Annual Loan Portfolio 2022

Key messages and highlights from the 2022 returns

Registered Social Landlords (RSLs) are facing major challenges in their operating environment: significant cost inflation, rising interest rates, increasing requirements on quality of homes – including on energy efficiency and zero-emissions heating – and huge demand for support from tenants who are facing genuine financial hardship.  And of course, there is the potential for government intervention on rents as the Scottish Government considers whether to cap increases in social rents from April 2023.  This analysis should be considered within this context, which has the potential to impact on RSLs’ ability to service current debt and raise new debt. 

As at 31 March 2022, RSLs had agreed £6.55 billion in debt facilities, with £5.64 billion of this debt drawn and repayable.  RSLs’ total cash and undrawn facilities totalled £1.81 billion at 31 March 2022 and liquidity remained robust.

From March 2020 until December 2021, the Bank of England’s Monetary Policy Committee had maintained interest rates at historic lows of 0.1%.  In the period since, the Bank of England has increased the base rate to 2.25%.  Interest rates are now at their highest level in 14 years and are forecast to rise further.

• Total investment through borrowing in Scottish RSLs is now £6.55 billion.
• Despite a less active year for borrowing by RSLs and the smallest aggregate drawdown over the last 5 years, 2021/22 still saw a net drawdown from available facilities after repayments of £142 million.
• RSLs plan to increase their borrowing by an additional £1.3 billion over the next five years.
• Annual interest charges were £183.6 million in 2021/22, which represents approximately 12.5% of landlords’ income from rent and service charges.
• Of the total loan debt outstanding at the 31 March 2022, 27% of this is on a variable interest rate. Uplifting the reference interest rates at the 31 March 2022 by 1%, would potentially increase annual interest charges by £13.2 million.
• 80% of all facilities comes from traditional borrowing sources whilst the remaining 20% is capital market funding and this is similar to 2020/21.
• Undrawn facilities available to RSLs reduced to £0.91 billion from £1.05 billion. This, along with cash balances means RSLs’ liquidity remained strong at 31 March 2022.
• 33 different RSLs took out 50 new loans in 2021/22. This compares to 2020/21 where 41 different RSLs took out 66 new loans. The new loans ranged from £0.1 million to £80 million, and totalled more than £352.0 million across 14 different lenders, one of which was a new entrant. The total new loan facilities fell by 47% from the £660.0 million arranged in 2020/21. Of the total new loan facilities in 2021/22, 30% were provided by capital market investors. 
• 59% of those new loans raised by RSLs were to fund affordable housing development.
• All affected RSLs, working in conjunction with their lenders, successfully transitioned to an alternative rate following the wind down of the London Interbank Offered Rate (LIBOR) at the 31 December 2021.

Lender and investor appetite for lending to RSLs remains high despite the disruption caused by COVID-19 and an increasingly challenging operating environment for landlords. Lenders and investors will be considering the implications of the Scottish Government’s emergency legislation to bring in a cap on increases in rent, and the challenges in the wider economy, for their assessment of risk in RSLs. Maintaining lender and investor confidence will be critical to supporting RSLs’ continuing capacity to deliver new development and capital investment, including that necessary to meet the Scottish Government’s ambitions on net zero-carbon and new homes.

RSLs’ increased reliance on debt in their business plans has for many years been underpinned by assumed continued low interest rates in forecasts.  As interest rates reach their highest level in 14 years, RSLs financial performance and ability to service existing and new debt will be impacted.

How much debt do RSLs have?

• The total value of facilities available to RSLs increased by 2.2% over the year to £6.55 billion;
• The net amount drawn down from total facilities increased by £280 million to £5.64 billion;
• The total loan balances outstanding at the end of the year increased by 4.1% to £4.90 billion;
• The average amount owed per home increased by £95 from £15,500 to £15,595 per unit; and
• The total amount drawn down is forecast to exceed £6.50 billion by the end of 2027

The total facilities and balances outstanding across recent years were:

How has debt changed this year?

The total amount of RSLs outstanding borrowing has increased by £0.98 billion, from £3.92 billion to £4.90 billion, since 2017/18. Despite another relatively small increase in the value of new facilities added in 2021/22, the total amount borrowed by the sector continues to increase.

• At 31 March 2021 RSLs outstanding borrowing was £4.71 billion;
• In 2021/22, £0.16 billion was repaid with further borrowing of £0.35 billion, the majority funding affordable housing development;
• At 31 March 2022 RSLs outstanding borrowing was £4.90 billion

Who lends to RSLs?

Thirty five different lenders and investors help fund the sector across more than 1,241 separate loans, to which more than 2,089 lending covenants are attached.

