S&P Global Ratings assigns issuer credit ratings to public and nonprofit social housing providers (SHPs), based on its qualitative and quantitative analysis of industry risk, market position, management and governance, financial performance, debt profile, and liquidity. This report provides comparative statistics for the 60 rated SHPs outside the U.S.

We continue to think that the non-U.S. SHP sector has reached a turning point. This is despite a general weakening of financial indicators since our previous report on ratings risk indicators from March 2024 and a slower recovery than we had anticipated in our sector outlook from November 2023.

Stock Quality Remains A Priority

We consider that cost pressures lingered for longer than we had forecast across most regions where we rate SHPs, while interest rates remained relatively high. At the same time, the focus remained on fire and building safety, as well as the quality of homes and energy efficiency, resulting in high investments in existing homes. We expect rent increases will exceed cost inflation over the coming years, which should support the sector's financial performance.

At the same time, SHPs are scaling back on developing new homes, reducing the debt-funding need. Nonetheless, we project debt metrics will weaken on average across our rated SHPs in Germany, France, and Sweden. In the U.K., we project debt metrics will recover at a modest rate.

We expect our ratings on non-U.S. SHPs will remain largely within the 'A' category (see chart 1). This view is underpinned by a significant reduction of the negative bias we observe across our ratings. With the gradually reducing proportion of negative outlooks across the portfolio, partially balanced by the number of positive outlooks, we continue to think that we are at a turning point in the rating cycle. Yet we note that the recovery would differ materially among SHPs and that it would be modest in many cases.

Chart 1

As of Sept. 30, 2024, 17% of ratings had a negative outlook, down from 33% on Dec. 31, 2022, when negative bias had reached its highest level since 2014. At the same time, 10% of ratings had a positive outlook, the highest number we have seen over the same period (see chart 2).

Chart 2

We consider that non-U.S. SHPs' financial performance, measured by the consolidated groups' S&P Global Ratings-adjusted EBITDA margins, is a solid indicator of creditworthiness and underpins the ratings. Non-U.S. SHPs rated 'AA-' or above typically have adjusted EBITDA margins above 30%, which gradually decline to an average of less than 25% for SHPs rated in the 'A' category, and to less than 20% for SHPs rated in the 'BBB' category. However, the difference between the lowest and highest adjusted EBITDA margins increases with the rating category (see chart 3).

Chart 3

The stronger SHPs' debt metrics, the higher the likelihood for a higher rating (see chart 4). Most entities rated 'AA-' or above have an adjusted debt-to-nonsales-EBITDA ratio below 17x that is gradually increasing to about 25x for entities rated in the 'A' category. Debt to EBITDA started to exceed 30x for SHPs rated at the lower end of the 'A' category, deteriorating further to above 35x across SHPs in the 'BBB' category. Equally, entities rated 'AA-' or above have a very strong adjusted nonsales EBITDA interest coverage that exceeds 3x. The interest coverage ratio declines to 1.8x on average for entities rated in the 'A' category and below 0.8x for entities rated in the 'BBB' category.

Chart 4

Our assessment of SHPs' liquidity ratios does not have the same correlation with the ratings as the debt ratios, but we consider that liquidity coverage remains solid across our non-U.S. SHPs, supported by an average liquidity ratio of 2.0x on average.

Since non-U.S. SHPs have a public policy role and strong ties with governments, the issuer credit ratings on these entities combine our assessment of the stand-alone credit profile (SACP) and the likelihood of extraordinary government support. In the case of SHPs, the application of our criteria for government-related entities could raise the final issuer credit rating relative to the SACP.

'AAA/AA'

We assume that most SHPs rated 'AA-' or above would receive sufficient support from related highly rated governments in case of financial distress. Our highest-rated entity, Kainga Ora-Homes and Communities (Kainga Ora), is a New Zealand government (Crown) agency, deeply integrated in the implementation of the government's social housing policy. While the agency's significant development pipeline is driving weaker financial performance and interest coverage, resulting in an assessment of its SACP at 'bbb+', we equalize our ratings on Kainga Ora with the sovereign credit rating on New Zealand at 'AAA'. The only rating on an entity at this rating level that does not benefit from an uplift is that on U.K.-based SHP Local Space. This entity has arrangements with local authorities under a unique operating model, which we think will continue to support its strong financial performance relative to peers and underpin its 'aa-' SACP.

We think the board and executive teams of SHPs in the 'AA' category tend to manage operations effectively and in line with consistent, realistic, and long-term plans that are underpinned by prudent treasury and liquidity management. They focus on core rental activities and ensure no or immaterial exposure to riskier activities, such as the development of homes for sale. They typically operate under a solid regulatory framework. The four Swedish SHPs benefit from a track record of support from their municipal owners.

