The current situation:
Following the requirement to remodel business plans and secured loans as a result of the unexpected rent reduction announced 12 months ago, housing association boards are once again faced with planning for a change which is largely expected to have an adverse impact. As a result, at the time of writing one week on from the referendum, Moody’s has changed the credit outlook for those housing associations that it rates to negative and Standard & Poor’s, which also has a number of housing associations in its portfolio, has downgraded the UK credit rating from AAA to AA. That notwithstanding, it’s important to remember that there remains a housing crisis in the UK and the demand for homes is not going to go away any time soon.
What might change?
The immediate impact on the ability to borrow and costs of borrowing as a result of the negative outlook of the credit rating agencies appears to be minimal. It is too early to say if house prices will fall but if they do, then the value of stock will decrease affecting balance sheets and loan covenants.
There has been some initial evidence of construction costs having been the subject of immediate defensive increases since the result of the vote, anticipating the potential imposition of duties and taxes not payable currently on materials imported and exported to the EU. However, this could change when things are more settled.
We currently operate under EU procurement rules and these could change with Brexit but it will be impossible to say how until we know whether we will continue to be part of the Single Market.
In the longer term, if there is cessation of free movement of labour, we could see skills shortages in the construction industry and in organisations providing services to housing associations as well as in the associations themselves.
What impact could this have on business?
It is clear that there will be some impact in the short, medium and longer term but the referendum result does not change the fundamental need for more good quality, affordable housing.
Two initial thoughts:
- Although new borrowing may become more difficult during this period of uncertainty, many housing associations have existing funding arrangements which could allow them to take advantage of any downturn in the market affecting land prices. This could go some way to off-setting the increase in construction costs.
- If development slows, rents should rise and market rent could become an even more attractive model for housing associations to provide much needed income for investment.