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Housing association debt to grow as risings costs bite, S&P warns
Housing associations’ debt piles will continue to grow despite more focus on government-backed affordable homes development, S&P has warned.
In a report this week, the rating agency flagged that many social landlords are scaling back on market sale development as margins have narrowed. They are instead upping their focus on building affordable housing, helped by grant funding.
In August, around 90 strategic partners were awarded a share of £8.6bn under the government’s latest Affordable Homes Programme.
But S&P warned: “While positive for the sector, the grant funding remains limited to less than 15% of social housing providers’ development costs, such that we continue to expect debt build-up.”
Earlier this year, S&P said it expected registered providers’ debt to hit £107bn by 2023.
A slew of housing associations have been taking advantage of low interest rates through fundraising this year. S&P forecast that rates would remain low until December 2023.
“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 note said.
S&P has downgraded eight of the 43 UK housing associations it rates this year, but 84% still have a “stable” outlook.
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But the report added: “An added risk in the UK 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.”
S&P also warned about the financial impact of the need to improve stock as the government looks to introduce more protection for tenants off the back of the Social Housing White Paper, and the ongoing building safety and decarbonisation challenges.
“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,” the report said.
“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.”
S&P said that with spending on building and fire safety work coupled with investment in decarbonising properties, the costs will “likely increase over time”.
On rent, S&P expects many housing associations to apply the full rent increase from April next year, which, based on current inflation rates, could be up to 4.1%.
However, it warned that hiking rents could lead to higher 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 labour force are also somewhat supported by the government’s recent decision to increase the National Living Wage additional work allowance, alongside the taper rate cut to Universal Credit recipients.”
The report added: “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.”
Despite the concerns, S&P said it expected liquidity to remain “strong” in the sector over the next year.
