Our annual analysis of RSLs’ annual loan portfolio 2024

Operating environment and highlights from the 2024 returns

Registered Social Landlords (RSLs) continue to face significant pressures and challenges as they work to deliver services for their tenants and invest in maintaining and improving the quality and energy efficiency of existing stock. At the same time, they are working to keep rents as affordable as possible for their tenants who are continuing to face a cost of living crisis.  The Governing Bodies of RSLs are therefore continuing to have to make tough decisions on how to effectively use their resources. And the operating environment for RSLs in coming years is likely to remain unpredictable, volatile, and difficult.

The most recent Consumer Price Index (CPI) rate is sitting marginally above the Government’s target rate of 2.0%, as announced in September 2024. There was a welcome downward trend in inflation levels throughout 2023/24, but the increases in costs landlords experienced over the last few years are locked in and inflation in construction and maintenance was still running well ahead of the headline rates during 2023/24. Many commentators also predict that the CPI rate will rise again later in the year.

Interest rates also continued to rise in 2023/24, with the Bank of England base rate reaching a peak of 5.25% in August 2023, the highest in 15 years. It remained at this level until August 2024, with the first change since February 2020 being a rate reduction of 0.25% to 5.0%, which was agreed at the August meeting of the Monetary Policy Committee. The rate is expected to remain around this figure until inflation returns sustainably to the 2% target.  

With interest rates remaining high during 2023/24, the RSLs with a greater proportion of debt outstanding on variable interest rate terms were impacted more significantly by rising interest costs, compared to those who held a greater proportion of fixed rate debt. All RSLs with a private financing requirement in 2023/24, for example to resource planned development of new homes or to carry out improvements to existing homes or to refinance existing loans, may also be impacted by rising interest costs on new loan facilities.

Many RSLs have benefitted from relatively low debt in the past decade. It is essential RSLs maintain sufficient liquidity to manage the impact of increased interest payments and operating costs during this period of economic uncertainty. Retaining the confidence of current and future lenders and investors to provide private finance also remains essential. We will continue to engage with RSLs that display signs of low liquidity.

As the cost of debt has increased materially and financial markets continue to shift, it is also vital that the Governing Bodies of RSLs maintain the skills and expertise to understand and manage the financial products supporting their business and ensure that these are the most appropriate ones for the RSL.

RSLs should be able to access independent financial and legal advice. It is important that an RSL’s treasury management activity complies with its treasury management policy, aligns to its treasury management strategy, and ensures that its approved treasury management practices are properly implemented and monitored. RSLs should have regard to the most up to date recommended best practice as set out in the CIPFA Treasury Management Code, adopting an effective approach to comply with Regulatory Standard 3.

Our analysis of RSLs’ annual loan portfolio returns at the 31 March 2024 should therefore be considered within the economic and operating context we set out above, 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 2024, RSLs had £6.84 billion in debt facilities available, with £6.04 billion of this debt drawn.
• 19 RSLs arranged new finance during 2023/24, totalling £198 million, compared to £578 million by 25 RSLs in the previous year. This is the lowest level of new finance arranged in the last five years.
• Total cash and undrawn facilities of £1.484 billion were available to RSLs at the 31 March 2024, a reduction of £166 million compared to the previous year. However, RSLs’ liquidity in aggregate remains strong.

Our analysis

• In 2023/24 RSLs had a net drawdown from available facilities after repayments of £129 million. This was 18.75% lower than 2022/23 (£160 million).
• RSLs plan to increase their borrowing by an additional £1.5 billion over the next five years.
• RSLs paid £252.7 million in interest charges in 2023/24 (2022/23 £201.7 million), which represents approximately 15.1% of their income from gross rent and service charges (13.0% in 2022/23). This increase in proportion of interest charges reflects the incremental interest rate rises for existing debt during 2023/24 and the full year cost impact of significant new debt sourced in the previous year.
• Of the total RSL loan debt outstanding at the 31 March 2024, 29% of the debt outstanding is on a variable interest rate and 71% on a fixed interest rate, both of which remain at previous year levels.
• At the start of financial year 2023/24 the base rate was 4.25% increasing to 5.25% by the end of August 2023, with no further changes for the period to the end of March 2024.
• Every 1% increase in interest rates from the 1 April 2024 could add around £15.2 million to the interest charges paid by RSLs.
• 79% of the total value of borrowing by RSLs is from traditional sources, with 21% from capital market funding, which is similar to the previous year.
• Undrawn facilities available to RSLs reduced to £800 million at the 31 March 2024. Whilst down by £70 million from the previous year, this along with £684 million cash balances means RSLs’ liquidity in aggregate remained strong. 
• Of the total loan debt outstanding at the 31 March 2024, 52% is repaid on an amortised or partially deferred basis. This helps RSLs to manage their refinancing risks.
• In terms of debt cash repayments falling due, £155 million (3.0%) is due to be repaid in 2024/25, £184 million (3.5%) in 2025/26, £766 million (14.6%) falling due between 2026/27 and 2029/30, with remaining balance of £4,125 million (78.9%) not due to be repaid until beyond 2029/30.
• 19 RSLs had drawn down 28 new loans compared to 25 RSLs and 44 new loans in 2022/23.
• These new loans ranged from £0.04 million to £40 million, totalling £198 million across 9 lenders. This is a decrease of 66% compared to the £578 million arranged in 2022/23. No new lenders entered the sector in 2023/24.
• £95 million (48%) of these new loans were agreed on fixed interest rate terms compared to £103 million (52%) on variable interest rate terms. With £62 million (31%) of the new variable rate loans being revolving credit facilities.
• The weighted average interest rate on new fixed interest rate loans secured by RSLs in 2023/24 was 5.0%, up by 0.7% on the equivalent weighted average interest rate in 2022/23.
• 77% of the new loans raised by RSLs were to fund affordable housing developments which includes 4% for mid-market rent developments, with 14% for refinancing, 4% for other capital investment, and the remaining 5% for working capital purposes.

How much debt do RSLs have?

• The total value of facilities available to RSLs increased by 1.92% over the year to £6.84 billion.
• The net amount drawn down from total facilities increased by 3.52% million to £6.04 billion.
• The total loan balances outstanding at the end of the year increased by 2.86% to £5.23 billion.
• The average amount owed per home increased by £250 from £16,217 to £16,467 per unit.
• The total debt drawn down is forecast to exceed £7.66 billion by the end of 2029.

The total facilities and balances outstanding across recent years were:

How has debt changed this year?

All new funding arranged in 2023/24 was traditional bank lending, with three lenders, Allia £86.2 million, Royal Bank of Scotland £54.7 million and Lloyds Group £37.9 million, accounting for 90% of this amount, with no new capital market facilities or private placements arranged. For the £198 million of new loans sourced, £95 million (48%) of these were at a fixed interest rate compared to £103 million (52%) at a variable interest rate. With £62 million (31%) of these new variable rate loans being revolving credit facilities.

The total amount of outstanding borrowing increased in the last 12 months by £0.15 billion and since 2019/20 has risen cumulatively by £0.71 billion, from £4.52 billion to £5.23 billion. Reflecting the value of new facilities added in 2023/24, the total amount borrowed by the sector continues to increase.

• At the 31 March 2023 RSLs outstanding borrowing was £5.08 billion.
• In 2023/24, £0.048 billion was repaid with further borrowing of £0.198 billion, with 77% of this used for affordable housing developments which includes 4% for mid-market rent developments.
• At the 31 March 2024 RSLs outstanding borrowing was £5.23 billion.

Who lends to RSLs?

Thirty-four different lenders and investors help fund the sector providing 1,149 loans, to which more than 2,097 lending covenants are attached.

The three largest lenders Royal Bank of Scotland, Lloyds Group and the Nationwide Building Society manage 55% of the value of all facilities available between them. The aggregate total facilities for all three, increased by a net £28 million to £3.76 billion with new loans of £99 million partially offset by debt repaid of £71 million in 2023/24. For the Royal Bank of Scotland and Lloyds Group, there was a net increase in lending facilities of £34 million and £1 million respectively, with the Nationwide Building Society facilities decreasing by a net amount of £7 million. The proportion of RSL total debt facilities these three lenders manage is:

• Royal Bank of Scotland (RBS) – 38%
• 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 £1.84 billion (71%) on a sole lender basis, and a further £0.75 billion (29%) as syndicate lead, for a total of £2.59 billion.
• Lloyds Group lend £0.61 billion (88%) on a sole lender basis, and a further £0.08 billion (12%) 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 increased their net lending by £98 million during 2023/24 which was the highest net increase amongst all lenders increasing their facilities by 13% to £0.37 billion.  Unity Trust Bank and Charities Aid Foundation Bank increased their net lending to the sector in 2023/24 by a net £16 million and £6 million respectively, whilst both Santander and Clydesdale Bank plc lending facilities decreased by a net £15 million and £3 million respectively, with other lenders showing a minor or no change. The sector also retains several specialist lenders to particular types of organisations (e.g. charities) or for specific purposes (e.g. environmental projects). In 2023/24 all new borrowing was undertaken with existing lenders with no new entrants recorded.

