About this report
This report provides an overview of the aggregate financial forecasts as submitted to the Scottish Housing Regulator (SHR) by all Registered Social Landlords (RSLs) during the return submission period to May 2023. These projections cover the period from April 2023 to March 2028 and reflect the corresponding five-year period from RSLs’ business plans.
We collect five-year financial projections (FYFP) annually from all RSLs. The returns set out the financial projections from RSLs’ business plans across a five-year, medium term reporting period. They incorporate the main financial assumptions applied by each RSL, along with the key financial statements plus additional details on their development programmes and decarbonisation plans.
Those business plans should set out an RSLs strategic direction and financial plans. In setting out how RSLs will resource those plans for a specific period at a given point in time, there can often be materially significant changes made to forecasts between years.
Since RSLs submitted their projections to us in May 2023, several key factors will have continued to impact RSLs’ business plans across the year and are likely to have led to further changes to individual financial projections:
- the cost-of-living crisis that is still impacting tenants;
- the increasing requirements to address the safety and quality of homes, including on energy efficiency and decarbonisation;
- the ongoing economic uncertainty and volatility including – high inflation, higher borrowing costs and skilled labour shortages;
- the risk of further disruption as the war in Ukraine continues and instability in the Middle East escalates.
The current and ongoing economic context for RSLs means that they are likely to have made significant changes to their financial projections and business plans since they were submitted to us in May, and it is important therefore to read this report with that in mind.
Highlights
RSLs’ projections show aggregate financial performance will remain robust. Whilst RSLs have coped well with the financial challenges, there has been a tightening of sector finances. This means RSLs will have reduced financial flexibility to respond to further challenges due to restraint on rent increases and cost increases. Governing Bodies are likely to face difficult trade-offs as they prioritise expenditure.
At an aggregate level over the five years to 2027/28 RSLs forecast:
- continuing to consistently generate operating and net surpluses;
- annual turnover to increase by an average of 1.0% (2022, 0.4%) more than operating costs;
- net assets to grow by an annual average of 3.9% (2022, 5.0%), with modest but steady growth of 3.8% in 2023/24 dropping to 3.0% in 2027/28;
- taking aggregate net housing assets to £19.30 billion (2022, £18.77 billion), and net assets to £5.59 billion (2022, £5.41 billion);
- net cash from operating activities to increase significantly to £855.7 million by 2027/28;
- significant but reducing cash reserves, with an aggregate closing balance of £801.0 million at March 2023 (2022, £892 million), dropping to £565.9 million by March 2028;
- interest cover remaining healthy, but lower than forecast in the 2022 returns;
- rent arrears steadily reducing, from 3.3% in 2023/24 to 2.8% by 2027/28;
- significant capital expenditure of £1.68 billion on existing homes, an average of more than £5,000 per property; and
- a projected 26,000 new homes, to be funded primarily by £2.45 billion of social housing grant (51% of total cost) and £2.00 billion of private finance (42%).
RSLs have faced, and continue to face, uncertainty in the national and global economy which has contributed to the cost-of-living crisis, alongside significant and sustained cost increases, higher energy costs, higher borrowing costs, continuing supply chain disruption and labour scarcity. The effects from some of this is only now starting to crystalise and impact the financial position of RSLs. As this happens and uncertainty remains, it is essential that RSLs maintain sufficient liquidity.
Keeping rents as affordable as possible for their tenants is a principal objective of all social landlords and RSLs have shown restraint when increasing their rents. However, tenants are still facing enormous financial challenges and RSLs should therefore continue to vigorously challenge every element of their cost base to ensure that it is necessary, is focused on the delivery of outcomes for tenants and others who use their services and represents value for money.
In response to an agreement by social landlords to voluntarily restrict rent increases for 2023/24 the Scottish Government’s (SG) emergency legislation that brought in a freeze on rent increases during 2022/23 was not extended beyond March 2023 for social lettings. This prevented the estimated removal of up to £60.0 million in rental income from RSL business plans.
With increased costs and below inflation rent increases, RSLs have a reduced financial flexibility to respond to further challenges. This has many implications for RSLs, tenants, and the SG, including a reduction in housebuilding, restrictions on maintenance expenditure and less expenditure on some of the wider role activities that support tenants and communities.
Over this financial year and last, interest rates have risen from a record low of 0.1% to 5.25%, their highest level for more than 15 years, although there may now be signs that the Bank of England Base Rate has peaked as at the time of writing it has been held at the current rate for 3 months. Despite that, we estimate that an additional 1.0% rise in interest rates could put RSLs’ aggregate debt servicing costs up by as much as £14.5 million a year. Rising interest rates are also likely to result in a reduction in interest cover for many RSLs.
Against this background, RSLs are facing the challenge of balancing stock quality, the need to invest in decarbonisation measures, delivering on tenant and resident safety and the construction of new homes. This planned activity could result in a reduction in RSLs’ forecast interest cover and consequently will reduce some RSLs’ capacity to manage any additional financial shocks. And we are seeing Governing Bodies reconsider their priorities as they face difficult trade-offs.
Around 29% of total RSL loan debt outstanding at 31 March 2023 was held on a variable interest rate, highlighting the importance of Governing Bodies ensuring they manage the risks from existing debt and understand the sensitivity of business plans to any further increases in interest rates. Further analysis of RSLs’ annual loan portfolio returns at 31 March 2023 can be found in our annual loan portfolio report for 2023.
Voids, arrears, and bad debts remain key performance indicators in assessing the efficiency of RSLs’ letting and rent collection. Each of these are forecast to either remain around the previous years’ levels or show some improvement, demonstrating the positive impact of the work done by RSLs to manage these. However, the sustained financial pressure on tenants means that RSLs cannot yet rule out further increases in arrears. RSLs should continue to ensure void, arrears, and bad debt risks are managed appropriately as failure to do so can materially impact their financial position. Stress testing against income reduction remains vital.
Analysis of the FYFP inflation assumptions compared to the forecast figures published by the Office for Budget Responsibility in November 2023 shows aggregate rents increasing by less than both CPI and RPI in Year 1 but by more than both inflation measures across the remainder of the current projections period.
The construction of new homes remains a priority for the SG and RSLs continue to play a key role in delivering this. The total number of new homes RSLs forecast to build over the five years of their projections has dropped to 26,000, potentially reducing rental income, but despite that, costs are only marginally down at £4.82 billion. Engaging in development brings its own set of risks, and high inflation, labour shortages, supply chain issues and contractor insolvencies are delaying and impacting RSL developments. This highlights the importance of effective oversight and management of development programmes by Governing Bodies, including stress testing against increased costs or delays. Our development thematic continues to be a relevant reference for RSLs when making decisions about whether to undertake a development project.
RSL expenditure on repairs and maintenance is at a record level and they are forecasting further increases, albeit some of this will be to reflect the ongoing impact of cost inflation. Many RSLs continue to report changes to their repairs and maintenance programmes, with limitations on access to contractors and inflationary cost increases often leading to investment being delayed, and in some cases, postponed.
