This report does not constitute a rating action.
Key Takeaways
- The U.K. government has committed to facilitate U.K. social housing providers in the delivery of additional new homes by providing more capital grants.
- At the same time, social housing providers are still under pressure to increase spending on improving the quality of existing homes.
- A push to increase investments in both new and existing homes would put pressure on about half of the ratings in our portfolio, even after additional development grants.
- However, a potential agreement on rent convergence and a grant rate that covers a higher share of the capital spending on new homes could reduce the burden of higher investments.
One of the U.K. government's key announcements in its spending review earlier this month was additional grant funding for new social and affordable housing. This shows the government's commitment to support social housing providers in delivering more new homes.
However, S&P Global Ratings thinks that the additional grants will not necessarily improve U.K. social housing providers' financial capacity because they will only subsidize part of the additional capital spending on new homes. We expect that social housing providers will still need to raise additional debt. Historically, grants have only covered around 20% of English social housing providers' capital spending.
At the same time, social housing providers are still under pressure to invest in improving the quality of their existing homes. Higher expenditure on repairs and maintenance has tightened social housing providers' financial headroom significantly over the past few years.
Ramping Up Spending Would Put About Half Of The Ratings In Our Portfolio Under Pressure
We analyzed four different scenarios to test the financial capacity of the 41 rated social housing providers in our portfolio to deliver new homes and maintain high investments in existing homes. The scenarios build on our latest base-case assumptions.
We found that a push to increase investments in both new and existing homes would put pressure on about half of the ratings in our portfolio, even after additional capital grants. This could lower the portfolio's average interest coverage toward 1.0x by the fiscal year ending March 31, 2027 (fiscal 2027) from our current base-case average of 1.2x.
In addition, we expect that the eventual implementation of rent convergence, which will generally ensure that tenants pay a similar rent for similar properties, will have a limited impact of no more than a 1% increase above the rent settlement of the Consumer Price Index (CPI) plus 1%. This is because social housing providers need to balance increases in rent with affordability for tenants. In general, we expect that rent convergence will ensure that tenants living in similar properties in the same area pay similar rents.
That said, if rent convergence is implemented, it could mitigate social housing providers' increasing investments, aligning their interest coverage more closely with our current base-case expectations.
We recognize that social housing providers may need more time to ramp up capital spending, and that rent convergence will vary greatly by social housing provider and will take time to be realized in the financial metrics. Social housing providers could also decide to increase their spending on new and existing properties, which could add to the pressure on their financial ratios.
Interest Coverage Headroom Continues To Tighten Through To March 2027
The portfolio's average nonsales adjusted EBITDA interest coverage is weaker and its recovery slower in our updated May 2025 base case--which runs to the end of fiscal 2027--than in our September 2024 base case (see chart 1).
We forecast that rent increases will outpace cost inflation and that interest rates will fall, supporting the social housing providers' interest coverage. However, the persistence of high investments in existing homes offsets some of the benefit.
Chart 1
In general, we are seeing the social housing providers in our portfolio increasing investments in their existing properties, which puts more pressure on the ratings. While the average rating in our portfolio remains 'A', the social housing providers' intrinsic creditworthiness has weakened since 2021, and more ratings are now at the lower end of the 'A' category (see chart 2).
Chart 2
Grant Funding And Rent Convergence Would Allow For Higher Investments But Not Higher Ratings
In our current base case to fiscal 2027, we forecast that the social housing providers' interest coverage will recover. This is because, in aggregate, they will generally scale down their development ambitions to mitigate the financial pressure from investments in existing properties.
However, the government's announcement of its aim to build 1.5 million new homes by 2029, along with the availability of more grants, could reverse this trend.
We have therefore tested four scenarios involving larger investments in new homes alongside higher operating expenditure. We have also tested the social housing providers' sensitivity to rent convergence, as this is one way of supporting the sector's financial flexibility.
Our scenarios focus on fiscal 2026 and fiscal 2027 and encompass the following technical assumptions:
- Scenario 1: A 20% increase in capital expenditure (capex) for development in fiscal 2026 and a 30% increase in fiscal 2027. This scenario assumes a one-year lag between increased capital spending and the delivery of new homes. It also assumes that all additional homes will be developed for general needs.
- Scenario 2: Scenario 1, combined with a 2% increase in operating expenditure in each of fiscal 2026 and fiscal 2027.
- Scenario 3: Scenario 2, combined with our assumption of rent convergence, which we approximate to be similar to a rent increase of CPI plus 2%.
- Scenario 4: Scenario 1, combined with our assumption of rent convergence.
In all scenarios, we assume that grants will fund 20% of new development. We rate a few social housing providers in the devolved regions of Scotland, Wales, and Northern Ireland. Historically, these regions have higher grant rates, but we conservatively assume the same grant rate as for England.
In aggregate for the 41 social housing providers we rate in the U.K., the scenarios we tested result in about 50% more properties in fiscal 2027 than we forecast in our latest base case.
Greater investments would increase both the quality of existing homes and the number of new properties, with the latter benefitting the sector by combatting housing shortages. However, scenarios 1 and 2 lead to weakening interest coverage.
Scenario 1
Interest coverage declines below 1.2x on average in both fiscal 2026 and fiscal 2027, with a weaker recovery than we forecast in our latest base case.
Scenario 2
Our rated social housing providers show high sensitivity to increasing operating expenditure. This materially reduces the headroom under their interest coverage ratios and constrains their ability to develop new homes.
Our projection of higher capex and operating expenditure could push nonsales-adjusted EBITDA interest coverage toward 1x. This is just about commensurate with a rating of 'A-', one notch lower than the average rating in our portfolio.
Scenario 3
Higher rents could mitigate the deterioration we see under scenario 2 and give the social housing providers greater capacity to build more new homes. This would allow interest coverage to move closer to our latest base-case level, although it would remain below this level (see chart 3).
Scenario 4
If our rated social housing providers increase their capital spending on new homes, higher rents would enhance their financial capacity. This would align their interest coverage with our latest base case.
Chart 3
Looking at the results by rating category, the average interest coverage ratio weakens below our base case if the social housing providers increase capital spending on new homes under scenario 1 (see chart 4).
The credit stress under scenario 2 would result in interest coverage that is not commensurate with the current ratings. Social housing providers with 'A-' issuer credit ratings now make up approximately 40% of our total rated portfolio.
If we project both higher capex and operating expenditure, the average interest coverage ratio dips well below 1x, close to the level of the 'BBB+' rated providers. However, rent convergence, as modelled in scenarios 3 and 4, could help mitigate this negative impact.
Chart 4
Management Actions Could Still Counter These Scenarios
The scenarios above are hypothetical and reflect our estimates of the impact of government policies and market demand. We have not taken into account any management actions that could mitigate the cost pressures. As we have seen recently, we believe that management teams' decisions on how to tackle challenges will be critical in influencing and differentiating the ratings.
| Primary Credit Analysts: | Tim Chow, CFA, London +44 2071760684; tim.chow@spglobal.com |
| Abril A Canizares, London + 44 20 7176 0161; abril.canizares@spglobal.com | |
| Secondary Contacts: | Colleen Sheridan, London +44-20-7176-0561; colleen.sheridan@spglobal.com |
| Felix Ejgel, London + 44 20 7176 6780; felix.ejgel@spglobal.com |
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