We consider the regulatory frameworks for social housing providers (SHPs) in the U.K. to be as strong as those in most other regions globally. However, we consider that England's framework is weaker than those in the devolved regions of Scotland, Wales, and Northern Ireland. Our view reflects less ongoing financial support for both capital and operating spending in England compared with the other parts of the U.K., where the sectors receive more adequate funding. Furthermore, government intervention has had a more adverse impact on English SHPs over the years.

While the regulation in the devolved regions typically follows English guidelines, SHPs there generally have more flexibility over rent-setting. That said, the emphasis on the quality of existing homes and environmental targets is greater in Scotland and Wales, and we consider that the performance of SHPs in those regions could suffer in the absence of adequate grant funding.

Furthermore, all U.K. regions other than Northern Ireland have seen limits on rent increases in the current fiscal year to March 2024 due to high inflation. In our view, this could have long-term financial implications for the SHPs. In Northern Ireland, we consider that political instability adds to the uncertainty of the social housing sector's operating environment.

England

Major Factors

We assess the regulatory framework under which English SHPs operate as strong.  This assessment is underpinned by the providers' public policy mandate to provide affordable homes and support their tenants by charging lower rents than the prevailing market rent. We continue to positively assess the extremely solid oversight by the RSH, which monitors the financial viability and governance of the registered SHPs. This allows the RSH to identify early indications of financial or operational difficulties, and act on them in a timely manner, often by brokering mergers.

English SHPs' financial indicators are under pressure.  Under the current long-term rent settlement, rent increases are supposed to allow SHPs to finance their operating activities and support the development of new homes. However, the English registered SHPs' financial indicators are under pressure due to government intervention in rent-setting amid high inflation and more stringent requirements to improve the quality of the existing stock. The sector needs to make investments to address fire and building safety regulations, make homes more energy efficient, and meet enhanced consumer standards to protect tenants. More grant funding has been forthcoming to the sector to cover these investments, but we consider that the current allocation is unlikely to be sufficient.

Repeated government intervention creates uncertainty for the sector.  In fiscal 2024, the U.K. government limited increases in social and affordable rents in England to 7%. The sector then extended this to owners of shared-ownership homes. This increase is materially lower than the implied consumer price index (CPI) + 1% increase allowed under the five-year rent settlement for social and affordable rents, which applies to fiscal 2025, and is well below cost inflation. We consider that frequent government intervention in the rent regime creates uncertainty for the sector. Furthermore, we see a risk that persistently high inflation may lead to additional limitations on rent increases, with limited predictability regarding the next multi-year rent settlement from fiscal 2026.

Public Policy Mandate And Regulatory Framework

We view the public policy mandate for English SHPs as strong, reflecting their important role in providing affordable homes across the country. Social housing includes low-cost rental properties for which the rent is typically 50%-80% of the prevailing market rate in the region where the registered provider operates. From a regulatory perspective, shared ownership, whereby a tenant purchases a first tranche of the property and then pays rent on the portion they do not own, is also considered an affordable product. We estimate that more than 15% of all homes in England, or close to 3 million, constitute affordable homes.

Registered providers typically emphasize their public policy purpose, supporting their tenants and providing community services. As nonprofit organizations, they reinvest all the surplus income they generate into more affordable housing. On the negative side, some registered SHPs in England are developing homes for outright sale, thereby exposing themselves to the risks associated with real estate market. We consider generating income from sales as riskier than generating income from traditional rental activities. Moreover, we consider that since the Housing Act 1988, which allowed local authorities to sell their housing stock to a registered provider, private finance has played an increasingly important part in funding the development and maintenance of social housing properties. This has led to a steadily increasing debt burden across the sector.

We consider that the sector benefits from solid ongoing oversight by the RSH, which is a nondepartmental public body that regulates private registered SHPs to promote a viable, efficient, and well-governed social housing sector. A registered SHP has to submit a quarterly survey forecasting its liquidity position 12-18 months ahead. The RSH also carries out annual stability checks of registered SHPs' business plans and annual accounts, and undertakes periodic in-depth assessments to assess their financial strength, risk profile, approach to value for money, and quality of governance. The RSH publishes regulatory judgements on all the registered SHPs that own or maintain more than 1,000 homes. In addition, the RSH sets consumer standards in order to protect tenants, and the rent settlement follows strict rules, limiting the leeway providers have to increase rents for the majority of their tenants.