Of the total value of available facilities of £6,843 million in 2023/24, traditional bank lending was £5,439 million, representing a net increase of £129 million or 2.42% compared to the 2022/23 total of £5,310 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 £6,843 million in 2023/24, nine capital market investors provide a total of £1,404 million. This comprises 21 individual bond agreements across 13 RSLs, with no new facility advances or repayments during 2023/24. The combined bond and capital markets investment is 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 20% at the 31 March 2024.

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 loan facilities and facilities fully repaid in year and falling off the list, there was a net increase of £129 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 2023/24, RSLs’ obtained lending of £21 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?

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

• The total amount of traditional bank lending facilities available increased by 2.42% to £5,439 million, with the outstanding debt increasing by 3.9% to £3,876 million.
• There was no change to the total investment from the capital market investors remaining at £1,404 million with the balance outstanding also remaining unchanged at £1,354 million.

The increase in traditional bank lending for debt outstanding represents 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, with no debt repayments or debt drawdowns for capital market debt during 2023/24 per the loan agreements.

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

Of the total loan debt outstanding at the end of 2023/24, 24.8% reference the Sterling Overnight Interbank Average Rate (SONIA) and 4.1% reference the “Base” rate.

At the end of 2023/24, there was a significant increase of £138 million (58.9%) in revolving credit facilities, with £372 million now 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 loan types held by RSLs.

Every investment and financial product carry some degree of risk dependent on several factors 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 12 ‘stand-alone’ contracts in place between the RSL and the lender at the 31 March 2024, which is 2 less than 2022/23.

What new borrowing have RSLs undertaken this year?

In 2023/24, £198 million of new loans were arranged by RSLs which is 65.7% less than the £578 million borrowed in 2022/23.  With 28 new loan agreements, this is 16 lower when compared to the 44 new loan agreements set up in 2022/23. These funds by value being used for

• affordable housing development (77%) which includes mid-market rent developments (4%)
• refinancing (14%).
• capital investment (4%).
• working capital purposes (5%).

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.  

This indicates that on average RSLs continue to make effective use of their properties as support for their borrowing. Secured property is valued at approximately £8.80 billion, which represents 129% of the facilities available to RSLs.

How much does borrowing cost RSLs?

Expenditure on interest costs was £252.7 million in 2023/24. This represented approximately 15.1% of landlords’ income from gross rent and service charges.

The new deals secured in 2023/24 had the usual broad range of interest rates, being 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 2023/24.

For the 22 new variable rate loans, interest rates on offer have risen during 2023/24 due to increases in the underlying reference rate. The above table shows the margin above that which is applied to the underlying rates. During 2023/24 the margins applied to underlying rates were generally higher for SONIA loans and lower for the Base rate loans compared to the previous year.

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 6 new fixed interest rate loans sourced during 2023/24, 1 was on an interest free basis, 1 was secured at an interest rate of 4.48%, 3 RSLs secured interest rates of between 4.64% and 5.07%, with for the remaining loan, the RSL securing an interest rate of 6.38%. Overall, the weighted average interest rate on new fixed interest rate loans sourced was 5.0%. This is a 0.7% uplift on the equivalent weighted average interest rate for new loans in 2022/23 which was 4.3% which reflects the increasing interest rate environment across this borrowing period.

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 2023/24, £95 million (48%) of new loans were at a fixed interest rate compared to £103 million (52%) at a variable interest rate. In sourcing new loans, it is important RSLs consider their current debt structure in terms of the proportion of fixed and variable interest rate debt held, particularly whilst prevailing interest rates remain uncertain. The approach adopted consistent with their interest rate risk appetite, ensuring the overall debt profile after borrowing is within any limits set within the treasury policy approved by the Governance Board to manage interest rate risks.  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 2024, lending classified as fixed interest rate or bond equity was 71% of the total and lending on a variable interest rate was 29%, the split remaining unchanged from the previous year. With interest charges on the variable rate 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 2024 (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 £15.2 million.

When will RSLs repay their debt?

11% 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.

48% 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.

In 2023/24 additional data was collected for the debt repayment profile based on when the loan is fully repaid, this provides analysis based on the actual debt repayments profile in cash terms, per the loan agreements. The table below providing an indicator of the refinancing risks for RSL’s in aggregate in the short to medium term.     

Glossary of terms