S&P Global Ratings believes that its ratings on social housing providers will remain largely resilient in 2021 following a temporary weakness in performance in 2020, largely because of losses in rental income linked to increasing unemployment. That said, we consider that central governments' fiscal responses to the COVID-19 pandemic, such as job support schemes, have lessened the impact. Furthermore, liquidity remains strong and has strengthened in some regions over the last 18 months. We rate SHPs in the U.K., the U.S., Sweden, Australia, France, Israel, Canada, Germany, the Netherlands, and New Zealand.

Over the next few years, we expect the SHPs we rate to increase both capitalized and expensed maintenance spending to address delays to development schemes and repair and maintenance during 2020 due to national lockdowns, to meet enhanced building safety regulations, and to align to green agendas. However, we believe the sector is well placed to face these pressures over the next 12 months, backed by cost-saving strategies, strong liquidity, and favorable debt markets. That said, partly debt-funded investment requirements into the existing stock are in our view the main challenge to the sector over the next few years.

To cater to an increase in investment in existing assets, while continuing to develop affordable homes, we expect SHPs to capitalize on record-low interest rates and obtain external financing. We therefore expect an increase in leverage in many countries, especially for SHPs that operate in jurisdictions that do not have access to favorable levels of government grant funding. Therefore, managing higher levels of debt, supported by stable and predictable cash flow, and strong liquidity positions are important for the SHPs to maintain stable creditworthiness over the next 12 months.

In England, we expect the recovery in earnings, which we had previously anticipated with the end of a restrictive rent regime, to be subdued. This delay in improving financial performance is mainly owing to increased spending in new and existing assets, but also due to the lower inflationary environment that constrains rent increases. A sluggish sale market attributed to the continued uncertainty about Brexit and COVID-19, more recently, have reduced cross subsidies from sales programs which, combined with relatively low grant funding, have resulted in increasing debt burdens. SHPs will have to balance increasing spending on maintenance and repairs, needed to meet higher standards for building safety and energy efficiency standards, with the ambition to continue to deliver affordable homes. At the same time, it would be important that debt service capacity remains solid even when the cross subsidies from market sales diminish.

Globally, SHPs have proven their direct access to domestic and international capital markets for debt funding over the last 12-18 months, while also accessing the capital market via bond aggregators, such as MorHomes, THFC, and GB Social Housing in the U.K.; Kommuninvest in Sweden; and National Housing Finance and Investment Corp. (NHFIC) in Australia. SHPs in France, Canada, and Sweden may also rely on borrowings from state-related financial institutions, or directly from their owners. French SHPs can raise funds through Caisse des Depots et Consignations (CDC), which offers low-rate, regulated, long-term loans. Toronto Community Housing Corp. (TCHC), the largest SHP in Canada and the second largest in North America, expects to receive a large amount of loans and grants from the federal government over the next 10 years as part of its National Housing Co-Investment Fund. Municipal social-housing providers in Sweden largely benefit from low-interest loans from the cities that own them.

U.K.

As we enter 2021, 85% of the 42 U.K. SHPs that we rate have a stable outlook, but while the sector remains broadly stable, there is a negative bias. Over the past year, we have lowered the ratings on seven SHPs, and as of Nov. 30, 2020, maintain a negative outlook on a further six.

Uncertainties will remain amid the pandemic and the related lockdowns across the U.K., the impact of which will likely spill into 2021, while the outcome of Brexit should become better known over the next 12 months. We consider that many SHPs are scaling back on development for sale because margins in this segment are narrowing, while enhanced building safety standards and the agenda to increase the number of energy-efficient homes will necessitate more investments in existing stock. We believe the sector is well situated to face these headwinds in the next year, supported by strong liquidity, gradually more supportive grant funding, and generally low interest rates. However, we consider the high level of debt in the sector, combined with a need to increase investments in existing assets to be the main challenge for the sector over the coming years.