Forms Of Support And Negative Intervention

Financial support to the English social housing sector is less generous than in other parts of the U.K. and in an international context, but we expect that the improvement we have seen over the past couple of years will help offset some of the financial pressures on the sector. Generally, the government provides grant funding via Homes England--an executive nondepartmental public body sponsored by the Ministry of Housing, Communities, and Local Government--or the Greater London Authority (GLA).

Grant rates in England are fairly low compared with many other regions globally, typically amounting to 15%-20% of the development cost. This means that English SHPs fund more of their activities with external debt that needs ongoing servicing. Some providers have resorted to a cross-subsidizing model, whereby they develop homes for outright sale to support other social housing activities and development, thus exposing themselves to potential volatility in the housing market.

We consider it positive that the government recently introduced more flexibility around grant funding to develop new homes, and understand that grant funding may also become available for regeneration schemes. Due to inflationary pressures, we understand that many providers are negotiating more grants with Homes England and the GLA to deliver the original number of units they committed to, or reduce the number of units they deliver for the same amount of grant funding. The sector also has more visibility on and easier access to grant funding from the Building Safety Fund and the Social Housing Decarbonization Fund. We understand that Homes England and the GLA could allow providers to use its recycled capital grant fund for investments in existing stock, although use of this funding source has been fairly limited to date.

Finally, we consider it positive that government support is available to a large proportion of the providers' tenants via the benefits system, as this supports rent collection and the stability of the SHPs' main income stream.

That said, we consider that prior negative intervention by the U.K. government weighs on the regulatory framework for England. As part of welfare reforms that the government launched in 2015, English providers were required to reduce their affordable rents over a four-year period from April 1, 2016. This weighed on their cash flow generation. While the rent settlement has since been revised, allowing registered providers to increase their affordable rents for five years from April 1, 2020, we consider the possibility of government intervention in the rent standards to be a weakness in the regulatory framework.

More recently, the U.K. government has imposed a 7% upper limit on the increase in social and affordable rents, which, in agreement with the sector, also applies to shared-ownership tenants. However, the cap excludes lower-margin business segments, such as supported housing and housing for older people. We understand there are ongoing discussions about potential rent-recovery mechanisms in future years, but consider that there is a high degree of uncertainty around the nature of such mechanisms, as well as around the rent increases for the next financial year and the following multi-year settlement.

Furthermore, we consider it negative that in recent years, the government has on multiple occasions changed and usually tightened the requirements for the sector, including the push for carbon neutrality, building safety, the Decent Homes Standard, and consumer standards, with grant funding being either limited or announced after a time lag.

Scotland

Major Factors

We consider that the regulatory framework for Scottish registered social landlords (RSLs) is very strong.   The Scottish housing regulator (SHR) has solid oversight of the sector and maintains a relatively high level of interaction with the RSLs. The RSLs in Scotland receive significantly more support than in England, in the form of grant funding, which typically covers up to 50% of the development of new homes.

The sector needs to meet accelerated environmental targets, which could put pressure on RSLs in the absence of sufficient grants.   While Scotland has historically had more flexibility to set rents, increases will be well below inflation for the current year. We understand that the sector and the government went through an extensive consultation, with high inflation and rent affordability in mind. However, we expect that Scotland will maintain rent-setting flexibility. In combination with relatively high grant funding, this should alleviate some of the financial pressures on the RSLs.

Public Policy Mandate And Regulatory Framework

We consider that the Scottish government prioritizes its social housing policies and agendas, entailing strong political support for RSLs to increase the quantity and quality of the social housing stock in the country. In the U.K., Scotland has the highest share of its population residing in social housing, which, in our view, supports the sector's vital public service. The sector has delivered more than 50,000 affordable homes since 2016, and now has around 300,000 social and affordable homes. It aims to deliver 110,000 more affordable homes by 2032.

We view oversight as being very strong in Scotland, with a separate body, the SHR, tasked with regulating the sector. The SHR publishes an engagement plan for every social landlord in Scotland, raising its level of engagement if it assesses the RSL as systemically important (about 15% of the 141 RSLs in Scotland). This is because a business failure of one of these RSLs would present significant challenges due to the number of tenants and homes affected. It could also be that the RSL holds a large amount of debt, and so a failure could have a systemic impact on funding in the sector.

