S&P predicts only modest impact of Iran war on social housing finances

Around a fifth of the world’s oil and liquefied natural gas usually passes through this waterway, which Iran has effectively blocked since war broke out at the end of February.

S&P recognised that higher inflation and interest rates as a result of the conflict could impact social housing providers, but said the sector’s exposure to interest rate volatility is “moderate” due to its reliance on long-term fixed rate debt.

The agency estimates that variable rate debt accounts for less than 20% of the sector’s total debt, while only 6% of debt will be refinanced over the next year.

Its report said the agency’s base case now assumes that the most intense phase of the war will ease over the course of this month, but some disruptions are “likely to persist further”.

“We continue to recognise the risk of spillovers and security incidents continuing beyond this period, and acknowledge that stress could be more severe than currently anticipated,” the report added.

It noted that many social landlords are still grappling with high spending on existing stock to meet regulatory requirements, which results in a “persistent negative bias in the sector”. Around 30% of the agency’s ratings have a negative outlook. 

But S&P also said providers will benefit from rent increases due to the 10-year rent settlement and will be able to raise rents by up to 4.8% in the current financial year.

The agency assumes that both Consumer Price Index and interest rates will normalise and return to previous expectations beyond the fiscal year ending 31 March 2027.

Under the agency’s “severe oil and gas price stress scenario”, it forecasts that less than 5% of its social housing provider portfolio will be “materially affected”.

In this scenario, S&P expects the inflation rate to average 3% in fiscal 2027, while interest rates may be 100 basis points higher in fiscal 2027 and 50 basis points higher in fiscal 2028.

The agency forecast that recovery of its non-sales earnings before interest, taxes, depreciation and amortisation interest coverage will be “more prolonged” under this scenario, but will continue beyond the current financial year.