Funding Social and Affordable Housing Through a Credit Perspective
This blog is the first in a two-part series on SHPAs and the affordable housing sector. The series is designed to 1) help readers understand the basics of social housing, with a focus on social housing in the UK, and 2) highlight the critical credit risk factors on SHPAs and financing.
Social and public housing has always been high on the agenda of many national governments. In the past, these governments fully funded the providers of social and public housing, which were generally not-for-profit entities. Over the past half century, global demand for SHPAs continues growing across Europe and North America. This requires increase investment not only for new builds, but also to improve housing standards, as such requirements cannot be met by government spending alone. As a result, private finance in the social housing sector is established and increasing in certain countries such as the United States (U.S.), United Kingdom (UK) and the Netherlands, whilst less so in others.
Today, many providers are funded with a mix of private and public funds. Government money is provided to meet social housing needs under a robust system of regulations to ensure the funds are spent in an appropriate way. As private financing of the sector increases, funding structures become more complex, therefore, there is a need for investors and lenders to understand the creditworthiness of providers as well as the drivers for credit quality. Moreover, social housing has strong links, either explicitly or implicitly, to national or local authorities. Along with changes in the government social housing policy, there is a growing need to understand the potential credit implications.
What are SHPAs and what are the latest trends for the sector?
Traditionally, SHPAs are non-profit organisations with clear mission statements. The popular perception of the housing provider is seen as an integral part for the national housing and social-welfare system, providing good quality and low-cost housing for low-income working households.
The role of social housing has changed radically in the past 60 years, as has the public perception. In recent years, SHPAs continuously express their mission to serve the public, but also have chosen to gradually expand into sales activities to cross-subsidize affordable and social housing development. This is particularly evident for English SHPAs, which is a response to reduced government grants and welfare reforms, including rent cuts, which have reduced funding for housing development.
Additionally, many housing providers e.g. Metropolitan Thames Valley Housing Association Limited (MTVH) also supplies a range of products and activities besides housing. These are not necessarily “extras” but may be central to providers’ core missions – social care, for example, is fundamental to some of the smaller specialist groups. However, increasingly providers are moving into other areas to subsidize their housing activities and/or capitalize on strategic strengths.
With changes and trends of the sector, we consider an entity has all the following characteristics defined as a public and social housing provider (housing provider):
- The entity has a public purpose mission;
- The entity is not commercially motivated, as may be demonstrated by a not-for-profit status; and
- Gains or profits may be generated but the entity generally retains such funds for the purposes of fulfilling its public purpose mission; however, it may distribute earnings to another entity with a direct and explicit public purpose mission.
How does changes in the sector structure (e.g. sales activities) affect the credit assessment of SHPAs?
The traditional public and social housing industry is generally considered as a low-risk industry globally.
The government grant support set at the lower level drives landlords (housing providers) to gradually provide other types of housing. This enables landlords to take on more risk to borrow from capital markets to finance development-for-sale activities, so that can cross-subsidize social and affordable housing development. With the recent sector trend when a housing provider has or intends to have structural/fundamental shift in its profile, additional risks from the exposure to sales activities and markets can limit the visibility and predictability of future earnings and also reduce the ability of housing providers’ to withstand external risks. This requires a blended view on the industry risk over the SHPA sector, homebuilder sector and real estate developer sector when a housing provider generates more than one-third of operating revenue from riskier activity (e.g. market sales), to adequately capture the overall industry risk because this is no single industry risk. This led to overall lower credit quality of the housing provider sector, reflected in the multiple downgrades in S&P Global Ratings’ English housing provider (housing association) portfolio over the past three years.
Although the substantial scale of development-for sales activity remains unique to England, regulatory frameworks in many other countries of housing provider sectors move into similar directions. For example, social housing sectors in France and US have become active in private financing from capital markets, as well as exploring market-related activities to compensate for potential uncertainty of the government grants lying ahead. This trend may increase the pressure on the credit quality of housing providers over time.
Government bodies play an intrinsic role in shaping the environment within which social and public housing providers operate. Each country has developed its own approach to the construction and maintenance of affordable housing, leading to a sliding scale of support that different governments give to SHPAs. Understanding where to place a particular housing provider on this scale of government support is a key point in the credit analysis, since the creditworthiness of a government-owned and fully funded provider may be in line with, and much closer to/equivalent to, the sovereign or local government's credit rating than an entity which is independent and receives minimal funding and support from government.
With the continuous evolvement in the social and affordable housing sector and explicit and implicit linkage to their respective government, it becomes important to take an in-depth look into the credit implications that these points have on the creditworthiness of housing providers, especially for the providers seeking funding in private sectors. S&P Global Market Intelligence’s Social Housing Provider and Association Credit Assessment Scorecard (SHPA) can assist lenders and/or investors with credit assessment on housing providers.
Learn more about our Social Housing Provider Credit Assessment Scorecard here.
 Globally, name convention differs across countries because of funding, structural and regulatory regime. For example, in UK the providers of social housing are called housing association since as early as Thatcher government. In US, the public housing provider is called Public Housing Authorities (PHA) and social housing is called affordable housing, similar to what UK housing association does. For simplicity, housing provider is used in the following article.
 For example, according to the UK government’s definition of general housing terms:
Social rented housing - is mostly owned by local authorities (LRG) and private Registered providers (PRPs), for which guideline target rents are determined through the national rent regime.
Affordable rented housing – is let by LRGs or PRPs of social housing to households that are eligible for social rented housing. Affordable rent is no more than 80% of local market rent (including service charge, where applicable).
Intermediate housing - refers to homes for sale and rent, (e.g. shared ownership and equity loans), provided at a cost above social rent but below market levels subject to the affordable housing definition.
 “The State of Social Housing: Is the English Model Catching on?”, S&P Global Ratings. As of: 25 July 2019
 Not all the countries’ housing provider sectors move into the same direction as England. Canada, New Zealand, and Sweden tend to enjoy safer and more stable funding environment, given their close link to their respective government.
 S&P Global Ratings is analytically and editorially independent from any other analytical group at S&P Global.