Key Takeaways
- S&P Global Ratings incorporates environmental, social, and governance (ESG) risks and opportunities into our credit ratings on public and not-for-profit social housing providers based on factors embedded in our sector-based criteria.
- We consider that social risks and opportunities are the most important, and generally the most supportive, ESG credit factors for providers of social housing in terms of industry risk and government support.
- Environmental risks are on the rise, from a low base, with stricter requirements and regulations around carbon-neutral homes.
- Governance factors can change ratings immediately but are overall neutral to the ratings in this sector. Our views on governance form part of our strategy and management assessment.
- In this report we highlight providers that we view as outliers in comparison to peers.
Analytical Approach
ESG risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics.
While some ESG factors correlate positively with credit quality, strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019). For example, if a not-for-profit social housing provider expands its portfolio of affordable homes to support a government's public policy target, this could at the same time result in pressure on financial performance and debt service capacity.
Social Housing Criteria Framework
This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.
In addition to our sector views, this report card lists ESG insights for a selection of individual public and not-for-profit providers of social housing, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers. These comparative views of ESG risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.
Environmental risks mainly relate to the sustainability and energy efficiency of the asset base as no providers we rate are directly exposed to material natural disaster risks. Social credit factors at the sector level primarily reflect the benefits that the public social mandate provides in terms of revenue predictability, sector regulation, below-market rents, and so on. Social risks relate to the community in which the provider operates; the affordability of homes and the tenure mix of the portfolio; and the potential for demographic changes in the tenant base and the region, as well as tenant satisfaction levels, voids, and arrears. Governance forms part of our strategy and management assessment.
The list of entities covered in this report is not exhaustive, but represents a sample of ratings where ESG factors play a particularly important role in the rating assessment compared to peers. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with entities expected to increasingly focus on ESG in their communication and strategy updates.
Environmental Exposure
Environmental risks are below average in this sector and mainly relate to the sustainability and energy efficiency of the asset base. An increasing focus on environmental issues and carbon neutral homes, combined with enhanced fire safety and asset quality standards, could change our view over time.
Enhancing the sustainability of a home can increase its operating efficiency and reduce costs. In the near to medium term, such efforts could affect a provider's profitability as it would typically invest more in its asset base.
In this respect we think that environmental factors could become more important for providers of social housing as regulatory authorities shift their focus to ongoing and sustainable energy efficiency and carbon neutral key performance targets.
Social Exposure
Social risk is the most important component of the ESG framework for providers of social housing. The sector compares favorably with other industries in this regard given that the public-policy mandate to provide housing for low-income earners is positive from a social viewpoint. We consider it even more so if a social housing provider maintains social rents at below average levels. Profitability is weaker in these cases but their social purpose remains a driving force in their rent setting policies.
In terms of industry risk, providers that focus on social housing and affordable rental properties are better positioned than those that develop housing for sale and generate a substantial proportion of revenues from doing so. We typically assess as moderate, or moderately high, the industry risk of social housing providers with an exposure to open market sales exceeding one-third of their total revenues. For social housing providers that generate revenues predominantly from affordable rent, or similarly stable and predictable sources, we assess industry risk as low.
Compliance with fire safety regulations, gas and electricity certifications, and building and decent home standards is fundamental to a social housing provider's asset quality. It is also key to tenants' health and safety and feeds into customer satisfaction metrics. We typically consider a provider that spends less than average on its asset base, or breaches any compliance standards, as underspending on maintenance. This weighs on ratings.
Social housing providers play an important public policy role for governments. Indeed, social housing providers deliver an essential public good--available housing for local residents. The sector also contributes to the government's general efforts to deliver homes that are well-managed and of appropriate quality. Social housing comprises different asset classes that play a variety of roles in this respect, be it operating in a region where rental properties predominate or providing services such as supported or sheltered housing, which are likely to become more important for demographic reasons (mainly the aging population in the U.K.).
At this point the COVID-19 pandemic has not been a direct driver of any rating change in our non-U.S. social housing portfolio, unlike in other more directly exposed sectors (see "The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus," published July 16, 2020).
