London did not vote for Brexit but its housing problems have suddenly got a whole lot harder.
Housing associations in the capital have had their credit ratings downgraded, following the cut to the UK’s previously top-notch credit rating.
As housing associations are essentially backed by the Government, their ratings and their ability to access cheap debt depend on the Government’s standing.
In total 40 housing associations secure long-term cheap debt and are rated by Moody’s, which predicted that a Brexit would throw housing associations into a prolonged period of uncertainty and negatively affect investment.
Now some housing associations with complex financial instruments are likely to face immediate cash calls at the end of the month.
London’s deputy mayor told a major housing conference in Manchester this week that the Brexit vote would make it harder to fix the housing crisis.
James Murray said that developers, local authorities and housing associations needed to work together to tackle the urgent need for tens of thousands of new homes in the capital. He and the mayor have already spoken to key partners in the development industry, in the wake of the poll result.
The prospects for the wider house building sector can be seen in the share prices of the major stock market quoted house builders, whose shares fell between 20 and 40 per cent on the first two days of trading following the decision.
While house builders’ shares have recovered a little, in the last two days, the likes of Barratt is still down 30% on the level it reached on the day of the referendum, when the market was still assuming a remain vote would win.
To make matters worse, the fall in the value of the pound will lead to increases in construction material costs. Galliard Homes said before the vote they could rise by 15%.
Coupled with the uncertainties of access to the free movement of labour and the fact that London may not prove as attractive a location to many multinational businesses, including the financial services sector, the residential construction sector is facing a significant challenge.
During the 2007 to 2009 financial crisis home selling prices fell by 22 per cent as both transactions plummeted and mortgage lending halved. Lloyds has already warned that funding levels – the money that can be made available for home loans – could fall to 2012 levels, before the Bank of England launched its Funding for Lending scheme.
The Brexit vote is a blow for efforts to build more affordable homes, just as there were signs that a new breed of investors are beginning to put money into affordable housing schemes.
Cheyne Capital, one of Europe’s largest hedge funds has said it will invest £850 million in social housing over the next three years.
Cheyne has already struck a deal with Luton council to build 400 homes that will be available at below market rents. Days before the referendum vote, Cheyne struck its first deal with a housing association.
Cheyne Social Property Impact Fund and South Yorkshire Housing Association will build 219 new flats in Sheffield that will be let through the SYHA’s lettings agency. Many will be let at sub-market rents.
Shamez Alibhai, head of the Cheyne Social Property Impact Fund, said: “With housing associations facing increasing challenges across the country, we believe the private sector and patient capital has an important role to play in helping to provide solutions to help with housing delivery.”
Earlier this year Cheyne also helped launch a £1 billion fund to help the public sector build 10,000 new homes, with construction company Kier Living and the housing growth partnership - a joint venture set up in 2015 between the Government’s Homes and Communities Agency and Lloyds Bank.
Large US investors have also been looking at the build to rent sector in the UK. Greystar, the US’s biggest developer and owner of multifamily homes, has bought a 26-acre site in Greenford, West London, that used to be offices for drug company GlaxoSmithKline. Greystar intends to submit a planning application to build 2,000 new homes for rent in August.
There may now be questions over how quickly the US company will want to commit money to the project, if there is a significant Brexit distraction.
Amid the gloom over Brexit, there could also be opportunities. If land values and house prices fall, housing associations could find themselves in a stronger negotiating position when it comes to building their landbank.
There has also been some relief this week that £1.5 billion pledged by the European Investment Bank to the sector, ahead of the referendum vote, will still go ahead.