Fitch: New Right-to-Buy Could Add to UK Housing Provider Challenges

The UK Conservative Party's announcement that it would offer 1.3 million tenants of registered housing providers (RPs) the right to buy their home at the same discounts as those available for council tenants could add to pressure on RPs' financial flexibility, Fitch Ratings says.

Right-to-buy (RTB) schemes since the 1980s have allowed qualifying local-authority tenants the right to purchase their home at a discount to the market value, provided they satisfy specific criteria. In some cases, these schemes also exist for RP tenants in the form of the 'right to acquire' (RTA) properties built or acquired by housing associations with public funds. Currently, around 800,000 RP tenants are eligible for RTA. Historically, completed RTB and RTA transactions have accounted for less than 2% of RPs' social housing portfolios per year, and the pace of sales has tended to decrease in recent years.

It is too early to quantify the potential impact of the proposed extension to all housing association tenants as it is difficult to predict the number of tenants who would want to buy their homes at the larger discounts that would be available. The discounts available for council house tenants are currently up to GBP 77,900 in England and GBP 103,700 in London, which could encourage take up (as was the case when discounts on council houses were increased). Scotland and Wales are not affected.

If the proposed extension materialises following the UK general election and the pace of sales accelerated, RPs' borrowing capacity could be constrained as the their balance sheets would weaken and the value of their available housing assets pledged for borrowings would decrease.

This would constrain the RPs' overall capacity to borrow even though the need for social housing is high due to strong demand across the country. The reduction in the available security could also lead to higher borrowing costs.

Beyond depleting the RPs' rent-generating asset base, the RTA extension could affect RPs' future capital revenues. As the envisaged discounts on the property price are significantly larger than the current discounts - which range between GBP9,000 and GBP16,000 - this may substantially reduce RPs' capital revenue on assets that could otherwise have been sold at close to market prices.

The discounted sales would add to the existing expansion of asset sales in total RP revenues, including 'staircasing' sales of shared ownership properties, sales of tenanted stock to other RPs, sales of void properties, and sales of non-housing fixed assets. This is because RPs are seeking to cross-subsidise the development of properties for social housing rent through the surplus generated by outright sales and other asset sales. Surpluses on the sale of RPs' fixed assets increased by 35% in 2014. As a result, RPs are increasingly exposed to development and property market risks.

The envisaged extension could lower the RPs' cash flow predictability. Fitch's standalone assessment of each RP takes into account, inter alia, the strong quality of its cash flow, through indirect and direct government-supported funding for social housing. Decreasing numbers of social housing units would lead to a fall in RPs' share of social housing revenue. This could put pressure on some ratings, as RPs with a high level of operating earnings from social housing generally have higher ratings than those with a high proportion of revenue coming from more volatile housing development or other non-social housing activities.

The RP sector is financially robust and has coped well with recent changes in regulation. If implemented, the extension would create additional challenges for RPs in managing their asset cover. While the overall impact would depend on the pace and depth of take-up, we would monitor the response of RP management in adapting their business and borrowing plans to these potential new risks.