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As we move through the final quarter of 2024, it’s an ideal moment to look ahead at what the next 12–18 months may bring for the social housing sector.

Housing associations (HAs) continue to face financial pressures and operational challenges. However, with inflation easing, interest rates set to decline, and the potential for a new government to support a longer-term rent settlement above inflation, there is hope for a shift in the economic and policy landscape – one that could provide renewed optimism.

As with any evolving environment, new risks will emerge, likely prompting innovative solutions and strategic adjustments. These shifts will help secure the future of affordable housing delivery.

Below are the key trends expected to shape the sector in 2025:

With the new government approaching its first one hundred days in office, and as we eagerly anticipate the Chancellor’s first budget in October 2024, we expect to see key policy shifts that could alleviate some of the challenges facing housing providers and enable the delivery of the 1.5 million new homes manifesto pledge for the Starmer ministry.

One key opportunity will be the introduction of a new rent settlement. If the labour government does indeed deliver a CPI +1% rent settlement for the next ten years, this would provide much-needed income stability for HAs, allowing them to plan long-term investment strategies. The longer-term compounding effect of rental growth above cost inflation will create additional borrowing and investment capacity – and let’s not forget that the single-year rent cap in 2023 created an estimated lost income stream of £1.3bn across the sector over a five-year period.

HAs will need to refresh their business plans to understand how this additional capacity is best delivered to alleviate existing financial pressures, whilst also assessing how additional funds can be invested in the competing priorities of existing homes and new homes to ensure future stability is also secured.

Any rent settlement must, however, be examined against the government’s longer-term commitment to grant funding – and how this might play out through different delivery vehicles at the national and devolved levels – before we can understand the sector’s capacity to deliver new homes. Private developers will also keenly observe the policy landscape to understand the supply-demand future for s106 homes, and HAs will have the opportunity to emerge as a strong lobbying force to ensure manifesto pledges are delivered onto the statute books.

We have already seen several HAs return to the capital markets for new funding this year, and 2025 promises to be an even busier period as rates become more palatable against business plans relative to their 2022 / 2023 peak.

Over recent years, with business plans creaking under the weight of the elevated rate environment which has eclipsed 6%, and an uncertain regulatory and policy landscape, we have seen a steep rise in HAs drawing on their shorter-term RCFs before re-committing to a long-dated fixed rate funding model; the dial has shifted materially from a historic average RCF drawing of 10% to over 30%.

In the year ahead, the capital markets will re-emerge as one of the key funding routes for HAs looking to secure long-term financing, especially to term out RCFs and reduce reliance on short-term floating rate exposure. After a period of wider pricing (c.6%), with the expectation of loosening monetary policy, HAs will have the opportunity to lock in more favourable terms (c.5 – 5.5%) but will continue to refresh their investment appraisal parameters to absorb these rates into a dynamic future weighted average cost of debt profile to ensure long term business planning viability.

Managing interest rate volatility through an expansion of longer-dated fixed-rate debt will enable HAs to mitigate broader market volatility, especially as geopolitical risks continue to evolve.

Pent-up investor demand in both the public and private markets will drive deal value, especially for HAs who commit to a strong, focused and regular investor relations strategy. Investors will focus with an even sharper lens on housing policy, existing homes pressures and credit profile – but their ESG fervour is unlikely to decline and they will continue to push HAs on the green and social value that can be achieved through patient, long-term capital. In a busy deal market, the timing and agility of the HA’s execution will be key to success.

The banks will continue to extend their balance sheets to the sector with deep pockets to fund through the rate cycle, but with most lenders limiting their term loans to five years. There will continue to be some offers out to 10-15 years, with relative pricing value against the capital markets reliant on how the arbitrage between the SONIA and gilt curves widens or reduces over time.

With the majority of banks firmly moving away from fixed-rate loans, the sector will once again have to accommodate derivative arrangements. Standalone hedging and the rise of the loan-linked ISDA, separate from traditional (embedded) financing arrangements, will become more common, allowing greater flexibility in managing debt portfolios. HAs will need to use more sophisticated financial instruments, such as interest rate swaps and caps, to navigate market uncertainties. This shift will reflect a broader trend towards financial sophistication, as HAs adopt treasury tools more typically used by corporate borrowers.

With several leading names in the sector already migrating into the BBB+ credit spectrum, HAs who once coalesced around a broadly similar credit profile diverge across three tiers of rating: those who remain at strong single A or above, those who weaken within the single A- spectrum, and those at BBB+. An above-inflation rent cap alone will not re-pivot this trend.

