Inside Housing – News – Housing associations’ debt to rise as costs rise, warns S&P

The debt of housing associations will continue to increase despite a greater focus on developing government-backed affordable housing, S&P cautioned.

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Housing associations’ debts will continue to grow despite greater focus on government-funded development #UKhousing

In a report released this week, the rating agency said many social landlords are slowing the development of sales in the market as margins shrink. Instead, they are focusing more on building affordable housing, aided by grants.

In August, around 90 strategic partners received a share of £ 8.6 billion under the government’s latest affordable housing program.

But S&P warned, “While positive for the industry, subsidy funding remains limited to less than 15% of the development costs of social housing providers, so we continue to expect debt build-up. “

Earlier this year, S&P said it expected registered supplier debt to reach £ 107 billion by 2023.

A large number of housing associations took advantage of the low interest rates through fundraising this year. S&P predicted that rates would stay low until December 2023.

“Currently, low interest rates combined with a large proportion of long-term debt with fixed coupons should protect the industry from a rate hike, despite the increase in debt,” the note said.

S&P has downgraded eight of the 43 UK housing associations it assesses this year, but 84% still have a “stable” outlook.

But the report adds: ‘An additional risk in the UK is the reliance on floating rate bank facilities used for short-term financing needs, and the need to take on more debt to support continued development. housing at rates potentially higher than those currently assumed in business plans.

S&P also warned of the financial impact of the need to improve inventory as the government seeks to introduce more protection for tenants in the wake of the White Paper on Social Housing, and the current challenges for housing tenants. building safety and decarbonization.

“The main risk for the sector in the coming year is the focus on asset quality and consumption standards, which reduces the financial margin of some entities,” the report said.

“Our view is that improving building safety standards and the national push towards energy efficiency will lead to more investment in the existing stock, which in turn will combined with cost inflation, will weigh on the profitability of the entire industry.

S&P said that with spending on construction and fire safety coupled with investments in decarbonizing properties, costs “are likely to increase over time.”

For rent, S&P expects many housing associations to implement the full rent increase from April next year, which, based on current inflation rates, could reach 4.1%.

However, he warned that rising rents could lead to an increase in arrears.

“We believe that the increase in rents is likely to be covered by the government, without a significant increase in arrears, for tenants receiving government assistance in the form of housing allowances or universal credit to pay their rents.

“Tenants who are part of the labor force are also somewhat supported by the recent government decision to increase the additional work allowance of the national living wage, alongside the reduction in the depreciation rate for beneficiaries of universal credit. . “

The report adds: “However, we believe that higher rents could still lead to arrears for those who pay their rent in full, due to the end of the holiday scheme in September 2021.”

Despite the concerns, S&P said it expected liquidity to remain “strong” in the sector over the next year or so.

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