Q4 2024 business plan assumptions

¹ Based on rent standard at CPI +1%

² Average expected rates for the financial year (April-March)

Economic developments

Inflation (CPI)

• CPI rose by 2.5% in the 12 months to December 2024, down from 2.6% in the 12 months prior to November. Core CPI, which excludes energy, food, alcohol, and tobacco, rose by 3.2% in the 12 months to December 2024. This also represented a reduction from November (3.5%).
• Whilst the downward movement was generally welcomed by markets and viewed as offering some respite to the U.K. government in the face of rising gilts (see below), CPI is higher than at any point since March 2024, excluding December. This is forecasted to remain above the Bank of England’s 2% target throughout the forecast period. The inflationary impact of higher transport costs and tax rises announced in the December budget is starting to flow through the figures, although Northern Ireland (NI) changes will not take effect until April. Of course, inflation remains well below the period from late 2021 to late 2023.
• From a social housing perspective, inflationary risks persist in two key respects:
  1. Persistently high inflation in high spend areas — both the materials and labour components of capex (development and repairs and maintenance, notably remedial and retrofit costs).
  2. Differential inflationary risk between input (cost) inflation and income (rent) inflation — in addition to the capex costs inflation noted above, many housing associations, like all large employers, face a significant increase in labour costs from the combined effects of the rise in employer’s national insurance and reduced thresholds. Further, wages inflationary pressure persists from “catch-up” pay claims lagging the high-inflationary period of 2022/2023. For the latest period for which data is available, regular pay increased by an annual average of 5.6% between September and November, compared with the same period the year before. Considering inflation, the real wage increase was 3.4%. Whilst employment tax increases may weaken the labour market and, therefore, wage growth going forward, for now, wages inflation continues to outstrip CPI.
• Our indicative assumptions show average cost CPI at 2.63% for FY 2026. However, it is recommended that housing associations run inflation sensitivities and stress test input inflation to reflect their cost base and projected expenditure programmes, particularly in respect of wages growth and capex.
• From an income perspective, housing associations in England face a reduction in year-on-year rent increases due to the September 2024 benchmark CPI setting at 1.7% (CPI + 1% aggregate 2.7%).

Interest rates (floating and term swap rates)

• The assumptions table highlights the significant upward trend in gilt rates during the period. Gilts which were already on an upward trend have shifted a further 15–20 basis points across durations of 10–30 years over the past month.
• The practical implication of the pricing of gilts for business planning purposes is minimal as most business plans revert to a long-term interest rate / funding assumption. However, should gilts remain stubbornly high, as is currently forecast, this is likely to have a real impact on the source and duration of funding sought by housing associations reluctant to tie into longer-term funding at these rates. In our experience, many borrowers regard 5% (excluding margin/spread) as a “ceiling rate” and this is currently breached around the 15-year duration. This is significant in the context of the refinancing risk facing many HA borrowers as short tenor term loans and RCF bank funding comes to expiry and borrowers seek to term out drawn debt.
• In the shorter end of our assumptions, revised expectations of the speed of cuts to U.K. interest rates have quickly flowed through to short- to medium-term swap rates.
• Whilst the market is still projecting a further 25-basis-point cut in February 2025 and variable rates (3-month compound SONIA) are expected to decrease over the forecast period, the major downside risk of “higher for longer” has seen a significant upward move in swap rates.
• For borrowers seeking to refinance existing facilities or place new bank funding to meet capex demands (notably required safety refit and energy efficiency / zero carbon cost which do not tend to have a corresponding impact on future income streams), many may look to the bank market as an alternative to the capital markets. The benchmark 5-year swap rate has traded around 4% during the period. We comment on indicative bank margins below.

Funding markets

• After the first three weeks of January, European (including U.K.) bond issuance volume is approximately €207B year-to-date, compared to €258B at this time last year (down c.20%).
• Of the total year-to-date European bond issuance, c.£18B was GBP denominated (10% of the total EURO equivalent).
• Bond issuance has primarily been driven by sovereign and agency debt, while corporate issuance (non-financial institutions) accounts for just 12% of year-to-date volume (€24M).
• U.K. credit spreads have tightened c. 5–10 basis points over the prior month compared to U.S. IG credit spreads, which are relatively flat (c.0–4 basis points wider) over the same period.
• We anticipate continued reliance upon shorter-term bank lending with sustained higher absolute borrowing rates and persistence in the wide gilt-to-swap spread. Despite generally wider bank margins compared to public bond spreads, underlying swap rates used to fix bank loans are currently 30–75 basis points lower than gilts of the same tenor in the 5–15-year maturity range. This drives relative pricing value of intermediate-term bank debt.

New issue activity

• Citizen Housing (A3) tapped and priced £140M 18-year (2042 maturity) bonds in October, of which £70M will be retained for future sale. The bonds carry a 4.625% coupon.
• Saltaire Finance (AHGS) (Aa3) announced multiple pricings, including a sub-benchmark issuance under a new 12-year maturity:
  • October 2024: Tapped and priced £150M 9-year (2033 maturity) bonds, of which £100M was lent to Moat Homes and £50M was retained for future sale. The bonds priced at +50/gilts for an estimated yield of 4.4% and no new issue premium to secondaries (4.818% coupon).
  • October 2024: Tapped and priced £70M 29-year bonds (2053 maturity) bonds for Coastline Housing and Wakefield and District Housing (4.809% coupon).
  • November 2024: Tapped and priced £83.5M 9-year bonds (2033 maturity) for Wythenshawe Community Housing Group at +47/gilts for an estimated 4.885% yield and no new issue premium to secondaries (4.818% coupon). Books were 3.5x subscribed.
  • December 2024: Issued £200M 12-year bonds under a new maturity (6 December 2036) with a 4.815% coupon. Of the £200M, £100M funded a loan to Nottingham Community Housing Association and £100M was retained for future sale. The bonds priced at +49/gilts with no premium to the 2033 maturity secondary level and no premium for sub-benchmark size.
  • December 2024: Tapped and priced £60M 29-year bonds (2053 maturity) for 54North Homes (£20M) and Connexus (£40M) at an all-in rate less than 5.15% (4.809% coupon).
• MORhomes (A-) tapped and priced £12.5M of its 13-year (2038 maturity) bonds for Soho Housing in December. The bonds priced at c.5.73% (c.+100/gilts, 3.40% coupon).
• bLEND Funding (A2) issued £20M of 20-year (2044 maturity) bonds for Acis Group in December. The bonds priced at 5.748% (c.+105/gilts, 5.748% coupon) in December. bLEND is a wholly owned subsidiary of The Housing Finance Corporation (THFC).
• Flagship (A2) announced the sale of £50M 36-year (2061 maturity) retained bonds in January. The bonds sold at 5.40% (1.875% coupon).