Where HAs fall into BBB+ territory, the credit narrative will most often be driven by more fundamental and organic issues around the stock profile and the underlying investment required for existing homes to meet legislative requirements for building safety, decarbonisation and an evolving Decent Homes Standard. In these cases – where increased spending (and therefore greater levels of debt) is not met with an increase in revenue – the return into the single A credit spectrum will be a medium-term project, with rating agency scorecards continuing to focus on the performance of key debt metrics.

The relative cost of debt at the BBB+ spectrum will continue to reflect a premium in the area of 30bps, materially reducing capacity for new funding in the business plans of those HAs and requiring a more proactive approach to loan book and interest rate optimisation.

Newbridge recently conducted an investor survey to explore sector credit ratings and their impact on investor perception. Should you wish to access the full paper, please don’t hesitate to contact us.

This will allow associations to focus on core geographical footprint to drive strategic alliances with local partners and support against credit strain. By rationalising stock, HAs will improve operational efficiency and reduce their burden on non-revenue generating investment to demonstrate a stronger financial position to rating agencies.

There will be a particular focus on those homes which are deemed uneconomical to renovate or retrofit to at least an EPC C energy rating. Where these homes are sold, careful consideration will need to be given to the social mission inherent to the sector and how any depleted social housing stock is replenished – as well as how the interests of the families residing in those homes are protected as a priority.

The rise of FPRPs and the equity flowing into the sector will present a new opportunity for HAs. As private investors increasingly view social housing as a stable and secure asset class, HAs will tap into this new capital. Equity injections will help associations expand their housing stock, address maintenance backlogs, and fund new developments without taking on excessive levels of debt – and will act as the backstop against credit downgrade.

The challenge will be for HAs to navigate partnerships with equity investors while maintaining their focus on the resident experience and long-term sustainability. The financial risk-reward paradigm will continue to develop, overlayed with a careful understanding of the connection between ownership (and the sovereignty over decision-making) and management of homes.

The pressure to meet housing demand and government targets, as well as greater operational efficiencies, will continue to drive merger and partnership activity across the sector. Consolidation will be seen as a pathway to achieving scale efficiencies, accessing larger pools of capital, and leveraging combined resources to deliver the increasing demand for investment in existing homes whilst also delivering new homes.

This trend will accelerate in 2025, particularly as smaller associations face greater challenges around regulatory compliance, financial viability, and cost pressures which an above-inflation rent settlement will not always alleviate. Strategic alliances between housing providers will support growth, enhance operational resilience, and act as a safety net against credit rating or regulatory downgrade as noted above.

The focus on sustainability and decarbonisation is set to intensify in 2025, particularly as HAs work towards meeting the UK government’s EPC C and net-zero targets. Retrofitting existing stock to improve energy efficiency will remain a major challenge, but also an opportunity, as new funding becomes available for green projects.

In its first guise, we will see the proliferation of sustainability-linked loans with a greater focus on the reporting and assurance of performance. The modest loan savings on undrawn RCFs over recent years will manifest greater economic value on larger, drawn loans. The ESG assurance service will go through a critical evolution and funders, HAs and assurance providers will find the appropriate harmony to land a framework that is reliable, proportionate and cost-effective.

In its second guise, this will emerge as bank or aggregator lending with favourable covenants and pricing terms against conventional lending products. We expect some of these facilities to be underpinned by broader institutional support – including from the UK Infrastructure Bank – which may deliver a genuinely unsecured funding option without a premium for HAs.

In its third guise, we expect the sector’s greatest funding innovation to be given birth in the energy retrofit space as an off-balance sheet model emerges to lift the investment burden out of the HA debt pile and into a separate vehicle with an income stream linked to resident bill savings. For these models to proliferate across the sector, the resident experience will reign paramount – with material energy bill savings so affordable homes are also affordable to heat. This will require a sector-wide effort to advocate for a new green grant at the national level.

Technology is playing an increasingly important role in shaping the future of housing. In 2025, digital transformation will continue to be a critical focus as HAs seek to improve operational efficiency and tenant services. From the adoption of property management platforms to the use of data analytics for asset management, digital tools are helping associations streamline processes, reduce costs, and improve tenant satisfaction. Enhanced data-driven decision-making will also support more informed capital allocation and strategic planning.

The regulatory landscape remains complex and continues to evolve. HAs will face ongoing scrutiny around governance, building safety, and tenant engagement – embodied within the new rating for the consumer standard, and the tenant satisfaction measures.

The increased focus on the Social Housing White Paper and the regulator’s expanded powers will require HAs to enhance their compliance processes and governance structures. HAs will need to ensure they are not only financially viable but also meeting the social and safety obligations set out by regulators. Investors will rank performance in this area alongside credit ratings as they seek to protect their brand in the investments they make.

If you would like more information, please reach out to:

Gows Shugumaran

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