OREANDA-NEWS. Cuts to UK social housing rents announced in the 2015 Summer Budget will be credit negative for the sector by adding to the instability of registered providers' (RPs) funding streams, Fitch Ratings says.

Social housing rents will be reduced by 1% a year for four years starting in April 2016, superseding last year's announcement that rent increases would be based on CPI+1% for the next 10 years (replacing the long-established RPI+0.5% formula). The CPI rise is expected to be reinstated after four years, resulting in a 12% reduction in rents by 2020-2021 compared to current forecasts. It is yet to be seen to what extent this will reduce individual RPs' annual income streams and the additional efficiency savings that will have to be made to compensate for reduced operating margins. This change may also push RPs further into riskier business operations to try to offset the loss of revenue.

The cuts will have an impact on RPs' development plans, which may need to be delayed or reduced, and on some operating spending such as maintenance costs, so that the RPs maintain sufficient operating surplus to cover their debt service needs. The cuts are also likely to affect RPs' loan covenants, potentially leading to breaches. In addition, the sudden and unexpected change of policy lowers the sector's predictability and may tarnish lenders' confidence in it.

Other measures announced include reducing the cap on the total amount of benefits an out-of-work family can receive, to GBP20,000 from GBP26,000 (GBP23,000 for London). Those aged between 18 and 21 will no longer necessarily receive housing benefit. Social housing tenants with household incomes of more than GBP30,000 (GBP40,000 in London) will be required to pay market or near-market rent for their housing. Lifetime tenancies in social housing will also be reviewed to limit their use. These changes will put further pressure on the ability of tenants to pay their rent and may lead to increased arrears.

The only mitigating factors announced are that some RPs could be exempt from reducing rents by 1% if this could threaten their financial viability. But more details have yet to be announced. There will also be an additional GBP800m of funding for Discretionary Housing Payments over the next five years.

The rent cuts could lower RPs' cash flow predictability. Fitch's standalone assessment of each RP - which is, along with the regulator's oversight and powers of intervention, a key input in the RP's rating - takes into account the strong quality of its cash flow, through indirect and direct government-supported funding for social housing. Accordingly, decreasing rents of social housing units could put pressure on some ratings if not fully compensated for by a reduction in spending.

Fitch considers the RP sector financially robust, and it has coped well with recent changes in regulation. Nevertheless, RPs also face the possible extension of right to buy, which if implemented, would create additional challenges for RPs in managing their asset cover. Fitch will continue to monitor the sector and focus on changes to business plans as a result of these announcements.