As part of its tailored engagement plans, the SHR requires RSLs to provide forward-looking financial returns and annual assurance statements to confirm that they are meeting the regulatory standards. Alongside its engagement plans, the SHR also carries out a risk assessment for RSLs each year and publishes their regulatory status based on their governance and financial management. This is similar to what we observe in England.

We understand that a periodic review of the regulatory framework in Scotland is due in April 2024 (the previous update was in 2019), but we do not expect it to have any material changes. That said, we think that, like in other parts of the U.K., discussions will include environmental targets as part of the Energy Efficiency Standard for Social Housing (EESSH) and net zero carbon targets.

Forms Of Support and Negative Intervention

RSLs in Scotland receive ongoing systemic support in the form of grant funding to develop new affordable homes, and have more flexibility to set rents compared to England. Grants to RSLs cover 40%-50% of the capital spending requirements for the development of new affordable homes. Because of continuing and significantly higher grants for new supply, Scottish RSLs do not face the same pressure as English registered SHPs to seek cross-subsidies from riskier outright sales. We are also seeing some support flow to the sector as a result of the government's growing focus on the quality of homes, fuel poverty, and the green agenda.

In addition to grant funding, the Scottish government aims to boost the development of affordable homes through the Allia charitable bond program. Established in 2014, this program provides flexible loans for RSLs to support the development of affordable housing across Scotland. The loans are unsecured and last for up to 15 years, and both the principal and interest are repayable at the end of the term. The Scottish government reinvests the interest on the loans into grants to the social housing rental sector, further contributing to the housing supply.

The sector continues to enjoy more flexibility over rent-setting than in England. That said, in fiscal 2023, the Scottish government passed emergency legislation stipulating a rent freeze and a moratorium on evictions by both public and private housing landlords until at least March 31, 2023. However, within a few weeks, and after extensive consultation with the sector, the social rent freeze was lifted in December 2022, and replaced with agreements from landlords to keep any rent increase for fiscal 2024 well below inflation. We expect that Scotland will maintain rent-setting flexibility.

That said, we consider that the Scottish RSLs face more rigorous environmental targets than their English peers, for example, full compliance with EESSH2--roughly equivalent to an Energy Performance Certificate (EPC) level B--by 2032 and carbon neutrality by 2045. In England, SHPs aim to reach EPC C by 2030 and carbon neutrality by 2050. These requirements could place additional financial and operational burdens on the Scottish social housing sector should additional grant funding not be made available. However, given the government's track record of support, we think it's likely that RSLs will see more support to cover these investments.

Wales

Major Factors

We assess the regulatory framework for Welsh RSLs as very strong.  The Welsh government has a strong focus on social housing, considering it to be a vital service to the population. We view oversight in Wales as very strong, with the regulatory function forming part of the government itself. Similar to most other parts of the U.K., rent increases in Wales are limited in fiscal 2024, which will put pressure on the sector's financial indicators amid high cost inflation and the need to invest in existing homes.

Solid government funding should offset longer-term pressure.  We consider that the track record of solid government funding--reflecting the Welsh government's strong focus on social housing and the affordability of new homes--will help offset pressure on the sector's financial indicators in the longer term. That said, some uncertainty remains around the potential acceleration of environmental targets and the adequacy of available funding.

Public Policy Mandate And Regulatory Framework

The Welsh government has a target of delivering 20,000 new affordable homes between 2021 and 2026, which we consider to be ambitious, seeing as it has delivered less than 2,500 new affordable homes on average over the past three years. The sector has around 170,000 affordable homes at present. As in other parts of the U.K., we understand that the regulatory framework in Wales is likely to increase the focus on housing quality standards, with a potential acceleration of carbon-neutrality targets.

We view oversight of the sector in Wales as very strong, with the regulatory function forming part of the government itself, within the housing regulation team. The regulatory model draws from and has parallels with the models in the other devolved regions and England, with minor variations in approach, but it maintains a fundamental focus on governance and the financial viability of providers.

The regulatory framework was updated in 2022, when it introduced five key components, including regulatory standards, judgements, oversight, and assessment, as well as placing the onus on RSLs to provide self-evaluations. The regulatory assessment includes a full regulatory assurance review roughly equivalent to the RSH's in-depth assessment in England. The social housing sector in Wales is considerably smaller than in England and Scotland, which allows for greater engagement between the regulator and providers, known as coregulation.

