The coronavirus outbreak is likely to have material operational effects on housing associations in the UK. Credit rating agency Moody's outline the impact they expect to see in the sector.
The crisis is likely to cause increased arrears for housing associations and bad debts as unemployment rises, and a material reduction in market sales income compared to pre-coronavirus forecasts.
However, we expect the majority of housing associations to be able to mitigate these impacts due to their strengthened liquidity positions, as cash is saved through postponed development programmes and non-essential repairs and maintenance.
As a result, we do not expect material credit impacts for most housing associations over the next year. Over the medium term, the credit impact will depend on organisations' strategic response to the crisis.
The expected rise in unemployment to 9.5%* in Q3 of 2020 will increase demand for social housing but will also drive an increase in rental arrears and bad debts as newly unemployed residents transition to receiving benefits.
Housing associations regularly support residents through the benefits system, however the scale of this is likely to be a considerable operational challenge for the sector. The risk of lower revenue for housing associations due to unemployed residents is somewhat limited, as 38% of 2019 social housing letting income for rated housing associations is already paid through the benefits system.
Counterbalancing rental income risk will be savings on non-essential repairs and maintenance (following the Regulator of Social Housing’s instructions on March 27) as well as stability in voids, as residents are unable to move homes during the period of government restrictions.
According to Moody’s analysis, a 75% reduction in repairs and maintenance costs for Moody’s-rated housing associations in fiscal year 2021 would represent £1.1bn, or 14% of expected social housing letting income.
We expect lower market sales receipts in fiscal year 2021 than forecasted, due to hindered sales activity from government restrictions, dampened prices due to the weaker economy, and construction delays negatively impacting supply.
Unsold market sales units may result in a rise in impairments and therefore lower surpluses for fiscal year 2021. Mitigating factors include changing the tenure of these units to rented homes or undertaking bulk sales, although either of these approaches would generate lower cash flows than forecasted.
(* Moody's Macroboard May 2020, UK unemployment forecasts)
The delay of development programmes and the re-evaluation of uncommitted and non-contracted development schemes will reduce capital expenditure in fiscal year 2021, consequently freeing up liquidity. Housing associations will be able to redirect these funds towards mitigating the adverse effects of the coronavirus.
The sector’s robust liquidity will continue to provide financial resilience. Rated housing associations’ liquidity currently covers 1.5 times their spending needs over the next two years (median). Strong liquidity positions are underpinned by strengthened treasury policies which typically require 18 to 24 months’ liquidity. Furthermore, access to funding is expected to remain strong via banks, capital markets and, for those who qualify, through the Covid Corporate Financing Facility (CCFF).
Over the next year, Moody’s expects limited credit impact to rated housing associations as a result of the outbreak. The medium-term credit impact is likely to depend on organisations' strategic response and whether or not it triggers a change of strategic direction in development programmes.
Credit risk in the sector would be reduced by: