S&P Global Ratings believes that its ratings on social housing providers (SHPs) will remain at a relatively high level and predominantly stable in 2022, following a year in which central governments' fiscal response such as job support schemes lessened the impact of the global COVID-19 pandemic and related lockdowns. Importantly, liquidity remains strong, thanks to abundant bond issuance over the past year, together with solid access to bank lines in the U.K. and borrowings below market rates and grant funding in the other regions.

In our view, the main challenge for the sector over the next few years will be to balance the debt-funded development of new homes with the need to invest in existing stock. While we consider that rents are likely to increase, meaning higher revenue for the SHPs, we forecast that costs will rise with inflationary pressure and the need to enhance the quality of the homes, in view of many governments' focus on asset quality, building standards, and the green agenda. We forecast that the aggregate S&P Global Ratings-adjusted EBITDA would modestly improve, but that higher debt and hence interest costs would result in only a modest strengthening of the interest coverage.

We rate SHPs in the U.K., the U.S., Sweden, Australia, France, Israel, Canada, Germany, the Netherlands, and New Zealand, and during the past year we have seen additional ratings in the U.K. and Germany, as well as France and the U.S.

We consider that the sector will retain its strong creditworthiness over the next year. There are only two SHPs rated in the 'BBB' category, while 20 are rated in the 'AA' category. Eight ratings have a negative outlook, indicating that we may lower the ratings over the next 12-24 months, but we consider that six of them are rated 'A' or higher, and are therefore likely to remain in the 'A' category.

Chart 1

The sector proved its resilience to economic volatility during the pandemic, with revenue holding up throughout. We saw a significant but temporary improvement in profitability and debt service metrics as spend was scaled back. Capitalized and expensed maintenance spending was delayed, and we forecast that these investments will have ramped up after the pandemic-related lockdown was eased. We note the focus on the quality of assets globally, whereby SHPs must invest in their properties to enhance building safety, and to meet energy efficiency targets set by central governments.

We expect that to cater to increased investment in existing assets, while developing affordable homes, SHPs will continue to capitalize on low interest rates and obtain external financing, as evidenced by the amount of capital market issuance so far in 2021. We therefore anticipate that leverage will continue to increase in many countries, especially for SHPs that operate in jurisdictions where governments don't provide large grant funding. As we expect debt burdens to remain elevated, we think it will be important that the management and governance practices remain sound, to ensure solid cash flow generation and debt service as well as the long-term viability of SHPs.

U.K.

In our view, there is a continued negative bias on the U.K. sector's creditworthiness, given that there are currently seven negative outlooks outstanding as of Nov. 23, 2021. At present, 84% of the 43 U.K. SHPs that we rate have a stable outlook, but this follows downgrades on eight SHPs in the past 12 months. During that time, we have added two new ratings to our publicly rated portfolio of SHPs.

The main risk to the sector over the coming year is the sharper focus on asset quality and consumer standards, which narrows the financial headroom on some entities. Our view is that enhanced building safety standards and the national push toward energy efficiency will result in more investments in existing stock, which in combination with cost inflation, will weigh on profitability across the sector. We have observed quite a sharp increase in these investments in fiscal year (FY) ending March 31, 2022, following a pause in maintenance and repairs works during the lockdown in FY2021. As the more immediate costs to address fire and building safety standards are likely to be replaced by investments to reach a minimum Energy Performance Certificate (EPC) rating of C by 2030-2035, then followed by expenditure on reaching the government's net-zero carbon emissions target by 2050, we think that these costs will remain--and likely increase over time.

Chart 2

At the same time, higher inflation expectations could result in increasing rental revenue per unit for the SHPs. This is because of the natural safeguard in the sector that allows for an annual consumer price index (CPI)+1% rent increase under the last rent settlement, applicable for five years from April 1, 2020. We consider it likely that many SHPs would apply the full rent increase, which from April 1, 2022, would imply an increase to the social and affordable rent of up to 4.1%, based on a September CPI of 3.1%.

Increasing rents could, however, pose a challenge to the sector's affordability and increasing rental arrears. We think it likely that the rent increase would be covered by the government, without a material increase in arrears, for those tenants in receipt of government support in the form of housing benefits or universal credit to pay their rents. Tenants that are in the labor force are also somewhat supported by government's recent decision to increase the national living wage additional work allowance, alongside the taper rate cut to Universal Credit recipients. However, we think that higher rents could still result in arrears for those who pay their full rent themselves, as a result of the furlough scheme ending in September 2021.

Increased operating costs and the continued development efforts will weigh on the sector's debt metrics. We continue to see many SHPs scaling back on development for sale because margins in this segment have narrowed, instead placing more focus on developing affordable homes, supported by the recent wave of grant funding from Homes England and the Greater London Authority. While positive for the sector, the grant funding remains limited to less than 15% of the SHPs' development costs, such that we continue to expect debt buildup. We also understand that the government's £3 billion Affordable Homes Guarantee Scheme, managed by ARA Venn, has opened. ARA Venn would issue bonds and on-lend the proceeds to SHPs.

Currently low interest rates, combined with a significant proportion of long-term debt with fixed coupons, should shield the sector from a rate increase, despite the increasing debt. The issuance in the sector has been at very low rates over the past two years, and we forecast that interest rates are likely to remain low until December 2023. However, we consider that compared with rated SHPs in, for instance, France, Germany, and Sweden, the borrowing costs in the U.K. remain relatively high. An added risk in the U.K. is the dependence on floating rate bank facilities used for shorter-term funding requirements, and the need to raise more debt to support the continued development of homes at potentially higher rates than currently assumed in business plans.

We continue to forecast that adjusted debt to nonsales EBITDA will remain elevated, while the adjusted nonsales EBITDA interest coverage will strengthen only modestly and remain at a relatively low level. Our view is that 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, and in this context we view as important the management's ability to appropriately balance these investments.

Chart 3

We expect liquidity to remain strong in the sector over the next year. We have continued to see abundant debt issuance in 2021, and many SHPs have signed new committed credit facilities or extended the term of existing loans. In our rated portfolio, we have seen the issuance of at least six 15- and 30-year bonds since the beginning of 2021, supporting our view of the sector's solid access to the capital market.

U.S.

We anticipate that the U.S. social housing sector will remain stable through 2022. During the pandemic, it has benefited from solid government support.

The Coronavirus Aid, Relief and Economic Security (CARES) Act 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) and U.S.-based SHPs maintain normal operations. The CARES Act appropriated an additional $1 billion for project-based rental assistance. Furthermore, two legislative initiatives enacted in late 2020 and first quarter 2021 funded a collective $46.55 billion in emergency rental assistance for households in need. 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 Joe Biden's housing plan contains significant additional support for public housing authorities.

With extraordinary federal government support, the pandemic's financial impact on U.S.-based SHPs continues to be minimal. Most PHAs' financial performance has improved in the past two years because of steadily increasing federal subsidies and controlled operating expenses. Across the country, the demand for PHA units continues to significantly outpace supply. Strong demand and the improved housing stock across most PHAs we rate have resulted in vacancy rates consistently lower than relevant market participants. As most tenants receive unemployment benefits as well as subsidized housing benefits, we do not expect arrears to weaken our view of operational performance. In addition, the federal government provided additional support for the PHAs through specific provisions in the CARES Act. The additional funding support helped cover administrative expenses for various housing programs to support or maintain the health and safety of assisted tenants.

PHAs have also accessed a broader range of financing programs and tools, including accessing the bond market based on their general obligation rating. We continue to see demand for new ratings and debt offerings from PHAs; in 2021, one SHP sought a rating, bringing the total to 25 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, thanks to the generally low leverage for these entities. Only four of the 25 PHAs or SHPs have average to adequate debt profiles. The remainder are very strong to extremely strong, while the profile of the four outliers resembles SHPs rather than U.S. legacy PHAs.

Sweden

The public housing sector in Sweden remains stable in our view, having shown its strong resilience toward external shocks throughout the pandemic. The Swedish government's response to the pandemic introduced furlough support schemes, which secured income for those working for companies affected by restrictions and companies affected by global supply chain disruptions. 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' revenue streams. While many housing providers have large refurbishment programs, demand-driven vacancies remained minimal throughout the pandemic.

Swedish housing providers continue to have ambitious energy efficiency targets set by their owners, often municipalities or central governments. The sector also executes on a social mission, promoting good integration, safety, and sustainability, for instance. Most municipally owned public housing providers are continuing the long-term trend of integrating their financial activities with those of their owners; effectively the pooling and pairing of financing in the municipal groups.

France

The French social housing outlook among our rated entities remains stable for 2022, reflecting expectations of strong operating performance, good liquidity, and limited debt intake despite growing capital expenditure (capex). We expect SHPs to continue benefiting from an overall supportive regulatory framework with balanced government intervention. Recently signed agreements signal an increase in financial assistance, despite limited flexibility to increase rents.

We anticipate strong operating cost controls and low vacancy rates, driven by high local demand for social housing, to continue contributing to the four rated entities' robust operating performance. We expect economic fundamentals to remain strong in 2022, with significant portfolio expansion fueling revenue growth. While lockdown-induced refurbishment delays caused some volatility, we anticipate vacancy rates to remain low in 2022 despite new and renovated units coming online, thanks to the portfolios' competitive rents and overall attractiveness.

Although we expect debt accumulation to grow as the rated entities roll out their expansion plans, we think it will be moderate, because providers employ internal sources of funding and benefit from government subsidies. In our view, access to liquidity will remain solid with adequate cash reserves and large committed credit facilities, while financing costs will remain structurally low.

We expect SHPs to continue to benefit from substantial financial and regulatory support from central and local governments and government-related entities. March 2021 saw the introduction of a new investment protocol signed between the government, social housing operators, and public financing bodies to address the lockdown-induced shortage affecting construction of new social housing and refurbishment of existing dwellings. The plan would see approvals for 250,000 additional units through 2021 and 2022, including 90,000 highly affordable units, at a cost of roughly €38 billion. In conjunction with this agreement, the Banque des Territoires will grant €24 billion in financial assistance (of which €23 billion is subsidized loans), while the Fonds National des Aides à la Pierre and the central government will contribute €1 billion and €500 million in subsidies respectively, across 2021-2022.

The social housing sector is already heavily engaged in environmental transformation; the existing French social housing portfolio has much greater energy efficiency than the rest of the residential property sector. The new investment commitment would see a further €500 million invested in energy efficiency with the goal of upgrading 40,000 additional dwellings in 2021 and 2022. In line with this new policy directive, we foresee considerable refurbishment and net new development among the four rated entities.

During the past year, we have added one SHP in France and now rate four SHPs, all at 'A+' with a stable outlook (see Ratings List table, below).

Germany

We do not expect any material changes in the credit quality of the SHPs in 2022. We anticipate that the country's municipal housing companies will continue growing their balance sheets over the next year, investing in new and existing assets and sourcing meaningful amounts of net new debt in support of their expansion. This carries forward trends already noticeable during 2021. It responds to an increasing political focus on the availability and affordability of urban housing, more demanding targets for energy efficiency of housing assets, and market conditions that have rendered alternative tools to traditional, asset-by-asset mortgage financings relatively more attractive. Because of the observable key themes, we believe that the recent growth in the number of our rated German municipal SHPs could continue. We have added three new ratings so far in 2021, and now rate six SHPs in Germany.

The influence that the outcome of Germany's recent national election will have on public housing providers is not yet fully clear. A still-to-be-formed government may support housing affordability by making carbon dioxide surcharges in heating cost or recurring property taxes no longer billable to tenants. While this would also affect municipal housing providers' bottom line, we consider the resulting financial impact to be clearly digestible. Overall, we anticipate the sector's profitability and liquidity will remain stable in 2022.

The forecast expansion of German housing entities' balance sheets in 2022 reflects the prominent place that the availability of lower-cost housing has on the local political agenda of practically all of Germany's urban centers. Faced with sharply rising metropolitan market rents, electorates have sent a clear signal in recent state and municipal elections that they consider it a local government task to counteract such developments. German municipal housing companies will remain a key tool for their governmental owners to address such demands. Consequently, we anticipate significant investments in new units and generally also incorporate substantial expenditure on improving energy efficiency.

As a correlate, we anticipate the average indebtedness of the sector to continue rising. While providers differ in this respect, we anticipate that even the less-levered public housing entities will eventually sit closer to 20x debt to EBITDA than the roughly 10x value that was often observed over recent years. That said, we do not expect debt affordability to suffer markedly. Thanks to providers' continuing access to subsidized loans from state promotional banks and federal lender KfW, and the low interest environment in the euro, we believe that 2022 EBITDA to interest coverage will not fall materially below 2.5x for any of our rated German social housing entities.

To cover their funding needs, we anticipate that German public housing providers will in 2022 continue to make increasing use of nontraditional financing instruments, which in our definition comprises senior unsecured loans from multinational lenders such as the European Investment Bank and Council of Europe Development Bank, privately placed "Schuldschein" loan certificates, and publicly distributed bond issues. To illustrate the market potential, we point to Berlin-based housing company HOWOGE, which in October 2021 issued €1.7 billion of senior unsecured bonds.

Australia

In 2022, we expect Australia's social housing sector to expand, with its policy framework remaining steady. We do not envisage any major policy changes from the Commonwealth and state governments. 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 but does provide rental assistances. Not-for-profit community housing providers comprise a small, but growing, proportion of the market.

We expect state governments to deliver more social and affordable dwellings in 2022 after multibillion-dollar funding announcements in recent years. These aim at increasing the supply and quality of current stock. The investment is part of the state governments' fiscal stimulus in response to the COVID-19 pandemic. Some of this funding will support community housing providers increasing their stock.

The National Housing Finance and Investment Corp. (NHFIC) is the Commonwealth government's community housing provider bond aggregator, among its other responsibilities. NHFIC will continue to offer community housing providers with attractive financing options in 2022. NHFIC has passed on about A$2 billion to community housing providers since inception. It also provides small grants to housing providers for financial advice, planning, property development, and risk management.

The Netherlands

In response to the pandemic, the Dutch government imposed rent restrictions on social and commercial lettings in 2021, which alongside higher maintenance costs, is expected to weigh on the sector's and key housing provider Stichting Stadgenoot's performance. That said, we understand that the government will reduce the landlord levy--a property tax imposed on social housing assets--in 2022, to partly compensate the sector for the rent freeze. We believe that this, in combination with continuously strong demand for social housing in Amsterdam, will support stronger performance in 2022. Moreover, Stadgenoot has downsized its development plan in response to government measures affecting its cash flow generation. As a result, we forecast that Stadgenoot's debt burden will strengthen from 2021.

In our analysis, we regard the Dutch landlord levy as a form of negative intervention from the Dutch government. If permanently removed, we believe it could affect our EBITDA-performance forecast positively, strengthening Stadgenoot's EBITDA-related metrics notably.

