Gap between inflation and rent levels threatens housing providers' creditworthiness, warns S&P

S&P said that despite expecting CPI inflation to remain high in September, it is uncertain whether providers will be able to increase rents from April 2023 to a level that offsets their cost increases.

This is due to the rising cost of living and the fact that rent affordability could become a concern and test providers’ social purpose, it added.

Abril Canizares, a credit analyst at S&P, said: “While we think that CPI inflation will remain high in September 2022, it is uncertain whether UK housing providers will be able to increase rents from April 2023 to a level that offsets their cost increases.

“This is because as the cost of living continues to rise in the UK, rent affordability could become a real concern and test social housing providers’ social purpose.”

S&P said that in its base case, it anticipates the inflation rate to moderate in the 2024 financial year and providers to implement a rent rise that largely offsets the cost increases from the 2023 financial year.

The agency said that it expects the ratings on nine out of 43 rated providers in the UK to come under pressure, if the rent increase in the 2024 financial year does not offset the cost growth from the previous year, which it calls the negative inflation gap.

If the inflation rate is higher than its current base case in the 2023 financial year, and the negative inflation gap continues in the 2024 financial year, S&P expects the ratings on 12 of its rated providers to come under pressure.

A separate S&P report said cost inflation is likely to exceed rent increases and further reduce English housing providers’ adjusted EBITDA margins over the next two years, while enhanced fire and building safety standards and the need to make the homes more energy efficient will lead to a higher cost per unit.

The agency said that given reduced internally generated cashflow and relatively low grant funding in England, providers would need to debt fund more of the new build and this is while interest rates are on the rise, implying higher funding costs.