While the operating framework for SHPs has been more uncertain due to the pandemic, the sector has remained relatively stable since the outbreak. The fiscal response of central governments, such as furlough schemes, has prevented a large peak in unemployment so far. That said, we expect arrears will increase incrementally across the sector, which could result in some bad debts accumulating for SHPs, and a loss of rent revenue. National lockdowns impeded development of new homes across the sector but also lowered maintenance and repairs spend on existing assets. With a reduction in development, capital spending was lower than anticipated, supporting strong liquidity, despite lower cross subsidies from market sales. Liquidity is expected to remain strong in the sector over the next year, with many SHPs entering into fiscal 2021 with strong liquidity positions. We have seen abundant debt issuance in 2020, and many SHPs have signed new committed credit facilities or extended the term of existing loans.

Over the next 12 months, the U.K. will gain clarity over its future trading relationship with the EU, after formally leaving on Jan. 31, 2020. We expect this period to continue to bring uncertainty to the housing market in the U.K., especially in London, which has been volatile over the last 12-24 months. Margins have tightened on for-sale activities for many SHPs, which weighs on the financial performance for SHPs and will likely continue to do so over the next year. We have also seen the uncertainty in the private sale market result in higher numbers of unsold homes, with many SHPs entering into fiscal-year ended March 31, 2020, with higher inventories than usual. SHPs are likely to prioritize the selling of unsold stock before approving new plans to develop more homes for sale. We believe the uncertainty observed over the last year will start to materialize in SHPs' business plans through lower levels of development of for-sale units being factored into future plans.

Another trend we expect over the next year is increased investments into existing assets. In the aftermath of the Grenfell fire, the Hackitt Review looked into the quality of building safety standards. The review, combined with new global fire standards, would lead to an increase in asset investments in the sector, especially for those SHPs situated in urban areas with high-rise structures. Aside from fire safety standards, we expect the sector to focus on customer satisfaction and asset quality, as outlined in the Government's Social Housing White Paper published in late November, and to start factoring in additional costs to future-proof their assets from an energy-efficiency standpoint. The sector is aiming to meet the U.K. government's target of carbon neutrality by 2050, and many are seeking to increase the energy-efficiency standards of existing assets in the interim where possible. We therefore expect to see these aspirations translate into increased spending on existing assets. Because S&P Global Ratings deducts the gradually increasing capitalized part of the investment on existing assets from adjusted EBITDA--because we consider them to be operating costs to maintain the asset base rather than enhance it-- we expect this to dampen a recovery in performance that we had expected from the more favorable rent policy, applicable from April 1, 2020 (see chart 1).

We anticipate the SHPs would have to balance the need to invest in existing assets against the provision of affordable housing to somewhat contain the increase in debt. We consider that debt burdens are likely to increase and that the higher debt positions would need to be sufficiently covered by stable and predictable internally generated cash flow to maintain stable creditworthiness across the sector.

In addition, SHPs with large exposures to sale-related activities will have to manage these investments in relation to spending on existing assets and new rental units. We forecast that margins on market-related spending will remain slim, which will likely add to a weakening in the SHPs' adjusted EBITDA. What's more, as the cross subsidy from sales reduces and grant funding remains low, this adds to the need for SHPs to fund their activities on the debt capital markets. As a result, we forecast that the adjusted debt to EBITDA will remain elevated (see chart 2), while adjusted EBITDA interest coverage - and even more so adjusted EBITDA interest coverage excluding sales - will continue to contract.

Chart 1

Chart 2

U.S.

The U.S. social housing sector remained stable through 2020 and benefited from provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provided $685 million of additional support for operating funds to prevent, prepare for, and respond to the pandemic, and to help public housing authorities (PHAs) maintain normal operations. The CARES Act appropriated an additional $1 billion for project-based rental assistance. While we generally view revenue diversification as a strength, this year, public housing authorities' significant reliance on U.S. Housing and Urban Development (HUD) funding proved to be a credit positive. If enacted, President-elect Joe Biden's housing plan contains significant additional support for public housing authorities.

