Last Wednesday, UK Prime Minister Theresa May announced that housing associations and local authorities will receive an additional £2 billion in grants for social (i.e., public) housing, including social rented homes. She also announced that rent increases will be set at CPI plus 1% starting in fiscal 2021 (which starts 1 April 2020) for five years. These announcements are credit positive for English housing associations because they signal greater support for the social rented sector.
Increased grant funding will reduce external financing needs and provide incentives to focus on social renting activities, which provide more stable cash flow than markets sales. The rent-setting regime provides clarity about housing associations’ operating environment and signals a shift from the previous government policy, which had negative financial effects on the sector.
The amount of grant funding available under the Affordable Homes programme for housing associations and local authorities will increase by £2 billion to £9.1 billion over the length of the program. Housing associations historically have relied on government grants to finance the production of new social homes, but such grants have significantly dwindled since the financial crisis.
The new grant programme aims to fund the construction of an additional 25,000 homes, and we expect the average subsidy per home to more than double to £80,000 from £32,600 in the last allocation round of the programme in 2016 and from £23,500 in the 2014 round. Although the distribution of the grants will depend on yet-to-be-defined criteria that determines which areas are most in need, we expect the 39 English housing associations that we rate to receive £650-£900 million of new grant funding, which would contribute to financing 8,000-11,250 homes.
The additional grants will reduce housing associations’ external financing needs, and should reduce future borrowing, which we currently expect will reach nearly £4 billion during fiscal 2018-20. However, some housing associations may choose to use the freed-up financial capacity to further increase their production of homes for open market sale rather than to stabilise indebtedness.
The grant programme signals a rebalancing of the government’s position in favour of rented social housing. The social letting business provides more stable cash flows for housing authorities than low-cost home ownership programmes, which had been at the centre of the previous housing policy. The lack of grants for building social rented homes and political pressure had encouraged housing associations to subsidise social homes by building units for open market sale that expose housing associations to the cyclicality of the housing market. The share of such sales to turnover has steadily increased over the past five years, reaching 15% in fiscal 2016 for our rated issuers and more than 40% for a small number of housing associations. Hence, this shift in the availability of funding and the direction of policy is credit positive.
