The ratings agency said about 70% of revenue lost in social housing rental income over four years of the government’s 1% rent cut policy is likely to be mitigated through significant cost savings in those areas.

The report, “Housing Associations — England: Rent cut mitigation demonstrates proactive management and expenditure flexibility”, predicts that the core social housing business’s profitability is likely to fall as a result of the policy and higher inflation, with rated housing associations absorbing a net loss of £600 million over the four years. Despite efforts to minimise the impact, the policy will have a net detrimental effect, with profitability expected to erode on the core business from a peak of 36% in 2017 to 34% from 2018.

For most rated housing associations, Moody’s said cost savings will come from across the business, including job cuts, procurement of new contracts and reduced costs for repairs and maintenance and cuts to community spending.

Some HAs are also delaying spending on repairs and maintenance, which is a less sustainable approach. Smaller savings will come from other areas, such as IT investments and reductions in community spending, it added.

The report stated: “Cost-cutting will be more difficult in the next couple of years because of higher inflation. Although inflation is likely to gradually decline to 1.7% by 2019, costs will be increasing at a higher rate than social rents. The pressure on HAs’ finances will continue for the next two years and Moody’s expects a modest erosion of profitability as a result.

“In addition to cost-cutting measures, rated HAs have explored ways to generate additional income in response to the rent cut. However, revenue flexibility, particularly around rental income, remains very limited, with increased revenue accounting for only 3% of the overall mitigation of the cut in rent, compared with 67% coming from reduced expenses.”

Jeanne Harrison, a Moody’s Vice President — senior analyst and the report’s co-author, said: “The housing associations’ proactive and thorough response in mitigating the impact of rent cuts is credit positive, and demonstrates their willingness to take action to protect their financial performance.”