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S&P would downgrade half its rated housing associations after no-deal Brexit
The credit ratings agency Standard & Poor’s (S&P) has said it will downgrade half the housing associations it rates if the UK leaves the European Union without a deal.
According to a judgement issued today by the agency, “the risk of a disruptive Brexit is substantial” and so, therefore, are the potential consequences on UK housing associations.
Most of the associations rated by S&P would, the agency said, be downgraded by one notch but those which are more reliant on income from market sale housing would be downgraded by two notches.
On 11 December, MPs will vote on a Brexit deal negotiated with the European Union, which defines the terms of the UK’s withdrawal.
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After a number of prominent resignations from Theresa May’s cabinet, it is widely expected that parliament will reject the deal.
This would not lead directly to the UK leaving without a deal, but this could happen eventually if MPs are unable to agree on an alternative.
S&P predicted: “We can reasonably expect certain negative shocks to the UK social housing sector in the event of a no-deal Brexit. Sharp declines in house prices and higher average inflation in the fiscal years (FY) 2020-2021 (ending March 31) would shrink operating margins which, in turn, would reduce EBITDA [earnings before interest, tax, depreciation and amortisation] margins.
“Moreover, we forecast a reduction in social housing lettings while we consider housing associations will increasingly struggle to increase social housing rents in FY2021 and therefore rents will continue reducing by 1% for this fiscal year.”
In a no-deal Brexit scenario, S&P said it assumes that the UK will enter “a moderate recession”, which will lead to rising unemployment and therefore a greater need for social housing. Associations, therefore, would need to maintain their current development plans.
In order to do this and account for the reduction in income, S&P said, associations would have to increase borrowing, which is also likely to reduce their ratings.
Apart from the impact of worsening market conditions, S&P said associations’ ratings would also be damaged by the government’s limited ability to provide support, which would happen if its own rating was reduced.
Nevertheless, S&P said, most associations’ ratings would remain in the ‘A’ category, as they are already relatively high at the moment.
Read more about how the social housing sector is preparing for Brexit
The agency currently rates 36 housing associations. The top rated organisations are Local Space – a landlord financially supported by a number of London councils providing rent guarantees – and Richmond Housing Partnership, both of which have AA- grades.
A further 17 associations are one notch lower on A+, 11 are rated A, and five are rated A- (Metropolitan Thames Valley, Green Square, Places for People, Swan and Apex). One housing association (Gentoo, based in Sunderland) is rated BBB+.
The lowest ‘investment grade’ rating in S&P’s scale is BBB – currently one notch below Gentoo and two below the other five. Below this rating, associations would cease to be considered top grade, safe investments which may make it harder for them to raise long-term finance.
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Update: at 12.46 on 4.12.18 This story was updated to clarify that Local Space is not partly owned by Newham Council.
Update: at 11.33 on 3.1.19 This story was updated to clarify the nature of Local Space’s support from some London councils.
