Annual Loan Portfolio 2023

Key messages and highlights from the 2023 returns

Registered Social Landlords (RSLs) have continued to face significant challenges in the year to 31 March 2023. Inflationary pressures and global instability have contributed to a challenging economic and operational environment. Inflation remains high as do interest rates and RSLs continue to face increasing, and sometimes competing, pressures on resources. Whilst costs have been rising RSLs also have to consider how to meet the increasing requirements on quality of homes – including on energy efficiency and zero emissions heating. RSLs also have to consider how to invest in existing homes, provide new homes and keep rents affordable for tenants dealing with the cost of living crisis.

As the Bank of England sought to reduce inflation through interest rate rises during 2022/23, the cost of debt increased substantially. When RSLs are faced with periods of economic uncertainty like that, it is essential they maintain sufficient liquidity and the confidence of current and future lenders and investors.  As the cost of debt has increased materially and financial markets continue to shift, it is also vital that Governing Bodies maintain the skills and expertise to understand and ensure that the financial products supporting their business are the appropriate ones for the RSL and that they are able to access independent financial advice.

Over recent months some RSLs have reported potential covenant breaches to us around interest cover requirements. This is primarily linked to catch-up expenditure on capitalised repairs and planned maintenance work which was delayed due to Covid.  It remains important for Governing Bodies to have a clear strategy to monitor their covenants effectively and manage their relationships and communication with funders. It is important Governing Bodies have an effective approach to Treasury Management to comply with Regulatory Standard 3.

Our analysis of RSLs’ annual loan portfolio returns at the 31 March 2023 should therefore be considered within this context as this has the potential to impact on RSLs’ ability to service current debt and raise new debt. 

We found that:

• At the 31 March 2023, RSLs had £6.71 billion in debt facilities available, with £5.84 billion of this debt drawn.
• 25 RSLs arranged new finance during 2022/23, totalling £578 million, including refinancing, compared to £352 million in the previous year.
• Total cash and undrawn facilities of £1.65 billion were available to RSLs at the 31 March 2023. Even though this is a reduction of £160 million compared to last year, RSLs’ liquidity in aggregate remains strong.

Our analysis

• In 2022/23 there was a net drawdown from available facilities after repayments of £160 million. This was 13% higher than 2021/22 (£142 million).
• RSLs plan to increase their borrowing by an additional £1.47 billion over the next five years.
• RSLs paid £201.7 million in interest charges in 2022/23, which represents approximately 13% of their income from gross rent and service charges.
• Of the total RSL loan debt outstanding at the 31 March 2023, 29% is on a variable interest rate. Between March 2023 and August 2023 interest rates increased from 4.25% to 5.25%. Every 1% increase in interest rates from the 01 April 2023 could add around £14.5 million to the interest charges paid by RSLs.
• 80% of the total value of borrowing by RSLs is from traditional sources, with 20% from capital market funding.
• Undrawn facilities available to RSLs reduced to £870 million at the 31 March 2023. Whilst down by £40 million from the previous year, this along with £780 million cash balances means RSLs’ liquidity remained strong. 
• Of the total loan debt outstanding at the 31 March 2023, 87% is repaid on an amortised or partially deferred basis which may help RSLs manage their refinancing risks.
• During 2022/23, 25 RSLs had drawn down 44 new loans compared to 2021/22 where 33 RSLs had drawn down 50 new loans.
• These new loans ranged from £0.3 million to £60 million, totalling £578 million across 16 lenders and investors. This is an increase of 64% compared to the £352 million arranged in 2021/22, with no new lenders entering the sector in 2022/23.
• The weighted average interest rate on new fixed interest rate loans secured by RSLs in 2022/23 was 4.3%, up by 1.5% on the equivalent weighted average interest rate in 2021/22.
• In 2022/23, £172 million (30%) of new loans were at a fixed interest rate compared to £406 million (70%) at a variable interest rate. The majority of which were revolving credit facilities. This compares to £232 million (66%) of new loans at a fixed interest rate and £120 million (34%) at a variable interest rate in 2021/22.
• 59% of the new loans raised by RSLs were to fund new homes, 21% for refinancing, 16% for other capital investment, and the remaining 4% for other purposes.

How much debt do RSLs have?

