitious” development plans could “erode profitability and liquidity” over the next two years, S&P said.
Housing associations, particularly in London, are seeking to “buttress their financial performance and cross-subsidise social housing development” by building one-third social housing, one-third private sales and one-third shared ownership, the report noted.
S&P said development and homebuilding activities “carry higher risks” than sub-market rental income. The agency said these activities are more exposed to “cyclicality risk because they are typically lined to consumer confidence, disposable income, employment levels and growth and household formation”.
However, overall housing associations operate in a “low-risk” industry and have shown “strong operational performance, supported by sound demand for affordable housing in the UK”. The agency said close to 70% of housing associations have a stable outlook and there is not a “material risk” that ratings will fall below the ‘A’ category.