Governance Exposure
Governance factors are generally neutral to ratings in this sector, with our views on governance forming part of our assessment of a provider's strategy and management. The majority of providers have clear strategies and are consistent in their focus on providing affordable housing. We would also consider that they have in most cases the experience and expertise to manage their activities satisfactorily, underpinned by comprehensive risk management standards.
Government Support
While the benefits of our extraordinary government support assumptions vary by operator, and more broadly by country, we systematically analyse the social mandate that social housing operators receive as a guide to our assessment of the role that government-related entities play for their government.
Table 1
| ESG Factors in Social Housing Providers | ||||
|---|---|---|---|---|
| Region | Company/Entity | Issuer Credit Rating | Comments | Analyst |
| EMEA |
Accent Group Ltd. |
(A+/Negative/--) | We see Accent's ESG factors as a rating constraint given its low asset quality due to underspending on maintenance evidenced by not all units being Decent Homes Standard (DHS) compliant. We nonetheless note that the group has a Corporate Governance Statement, which highlights the Board's direct responsibility for reviewing environmental matters. Additionally, Accent has recently been investing in its housing stock to improve asset quality and to ensure full compliance with the DHS. We also assess positively the fact that social rent represents around 59% of market rent in most areas. Therefore, we expect that Accent will continue benefiting from high demand for social housing. | Celia Franch Lopez |
| EMEA |
Catalyst Housing Ltd. |
(A/Negative/--) | We believe that social factors are weighing on Catalyst's credit rating given its high sales exposure. Catalyst has sales revenues peaking at 44% of total revenues in our base case, which puts it as one of the most exposed housing associations in our portfolio. With respect to governance factors, we have a negative view of strategic planning process stemming from the high sales exposure. Other assessments are neutral as management changed when Catalyst merged with Aldwyck. Environmental factors have a relatively low impact on the rating for the time being. However, in line with other U.K. entities, we believe that environmental factors are likely to become more important as regulatory authorities shift their focus to ongoing and sustainable energy efficiency and carbon neutral key performance targets. | Christopher Mathews |
| EMEA |
Clarion Housing Group Ltd. |
(A/Negative/--) | We believe Clarion's exposure to social risks is higher than that of its peers. We project that Clarion Housing Group will generate about a third of its turnover from development of homes to be sold outright on the market. We think that significant exposure to sales activities limits visibility and predictability of future earnings in a way not typically seen with a traditional housing association providing mainly social rent properties. In addition, we think that environmental factors could become a factor impacting the asset quality of Clarion, given governments, and in turn, regulatory authorities increasing focus on ongoing and sustainable energy efficiency and carbon neutral key performance targets. In the near to medium term, these efforts could impact the profitability of the group, as investments in their asset base would typically need to increase. | Karin Erlander |
| EMEA |
Gentoo Group |
(A-/Negative/--) | We see Gentoo as making substantial progress in terms of environmental, social, and governance risks relative to its peers. Gentoo's new additions to both the senior management and board of Gentoo have strengthened the group's leadership and risk management practices which drove our score change to '4' from '5'. The group also appointed two new board members in March 2019 which helped improve gender diversity. We now consider the group's governance more stable than in previous years. We consider that external environmental factors are typically low for Gentoo, as it has limited exposure to regions exposed to the risk of flooding, forest fires, hurricanes, etc. | Richard E Kubanik |
| EMEA |
GreenSquare Group Limited |
(A-/Stable/--) |
GreenSquare's weaker management and governance in comparison to peers stems from a high turnover, lack of transparency, and less conservative risk standards that have constrained our credit assessment. We note the lack of adherence to decent homes standards and some concerns around fire safety. With respect to environmental factors, underspending on maintenance raised concerns around fire safety in GreenSquare's housing stock, which we reflect in a negative adjustment for asset quality. |