Generally, the steps PHAs have taken to expand non-HUD-funded revenue have boosted asset quality and cash flow and have been positive for their creditworthiness. As PHAs evolve to a more entrepreneurial profile they have more flexibility to develop or acquire affordable and mixed-income housing properties and renovate their existing portfolios. In contrast with prior trends, as of our latest review (primarily with fiscal 2019 audits), federal funding increased to a median of about 80% of total revenue among the PHAs that we rate in contrast to 78% in fiscal years 2017 and 2018. Asset quality is improving with the average age of portfolios dropping to 38 years, compared with an average of 40 in the prior year, and a median vacancy rate below 3%. Across the country, the demand for PHA housing units continues to significantly outpace supply.

As part of this evolution, PHAs have also accessed a broader range of financing programs and tools, including accessing the bond market based on their GO rating. We continue to see demand for new ratings and debt offerings from PHAs; in 2020, one PHA sought a rating, bringing the total to 24 organizations and several accessed the bond market. In addition, due to favorable market conditions, several PHAs refunded existing debt to reduce their cost of capital. We anticipate that the number of authorities pursuing debt financing will continue to increase as they plan for a multiyear effort to redevelop their respective public housing stocks and seek non-HUD-funded revenue through mixed-income developments and workforce housing acquisitions. This increased use of debt has not exerted weakened ratios for debt to EBITDA or EBITDA to interest due to the generally low leverage for these entities. Only three of the 24 PHAs or SHPs have average to adequate debt profiles, the remainder are very strong to extremely strong; the profile of the three outliers resemble SHPs rather than U.S. legacy PHAs.

Sweden

The public housing sector in Sweden has remained strong through the pandemic in 2020, as the central government has introduced unprecedented support packages for the benefit of rent support for ailing commercial property tenants and, benefiting housing tenants, furlough schemes supporting income levels in the labor market. These measures, together with the supportive social security system in the country, have supported the tenants of Swedish public housing providers and therefore the housing companies' revenues streams. We believe that support measures will be extended if we see rising infection rates in 2021, either by the central government or local governments, that will result a continued, very limited effect on public housing sector finances in Sweden.

Vacancies remain minimal across the country, and continued population growth, together with rising prices on private houses and owner apartments, fuel demand for rental housing. Although several landlords in the sector are expanding their refurbishment programs, they are still seeing high demand for new developments, requiring correspondingly high levels of capital expenditures. In 2020 uncertainty about the economic outlook has put a hold on some construction in the condominium market, which could allow more capacity for new construction and refurbishments in the rental housing sector. We therefore anticipate that public housing providers will continue to develop new properties, alongside refurbishments, in coming years, with continued high levels of investment, with a slightly higher chance that investments will be completed in line with budgeted volumes. We expect the sector to be able to maintain its financial margins but with increasing leverage, but largely in line with our pre-COVID-19 expectations.

We also note that Swedish public housing providers, owned by municipalities and the central government, generally have ambitious sustainability targets set by their owners, which is ahead of national regulation. This makes the sector largely resilient to potential future regulatory shifts and offers a way for owners to achieve environmental targets. The sector also executes on a social mission, promoting good integration, safety, and sustainability, for instance.

Most municipal-owned public housing providers are continuing the long-term trend of integrating their financial activities with those of their owners, effectively increasing the benefits of scale and cost efficiency. The integration also effectively anchors the liquidity position of these entities because the municipal in-house bank typically assumes responsibility for the debt portfolio.

France

We maintain our stable outlook on the French public housing entities that will show strong resilience despite the 2020 outbreak.

This outlook reflects our view that Grand Delta Habitat (A+/Stable), Maisons & Cites S.A. d'HLM (A+/Stable) and SACVL (A/Stable) will maintain their solid financial profiles and limit large debt intake despite sizable capital expenditures.

Those entities have recently secured large committed credit facilities and are continuing their cost control strategy that will very likely withstand the negative effects of the pandemic.

