We forecast a modest recovery in S&P Global Ratings-adjusted EBITDA margins across the non-U.S. SHP sector over 2024 because we project that rental incomes will increase faster than cost inflation in most regions.   We consider that SHPs will need to continue to invest in existing homes, given that governments are focusing on asset quality, building standards, and the green transition. That said, we think that the investments will rise at a slower pace, compared with the past two years when we saw a material ramp-up in spending. In our view, however, investments will likely outpace the expected rental increases and therefore continue to constrain a more significant improvement in the sector's financial performance.

We assume that the growth in SHPs' debt funding will slow next year and that decreasing borrowing costs will ease the pressure on interest cover ratios.   However, we continue to believe that SHPs' debt burden will remain elevated and that the interest coverage will only marginally strengthen from weak levels. Many SHPs are scaling back on the development of new homes because of cost pressures, delays caused by material or labor constraints, and the continued focus on investments in existing homes. We project the slowdown in the development of new homes will reduce funding needs. We also consider that many SHPs will continue to dispose of existing homes. This, together with grant funding and the use of cash, will provide funding sources for investments in new and existing homes and further reduce the need for additional debt.

In our view, management and governance practices will remain a differentiating factor.   This is because SHPs will need to take timely actions to mitigate risks from challenging external economic and regulatory conditions. SHPs also need to balance investments in existing homes with their aspiration to continue to develop new homes to ensure solid cash flow generation and the coverage of interest expenses. Our rated SHPs' liquidity remains very strong.

Ratings Will Remain Predominantly In The 'A' Category

We anticipate that our ratings on 62 non-U.S. SHPs will remain predominantly in the 'A' category in 2024 (see chart 1).   However, pressure on the creditworthiness of the SHPs remains. We expect SHPs at the higher end of the 'A' category could experience downgrades as 14 SHPs we rate at 'A' or above have a negative outlook. In the U.K., for instance, we could downgrade SHPs if, contrary to our expectations, inflation and interest rates remain persistently high over the next two fiscal years (fiscal year ends March 31) and management teams are unable to take corrective measures (see "U.K. Social Housing Providers' Credit Headroom Could Tighten If The Operating Environment Deteriorates," published Oct. 4, 2023). Another indicator of the pressure on the creditworthiness of SHPs is the fact that the ratings on three SHPs are now in the 'BBB' category. In 2022, we had rated only one SHP, which has since become a subsidiary of another SHP, below 'A-'.

Chart 1

The U.K. is the main driver for the negative bias across non-U.S. SHPs.  The negative bias across the sector will remain but might ease in 2024, following a marginal improvement over the past year. On Oct. 31, 2023, 31% of our ratings had a negative outlook, down from 33% a year ago (see chart 2). In our view, the U.K. is the main driver for the negative bias across non-U.S. SHPs. As of Oct. 31, 2023, about 35% of our ratings on 42 U.K. SHPs had a negative outlook, indicating that we could lower the ratings over the next two years. In contrast, we expect the German SHP sector will remain relatively stable in 2024, which is reflected in the existing outlooks on the ratings on nine German SHPs: One outlook is negative, one is positive, and the others are stable. France, where we rate four SHPs, has a stronger negative bias. Two of the four ratings have negative outlooks, although these negative outlooks are linked to the negative outlook on France rather than an intrinsic pressure on the SHPs. The four SHPs we rate in Sweden also experienced more pressure on the ratings, with one outlook having turned negative for the first time since 2017.

Chart 2

Modestly Strengthening Financial Performance Hints At A Turning Point

We forecast that adjusted EBITDA margins across our rated SHP portfolio will strengthen modestly in fiscal year 2024, from a relatively weak fiscal year 2023.   This is underpinned by our expectation that rental incomes will increase faster than costs and our projection that investments in existing homes will rise at a slower pace than in the past two years.

Most rated SHPs' adjusted EBITDA margins continued to erode in 2023.   This was mainly because cost inflation outpaced any significant rent increases, which were constrained by governments in many regions. At the same time, SHPs ramped up investments in existing homes to address pent-up demand for repair works following the COVID-19 lockdowns and increasing building safety and energy efficiency requirements.

We project that U.K.-based SHPs' financial performance will improve marginally in fiscal years 2024 and 2025, from a lower point in fiscal year 2023 than we had previously forecast (see chart 3). The consumer price index (CPI) in England was 6.7% in September 2023, which, in the absence of another government-imposed rent cap, could result in rent increases across the social housing rent sector of up to 7.7% for the year ending March 31, 2025. We expect CPI inflation will abate gradually and reduce the pressure on SHPs' cost base, which should improve SHPs' financial performance. We also consider that the growth of investments in existing homes will slow in 2024, partly due to the grant funding SHPs obtained to cover a part of these investments, which we net off the spend.