New Zealand

Strong demand for services will continue to underpin the creditworthiness of the New Zealand social housing sector in 2022. The number of applicants on the public housing register waitlist has quadrupled in the past four years. Median prices for residential property across New Zealand soared by 28.7% in the year to June 2021, according to the Real Estate Institute of New Zealand. This could place further pressure on demand for public housing. March 2021 saw the government allocate NZ$3.8 billion to a Housing Acceleration Fund and Infrastructure Acceleration Fund, the latter administered by Kainga Ora. We think capacity constraints in the construction sector could slow the pace of delivery of new homes.

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 New Zealand. Kainga Ora houses over 186,000 people, or over 4% of the national population. It remains the dominant, near-monopoly provider of social housing. Kainga Ora is the only SHP in New Zealand with a public credit rating.

We expect Kainga Ora-Homes and Communities to continue to invest heavily in property additions and upgrades. Fiscal year (FY) ending June 30, 2021, saw a step-up in capital investment to NZ$1.9 billion and a net increase of 1,915 homes. In FY2022, Kainga Ora has an ambitious plan to invest NZ$3.4 billion in property additions and upgrades, for a net increase of over 2,700 homes. Most of the capital spending will need to be financed through new market borrowing.

In March 2021, the government raised its limit on Kainga Ora's commercial debt to NZ$8.3 billion from NZ$7.1 billion. Kainga Ora anticipates that it will issue about NZ$2.3 billion of new debt each year, and its debt-to-EBITDA ratio consequently will continue to climb. Commercial debt is issued via a wholly owned subsidiary known as Housing New Zealand Ltd. Kainga Ora also has access to a NZ$1 billion standby liquidity facility from the government.

Israel

Under is main mandate, Amidar, our only rated entity in Israel, manages social housing assets, most of them owned by the state of Israel. We expect its stable relationship with the state, and the state's strong oversight and financial support, to continue to benefit Amidar's creditworthiness, enabling sound liquidity and stable business and financial profiles.

We expect the demand for social housing to remain higher than supply in the foreseeable future. Housing prices continue to increase despite the government's efforts, because an insufficient number of housing units is constructed and marketed. As a result, more residents are unable to afford to buy their own house, so social housing waiting lists become longer. In addition, Israeli law gives tenants purchasing rights of the social housing unit in which they live, so that the stock of social housing units declines much faster. These two opposite vectors, together with the expected national population growth of 2% per year, increase the gap between demand and supply.

That said, the 2021-2022 state budget was recently approved in the Israeli parliament, after a long period of political instability. In accordance with the budget, the government will allocate funds to increase social housing units stock in 1,700 units withing two to three years. In addition, the government will continue supporting low-income households in paying rents in the free market, as well as incentivizing entrepreneurs to construct long-term rental projects with tax relief, as a complementary cheaper measure of purchasing its own social housing units. We nevertheless believe that disagreements within the government regarding the optimal social housing policy will continue in the coming years.

Canada

We expect the housing policy framework to remain stable in 2022. The Canadian social housing sector is the responsibility of the provinces which, through the regional and city governments, are mandated to deliver and maintain affordable housing. All levels of government have implemented multi-year programs and are providing funding to deliver more affordable dwellings over the next 10 years, with the objective of adding to the supply and improving the quality of the existing stock. We believe demand for social housing, largely driven by the level of immigration, will remain strong, supported by the federal government's commitment to reach annual immigration targets. In addition, rising inflationary pressures, spiking rents, and growing housing and construction prices recorded in 2021 across the country will continue in 2022, contributing to a stronger demand for affordable housing and impeding the government's ability to achieve its goal of significantly narrowing the gap between supply and demand.

We expect that the City of Toronto will continue to provide strong operating and capital support to Toronto Community Housing Corp. (TCHC), reflecting its provincially legislated mandate to act as the service manager for social housing in the city. TCHC will use funding from different levels of government for the repair and renewal of its entire portfolio of almost 59,000 units, which will help to address its significant capital repair backlog. Moreover, the company expects to add over 19,000 new market and replacement homes across the city by 2030. We believe that the increased investments 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, averaging about 10x EBITDA in the next few years.