About this report
This report provides an overview of the aggregated financial projections as submitted to the Scottish Housing Regulator (SHR) by all Registered Social Landlords (RSLs) during the returns submission period to May 2024. The projections cover the five-year period from April 2024 to March 2029, reflecting the corresponding RSL business plan period.
We collect Five Year Financial Projections (FYFP) annually from all RSLs. The return sets out the financial projections from an RSL’s business plan across a five-year, medium term, period. The projections set out the main financial assumptions applied and incorporate the primary financial statements, along with additional context around, for example, development programmes and decarbonisation plans.
Strategic context and financial environment
Business plans will set out an RSL’s strategic direction and their financial plans and how they will resource those plans for a specific period at a given point in time. However, there can often be significant changes made to forecasts in the intervening years, with several key factors likely to have continued to materially impact business plans and it is important therefore to read this report with that in mind:
- the cost-of-living crisis that is still impacting tenants;
- the increasing financial pressures associated with addressing the safety and quality of homes, including around energy efficiency;
- the ongoing economic volatility including higher borrowing costs, skilled labour shortages and National Insurance (NI) increases. We have, for example, calculated that the NI changes alone could cost RSLs around £15 million in unplanned costs in 2025/26;
- the risk of further disruption as the war in Ukraine and instability in the Middle East continue; and
- funding cuts to the Affordable Housing Supply Programme.
Highlights
RSLs' aggregate financial position has weakened, leaving them with less financial headroom, although projections indicate a slight improvement in the medium term. We are engaging with more RSLs on financial matters than in the past, but most are still managing financial pressures, albeit with tightening finances. As a result, RSLs have reduced capacity to respond to emerging costs, like NI increases, which are not included in these projections. This means that Governing Bodies will continue to face some difficult choices and trade-offs as they prioritise expenditure.
At an aggregate level over the five years to 2028/29 RSLs forecast:
- annual turnover to increase by an average of 1.7% (2023, 1.0%) more than operating costs;
- net assets to grow by an annual average of 3.7% (2023, 3.9%), with modest growth of 2.5% in 2024/25 increasing to 4.3% in 2028/29
- taking aggregate net housing assets to £19.99 billion (2023, £19.30 billion), and net assets to £5.72 billion (2023, £5.59 billion);
- net cash from operating activities to increase significantly to £911.1 million by 2028/29;
- significantly reduced cash reserves, although still at a healthy level, with an aggregate closing cash balance of £561.3 million at March 2024 (2023, £801.0 million) dropping to £509.0 million by March 2029;
- interest cover remaining healthy, but lower than forecast in the 2023 returns;
- rent arrears marginally up but then steadily reducing, from 3.4% in 2024/25 to 3.0% by 2028/29;
- significant capital expenditure of £1.91 billion on existing homes, an average of more than £5,700 per property;
- estimated decarbonisation costs in the period to 2030 could range from £4.8 billion to £9.6 billion, while RSLs' projections include just £154.6 million; and
- a projected 22,600 new homes, to be funded primarily by £2.49 billion of social housing grant (53% of total cost) and £1.91 billion of private finance (40% of total cost).
RSLs continue to navigate a challenging operational landscape and over the past year threats to their financial stability have grown, leading to a decline in many RSLs’ financial performance. The repercussions of the severe shocks that the UK economy has endured in recent years persist, with ongoing issues resulting from significantly increased costs, higher borrowing costs, and difficulties in securing skilled labour and materials. Furthermore, there is a significant risk of additional unforeseen disturbances arising from market volatility and global instability, including the ongoing conflicts in Ukraine and in the Middle East.
Simultaneously, the sector will need to invest significant sums in existing properties to enhance quality, ensure building safety, and meet net zero standards. Additionally, RSLs anticipate continuing to build new social housing to contribute to the Scottish Government’s (SG) target of 110,000 homes.
This is occurring at a time when tenants and their families are continuing to endure considerable financial difficulties due to the cost-of-living crisis. Ensuring affordable rents for tenants is a primary objective for all social landlords. Most RSLs have shown restraint when increasing rents in recent years in recognition of the difficult financial position for many of their tenants. As a result, these RSLs have received lower income than they had originally planned for, leading to reduced resources for investing in homes and services. Landlords are also having to manage significant cost increases and new costs. All of this adds to the pressure to increase rents. At the same time, we are acutely aware that tenants and their families are still facing an incredibly difficult and worrying time with household finances under real strain. That is why it has never been more important for social landlords to have meaningful conversations with their tenants about rent increases, and to examine all of their expenditure to ensure it is necessary and delivers positive outcomes for tenants and service users, and provides good value for money.
