articles Ratings /ratings/en/research/articles/241104-u-k-social-housing-providers-financial-capacity-shrinks-on-investment-needs-13307377.xml content esgSubNav
In This List
COMMENTS

U.K. Social Housing Providers' Financial Capacity Shrinks On Investment Needs

COMMENTS

Instant Insights: Key Takeaways From Our Research

COMMENTS

CEE Brief: Growth Will Decelerate, But The Outlook Isn't Bleak

COMMENTS

Credit FAQ: How Would China Fare Under 60% U.S. Tariffs?

COMMENTS

LGFV Brief: China's RMB10 Trillion Debt-Swap Scheme Is A Good Start


U.K. Social Housing Providers' Financial Capacity Shrinks On Investment Needs

According to our sensitivity analysis, if investments in existing and new homes were to increase modestly above expectations, interest coverage for nearly 70% of our U.K. rated social housing providers could drop to a level that is no longer commensurate with the current ratings. In this case, many of the ratings could migrate toward the lower end of the 'A' category.

However, whether pressure from rising investments would translate into rating actions outside our sensitivity analysis would primarily depend on management's response to the financial pressure.

Social Housing Providers' Investments Have Weakened Their Stand-Alone Creditworthiness

While the average rating on our 41 rated social housing providers remains 'A', their stand-alone credit profiles (SACPs), our measure of intrinsic creditworthiness, have weakened over the past 12 months (see chart 1). This is largely the result of the sector increasing investments in its existing assets.

There is a more pronounced movement in SACPs than in ratings because we apply notching uplift to account for government-related support in some instances. Because one of the priorities of U.K. regulators is to maintain lender confidence and low funding costs across the sector, we think it is likely that they would try to prevent a default in the sector. In our view, social housing providers would receive timely extraordinary support from the U.K. government in the event of financial distress. This is the key reason why the average rating on the 41 rated providers remains 'A' despite the downward migration in SACPs.

Chart 1

image

Our Base-Case Interest Coverage Ratio Will Recover More Slowly Than We Had Anticipated

We see a steep increase in planned investments in existing properties for most of our rated U.K. social housing providers as compared to our previous expectation. This rapid increase in investments will delay the financial performance improvement from rent increases outpacing cost inflation and lower interest rates.

Our updated base case that runs to the end of fiscal 2026 (ending March 31) indicates a greater weakening in nonsales-adjusted EBITDA interest coverage and a delay in its recovery. However, we estimate that interest coverage will remain above 1.1x on average for the portfolio (see chart 2).

Chart 2

image

The Need To Invest In Existing Homes Is A Big Challenge, Particularly For The Large London-Based Providers

Many social housing providers increased their investments in their existing homes by an average of about 17% over fiscal 2024, as the sector focuses increasingly on improving housing quality.

The large London-based social housing providers--those with more than 40,000 homes--are more exposed to fire-safety remediation works as they have more high-rise and complex buildings in their housing portfolios. Moreover, the cost of capitalized repairs per unit for these providers is on average about 13% higher than for the rest of our rated portfolio (see chart 3). For these reasons, the ratings on the large London-based providers are lower on average than the ratings on the rest of the portfolio.

Chart 3

image

Higher costs year on year for all providers also reflect inflation, which rose significantly in fiscal 2023 and fiscal 2024. Going forward however, we forecast that average inflation will decelerate and drop below 3% in fiscal 2025.

We anticipate that the sector will keep increasing investments in existing homes as it focuses on meeting regulatory requirements for housing quality. At the same time, we believe that more grants could become available to social housing providers--for example, from the Warm Homes: Social Housing Fund and the Building Safety Fund--and that these could cover some of the increase in investments.

Larger Investments Than We Forecast Pose A Risk To Our Base-Case Scenario

The sector's need to improve the quality of its existing homes mainly arises from stricter regulation and the push toward decarbonization, while the development of new homes is necessary to meet the U.K.'s housing needs. Against this backdrop, we tested larger investments in both new and existing homes in the following three scenarios:

  • Scenario 1: Our base-case assumptions, combined with a 10% increase in capital expenditure for development in fiscal 2025 and a 15% increase in fiscal 2026.
  • Scenario 2: Our base-case assumptions, combined with a 10% increase in capitalized repairs in fiscal 2025 and a 15% increase in fiscal 2026.
  • Scenario 3: A combination of scenarios 1 and 2.

In our base-case scenario, we forecast that our 41 rated social housing providers would have capacity to deliver approximately 27,000 new units per year in fiscal 2025 and fiscal 2026. We observe that a large London-based provider would deliver on average roughly double the units per year compared to a provider in the rest of the portfolio. Scenarios 1 and 3 increase delivery capacity by approximately 7,000 units over the same period for the total rated portfolio.

Our scenario testing focuses on increasing social housing providers' planned level of capitalized repairs, although we acknowledge that their operating expenditure is also rising.

In all three scenarios, we assume that about 80% of the social housing providers' existing debt is at a fixed rate, with the average cost of debt remaining above 5% until fiscal 2026. We incorporate this assumption of higher-for-longer interest rates to test the social housing providers' interest rate sensitivity. This contrasts with our base-case that follows our macroeconomic forecast of lower funding costs for U.K. issuers (see "U.K. Economic Outlook Q4 2024: Disinflation And Rate Cuts Will Stimulate Growth," published Sept. 23, 2024).

Social housing providers' nonsales-adjusted EBITDA interest coverage would remain weaker for longer if they undertook larger investments

The average interest coverage ratio for the 41 rated entities would continue weakening, although it still recovers modestly toward the end of our forecast periods in all scenarios. The average interest coverage ratio for the portfolio in all scenarios is around 1x (see chart 4). It would therefore be challenging for our rated social housing providers to maintain their current SACPs if any of the scenarios were to materialize.

Chart 4

image

In addition, the average nonsales-adjusted EBITDA interest coverage ratio weakens across all SACPs in all three scenarios. The scenarios have a particularly material effect on providers with a 'bbb' SACP, because their average interest coverage would migrate well below 1x. This is the average interest coverage ratio of providers with a 'bbb-' SACP, the lowest SACP category in the portfolio.

Chart 5

image

Mitigating Factors That Could Support Providers' Ratings

Overall, rating headroom has diminished compared to our prior forecasts from last year. We observe that our rated social housing providers are sensitive to higher investment spend and that even a modest increase in capitalized repairs and/or development could strain creditworthiness. However, these are hypothetical scenarios, and we acknowledge that the actual performance of the housing provider depends on its management priorities and risk appetite. Some social housing providers still have rating headroom and are carrying out mitigating strategies to ease financial pressure. Also, additional grant availability from the government could balance these investment needs.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Abril A Canizares, London + 44 20 7176 0161;
abril.canizares@spglobal.com
Secondary Contacts:Felix Ejgel, London + 44 20 7176 6780;
felix.ejgel@spglobal.com
Colleen Sheridan, London +44-20-7176-0561;
colleen.sheridan@spglobal.com
Tim Chow, CFA, London +44 2071760684;
tim.chow@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in