Report: Social housing sector will survive Covid, Brexit

England’s housing associations can meet the challenges of lingering Covid and Brexit risks, rising costs and sustained reliance on debt.
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England’s housing associations are well-placed to meet the challenges of lingering Covid and Brexit-related risks, rising costs and sustained reliance on debt finance amid the politically sensitive debate about affordable housing, according to a new report from Scope Ratings.

Scope says the sector’s proven ability to adapt to an evolving operating environment is a credit strength, as demonstrated by the associations’ capacity to weather the operational disruptions caused by the Covid-19 crisis and adapt their strategies to evolving government policies for the sector.

“The sector has undergone important changes over past decades, with the rise of the associations as the main providers of social housing,” says Jakob Suwalski, analyst at Scope. “Changes in government policies and grant funding schemes have also shaped housing-association business models and risk profiles in the move away from traditional social activities and increased reliance on debt funding.”

At the same time, the need to manage the transition to new funding regimes has underpinned the association’s operational and financial sophistication. Similarly, the regulatory framework has evolved to better monitor and manage emerging risks linked to higher debt and more complex business profiles.

“The Regulator of Social Housing’s comprehensive regulatory standards, robust monitoring and good record of pro-active interventions has been critical for financial resilience, good governance and risk containment across England’s social housing sector,” says Thibault Vasse, analyst at Scope.

Today, housing associations are facing a wide range of short- to long-term challenges including the disruptions caused by the Covid-19 crisis, Brexit-related risks related to a reduced labour force for construction and additional checks of materials coming from Europe which could lead to delays in property development. Rising cost and regulatory pressures linked to the safety, quality and energy efficiency of homes also put pressure on associations.

“Even with increased government grants and higher rents, we expect debt to remain a key source of funding for housing associations’ capital development plans,” says Suwalski. “Social housing providers will have to balance development priorities with the higher investment needs related to their existing stock or risk higher-than expected debt increases.”

The Covid-19 crisis confirmed the sector’s resilience, as the impact of the crisis on operational and financial performance was limited thanks to providers’ pro-active management and mitigation planning. The regulator’s requirements regarding internal stress-testing gave providers clear visibility on their risk exposure and prepared them well for adverse conditions, such as those related to the pandemic.

Similarly, access to funding remained strong. New credit facilities agreed in 2020 peaked at GBP 14.5bn, up from GBP 12.4bn in 2019, reflecting investor demand for housing-association debt. “Access to external borrowing will remain fluid for the sector overall, with the investor base to increasingly diversify on the back of strong and rising demand for debt and the sector’s strong ESG credentials,” says Vasse.

Overall, the sector remains resilient in the face of a broad range of short- and long-term challenges. Housing associations’ comfortable profitability, robust financial positions, strong governance and predictable cash flows for their core activities, combined with increased government support, underpin credit quality across the sector.

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