The three largest lenders Royal Bank of Scotland, Lloyds Group and Nationwide Building Society manage 55.6% of the value of all facilities between them. The aggregate total facilities for all three, remained the same at £3.65 billion with new loans and debt repaid in 2021/22 balancing out.

The proportion of RSL total debt facilities these three lenders manage is:

• Royal Bank of Scotland (RBS) – 37.4%
• Lloyds Group – 9.4%
• Nationwide Building Society – 8.8%

We know that some of this debt is provided across a syndicate of lenders, but most is on a sole lender basis.

• RBS lend £1.75 billion (71.0%) on a sole lender basis, and a further £0.71 billion (29.0%) as syndicate lead, for a total of £2.46 billion;
• Lloyds Group lend £0.53 billion (87.0%) on a sole lender basis, and a further £0.08 billion as syndicate lead, for a total of £0.61 billion (13.0%); and
• Nationwide Building Society lend £0.58 billion (100.0%), all on a sole lender basis

GB Social Housing, Charities Aid Foundation Bank, Unity Trust Bank, Allia and Triodos all increased their net lending to the sector in 2021/22 by an aggregate of £28 million with additional Local Authority net lending of £1 million. The sector also retains a number of specialist lenders that lend to particular types of organisations (e.g., charities) or for specific purposes (e.g., environmental projects).

There was one new entrant to the market in 2021/22 with bLEND Funding plc a financial aggregator advancing £22 million.    

The total value of all these available facilities in 2021/22 was £5.225 billion, representing a net increase of £37 million or 0.7% on the 2021 total of £5.188 billion. The table below summarises facility values by individual lender and the net change year on year.

In 2021/22, there was an increase of £105 million (9%) in funds raised through bonds and private placements, the combined bond and capital markets investment remains the sector’s second largest source of funds.  The proportion of capital market funding held by RSLs has increased, from 10% of total facilities 4 years ago to the current total of 20.0%.

Nine capital market investors make a total of £1.329 billion available to more than 20 RSLs and more detail on this funding can be found in the table below.

Overall, for all lending including both traditional lenders and capital market investors, reflecting both new loans and debt falling due for repayment in the year, there was a net increase of £142 million.

RSLs are increasingly considering Environmental, Social and Governance (ESG) investments, which may attract additional lenders and investors.  This type of lending has the potential to be moderately cheaper; however, it may also bring extra costs associated around the governance and reporting of delivery against targets.

In 2021/22, RSLs’ obtained lending of £80 million which included beneficial lending terms, linked to the RSL’s sustainability performance targets, with the funds supporting the delivery of new affordable housing. 

What type of private finance do RSLs have?

74.0% of RSLs outstanding debt remains traditional borrowing, with 26.0% provided by bond and capital market investors.

• The total amount of traditional lending facilities available increased by 0.7% to £5.225 billion, with the outstanding debt increasing by 3.5% to £3.603 billion
• The total investment from the capital markets increasing by 8.6% to £1.329 billion with the balance outstanding increasing by 5.7% to £1.294 billion.

The increases within each category for debt outstanding represent the net impact of the in-year drawdowns for existing and new facilities, net of the debt falling due for repayment during the year per the RSL’s loan agreements.

While the percentage of debt sourced from the bond and capital markets has increased in recent years, the tables above show that most debt still remains with traditional lenders.

LIBOR which underpinned many financial and some non-financial contracts was wound down at the 31 December 2021. With 38% of all loans referenced to LIBOR at the 31 March 2021, RSL’s, working in conjunction with their lenders, had to transition to an alternative rate. Only three loans still referencing the LIBOR rate at the 31 March 2022. As one of these loans was due to mature shortly after the 31 March 2022 no action was taken, whilst the other two have an effective date of change agreed falling due after the 31 March 2022.

Of the total loan debt outstanding, and following the winding down of LIBOR, 23% now reference the Sterling Overnight Interbank Average Rate (SONIA) and 4% reference the “base” rate.    

Having increased by £100 million (51%) between 2017/18 and 2019/20, and falling by £76 million (26%) during 2020/21, revolving credit facilities increased by £23 million (10.5%) in 2021/22. RSLs using such facilities are likely to need to re-tender, or at least re-negotiate, on a more frequent basis.

The table below shows the debt balances outstanding on the wide variety of loan types held by RSLs.

Every investment and financial product carries some degree of risk. This highlights the importance of Governing Bodies having the skills and expertise to understand and ensure that financial products are the appropriate ones for the RSL, and being able to access independent financial advice.

