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Housing associations’ credit ratings could ‘suffer’ due to gap between rising costs and rent, warns S&P
A host of housing associations’ credit ratings could “suffer” as they tackle the thorny issues of rent levels and rising inflation, ratings agency S&P has warned.
In a new report, S&P said the “widening gap” between rent levels and cost inflation in the current financial year poses “significant challenges” to social landlords.
Analysis by S&P showed that more than a quarter of the 43 associations it rates could see “very weak interest coverage” if they are unable to cover cost increases by boosting revenues or scaling down costs.
It comes as housing associations deal with the growing financial challenges of investing in their stock to improve housing conditions, tackling building safety and making homes energy efficient.
The vast majority of housing associations, according to exclusive Inside Housing research, increased their rents by the maximum – 4.1% – in April. However, S&P said it forecast that the Consumer Price Index (CPI) measure of inflation will average 8.7% this year, leading to a negative inflation gap of around 4.6%.
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Inflation is currently running at a 40-year high of 9.4%, while the Bank of England yesterday forecast it could hit 13% in October as it raised interest rates and warned of a recession this year.
“A persistently negative inflation gap would structurally weaken social housing providers’ credit standing and create a long path to recovery,” S&P’s report said.
Landlords are only able to set their rent levels based on the CPI of the previous September. Since 2020, when the rent cap was lifted, housing associations have been allowed to increase rents by up to 1% above the rate of CPI inflation.
Abril Canizares, associate director at S&P, said: “While we think that CPI inflation will remain high in September 2022, it is uncertain whether the UK SHPs [social housing providers] will be able to increase rents from April 2023 to a level that offsets their cost increases.”
Ms Canizares added that as the cost of living crisis increases, rent affordability “could become a real concern” and test the “social purpose” of registered providers.
The report added: “Significant cost of living pressure in the UK and SHPs’ social purpose could make it challenging for them to introduce a full rent increase from April 2023 – one that results in close to double-digit
growth and completely offsets their cost increases.”
The warning from S&P echoes that from fellow ratings agency Moody’s, which said in June that associations face “challenging decisions” over rent increases next year as soaring inflation and rising energy bills weigh on tenants’ finances.
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