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Finance experts respond to housing association reclassification

Thu 05 Nov 2015

The Office for National Statistics' (ONS) decision to reclassify housing associations as public bodies has prompted a response from industry and financial specialists.

Savills, says the move has a "number of significant implications" for the housing sector.

On the positive side, it noted that the credit worthiness of housing associations is likely to improve as a result of them being backed by the state.

However Savills also pointed out that controls over new housing association debt will be required from next year's Budget onwards given the Government's desire to cut the public sector deficit. This could lead to greater controls over housing associations’ income and expenditure.

Savills has pointed out that lenders would like to consider whether loss-making loans can be repriced on the basis that the ONS's decision will "mark a material change in the market".

Louise Leaver, Head of Social Housing Finance at Winckworth Sherwood, cautions that while this could be raised in lender negotiations, as a matter of course a lender would normally need to show that the reclassification itself had caused a material adverse effect on the RP’s business or on the lender’s position as a creditor and this causation would be difficult for lenders to prove.

The Office for National Statistics' (ONS) decision to reclassify housing associations as public bodies has also led to responses from industry and other financial specialists.

Robert Grundy, head of housing at Savills, said there had already been "a great degree of uncertainty" in the housing sector in the wake of recent policy developments.

He stated that the ONS announcement has "unfortunately increased this", but said it is good that the government has responded quickly by stressing its "commitment to ensuring housing associations remain private, independent organisations".

However, Mr Grundy pointed out that the government is likely to find allowing the ONS to reverse its decision challenging. This, he said, is because any future analysis by the body "would likely consider the more recent policy changes".

The two main credit rating agencies, Moody's and Standard & Poor’s have commented that reducing regulation on housing associations as part of an effort to overturn the decision could be "credit negative".

The organisation said the Government is "signalling that it will respond to the reclassification by diluting the regulatory controls that led to it".

While it does not believe a change in regulation would necessarily lead to individual associations being downgraded, Moody's does think it sends out the message that "the business environment is more challenging".

Speaking to Inside Housing, Roshana Arasaratnam, vice president of the sub-sovereign group at Moody’s, said any ratings changes would depend on what deregulatory changes take place.

She said Moody's would then "take a view, but also on individual entities' responses to it". Ms Arasaratnam went on to state that while the regulatory framework might weaken, it is possible housing associations will respond "by getting financially stronger".

The ONS believes private registered providers should be considered as institutional units because they have "the ability to incur liabilities and hold assets on their own accounts, enter into contracts, and exhibit sufficient decision making autonomy". The ONS also determined that housing associations are subject to public sector control, since the government can influence areas such as the disposal of social housing assets.

However, it has stressed that assessments are made "purely for accounting purposes", which means classification decisions do not affect housing associations' legal ownership or management structures.


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