S&P predicts improved credit metrics as social landlords ‘temper growth ambitions’

S&P also said its projection of a recovery in EBITDA (earnings before interest, taxes, depreciation and amortisation) margins is supported by an “expectation that rent increases will outpace cost inflation”. 

The report said: “The recently announced rent convergence mechanism will further support this trend. This mechanism would allow providers to increase rents that are lower than the formula rent faster than the Consumer Price Index (CPI) plus 1%. 

“In the fiscal year ending March 2027, rents are allowed to increase by 4.8%, while we expect inflation to head toward the 2% Bank of England target.”

S&P said that more providers are rationalising their stock in “an effort to further reduce funding needs and improve efficiency”. 

“While we believe that this will have long-term benefits, we note an increasing reliance on fixed-asset sales to achieve financial targets,” the report said.

Among S&P’s social housing portfolio, the average rating remains in the ‘A’ category, but the agency said “divergence in credit metrics and strategies persists”.

The report continued: “Strong credit metrics typically reflect management teams’ proactive asset management and prudent balancing of required investments in existing stock with growth ambitions.

“A greater need to invest in stock – because of fire and building safety concerns, repair backlogs, or previous underinvestment – typically results in non-sales adjusted EBITDA interest coverage that is materially below the median. 

“Many providers with a high debt burden are carrying out large asset-disposal and operational efficiency plans to support their recovery.”

Many of the top 20 borrowers in the sector have “curtailed spending on new development and are focusing on containing debt or deleveraging”, while their debt is “mostly growing as a result of mergers”, S&P said. 

The agency also predicted that social landlords will refinance more short-term credit lines with longer-term funding as a result of interest rates now moderating. 

The report said: “We project that the sector will continue to require new funding to finance the development of new homes and refinance maturing debt. Debt repayments tend to be higher than the amounts of debt coming due, as providers proactively re-profile their debt.

“We expect providers to continue utilizing a variety of funding options, from bank debt to government-backed funding. This includes the national wealth fund, the affordable housing guarantee scheme and the upcoming launch of low-cost government loans.”

S&P recognised increased funding coming into the sector, but said “grant-funded development may not materially improve margins due to an increased focus on the delivery of lower-margin units”.

On the government’s recent announcements to boost housebuilding – including low-interest loans and Section 106 flexibilities – the agency expects these initiatives to take time to translate into higher capital expenditure among social landlords

Noa Fux, credit analyst at S&P, said: “In the UK, high investments in existing homes will continue to weigh on providers’ financial profiles. 

“However, we still expect an improvement in credit metrics as turnover outpaces cost increases and management teams temper their growth ambitions, seek efficiencies and, in some cases, dispose of stock to support credit metrics.”