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Cost of Living Surge and Arrears Risk: English Social and Affordable Housing Providers Likely More Exposed Than French Counterparts

This commentary discusses the risk to English and French Social and Affordable Housing Providers (SAHPs) of rental payment arrears related to recent cost of living increases. Driven notably by the surge in energy prices, reinforced by the Russian invasion of Ukraine, the rise in inflation is putting households' finances under pressure, especially low-income tenants, which could translate into higher rental arrears in the short term. DBRS Morningstar takes the view that the English SAHP sector is likely more exposed to this risk than its French counterpart, based on (1) the historically higher housing cost overburden rate for tenants in the United Kingdom (UK); (2) the higher inflation in the last 12 months in the UK; and (3) the greater social rent increases implemented in April 2022 by English SAHPs compared with French SAHPs this year.

At this stage, DBRS Morningstar expects the impact of the potential materialization of increased cost of living-related arrears on SAHPs' financial performance in both jurisdictions to remain very moderate and financially manageable. Nevertheless, the French SAHP sector's capacity to absorb potentially higher provisions for bad debts appears relatively stronger than its English counterpart thanks to its stronger financial standing.

Key highlights include:
-- The housing cost overburden rate is historically higher for UK social housing tenants compared with in France, which is likely to increase the risk of arrears for English SAHPs versus their French counterparts.
-- English tenants also currently face higher consumer price inflation and a larger increase in social rents this year.
-- The French SAHP sector's stronger financial metrics compared to its English peer offer it a relatively higher shock absorption capacity.

“The recent measures implemented by the French and the UK government to mitigate the impact of inflation on households and SAHPs’ proactive rent collection management should help alleviate the pressure on tenants in both countries”, said Mehdi Fadli, Vice President in the Global Sovereign Ratings Group. “Nevertheless, in the event that bad debts and associated provisions rise, the French SAHP sector benefits from a relatively greater shock absorption capacity than its UK peer thanks to its overall stronger financial standing”.