Chart 3

In Germany, municipal owners' permissiveness for realistic rent increases will be a key factor to cap the cost-to-revenue ratio. Some cities now follow a more realistic approach to rent increases, which should support SHPs' financial performance. For instance, Berlin-based SHPs can now adjust rents for existing tenants by up to 2.9% per year through 2024-2027, after years of being more or less unable to increase rents in existing contracts. However, we are mindful that such additional leeway is not granted everywhere. Overall, we expect adjusted EBITDA margins in the sector will largely bottom out and might even strengthen slightly in 2024.

France-based SHPs, on the other hand, continue to be subject to statutory rent ceilings. SHPs' rent increases depend on the state-provided reference index for rents (Indice de Référence des Loyers, IRL), which is based on the average CPI of the past 12 months. The French government imposed a 3.5% rent increase cap for 2023, even though the CPI in France increased by almost 5.6% over the past 12 months. This put downward pressure on SHPs' financial performance. The government extended the 3.5% rent increase cap for 2024, meaning the pressure will remain. Even so, we forecast that adjusted EBITDA margins will strengthen modestly in 2024, underpinned by our expectation that CPI growth will reduce next year, which should have a positive effect on SHPs' cost base.

Similar to Germany, Sweden-based SHPs were unable to increase rents to compensate for increasing costs over 2022-2023. Even though rent increases amounted to an average 4.1% in 2023, SHPs' financial performance weakened as expenditure growth has remained high since the beginning of 2022. We believe the sector will recover modestly in 2024, based on our assumption that rents will increase faster than inflation. That said, district heating, water, and sewerage costs will rise significantly from Jan. 1, 2024, in many parts of Sweden. Accordingly, we think SHPs will likely need to increase operational efficiencies and raise rents to improve their financial performance. The actual rent increases are uncertain as the Swedish system of rent setting requires an agreement between SHPs and the tenant association.

We rate one SHP each in the Netherlands, Canada, and New Zealand.

We project the financial performance of the Netherlands-based SHP will benefit from the Dutch government's decision to abolish a landlord levy.  We expect the abolition of the levy, which had been in place until 2022, will result in lower operating costs. This will more than offset the adverse effect of inflation, such that adjusted EBITDA margins will continue to improve in 2024.

The operating needs of the rated SHP in Canada are supported by an established funding formula with the City of Toronto.   This reflects the SHP's provincially legislated mandate to act as the service manager for social housing in Toronto, the largest city in Canada. We expect that the SHP will maintain its superior market position and maintain relatively stable financial performance, despite inflationary pressures.

Unlike most SHPs we rate, the SHP in New Zealand will face weakening adjusted EBITDA margins in 2024.   The SHP's revenue streams are reliable because it receives most of its operating revenue directly or indirectly from the government. Yet, higher repair and maintenance expenses for existing properties and increasing staff costs, which generally outpace growth in rental revenues, will reduce adjusted EBITDA margins.

High Construction Costs And Interest Rates Hamper The Development Of New Homes

Since many SHPs divert resources to existing homes and scale back the development of new homes, we forecast a more modest increase in new homes, compared with our previous expectation. Higher construction costs and interest rates also contribute to this trend because debt schemes might become less financially viable if additional grants are not provided.

Based on the continued demand for affordable housing in many regions, some governments take measures to encourage the continued development of SHPs. We note, for instance, that grant funding for the development of new homes has remained high in the devolved regions of the U.K. Germany, for example, aims to make an additional €1 billion available to subsidize lending and transfers from state development banks, provide federal lands, suspend the tightening of certain energy efficiency standard requirements, and make the planning process more efficient. Although we have some doubts as to the full implementation of these plans, we forecast that Germany-based SHPs could see a more resilient growth in new homes than many other regions. However, at less than 2% per year, this will still be significantly lower than in recent years. We project German SHPs' debt profiles will remain relatively solid in 2024, supported by slightly reduced capital expenditure (capex) and therefore lower funding needs, as well as availability of subsidized funding sources.

We expect the disposal of existing homes and other non-core assets, as well as stock transfers, will continue in the U.K. as many SHPs consolidate the geographical regions they operate in or sell empty homes where investments to enhance energy efficiency are not financially viable. We consider these disposals add a funding source, either to support the investments in existing homes or to partially fund the development of new homes. Nonetheless, gradually increasing investments in existing homes will continue to hamper the development of new homes. We forecast the growth in new homes will average 1% over the next three years (see chart 4).

