The social housing regulator’s appetite and ability to protect housing associations from financial trouble has been called into question by a credit rating agency.
Moody’s this week downgraded the credit ratings of 26 housing associations as a result of its decision to downgrade the UK’s rating.
The agency also launched a review of associations’ ability to access ‘liquidity support’ from the government in the event of financial trouble and warned this could result in ‘multiple-notch’ downgrades of credit ratings.
It said the recent problems encountered by Cosmopolitan could result in social housing assets being protected ‘but the leaseholders… forced to absorb a financial loss’.
Moody’s added this ‘would set a clear precedent that not all liabilities of housing associations necessarily benefit from the implicit support of government’ and said this reflects ‘a somewhat weaker regulatory framework’.
Phil Jenkins, consultant at Centrus Advisors, said the move was ‘inevitable’ given the UK downgrade, but added: ‘The bit that was not expected was the continuing negative outlook on the sector which seems linked to a re-assessment of the likelihood of regulatory and government support.’
Moody’s warning is likely to put pressure on the regulator, which has admitted previously it lacks the resources to function effectively. The Homes and Communities Agency has around 110 regulation staff compared with 205 employed by its predecessor the Tenant Services Authority, which was axed by then housing minister Grant Shapps – the architect of the new framework.
Consultation on how the HCA will ring-fence risk to social housing assets and regulate for-profit providers has been delayed by several months due to resource problems.
Matthew Bailes, director of regulation at the HCA, said he recognised that regulation ‘will need to adapt’ to a more diverse sector.
One housing association chief executive called on the government to make more resources available to the regulator. ‘The government has created an environment where housing associations are encouraged to take more risk, so it must surely follow that regulation needs to be adequately resourced,’ he said.
Other figures said Moody’s is merely catching up with developments in the sector.
Steve Douglas, partner at consultancy Altair, said: ‘Credit ratings agencies have always made a false assumption that the regulator would bail associations out, when it does not happen.’
James Pargeter, head of residential projects at Deloitte Real Estate, said the Moody’s downgrade was not a surprise. However a senior source at the regulator admitted the change raised doubts around the regulator’s appetite to bail out failing landlords.
A capital markets banker told Inside Housing the price of housing association bonds being traded by investors increased following the announcement. The spread over gilt, the difference between the bond price and government bond pricing, increased by between five to 10 basis points.