The UK needs more affordable housing. In 2017 there were 1,155,285 households on local authorities’ housing waiting lists in England alone. Development of new council housing has fallen off a cliff over the last half century and councils no longer have the resources to be significant developers of social housing. The burden has been left to the private house builders and, particularly for social housing, the Housing Association (HA) sector. HA’s have been somewhat reluctant participants in the development game, being happy to cautiously grow their housing stock, but not picking up the slack from the dearth of council housing.

New homes built by private and social sectors in England

Source – Ministry of Housing, Communities and Local Government

It has to be said that government policy has, at times, not exactly been favourable towards the sector. Under the Cameron government the onus was on advancing home ownership, rather than promoting social housing. HA’s pared back their development in the face of a series of cuts by George Osborne to the level of rent they were being paid. The Theresa May regime seems to be more predisposed to the social housing sector. Rent levels will return to being linked to inflation in the coming years, and there has even been a return of government grants, albeit relatively small, to fund new social housing development. The quid-pro-quo for this friendlier relationship is that housing associations have to get out and build new affordable homes. Many in the sector, especially the larger associations, have heard the call. They have responded with a spate of mergers designed to pool resources and flex balance sheets to launch ambitious development programmes. Some of this will be funded by government grant, but much of will come from debt raised by HA’s in the corporate bond market. Indeed, they have become some of the most prolific issuers of corporate bonds in the UK market in recent months. It is rare that a week goes by that my colleagues and I don’t have a meeting with one HA or another looking to raise fresh bond market finance to fund new housing.

These development programmes often consists of a mix of “tenures”. Some new homes will be for traditional social housing, some will be for shared ownership schemes, and some will be for outright sale on the open market. The profit from the open market sales is used to subsidise the new social housing. All very sensible and commendable. However, from a creditor’s point of view it introduces more risk. Developing homes for outright sale exposes them to potentially adverse movements in house prices, especially in volatile markets such as London. This increase in risk has been reflected in a drift downwards in the credit ratings of some of the larger issuers of corporate bonds in the sector. When I first started analysing the sector over a decade ago, the small number of issuers generally had very strong credit ratings – usually in the broad AA range. That has all changed. There are still a few who can boast of a AA rating, but they are the exception rather than the rule as the table below shows:

Housing Association  Initial Moody’s Rating Current Moody’s Rating
London & Quadrant Aa2 (Jan 2010) A3
Affinity Sutton* Aa2 (Oct 2012) A3
Notting Hill Aa3 (Jun 2010) Baa1
Sanctuary Aa2 (Mar 2009) A2

*Now part of Clarion Housing

Part of these moves reflect the downgrade of the UK’s sovereign rating (to which HA ratings are linked) in recent years, but the increase in development risk has taken its toll on the credit rating of many an association.

HA’s have a tricky path to navigate – developing new housing stock to keep policymakers happy, but also maintain good relations with bondholders on whom they rely to finance this development. The two aren’t mutually exclusive, but will provide a difficult challenge for management teams in the coming years.

At Kames, we have long been providers of finance to the housing association sector, often through our range of Ethical funds. It will continue to be an area of focus for those funds. However, now, more than ever, we are being increasingly selective about where we invest in this sector. We will concentrate on those HA’s with a proven track record of development through different property cycles, and on those whose focus is on developing primarily social housing, without taking outright sale risk.

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