We expect French social housing providers to deliver on their multiyear strategic plans. Although some operational and financial projections could be updated to reflect the impact of COVID-19, they intend to increase their asset portfolios in the next few years, maintain significant renovations of their properties, and, to a lesser extent, destructions and sales of dwellings. Those refurbishments will enhance the attractiveness of the three entities, leading to a gradual reduction in vacancy rates.

The public housing sector in France also benefits from a favorable institutional framework and our expectation of sufficient extraordinary support from the government in case of financial distress, as its role remains socially, economically, and politically important through providing integration, sustainability, and safety to citizens, while contributing to government targets for emissions reduction. For those reasons, we see the sector's creditworthiness as positively influenced by environmental, social, and governance (ESG) credit factors.

The municipal-owned public housing providers also benefit from a strong liquidity: local governments, which own most of them, regularly monitor their finances and strategy, with a track record of providing credit support and cash subsidies when needed.

However, we do not think those entities have much flexibility to raise rents in the coming years, due to national annual caps on rent increases. Within this context, the Elan law aims to encourage the construction of low-cost housing and to protect the most vulnerable population against high rent. It plans to reinstate what had already been proposed by the Alur law: a rent cap in practice.

Furthermore, the Réduction de loyer de solidarité measure also affects the revenue of social housing entities, given that it offers modest families a reduction in the amount of their rent, in the same proportion as the decrease in their APL (personalized housing aid), which became law in 2018. However, we positively view the non-inflation-linked income level threshold that allows families to benefit from this rent rebate.

Germany

The portfolio of rated social housing entities in Germany includes Berlin-based Gewobag Wohnungsbau-Aktiengesellschaft (A/Negative/A-1), and the almost identically named, but entirely unrelated GEWOBA Aktiengesellschaft Wohnen und Bauen, to which we assigned long- and short-term ratings of 'A' and A-1' respectively, with a stable outlook, in July 2020. GEWOBA focuses its activities predominantly on the city of Bremen in northwestern Germany. On Nov. 23, 2020, we assigned our 'A+' and 'A-1' long- and short-terms ratings on GBG - Mannheimer Wohnungsbaugesellschaft mbH, which is fully owned by the German city of Mannheim, also with a stable outlook. We view this as further anecdotal evidence that alternative financing sources, in this case lending from the European Investment Bank and private placement types of transactions directly in the capital market, are continuing to slowly gain more relevance for German housing providers. Funding needs are currently created by modernization projects that particularly focus on making existing buildings--often from the 1950s to 1970s--more energy efficient and by (mostly) municipal owners of German social housing entities pushing for the construction of a greater number of affordable housing units.

The three rated companies are typical representatives of the German social and affordable housing sector. Typically, larger German cities own--individually or jointly with public sector-affiliated partners--one or even more housing providers that target lower-income tenants on the city's territory. They are often the largest player in their local market, and they compete with smaller cooperatives as well as with a few listed, for-profit real estate companies, which are active throughout Germany. Affordable, submarket rents in Germany are supported by state-owned promotional banks that grant heavily subsidized loans subject to caps on rent levels. The authority to pass the relevant regulation rests with each of the 16 German regional states. In addition, federally controled development bank Kreditanstalt für Wiederaufbau maintains attractively priced funding programs for capex on real estate that helps to meet certain social and environmental objectives.

German social and affordable housing providers have displayed a great degree of resilience in the face of the COVID-19 pandemic, and we forecast this to remain unchanged during 2021. We attribute this stability to the composition of their tenants and the wide availability of social welfare and furlough schemes. As recipients of income transfers, including pensioners and refugees, constitute an important client group, the impact of reduced business activities on the rental income flow of German social housing providers is effectively mitigated.

For 2021, we expect elevated construction activity and related funding transactions of Germany's largest socially oriented landlords to continue. To address the growing scarcity of affordable housing and increasing rent levels in more prosperous urban areas, many municipalities have mandated their housing companies to expand their stock. We therefore observe a high level of construction activity and, for example, in the case of Gewobag in Berlin in 2019 and 2020, even the repurchase of housing portfolios that had been sold to private-sector investors only a few years ago.

