London landlord handed BBB+ downgrade with negative outlook

News20.12.2212.00 PM by Alex Turner

A major credit rating agency has downgraded a London landlord from A- to BBB+ with a negative outlook after raising concerns about its ability to relieve a number of issues.

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S&P says it downgraded a London-based association in part because of the government-imposed rent cap #UKhousing

S&P said it had downgraded London-based Octavia Housing because it believes the landlord “has limited capacity to mitigate the effects of cost overruns, high inflation, rising interest rates and the government-imposed rent cap”.

After much speculation, Jeremy Hunt, the chancellor of the exchequer, confirmed in November that social rents in England will be capped at 7% from April next year.

“We expect this will result in the group’s financial metrics remaining extremely weak in the medium term,” S&P said. “We further consider that management’s actions to improve cost controls and implement cost savings might not be sufficient to improve the group’s financial indicators.”

Octavia’s downgrade follows S&P’s decision in October to downgrade the credit ratings of eight other large associations.

This came shortly after the rating agency lowered the UK’s entire credit outlook from stable to negative in the wake of the controversial Mini Budget delivered in September by Kwasi Kwarteng, the chancellor at the time.

With the rent cap restricting income and the cost of materials rising, many face significant costs related to decarbonisation and fixing fire-safety defects. A number of high-profile investigations into poor living conditions in social homes is also forcing providers to invest in their existing stock.

S&P said 5,000-home Octavia’s relatively old stock, which has an average age of 70 years, and its inner-London operating area “exposed [it] to a higher cost base compared with rated peers”, despite high housing demand in the capital.

“We think the group has incorporated optimistic assumptions on spend and savings in its budget and business plans, leading to consistent underperformance,” S&P added.

“We note Octavia’s financial team has seen high turnover over the past few years, reducing accountability and the ability to adequately execute plans.”

S&P said Octavia’s social purpose-driven decision-making could constrain its ability to absorb financial shocks, and that while bosses were targeting efficiencies, these would be “difficult to implement in the current environment”.

S&P said Octavia’s rating could be lowered further, should strategic decisions expose it to additional risk, but added that its outlook could be revised to stable if management actions have a positive effect on finances.

The agency added that the association’s access to external liquidity remained satisfactory and is likely to improve once new lines are secured in early 2023.

Sandra Skeete, chief executive of Octavia, said that while the downgrade was disappointing, the association remained “focused on delivering quality services, investing in our homes and keeping our residents safe”.

Ms Skeete pointed out that Octavia’s “strong” liquidity would enable the organisation to deliver on its aims.

“Through our refinancing in October 2022, we obtained £180m of committed facilities as part of our long-term corporate finance strategy.

“Like the rest of the sector, Octavia currently faces strong headwinds and increasing demands. We fully understand the challenges ahead and are focused on managing the associated risks.

“With over 5,300 homes for rent and shared ownership in sought-after central and west London locations, Octavia has a strong asset base, and our homes are in demand,” Ms Skeete added.

“We continue to offer affordable rents to people on the lowest incomes, in some of the most expensive parts of the capital, and remain committed to our social purpose.

“Resident safety is our top priority, and we place great significance on the energy efficiency of our homes, both of which we are substantially investing in.”