Housing associations amid economic flux

Market update

Economic news

• At its February meeting, the Monetary Policy Committee (MPC) voted six-to-three to maintain the bank rate at 5.25%.
  • Two members voted for a 0.25% increase to 5.50% and one member voted for a 0.25% rate cut — the first vote for a cut since 2020.
• The Bank of England's (BoE) revised forecast projects headline inflation falling to around 2.00% in the second quarter of 2024, before gradually rising to 2.25% in the third quarter and 2.75% in the fourth quarter. This trend is driven by declining energy prices and a slowdown in general price growth. The subsequent projected increase in CPI is driven by the energy price contribution becoming less negative.
• Core inflation is projected to decline in the short-term but stay above headline inflation, reaching 3.50% in the second quarter of 2024. This is due to stronger sensitivity from domestic factors compared to global influences. Core-CPI strips out volatile prices such as food and energy that are more prone to external shocks, demonstrating a more stable measure of the underlying inflationary trends. GDP figures indicate that the U.K. has entered a technical recession, with two consecutive quarters of negative growth.
• GDP in the third quarter of 2023 fell by -0.30%, following a fall of -0.10% in the previous quarter. This was largely driven by seasonally lower retail sales in the critical pre-Christmas period. However, the most recent data release showed month-on-month retail sales increasing by 3.40% in January. This may indicate that the recession is modest and will recover from the contraction seen in the second half of 2023.

• Headline CPI for January came in at 4.00% below consensus of 4.10%, although unchanged from the previous month.
• Core-CPI remained at 5.10% year-over-year, which marked the third consecutive print with no change. There was a slight uptick in services CPI from 6.40% in December to 6.50% in January. Goods saw a slight decline to 1.80% from 1.90% in the month prior.
• The labour markets continue to show a moderate cooling trend. Regular pay, excluding bonuses, rose to 6.20% in the fourth quarter of 2023 and total pay, including bonuses, reached 5.80%. While this is relatively strong growth, it is slowing from the highs we saw last summer.
• Vacancies in the three months leading up to January 2024 declined to 932 thousand. However, it remains above pre-pandemic levels.
• The inflation picture continues to present significant challenges for housing associations (HA) who have faced above inflation increases in many capital expenditure costs in recent years and capped rent increases, particularly in a falling inflation environment where rent inflation references higher CPI recorded months previously.

Sterling rates markets over the past fortnight

• Gilt yields have risen by c. 30–37 bps on the shorter end of the curve (10-year or less).
• On the medium- to long-end of the curve, yields have risen by c. 26–18 bps.
• The SONIA curve has seen similar upward movement, with a c. 30 bps increase in the short-medium part of the curve, with the long-end rising by c. 20 bps.
• The upward movement of rates is a reaction to the MPC meeting. The market is now pricing the first BOE rate cut in August, compared to June a fortnight ago.

Capital markets — Sterling issuance

• The Sovereign Network Group (A3/A) opened housing association capital markets issuance for 2024 in mid-January, with a £400M 33-year senior secured issue priced at UKT + 108 bps to yield 5.603%.
• Pricing tightened significantly from IPT of UKT+125–130 bps, with the final spread representing a new issuance concession of ~13 bps to secondary levels on SVNLN 2 3/8s of 2048.
• Books were reported above £1.4B, which would imply a 3.5x bid-to-cover ratio. The issue was structured as a sustainability-linked transaction in line with their SPO.
• Since then, the market has been quiet from a HA perspective, with no further own-name issuance. However, HA secondary bond spreads have continued to tighten over the two first months of the year.

Indicative pricing