Furthermore, the refurbishment and modernization of existing units to higher environmental standards adds to capex. We believe that funding for these activities can increasingly be sourced outside of the traditional commercial banking market for mortgage loans. This could include the direct issuance of Schuldschein loans to institutional investors, and possibly access to EIB loans.

We expect affordable urban rents will continue to be a key focus item of German policymakers in 2021, and administrative efforts to control rent increases will undoubtedly remain in place. However, given that German social housing providers charge, on average, below-market rents, we expect the financial impact of such regulation on their results to remain negligible in most cases, except in the city of Berlin. The capital has imposed a more restrictive regulation that generally prohibits rent increases for existing housing assets over the next five years. We think this will directly curb the growth of rental income, such as for Gewobag. Berlin's regulation has been challenged in various lawsuits, but we consider the timing and outcome of the legal resolution is highly uncertain.

Australia

In 2021, we do not expect many policy changes from the Commonwealth and state governments that would affect the social housing sector. The Australian social and affordable housing sector is dominated by state governments, which are responsible for its delivery and maintenance. The Commonwealth has little direct involvement. Not-for-profit community housing providers comprise a small, but growing, proportion of the market.

We expect state governments to increase funding and investment in social and affordable housing in their 2020-2021 budgets. This will increase the number of properties and their quality. This investment is part of the state governments' fiscal stimulus in response to the COVID-19 pandemic.

In contrast, the Commonwealth's 2020-2021 Budget offered little direct support for social housing. It enabled the National Housing Finance and Investment Corp. (NHFIC) to raise an additional A$1 billion to increase the supply of affordable housing. NHFIC acts as a bond aggregator, among its other responsibilities, and is expected to provide community housing providers with attractive financing options in 2021. This will help them expand their offerings. NHFIC has already issued more than A$1.5 billion since inception. In February 2019, we assigned a AAA/A-1+ rating to NHFIC, which is guaranteed by the sovereign, Australia (AAA/Negative/A-1+). The negative outlook on NHFIC's long-term rating reflects that of the guarantor, Australia.

In Australia, we rate Brisbane Housing Co. (BHC), one of the State of Queensland's largest community housing providers, at AA-/Stable/A-1+. BHC operates about 1,700 properties.

The Netherlands

With about 35,000 units under management, Stichting Stadgenoot (AA/Stable) has a secure foothold as one of Amsterdam's key providers of social housing. Furthermore, the sector is under frequent and ongoing oversight from the regulator, Autoriteit Woningcorporaties (Aw), which, alongside the entitlement to Waarborgfonds Sociale Woningbouw's (WSW's) restructuring fund, supports Stadgenoot's creditworthiness.

Despite COVID-19-related setbacks, we expect Stadgenoot's financial position will remain resilient. Similar to other governments, Dutch authorities have provided extensive support to curb the economic effects of the pandemic. Alongside the very strong demand for housing in Amsterdam, this will, in our view, support Stadgenoot's operating performance over the coming two years. Furthermore, we expect stable operating cash flows and divestments will contain Stadgenoot's debt burden, despite high investment needs in the coming years. Moreover, we understand there is now a majority in the Dutch parliament for abolishing the landlord levy that Dutch social housing providers pay. Should the levy be abolished, we estimate it would materially improve Stadgenoot's EBITDA results going forward.

New Zealand

In 2021, we expect Kainga Ora-Homes and Communities to increase its delivery of social housing properties across New Zealand. The central government's May 2020 budget announced a commitment to create 8,000 new public housing places over the next four years. Kainga Ora will account for 70% of this quota. Most of the capital spending will need to be financed through new market borrowings.

In January 2020, the government raised its limit on Kainga Ora's commercial debt to NZ$7.1 billion from NZ$3.05 billion. The limit could be raised even further to accommodate the expanded building program. Kainga Ora anticipates that it will issue net new debt of around NZ$2 billion each year, and its debt-to-EBITDA ratio consequently will continue to climb. In April 2020, Kainga Ora announced that it had secured a new NZ$1 billion standby facility from the government, replacing its existing NZ$500 million bank standby facility. This could positively affect our assessment of its liquidity.