• The total value of facilities available to RSLs increased by 2.45% over the year to £6.71 billion.
• The net amount drawn down from total facilities increased by £200 million to £5.84 billion.
• The total loan balances outstanding at the end of the year increased by 3.67% to £5.08 billion.
• The average amount owed per home increased by £622 from £15,595 to £16,217 per unit.
• The total amount drawn down is forecast to exceed £6.68 billion by the end of 2028.

The total facilities and balances outstanding across recent years were:

How has debt changed this year?

Most of the new funding arranged in 2022/23 was traditional bank lending. It accounted for 93% (£538 million) with four lenders accounting for 85% of this amount. Most new bank facilities arranged in year were revolving credit facilities rather than fixed rate loans. Capital market funding, including private placements accounted for 7% (£40 million) of the total.

The total amount of RSLs outstanding borrowing increased in the last 12 months by £0.18 billion and since 2018/19 cumulatively by £0.93 billion, from £4.15 billion to £5.08 billion. Reflecting the value of new facilities added in 2022/23, the total amount borrowed by the sector continues to increase.

• At the 31 March 2022 RSLs outstanding borrowing was £4.90 billion.
• In 2022/23, £0.40 billion was repaid with further borrowing of £0.58 billion, the majority funding affordable housing development.
• At the 31 March 2023 RSLs outstanding borrowing was £5.08 billion.

Who lends to RSLs?

Thirty-four different lenders and investors help fund the sector providing 1,176 loans, to which more than 2,020 lending covenants are attached.

The three largest lenders Royal Bank of Scotland, Lloyds Group and the Nationwide Building Society manage 56% of the value of all facilities available between them. The aggregate total facilities for all three, increased by a net £82 million to £3.73 billion with new loans of £365 million partially offset by debt repaid of £283 million in 2022/23.

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

• Royal Bank of Scotland (RBS) – 39%
• Lloyds Group – 10%
• Nationwide Building Society – 7%

We know that some of this debt is provided across a syndicate of lenders, but the majority is on a sole lender basis as follows:

• RBS lend £1.82 billion (71%) on a sole lender basis, and a further £0.74 billion (29%) as syndicate lead, for a total of £2.56 billion.
• Lloyds Group lend £0.62 billion (90%) on a sole lender basis, and a further £0.07 billion (10%) as syndicate lead, for a total of £0.69 billion.
• Nationwide Building Society lend £0.48 billion (100%), all on a sole lender basis.

Allia, Barclays, Charities Aid Foundation Bank, The Housing Finance Corporation, Triodos and Unity Trust Bank, all increased their net lending to the sector in 2022/23 by an aggregate of £132 million, with an additional £3 million from the Energy Savings Trust. The sector also retains several specialist lenders that lend to particular types of organisations (e.g. charities) or for specific purposes (e.g. environmental projects). In 2022/23 all new borrowing was undertaken with existing lenders with no new entrants recorded.

Of the total value of available facilities of £6,714 million in 2022/23, traditional bank lending was £5,310 million, representing a net increase of £85 million or 1.6% compared to the 2021/22 total of £5,225 million. The table below summarises facility values by individual traditional bank lender and the net change year on year.

Of the total value of available facilities of £6,714 million in 2022/23, nine capital market investors provide a total of £1,404 million. This comprising 21 individual bond agreements across 13 RSLs, representing a net increase of £75 million or 5.7% compared to the 2021/22 total of £1,329 million. The combined bond and capital markets investment being the sector’s second largest source of funds, with the proportion of capital market funding held by RSLs having increased, from 10% of the total debt facilities 5 years ago, to 21% at the 31 March 2023.

The table below summarises facility values by capital market investors and the net change year on year.

Overall, for all lending including both traditional bank lenders and capital market investors, reflecting both new loans and debt falling due for repayment in the year, there was a net increase of £160 million.

RSLs are increasingly financing and refinancing using Environmental, Social and Governance (ESG) linked loans. It is possible that new lenders and investors may be attracted by the ESG credentials of the Scottish housing sector.  This type of lending has the potential to be discounted. However, it may also bring extra costs associated around the governance and reporting of delivery against targets.