Forms Of Support And Negative Intervention

The prioritization of social housing in Wales is also evident from prominent grant funding to the sector. Typically, grants comprise 40%-50% of spending on new development, thus containing the need for debt in the sector. Moreover, the government has a track record of providing operating grants for investments in existing homes. This approach also limits the need and appetite for sales to obtain cross-subsidies, although sales do occur, especially at larger providers or on the delivery of large schemes.

Historically, negative intervention by the Welsh government has been limited, although we consider that the scope for rent increases is more restrictive than in other U.K. regions, and proves more challenging at times of high inflation. The current five-year rent settlement allows for a CPI + 1% increase, like in England, providing that the CPI falls into the 0%-3% range. If the CPI falls outside this range, the Welsh ministers will decide on the annual rent increase.

This was the case in November 2022, when the Welsh government announced, after agreeing it with the sector, that it would cap the increase in social rent at 6.5%, with a few exceptions, for example, extra care and supported housing. While the sector follows a five-year rent policy and the changes were not as severe as those we observed in England, it showed that the Welsh government is willing to impose short-term changes that could be credit-negative in nature.

Northern Ireland

Major Factors

We assess the regulatory framework in Northern Ireland as very strong.  Our view of the regulatory framework is underpinned by relatively solid oversight, although we consider that the sector in Northern Ireland appears to be based more on self-evaluation by the SHPs rather than rigorous scrutiny by the regulator. Registered housing associations (RHAs) in Northern Ireland receive ongoing systemic support in the form of freedom over rent-setting and grant funding for new development. This is because affordable housing is one of the most important policy agendas in Northern Ireland, as evident from the high share of government spending devoted to housing in comparison to other regions in the U.K.

We think that ongoing political instability in Northern Ireland adds to the uncertainty around the future of the regulatory framework.   In February 2022, the power-sharing institution in Northern Ireland collapsed, following a number of years of political instability. This makes long-term planning more difficult compared with other parts of the U.K.

Public Policy Mandate And Regulatory Framework

Housing is one of the most important agendas on political manifestos in Northern Ireland, as evident from the relatively high share of government spending devoted to housing in comparison to other regions in the U.K. There are only 20 RHAs in Northern Ireland, managing more than 57,000 homes. The government, through the Department for Communities (DfC), sets the regulatory and operating framework for these RHAs.

The DfC published a 15-year draft housing supply strategy (2022-2037) in 2021, with the aim of delivering over 100,000 homes in total, of which one-third would be for social housing. However, continued political instability in Northern Ireland, with the collapse of the power-sharing institution in February 2022, once again left the region without its own assembly or government. This increases the uncertainty over whether the DfC can fulfill its long-term strategic goals, including on housing.

In Northern Ireland, like in Wales, the government itself, through the DfC, regulates the sector rather than a separate regulatory body. As a result, RHAs have very close ties with the government. This allows for solid oversight of the sector. The DfC requires RHAs to provide regulatory standards evaluations, annual returns, and financial and tenancy management information, as in the other U.K. regions. This helps the DfC govern the sector. The DfC determines a regulatory rating after periodically reviewing an RSL's evidence of its compliance with the governance, financial, and consumer standards under the framework.

Forms Of Support And Negative Intervention

RHAs in Northern Ireland have freedom over rent increases, and receive ongoing systemic support in the form of grant funding for new development. Direct grants to RHAs for new development cover up to 50% of the capital expenditure for affordable homes, which reduces the need to fund development with debt or seek cross-subsidies from riskier activities, such as sales. However, with no government in place in Northern Ireland, there is less clarity on the availability of funding to address long-term housing needs and investments in existing stock, with the latter necessary to meet building safety and energy efficiency targets.

We have not seen any negative intervention across the sector to the extent we have observed in England. Individual RHAs continue to have the freedom to set rents, giving them greater financial flexibility over their revenues. We understand that the DfC has the statutory powers to intervene in or broker mergers within the sector, although such instances have been limited to date.

Related Criteria

• Criteria | Governments | General: Methodology For Rating Public And Nonprofit Social Housing Providers, June 1, 2021

Related Research

• United Kingdom 'AA/A-1+' Ratings Affirmed; Outlook Stable, Oct. 20, 2023