We expect construction activity to ramp up in the months ahead. The construction industry was forced to shut down for a few months in early 2020, but has reopened after New Zealand's rapid, successful containment of COVID-19. In addition to building new properties, Kainga Ora will focus on renewing older houses and aligning them with the latest government standards.

In February 2020, we assigned 'AA+/A-1+' local- and 'AA/A-1+' foreign-currency ratings to Kainga Ora and withdrew our ratings on Housing New Zealand Corp. Kainga Ora has subsumed all of the assets and liabilities of the former Housing New Zealand Corp. The core management team and day-to-day operations affecting tenants remain essentially unchanged. Commercial debt is issued via a wholly owned subsidiary known as Housing New Zealand Ltd. Kainga Ora is the only SHP in New Zealand with a public credit rating.

We expect Kainga Ora, as a Crown agency, to remain tightly linked to the central government. As such, we continue to equate our ratings on Kainga Ora and Housing New Zealand Ltd. with those on the New Zealand sovereign. Kainga Ora houses over 189,000 people, over 4% of New Zealand's population. We believe it will remain the dominant, near-monopoly provider of social housing in the country. Demand remains strong: there has been an almost sixfold increase in the number of applicants on the public housing register waitlist over the past five years.

Israel

Amidar is the largest company operating social housing properties in Israel. It is closely linked to the Israel (AA-/Stable/A-1+), which is the company's largest customer and covers the principal repayments of its outstanding bonds with matching transfers. We expect its stable relationship with the state to continue to benefit Amidar's creditworthiness, enabling sound liquidity and stable business profile.

Despite the COVID-19 outbreak, we expect demand for Amidar's services to remain high for a few reasons: First, inequality in Israel is high. It has an increasing share of the population that doesn't own its housing, especially in the current environment of continuing real estate price increases. Second, we believe that the COVID-19 pandemic has possibly worsened part of the population's economic position. And third, the national population is expected to grow by about 2% a year. Given that supply of social housing does not seem to rise in line with demand, we think the pressures to expand Amidar's housing stock will remain. Any such additions would in our view depend on stability at the central government level and clear decisions taken, to push through adequately designed projects, as witnessed in 2018.

While the third round of elections in Israel has ended with the constitution of a government, the political uncertainty is not over, and could cause important policy decisions to be postponed again.

Canada

Although the pandemic has slowed immigration into Canada, it is still a large driver of demand for housing across the country, especially in urban centers. The federal government has made some changes to mortgage rules meant to ease access to homeownership, but we expect that affordability will continue to be an important issue for all levels of government and that demand for social housing will remain strong in 2021.

Toronto Community Housing Corp. (TCHC) is the sole Canadian social housing provider (SHP) that we rate. It is the largest SHP in Canada and the second largest in North America, serving more than 110,000 residents in 2,100 buildings. It is 100% owned by the City of Toronto and receives a large annual subsidy from the city, accounting for about one-third of total revenue. We expect the city will continue to provide strong support to TCHC, reflecting its legislated mandate to act as the service manager for social housing in the city.

The City of Toronto recently revised its funding arrangement with TCHC to provide more sufficient and stable annual operating and capital subsidies. TCHC will also be receiving C$1.3 billion in loans and grants as part of the federal National Housing Co-Investment Fund, which will provide C$15.9 billion in grants and low-interest loans to repair up to 240,000 affordable housing units across the country as well as build 60,000 new ones. TCHC intends to use the funding for the repair and renewal of its entire portfolio of almost 59,000 units over the next eight years, which will help to address its significant capital repair backlog. We believe increased investment in state of good repair will result in an overall improvement in the condition of the company's housing stock, which could translate into long-term savings on costs for maintenance and utilities. However, the gradual rollout of the loans over the life of the program will likely result in a moderate increase to the company's debt burden, approaching 10x EBITDA in the next several years.

Table 1