In 2022/23, RSLs’ obtained lending of £126 million which included beneficial lending terms linked to the RSL’s sustainability performance targets with the funds supporting the delivery of new affordable housing and refinancing. 

What type of private finance do RSLs have?

73.0% of RSLs outstanding debt remains from traditional bank lending, with 27.0% provided by bond and capital market investors.

• The total amount of traditional bank lending facilities available increased by 1.6% to £5,310 million, with the outstanding debt increasing by 4.0% to £3,730 million.

• The total investment from the capital market investors increased by 5.7% to £1,404 million with the balance outstanding increasing by 3.0% to £1,354 million.

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 remains with traditional bank lenders.

Of the total loan debt outstanding at the end of 2022/23, 24.3% reference the Sterling Overnight Interbank Average Rate (SONIA) and 3.9% reference the “Base” rate.

At the end of 2022/23, there was a net reduction in revolving credit facilities of £8 million, with £234 million available, with RSLs using such facilities 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 carry some degree of risk depending on things such as the amount required, market conditions and lender appetite. Mark-to-market exposure on derivatives remains low. However, some RSLs still 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, with 14 ‘stand-alone’ contracts in place between the RSL and the lender at the 31 March 2023, which is 2 less than 2021/22.

What new borrowing have RSLs undertaken this year?

In 2022/23, £578 million of new loans were arranged by RSLs which is 64% more than the £352 million borrowed in 2021/22.  Despite the increase in monetary terms, there were 6 fewer new loan agreements, at 44 compared to the 50 new loan agreements set up in 2021/22.

• 59% by value has been for affordable housing development.
• 21% for refinancing.
• 16% for capital investment.
• 4% for other purposes.

RSLs 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 capital investment in existing properties.  

RSLs are using 64% of their housing stock as security for borrowing, with the remaining 36% unencumbered. This indicates that on average RSLs continue to make effective use of their properties as support for their borrowing. Secured property is now valued at approximately £8.44 billion, in the region of 129% of the facilities available to RSLs.

How much does borrowing cost RSLs?

Expenditure on interest costs was £201.7 million in 2022/23. This represented approximately 13% of landlords’ income from gross rent and service charges.

The new deals secured in 2022/23 had the usual broad range of interest rates, with the majority either 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 2022/23.

For new variable rate borrowing, interest rates on offer will have risen during 2022/23 due to increases in the underlying reference rate. The above table shows the margin above that which is applied to the underlying rates. During 2022/23 these margins were slightly lower than the previous year, partially offsetting the increase in the reference rate.

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

For the 14 new fixed interest rate loans, 4 RSLs secured interest rates of 3.50% or lower, whilst 4 secured interest rates of 4.49% or above, with the other 6 RSL’s securing loans within these boundaries. Overall, the weighted average interest rate on new fixed interest rate loans sourced was 4.30%. This is a 1.50% uplift on the equivalent weighted average interest rate for new loans in 2021/22 which was 2.80%.

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 ensuring they will be able to meet these 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 to mitigate the corresponding risks attached to each type of loan.

In 2022/23, £172 million (30%) of new loans were at a fixed interest rate compared to £406 million (70%) at a variable interest rate. This is a reversal of the position in 2021/22 where £232 million (66%) of new loans were at a fixed interest rate and £120 million (34%) were at a variable interest rate. This may reflect current economic uncertainty regarding interest rates and their future direction, potentially indicating a reluctancy to lock into the current higher fixed interest rates over the medium to longer term whilst anticipating possible future interest rate reductions. Sourcing variable rate debt, including revolving credit facilities, will allow greater flexibility for future refinancing.

Of the total loan debt outstanding at the 31 March 2023, lending classified as fixed interest rate or bond equity accounted for 71% and lending on a variable interest rate was 29%. With interest charges on this debt subject to volatility as interest rates change, Governing Bodies must ensure they understand how a 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 rate at the 31 March 2023 (i.e. primarily Base rate or SONIA), a 1% uplift in interest rates would result in an increase in the estimated annual interest charges of £14.5 million.

When will RSLs repay their debt?

46% of loans held by RSLs are fully amortising i.e. repaid in instalments across the full term of the loan.

41% of loans having a 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.

13% of loan debt outstanding is 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 amortising, partially deferred or fully deferred.

Glossary of terms