Insights and challenges for housing associations amid market fluctuations

Market update

Capital markets — timing of issuance

• Some housing associations are delaying new issuance, in the hope that rates will fall and they will be able to lock-in funding at more attractive all-in levels.
• While we have seen some rallies in the gilt market over the last six months, notably in December and the start of March, long-dated gilt yields have broadly traded in the 4.40–4.70% range.
• A working assumption of 4.50% may not therefore be ‘high’, but rather ‘normal’.
• Recent trading has shown that gilt yields have the capacity to rise again with 30-year yields at 4.72% at the time of writing. Issuers who approached the market while benchmarks at c. 4.50% will feel like they got a positive deal in this context.
• Chatham continues to see strong investor demand for housing association credits — demonstrated by book sizes in recent private and public transactions. Waiting could carry the risk of entering into a crowded market, with more supply vs. demand and greater execution risk.

Banking market

• Banks remain active lenders with several large ticket loans being written in recent weeks for larger HA borrowers.
• Some lenders are able to provide a wider range of products, including bridge to PP and more tailored KPI packages on sustainability-linked lending, which may help.

Business plan performance trends

• The sector has faced a challenging two years.
• While some have opted to place the majority of their reinvestment expenditures at the outset of their business plans, others have delayed their reinvestment expenditures in order to safeguard short-term plan performance.
• Although front-loading spend has been viewed negatively by some rating agencies, those who have completed a bulk spend now often find themselves with strong plans that can maximise benefits from lower inflation and rate assumptions.
• Housing associations without ‘costed’ plans may not see the same improved performance of their counterparts.

Sterling rates markets over the past fortnight

• Rates across the gilt and SONIA swap curve have increased over the past fortnight.
• They are up c. 20 bps on short- and medium-part of the curves and c. 15 bps on the long end.
• While rates started to surge after Easter, the continued rise is most likely attributed to the higher-than-expected U.S. CPI figures.
• U.S. year-on-year CPI came in at 3.50%, up from 3.20% in the previous print.
• This led markets to anticipate that a first rate cut is further away from materialising than previously expected.
• Markets are pricing in an 80% likelihood that the Bank of England (BoE) will carry out its first 25 bps rate cut in August, while the first 25 bps rate cut is priced in for September from the Federal Reserve.
• Given past actions of the BoE, it is unlikely that it would start its rate cutting cycle prior to the Federal Reserve.

Economic news

• Headline CPI for March printed at 3.20%, down from 3.40% in February.
• Core-CPI also eased to 4.20%, down from 4.50% the month prior. Core-CPI is closely watched by the BoE as a gauge of domestic inflationary pressures.
• The decrease in core-CPI for two consecutive months will be encouraging for the Monetary Policy Committee after the stickiness experienced between November 2023 till January 2024 where it remained at 5.10%.
• GDP showed growth in the month of February at 0.10%, following 0.30% growth in January. The expansion was mainly driven by the production output which grew by 1.10%.
• Year-on-year regular pay growth slowed to 6.00% in the three months leading up to February. Including bonuses, pay increased by 5.60%.

Indicative pricing