Some RSLs have loans incorporating a derivative arrangement, the most common allowing them to ‘swap’ a variable interest rate for a fixed interest rate. Many are ‘embedded’ within the loan agreement, some are ‘stand-alone’ deals between RSL and lender. This form of borrowing has proved less popular in recent years, with just 16 contracts in place at 31 March 2022, which is 2 less than 2020/21.

It remains important for Governing Bodies to have a clearly expressed strategy reflecting how they will monitor covenants effectively, and manage relationships and communication with funders. Governing Bodies must have an effective approach to Treasury Management in place in order to ensure their organisation is compliant with Regulatory Standard 3.

What new borrowing have RSLs undertaken this year?

In 2021/22, £352.0 million of new loans were arranged by RSLs. This is 47% less than the £663.0 million borrowed in 2020/21 and 50 new loan agreements is a 24% drop in the number from 66 in 2020/21.

• 59% by value has been for affordable housing development or investment in existing properties;
• 39% for refinancing; and
• 2% for other purposes

RSL’s may classify their new loans as refinancing, however due to the nature of the treasury management structure in place for cashflow, where all funds are held centrally, a proportion of this may indirectly relate to affordable housing development or investment in existing properties.  

RSLs are using 70.0% of their housing stock as security for borrowing, with the remaining 30.0% unencumbered. This indicates that on average RSLs continue to make good use of their properties as support for their borrowing. Secured property is now valued at approximately £8.19 billion, in the region of 125% of the facilities available to RSLs.

How much does borrowing cost RSLs?

Expenditure on interest costs was £183.6 million in 2021/22. This represented approximately 12.5% of landlords’ income from rent and service charges.

The new deals secured in 2021/22 had the usual broad range of interest rates, with almost all either as traditional fixed interest rate loans or variable interest rate loans referenced to SONIA or the base rate. The table below summarises the interest rate margins secured on new loans in 2021/22.

Given the aforementioned wind down of LIBOR, a direct comparison to variable interest rates secured in the previous year is not possible, however the figures show a marginal uplift in the variable interest rate margins secured for loans referenced to both the base and SONIA interest rates compared to the previous year LIBOR rates.

The interest rates secured by RSL’s on new borrowing can be influenced by a number of factors including the size of the loan, the repayment profile, the term to maturity, the risk profile of the RSL and the sector as a whole as assessed by individual lenders and the availability of funds from potential lenders.  

For the 19 new fixed interest rate loans, 5 RSL’s secured interest rates of 2.33% or lower whilst 5 secured interest rates of 3.28% or above with the other 9 RSL’s securing loans within these boundaries. Overall the weighted average interest rate on new fixed interest rate loans sourced was 2.78%.

Fixed interest rates provide certainty on debt servicing costs. Given that rental income is a relatively certain figure this should allow RSLs to better forecast their future expenditure hopefully knowing that they will be able to cover their interest payments. However, they can also expect fixed interest rate borrowing to come at a price as in general they are likely to be higher than variable interest rates.

Conversely, while generally being able to provide cheaper borrowing, variable interest rate loans do not come with the same future certainty on the cost of debt servicing. RSLs have traditionally taken a mix of fixed and variable interest rate borrowing in order to mitigate the corresponding risks attached to each type of loan.

In 2021/22, 66% of new loans taken out were at a fixed interest rate compared to 34% at a variable interest rate. This may reflect economic commentators, during 2021/22, predicting increases in interest rates over the next few years.

Of the total loan debt outstanding at the 31 March 2022, lending classified as fixed interest rate or bond equity accounted for 73% and lending on a variable interest rate was 27%. With interest charges on this debt subject to volatility as interest rates change, Governing Bodies must ensure they understand how any movement in interest rates could impact on their costs.

Adopting high level assumptions, and based on the variable interest rate debt outstanding and the prevailing reference interest rates at the 31 March 2022 (i.e., primarily base rate and SONIA), a 1% uplift in interest rates would result in an increase in estimated annual interest charges of £13.2 million.

When will RSLs repay their debt?

Many loans held by RSLs are fully amortising i.e. repaid in instalments across the full term of the loan.

Others may have some form of partial deferral e.g. an interest only arrangement for a period before they start making regular capital repayments, or bullet repayments at set points throughout the loan term. Some are fully deferred, with no scheduled capital repayments until the end of the loan term, when the debt may be repaid, or alternatively refinanced with another loan. It is therefore difficult to provide a definitive debt repayment profile.

The table below shows the remaining life of all existing loans, split into three distinct groups as determined by the repayment profile; fully deferred, partially deferred or fully amortising.

Glossary of terms