As a consequence of the UK Budget changes to employers’ National Insurance Contributions (NIC) we estimate that the aggregate impact on RSLs could be around £15.0 million in additional costs each year. The calculation includes the impact of the 1.2% increase in Employers’ NIC and the reduction in the secondary threshold, the level at which employers start paying NIC on each employee’s salary, from £9,100 a year to £5,000.
Rising costs and constrained rent increases have diminished the financial headroom of RSLs. The effects of this are already becoming evident for RSLs, tenants, and the SG, with fewer landlords building fewer new homes, reduced maintenance budgets for many RSLs, and cuts to some of the broader services that support tenants and communities. Governing Bodies will need to manage risks, identify emerging pressures, and ensure that their RSL can withstand potential future shocks.
Since 2020, RSLs interest cover has consistently declined, dropping to 200% in 2023/24 from 246% the previous year. Future interest cover is now forecast to rise again due primarily to interest rates having started to drop, with further reductions anticipated. Overall liquidity remains strong, with total cash and undrawn facilities amounting to £1.48 billion.
The weighted average interest rate for new fixed-rate loans taken by RSLs in 2023/24 was 5.0%, up 0.7% from 4.3% in 2022/23. Most existing debt is fixed for over five years. However, a sizeable portion of RSLs’ debt is either at a variable rate or will soon require refinancing at higher rates and potentially shorter terms. You can read more about RSLs’ debt in our annual loan portfolio report for 2024.
Voids, arrears, and bad debts remain critical performance indicators for evaluating the efficiency of RSLs' letting and rent collection processes. Voids and bad debts are expected to either remain stable or see slight improvement. However, the continued financial strain on tenants risks future increases in arrears, and so RSLs stress testing for potential income reductions remains crucial.
Analysis of the FYFP inflation assumptions compared to forecast figures published by the Office for Budget Responsibility in October 2024 shows average aggregate rents increasing by more than CPI and RPI in Year 1, with that trend continuing across the remainder of the current projections period, although the gap between rent increases and the inflation measures is expected to narrow over time.
The UK economy has faced a series of significant shocks in recent years, leading to a decline in the rate at which RSLs are building new homes, with this trend expected to continue over the next five years. RSLs' forecasts for the 2024 FYFPs show a 13% reduction in the total number of new homes planned, compared to the 2023 FYFPs, which were already 17% lower than the previous year’s projections. RSLs attribute this decline primarily to rising construction costs and uncertainty over the future availability of grant funding. Additional pressures, such as increased costs for maintaining existing homes and uncertainty regarding spending on the proposed Social Housing Net Zero Standard, have also contributed to reductions in planned expenditure on new homes. Furthermore, many development projects continue to be hindered by labour shortages and subcontractor insolvencies.
Development projects carry their own set of risks, and factors such as high inflation, labour shortages, supply chain disruptions, and contractor insolvencies are causing delays and affecting RSL developments. This underscores the need for effective oversight and management of development programmes by Governing Bodies, including stress testing for potential cost increases or delays. Our development thematic remains a key reference for RSLs when considering whether to proceed with new development projects.
We asked RSLs in the FYFP return if they had considered the costs of de-carbonisation and to tell us what estimated future costs they have incorporated into their projections. This is a significant risk area that will have a material impact on the funding of business plans, but as yet most RSLs have not set out these costs. Many told us they are awaiting the finalisation of the SG’s proposed Social Housing Net Zero Standard for clarity on what they will be required to invest and for further clarity on potential funding sources.
We have previously estimated the additional costs in the period to 2030 could range from £4.80 billion to £9.60 billion. The current aggregate level of costs included by RSLs in financial projections is £154.6 million.
It remains crucial for RSLs to maintain adequate liquidity, especially in this period of economic volatility. We will engage with RSLs with low liquidity indicators and maintain close engagement with RSLs where our analysis indicates weak financial performance, and this will be reflected in their regulatory status and engagement plans.