Abril Canizares |
| EMEA |
Housing 21 |
(A/Stable/--) | We view Housing 21's ESG factors, with an emphasis on social factors, as a rating strength. Indeed, given H21's focus on population above 65, we deem it well-placed in order to benefit from the U.K.'s ageing population. Additionally, H21 is socially responsible with regard to ensuring it pays all its care staff above minimum wage and not offering zero hour contracts. We also have a positive view of management and the strategy it follows. In regard to environmental factors, we believe that recent investments translate into relatively strong asset quality-average age of stock is only 30 years. Similarly to other housing associations in England, we consider that environmentals factors may become more important in the medium term as regulatory authorities shift their focus toward ongoing and sustainable energy efficiency and carbon neutral key performance targets. Yet environmental factors have had a relatively moderate impact on the credit drivers hitherto. | Noa Fux |
| EMEA |
London & Quadrant Housing Trust |
(A-/Stable/--) | In our view, L&Q's governance factors are weaker than peers in the U.K. social housing sector. L&Q has sales revenues comprising 45% of total turnover in FY2020, which makes it one of the most exposed entities in our portfolio. We believe that a substantial deterioration of debt metrics in recent years, combined with lower net proceeds from sales and higher spending on existing assets, displays a certain weakness in the group's risk management standards. In line with other U.K. social housing entities, we believe that environmental factors could become a factor impacting the asset quality of L&Q given governments, and in turn, regulatory authorities increasing focus on ongoing and sustainable energy efficiency and carbon neutral key performance targets. In the near to medium term, these efforts could impact the profitability of the group, as investments in their asset base would typically need to increase. | Karin Erlander |
| EMEA |
Peabody Trust |
(A/Stable/--) | Social factors have a positive influence on Peabody Trust's credit rating. Compared to many peeers, Peabody's average social and affordable rent is about 40% of the prevailing market rent in its area of operations. Although this is partially driven by the high market rent prevailing in London and neighbouring regions, we consider that rent is lower than many of Peabody's London-based peers. Additionally, we think that environmental factors could become a factor impacting the asset quality of Peabody in the future. Indeed, given governments and regulatory authorities increasing their focus on ongoing and sustainable energy efficiency and carbon neutral key performance targets, these efforts could impact the profitability of the group in the medium term, as investments in their asset base would typically need to increase. However, over time, we foresee a strengthening of the asset quality and ultimately lower costs as the homes become more sustainable and energy efficient. | Karin Erlander |
| EMEA |
Swan Housing Association Ltd |
(BBB+/Negative/--) | We view Swan's management and governance as a negative rating factor. Indeed, we deem it weaker than peers' highlighted by the recent management turnover, lack of stress test forecasting disclosure beyond the outlook period, and elevated exposure to sales activities. We nonetheless acknowledge that management has reorganized its reporting structure to better manage risk and changed policies to bring open market sales down from 60% to 40% with plans for more joint venture development going forward. We do not have any concerns about underspending on maintenance and environmental factors at par with other housing associations in England. However, we consider that environmental factors could become more important as regulatory authorities shift their focus to sustainable energy efficiency and carbon neutral key performance targets. | Richard E Kubanik |
| EMEA |
Wheatley Housing Group Ltd. |
(A+/Stable/--) | We consider that ESG factors uphold Wheatley Housing Group Ltd.'s creditworthiness, especially its strong track-record of sound governance. WHG has followed the same strategy consistently over the last 3-5 years. The management team is strong and the group has a very strong focus on social housing. We also deem WHG's very strong links to the government, as shown by its recent partnership with the second largest housing assosciation in Scotland, an additional rating strength. With respect to some additional social factors, WHG has adopted a new fire containment technique that decompartmentalizes risks of fires. It is also innovative in its developments, often decanting tenants from old towers and refurbing them from the inside as tenants like the old buildings. | Christopher Mathews |