The financial performance of SHPs in the 'AA' category is solid, but some face challenges that are similar to those lower-rated SHPs are exposed to. Adjusted EBITDA margins have declined to a five-year average of 32% in October 2024, from 34% in March 2024. However, the financial performance of SHPs in the 'AA' category remains strong relative other SHPs, underpinned by their resilient and flexible operations.

Adjusted debt to nonsales EBITDA remained largely unchanged across the 'AA' category between October and March 2024, at 14x, on a five-year average. In contrast, the adjusted nonsales EBITDA interest coverage declined to 3.6x, from 3.7x, over the same period. Again, these debt metrics are strong, compared with other SHPs we rate.

Liquidity, on the other hand, is weaker than the average across our ratings portfolio, with the average liquidity ratio remaining at 1.5x. This is mainly due to the fact that these SHPs can sustain lower liquidity coverages since they would typically be offset by strong ties with their respective governments or local authorities, which provide ongoing liquidity support or are likely to provide extraordinary support if necessary.

Table 1

Table 2

'A'

The largest number (48) of non-U.S. SHPs are in the 'A' category, with three entities in France, eight in Germany, and 37 in the U.K. While government support plays a role in this rating category as well, entities with an SACP of 'a+' typically have a solid enough creditworthiness. We therefore do not apply any uplift for government support as we do not think that they would need it.

In this rating category, SHPs have a more pronounced exposure to sales risk, that is, they are developing a higher proportion of new homes to sell. In our view, this could create volatility on financial indicators and is reflected in a weaker industry risk assessment. We typically assess management and governance as relatively solid in this rating category but consider that some of the lower-rated SHPs in this category have less consistent strategies, resulting in a marginally negative assessment.

Financial performance differs significantly within this rating category. While the five-year average across SHPs has remained largely unchanged at 25% between March and October 2024, the financial performance is much stronger at the 'A+' rating level--at close to 30%--than at the 'A-' rating level, where adjusted EBITDA margins are below 20% on a five-year average.

The average debt to adjusted nonsales EBITDA remained largely unchanged at 22x between March and October 2024, while the average interest coverage weakened to 1.8x on average in October 2024, compared with 2.1x in March 2024. The difference between 'A+' and the 'A-' rated SHPs is material, with 'A+' rated SHPs typically having a debt to non-sales adjusted EBITDA of 17x and an interest coverage of 2.1x, versus 26x and 1.2x, respectively, for SHPs in the 'A-' category.

Two of the 'A-' rated SHPs have a negative outlook, indicating that we could lower the ratings on them to the 'BBB' category. The reasons for the negative outlooks are largely the same for both SHPs, namely weakening credit metrics due to increasing investments in existing homes, which reduce adjusted EBITDA and adjusted nonsales EBITDA and impair financial performance and debt metrics.

Table 3

Table 4

'BBB'

We rate three SHPs in the 'BBB' category, all based in the U.K. We have a relatively negative view of these SHPs' management and governance because we think that decisions and strategies limit their flexibility to adjust plans, thereby significantly weakening their respective credit metrics.

We consider that the outcome of these decisions--be it early debt funding, accelerated investments in existing homes, large development sites for new homes, or potential underinvestment in existing homes--made it more challenging for them than others to take efficient actions to mitigate the headwinds over the past two years.

All SHPs in the 'BBB' category have adjusted EBITDA margins below 20%, debt to EBITDA ratios exceeding 35x, and interest coverage well below 1x.

Table 5

Table 6

Related Criteria

• Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Methodology For Rating Public And Nonprofit SHPs, June 1, 2021
• Group Rating Methodology, July 1, 2019
• Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• Regulatory Framework Assessment: Social Housing Providers In The Netherlands, July 23, 2024
• Full Analysis: United Kingdom, April 22, 2024
• Non-U.S. Social Housing Providers Ratings Score Snapshot: March 2024, March 11, 2024
• Non-U.S. Social Housing Providers Ratings Risk Indicators: March 2024, March 11, 2024
• Non-U.S. Social Housing Providers Ratings History: March 2024, March 11, 2024
• U.K. Social Housing Borrowing 2024: Borrowing capacity remains constrained, March 6, 2024
• European Housing Markets Forecast Brightens Amid Ongoing Corrections, Jan. 25, 2024
• Non-US Social Housing Outlook 2024 At a turning point?, Nov. 29, 2023
• Regulatory Framework Assessment: Social Housing Providers In The U.K. Benefit From Strong Regulatory Frameworks, Oct. 23, 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. 8, 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
• Regulatory Framework Assessment: Swedish Public Housing Providers' Rent-Setting Scheme Balances Income And Costs, May 22, 2023