S&P: sector will remain in the A category but would benefit from ‘firm’ rent settlement

“We think [the social housing sector] will remain in the A category,” Ms Erlander said. “We have a number on a negative outlook, but some of them are at the higher end of the A category, so even if they were downgraded, they would remain in the A category.

“And we only have one A- with a negative outlook. So, at this point, we don’t see the sector crawling into the BBB category, but remaining in the A category.”

The message reiterates the agency’s guidance in December that the sector would remain in this A category during 2024.

Ms Erlander said social landlords that were in a strong position already had withstood high cost inflation over 2023 and 2024, the government-imposed rent cap, steadily increasing investments in existing homes and higher interest rates from 2022. In many cases, these had resulted in positive rating actions, typically underpinned by their management team’s strategy and actions, she added.

Ms Erlander said negative rating actions were predominantly driven by high investment in existing homes and cost inflation where the landlord did not or could not take mitigating actions.

She said the negative bias of the sector had reduced, following rating actions and five providers having their outlook raised to stable.

Ms Erlander said the percentage of S&P’s portfolio of housing associations on a negative outlook had fallen from 39 per cent a year-and-a-half ago to 21 per cent today.

Of all the negative outlooks, only one was rated A-, compared with seven around 18 months ago, she added.

“With rent increases exceeding cost inflation, [the Consumer Price Index (CPI)] coming down and interest rates coming down, we think the main driver for downward pressure remains the potential requirements to increase investments in existing stock,” Ms Erlander said.

“It could be fire safety, building safety, compliance with the Decent Homes Standard or just the effort to make homes more energy efficient. It has been the main driver and is likely to remain the main driver.

“But we see at this point a limited risk to materially shift into the BBB category. And we continue to assess the portfolio’s value solely in the A category.”

Ms Erlander said that, after the general election, a firm rent settlement would be beneficial for the sector.

In April, the government extended the existing CPI plus one per cent social housing rent settlement for an extra year for 2025-26. However, uncertainty remains over what will happen after this.

Ms Erlander said: “It’s been very challenging over the recent rent settlement period, which was 10 years, but turned out not to be 10 years, because there were rent caps. I think the sector would look forward to seeing a firm, long-term rent settlement, providing visibility and making planning easier to deal with.

“And I think the sector would also look for more grant funding, but I think that is a matter of the willingness and capacity of the government to provide such grant funding.”

Local authorities

Separately, in its UK local authorities are bending, but adapting report, S&P said the overall credit quality of local authorities “remains robust” and that local authorities will maintain “solid credit quality” despite short-term challenges.

The agency has performed credit assessments of 33 local authorities, which it considers a fair representation of the sector, and said it believes that most entities belong to the A category. In addition, the average credit rating for local authorities the agency rates is A+, two notches below its rating on the UK sovereign.

S&P said several headwinds were challenging the sector and leading to “temporary fiscal imbalances”. These headwinds include high inflation, elevated interest rates and rising demand for public services, among others.

Despite this, supportive government mechanisms and regulations enabled councils to maintain “strong credit quality”, it said.

The credit rating agency expects that strong “systemic fundamentals” coupled with economic recovery will help to improve the sector’s financial standing.

“Strong systemic fundamentals and a supportive institutional framework will see UK local authorities maintain solid credit quality despite short-term challenges,” S&P said in the report.

“We expect councils will keep operating spending under control to meet the balanced-budget requirement and that uninterrupted access to government funding will remain a reliable external borrowing source.

“While higher costs will persist in the medium term, economic growth and moderating inflation will contribute to a gradual improvement in financial performance.”