| EMEA |
Gewobag Wohnungsbau-Aktiengesellschaft Berlin |
(A/Negative/--) | We believe that ESG considerations are currently not material factors for Gewobag's credit quality. We note, however, that Gewobag is addressing legacy asbestos issues in a number of units, and that new buildings and refurbishments try to use environmentally friendly materials where possible and are done according to relatively strict energy efficiency standards in excess of legal minimum. Recent, large acquisition seems to partially be "anticipatory obedience" to the clearly formulated political desire to have more government control over the housing stock in Berlin. It may stretch management capacity and has led to a more aggressive financial policy. However, we deem risk management practices and governance as in line with industry standards. The recently imposed rent freeze in Berlin, if upheld by the courts, could constrain medium-term revenue growth, although Gewobag's position as a provider of affordable housing implies that it should be far less affected than others. | Michael Stroschein |
| APAC |
Kainga Ora-Homes and Communities |
(AA+/Positive/A-1+) | We believe Kainga Ora-Homes and Communities' credit profile is more positively influenced by environmental factors and the government's strong likelihood of extraordinary support. We note its very good asset quality, and focus on lifting energy efficiency and reducing construction waste. Kainga Ora is engaged in a significant multiyear upgrade program to retrofit older properties to comply with new 'healthy homes' standards and, since July 1, 2019, all new houses are planned to meet '6 Homestar' standards from the New Zealand Green Building Council. Kainga Ora issues medium-term notes (MTNs) in domestic capital markets via its rated subsidiary Housing New Zealand Ltd. All MTNs on issue, and expected future issuance, are self-labelled as 'wellbeing bonds' under Kainga Ora's Sustainability Financing Framework. All notes are also 'sustainability bonds' compliant with the International Capital Markets Association (ICMA) Sustainability Bond Guidelines (SBG). The recent May 2020 central government budget committed Kainga Ora to delivering thousands of additional public housing places over the next few years, which will result in higher borrowing but may reinforce Kainga Ora's critical public policy role. | Martin J Foo |
| EMEA |
Stockholms Kooperativa Bostadsforening |
(AA-/Stable/--) | In our view, SKB's management is stronger than average. It has a focused strategy, prudent planning, and comprehensive risk-management practices, showcased through a conservative and consistent approach to risks in the debt portfolio and development of new properties. Since SKB is a tenant-owned co-operative society, interaction and steering with/by tenants is significantly more pronounced than the municipal-owned SH companies. Additionally, we note that SKB is compliant with regulatory standards in terms of apartment quality and condition. There is no underspending on maintenance. With respect to environmental factors, we view SKB at par with other housing associations in Sweden. We acknowledge the ambitious sustainability goals in place, limiting the potential effects of regulatory shifts and environmental requirements imposed on the sector. |
Dennis Nilsson |
Related Research
- The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis, Sept. 12, 2019
This report does not constitute a rating action.
| Primary Credit Analysts: | Karin Erlander, London (44) 20-7176-3584; karin.erlander@spglobal.com |
| Felix Ejgel, London (44) 20-7176-6780; felix.ejgel@spglobal.com | |
| Dennis Nilsson, Stockholm (46) 8-440-5354; dennis.nilsson@spglobal.com | |
| Patrice Cochelin, Paris (33) 1-4420-7325; patrice.cochelin@spglobal.com | |
| Secondary Contacts: | Christopher Mathews, London + 44 20 7176 7115; christopher.mathews@spglobal.com |
| Eileen X Zhang, CFA, London (44) 20-7176-7105; eileen.zhang@spglobal.com | |
| Abril A Canizares, London (44) 20-7176-0161; abril.canizares@spglobal.com | |
| Richard E Kubanik, London + 44 (20) 71767031; richard.kubanik@spglobal.com | |
| Celia Franch Lopez, London + 44 20 7176 0100; celia.franch_lopez@spglobal.com | |
| Noa Fux, London +44 020 7176 0730; noa.fux@spglobal.com | |
| Carl Nyrerod, Stockholm (46) 8-440-5919; carl.nyrerod@spglobal.com | |
| Martin J Foo, Melbourne + 61 3 9631 2016; martin.foo@spglobal.com | |
| Michael Stroschein, Frankfurt (49) 69-33-999-251; michael.stroschein@spglobal.com | |
| Gauthier Robinet, London 44-20-7176-0637; gauthier.robinet@spglobal.com | |
| Additional Contact: | EMEA Sovereign and IPF; SovereignIPF@spglobal.com |
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