Changes in regulation affect too
Based on recent announcements in the UK budget, Moody's anticipates cuts in rent subsidies for tenants and in direct capital subsidies for English housing associations (HAs), Moody's Investors Service said in a new special comment. However, although the government is also considering changes to the regulatory framework of the sector, Moody's believes that a significant weakening of regulation is unlikely to materialise. Strong oversight will therefore continue to support the credit strength of what has been a secure, government-related sector to date.
"Whilst the details of reforms may take many months to emerge, difficulties in implementation could potentially be negative for the HA sector," said Gianfilippo Carboni, co-author of the report. For example, the rating agency points out that substantial cuts in housing benefits could increase rent volatility and potentially lead to lower margins for HAs. Due to the complexity involved in reforming housing benefits within the broader web of social support programmes, the furthest-reaching changes could take many months, if not years, to implement.
A more immediate impact could come from a sharp cut in capital grants, leading to increased debt and steering HAs towards more high-risk commercial activities, such as reliance on market sales of properties, in order to cross-subsidise their operations.
Moody's said that the impact of lower government funding would vary between individual HAs and would depend on their business models, appetite for risk and risk-management capacity.
Another consideration includes the potential reform of the regulatory framework of the social housing sector.
"A significant weakening in financial monitoring by and intervention powers of the regulator, currently the Tenant Services Authority (TSA), could weaken credit quality in the sector, which by design operates with low, not-for-profit margins," noted Thomas Amenta, co-author of the report. "However, in Moody's view, significant changes to the sector's core financial regulatory framework are unlikely."
