Adverse policy changes will weigh on English housing associations after 2016

English Housing Associations’ (HAs) financial performance will likely peak next year before adverse policy changes introduced in 2015 begin to bite from 2017 onwards, Moody’s Public Sector Europe said in a report, noting that its 2016 outlook for the sector is negative.

The policy environment remains challenging for HAs, which among other factors will result in a decline in social rental income for four years from April 2016.

“Adverse policy changes will result in eroding margins and interest coverage ratios for English Housing Associations from 2017 onwards,” said Amir Girgis, an associate analyst at Moody’s.

“HAs will look to offset income lost as a result of the rent cut by cutting costs and slowing their capital expenditure programs. They will likely also accelerate market sales exposure for new builds under a housing policy that is more supportive of home ownership. The impact of these changes on their balance sheets will depend on their strategy to mitigate the impact of adverse policy changes. For those unable or unwilling to adjust, credit quality could start to diverge.”

The rating agency expects the sector’s median operating margin to fall by 2-3 percentage points to below 30% by 2017, and to remain at that level thereafter.

Reduced profitability will erode interest cover ratios from 2017, Moody’s said, while market sales replace lower risk social housing rentals and are expected to make up approximately 25% of turnover by 2019.

As such, the sector will become more reliant on the housing market remaining buoyant. Any moderation or reversal in house prices would exert pressure on cash flow from operations.