Fitch: Budget rent cuts threaten creditworthiness of social landlords

14 Jul 15

Chancellor George Osborne’s decision to impose rent cuts on social housing providers in last week’s summer Budget has hit the creditworthiness of the sector, ratings agency Fitch has said.

In its analysis of the change, which means rents paid in the social housing sector will be reduced by 1% a year for the next four years instead of increasing based on the Consumer Prices Index, Fitch said the reform was “adding to the instability of registered providers’ funding streams”. The sector is also expected to be hit by government plans to extend the Right to Buy to housing associations.

The reduction in rents from next April superseded an announcement last year that increases would be based on CPI+1% for the next 10 years, which itself would replace the long-established RPI+0.5% formula.

As a result of the reductions, housing associations face 12% lower rents by 2020/21 compared to current forecasts, according to Fitch’s forecast.

It is yet to be seen to what extent this will reduce individual providers’ annual income streams, and what additional efficiency savings will be needed. If efficiencies cannot be made, the change may also push providers into riskier business operations to try to offset the loss of revenue, Fitch’s analysis warned.

“The cuts are also likely to affect registered providers' loan covenants, potentially leading to breaches,” it added.

“In addition, the sudden and unexpected change of policy lowers the sector's predictability and may tarnish lenders' confidence in it.”

Other measures announced in the Budget, including the cut to the household benefit cap from £26,000 to £23,000 in London, and £20,000 in the rest of the country, could also hit the sector, as would the bar on Housing Benefit for those aged between 18 and 21.

“These changes will put further pressure on the ability of tenants to pay their rent and may lead to increased arrears,” it added.

“Fitch considers the registered providers sector financially robust, and it has coped well with recent changes in regulation. Nevertheless, registered providers also face the possible extension of Right to Buy, which if implemented, would create additional challenges for registered providers in managing their asset cover.”

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