Chart 4

Based on the reduced development of new homes, we forecast that funding needs, excluding the refinancing of existing bank debt that will mature over the next year, will decrease in 2024, such that debt metrics will strengthen (see chart 5). This is further supported by an increase in non-sales adjusted EBITDA. We are mindful that the reduced development of new homes will constrain revenue growth in the medium term but project that non-sales adjusted EBITDA will increase significantly next year, compared with a very weak fiscal year 2023, thanks to rental revenues increasing more than costs. While we expect that debt metrics will strengthen over the next two years, we do not anticipate that they will recover to the very robust levels seen before and during the COVID-19 lockdowns.

Chart 5

In contrast to the U.K., where investments in existing homes are mainly funded by internal cash flow generation--including grants and the proceeds from asset sales--the investments needed for the energy transition in France and Sweden would likely require increasing borrowings. We therefore forecast that French SHPs' borrowings will increase more than in any other region where we rate SHPs. At the same time, the development of new homes is among the lowest. French SHPs continue to have an exceptional access to regulated and subsidized borrowing through the Caisse des Dépôts et Consignation (CDC), comprising almost 80% of SHPs' outstanding debt. Higher inflation and rising short-term interest rates have resulted in the CDC increasing its interest rate (Livret A), which has put pressure on SHPs' interest costs. Yet, the French finance minister announced in July 2023 that the Livret A rate will remain flat at 3% for at least the next 18 months. This is below financial market rates and the indexation formula. We consider that the access to favorable funding from the CDC remains a key credit strength for rated SHPs in France.

We project that the development of new homes will decline in Sweden but will remain quite robust. The growth in the number of new homes is higher than in any other region. We anticipate that Swedish SHPs will see their interest cover ratios decline as interest costs increase but consider that their debt burdens remain relatively solid, compared with other regions.

We understand that Dutch SHPs' focus on improving energy efficiency mostly materializes in the form of demolishing old units that are too costly to refurbish, building new units according to the highest energy efficiency standards, and undertaking energy efficiency investments in the remaining stock. We anticipate Dutch SHPs will raise more debt to fund these investments. That said, the abolished levy should support stronger financial performance and contain the sector's indebtedness, although rising inflation and social housing rent restrictions will counterbalance some of the benefits.

The SHPs in Canada and New Zealand face the same pressure as SHPs elsewhere, with demand for social housing increasing and the need to improve the quality and energy efficiency of the stock. The two SHPs we rate in these regions benefit, just like SHPs in Germany, France, and Sweden, from preferential borrowings from their respective municipality or government. That said, we project that the New Zealand-based SHP's debt burden will remain high and its interest coverage relatively week, mainly due to a substantial debt-funded investment program. We expect the SHP in Canada will maintain very strong financial indicators.

Strong Liquidity In 2024

We expect non-U.S. SHPs' liquidity sources will cover liquidity uses by 2x in 2024. In many respects, bank loans have replaced debt issuance on capital markets over the past year, mainly due to the higher cost of funding. Even so, we think SHPs will try to access capital markets for bond issuances as interest rates start to reduce over 2024. In addition to lower capex, this will support their liquidity coverage, which could otherwise decline as maturing bank facilities expire.

Table 1

Related Research

• Non-U.S. Social Housing Providers Ratings Score Snapshot: November 2023, Nov. 15, 2023
• Non-U.S. Social Housing Providers Ratings Risk Indicators: November 2023, Nov. 15, 2023
• Regulatory Framework Assessment: Social Housing Providers In The U.K. Benefit From Strong Regulatory Frameworks, Oct. 23, 2023
• United Kingdom 'AA/A-1+' Ratings Affirmed; Outlook Stable, Oct. 20, 2023
• U.K. Social Housing Providers' Credit Headroom Could Tighten If The Operating Environment Deteriorates, Oct. 4, 2023
• Regulatory Framework Assessment: German Public Housing Providers Face Increasing Political Demands But Benefit From Strong Institutions, Oct. 3, 2023
• Regulatory Framework And Systemic Support Assessments For Nonprofit Social Housing Providers, Sept. 7, 2023
• European Housing Markets: Sustained Correction Ahead, July 20, 2023
• Freeze On Livret A Rate Should Boost French Social Housing Providers’ Credit Metrics, July 17, 2023
• Regulatory Framework Assessment: Social Housing Providers In France, May 30, 2023
• United Kingdom Revised To Stable From Negative On Moderating Fiscal Risks; ‘AA/A-1+’ Ratings Affirmed, April 21, 2023
• U.K. Social Housing Borrowing 2023: On Pause, March 28, 2023
• Non-U.S. Social Housing Providers Ratings History: March 2023, March 27, 2023
• U.K. Social Housing Providers Set Their Sights On Cyber Risks, Dec. 16, 2022
• France Outlook Revised To Negative On Rising Budgetary Risks; 'AA/A-1+' Ratings Affirmed, Dec. 2, 2022