Market update
- Since the last monthly update, the outlook for inflation and interest rates fell during late November but has since bounced back in December, with the 5 and 10-year swap rates back at 4%. Expectations are that businesses will pass on higher National Insurance and Minimum Wage costs and service CPI remains stubbornly high.
- Despite 3 of the 9 MPC members voting for a rate cut in December, the outlook for rate cuts in 2025 hasn’t moved much since last month, with two cuts expected in 2025.
- The strength of the US economy is another factor influencing the higher rate outlook, with UK gilt yields broadly tracking the higher US Treasury yields; the 30-year gilt is 5.1% as we release
this update. - CPI rose to 2.6% in November from 2.3%, with transport costs the main driver. Service CPI held steady at 5.0%. Both readings were above the Bank of England’s expectations.
- Demand from investors remains, with bond spreads back to record lows helping to offset some of the rise in gilt yields. The gilt yield curve rises steeply from 4.6% at 13 years, highlighting the relative attractiveness of shorter-dated issuance.
Implications for clients
- The higher inflation outlook will moderately improve rent increase projections with September 2025 CPI currently projected at c. 2.5%, although a higher cost base is likely to more than offset this; most clients are describing the 2025/26 budget process so far as ‘challenging’.
- The higher long-term cost of capital makes investment decisions even more challenging, with Housing Associations facing the difficult choice between subsidising new development schemes and maintaining financial resilience. The cost of re-financing future debt maturities is another factor to consider when assessing capacity to invest.
Recent client activity
There have been several portfolio restructures and new funding transactions completed in November, with case studies soon to roll out on our website.
Additonaly, the banking market continues to be supportive of the sector, evidenced by recent deals that lowered margins across banking portfolios creating material value for our clients. Support is also evidenced by bank cooperation to amend loan covenants and reduce risk for Housing Associations. Where legacy long dated low margin facilities are in place, some banks seek to shorten tenor and increase the margin moderately, whilst others look at restructure and can offer 10 years or more.
To learn more about our work in the affordable housing sector, click here.
For more information, please contact Paul Stevens or John Tattersall.
