Helen Shaw - SFHA Finance Conference - 12 November 2024

Introductions 

Good afternoon everyone, it’s great to be invited back again to talk to you today. 

So, the brief I was given was to talk about the economic landscape for RSLs, the SHR’s current work and priorities, and what we could see in the year ahead. 

A lot to cover so bear with me! 

On the economic landscape, other commentators have very succinctly set out the current context. For us as Regulator, the key factors which we see as a result of the post-pandemic world, the cost of living crisis the wars in Ukraine and the Middle East and recent global political changes all come together to create an uncertain, unpredictable, and volatile context. 

On the plus side, last week we saw the Bank of England cut interest rates to 4.75%, the second cut in the base rate this year. And the Bank of England has indicated that interest rates are likely to continue to fall gradually from this point, provided inflation stays close to the Bank’s 2% target. 

The Bank’s latest monetary policy report also highlights that wages in 2024 will increase on average by 5.5% compared to 6% last year. 

However, the UK government’s recent budget also included changes to the National Insurance payments. 

We have done some initial calculations and with the usual caveats about the nature of the calculations, we estimate that the aggregate impact on RSLs will be around £15m 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 national insurance on each employee’s salary, from £9,100 a year to £5,000. And this doesn’t include the impact that the minimum wage rise will have on landlords. 

And we also know now the outcome from the US elections and the main immediate issue for the UK would appear to be the potential impact on the UK economy if there are tariffs imposed on imports. This could have a significant impact if these happen and could see inflation rise and interest rates stay put or even rise again.  

Inflation fell below the Bank of England’s target in the year to September, but it is (and probably always was) expected to rise again as energy bills increase over the colder winter months. Inflation was then forecast to drop back to 2% by 2026 but it remains to be seen what the impact of the political change in the US will mean for prices in the UK. 

Earlier this year, the Scottish Parliament’s declared a national housing emergency. The declaration is clearly significant, although it is largely symbolic, and sits alongside the declaration of local emergencies in 12 local authority areas. Such declarations don’t trigger any defined actions or release additional resources.  

The Scottish Government is working with its stakeholders to agree an action plan in response to the declaration. But in our work, we are seeing acute issues in housing which reflect some of the reasons which have led to the declaration of the housing emergency. 

We are seeing in particular the number of homelessness applications continuing to rise and, perhaps most significantly, a marked increased in failures by local authorities to meet their statutory duties in relation to homelessness.  

Essentially in many areas of Scotland the demands in the homelessness system – the number of people who are homeless, and the level of need they have – exceed the capacity in the system to respond. For some councils, the increase in capacity that is needed goes beyond that which they can deliver alone. And that is what we mean when we describe some councils as being impacted by systemic failure.  

As things stand, there is a real risk of statutory failures becoming endemic in some council areas.  

Systemic failure requires a systemic intervention. Over the longer term this is about reducing the demands on the system by preventing homelessness. But for now, the immediate focus has to be about increasing the capacity in the system to meet the current level of demand and need.  

In the context of constrained public finances, it doesn’t feel like there are easy or quick actions that will end the current situation speedily. While there may be some consequentials for Scotland from the recent UK Budget, it looks likely that the next year will be at least as tough as the last one. 

The response to the housing emergency therefore might be as much about actions to mitigate the worst impacts of the current situation, while we all consider what changes might be needed over the longer term to change the underlying structural weaknesses in our housing system. 

As a regulator, we have an important role to play in informing the discussion on the policy response required to tackle the housing emergency. So, within that context, I thought it would be helpful to say a little about the current financial situation in the sector in aggregate.  

I’d also like to touch on some of the issues that are affecting individual RSLs where we’re engaging around finance as I know that is also of interest to many of you.  

So, the financial position of the sector. Our most recent financial returns received from RSLs look back at the past through the annual financial statements and loan portfolios to the year ended 31 March 2024. But they also consider RSL financial forecasts for the next five years. 

And what all of these tell us is that despite a tightening of sector finances and less margin for error, overall liquidity in the sector remains robust and RSLs in general have maintained sufficient liquidity.  

Firstly, I wanted to take a quick look back at some of the key highlights from the most recent set of loan portfolio returns and annual financial returns. 

To reflect briefly on where we are now. 

And then, and perhaps most importantly, to talk about where we might be headed. 

We published our most recent loan portfolio report last month, and this highlighted that, overall, during 2023/24 there was a reduction in both the number of RSLs arranging new borrowing and the level of new finance being put in place compared with the previous 5 years.  

At the end of March 24, RSLs had £6.8bn in debt facilities available, with just over £6bn of that debt drawn. 

And RSLs have told us they plan to increase their borrowing by an additional £1.5 billion over the next five years. 

During 23/24, 19 RSLs arranged new finance totalling £198m and that compares to £578m in the previous year. We have heard from landlords that this significant reduction is partly because of high interest rates which have deterred landlords going to the market and also the fall in plans to build new homes.  

This all meant on March 24, RSLs had available cash and undrawn facilities of £1.48bn. And as we have highlighted in our recent report, while this is a reduction of £170m compared to the previous year, it does show that RSLs’ liquidity in aggregate terms remains strong. 

So how has that debt changed? 

All the new funding arranged in 23/24 was traditional bank lending, but we are aware that some private placements have been completed since March.  

And 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.  

We do however await the outcome of the Scottish Government’s budget due on 4 December to see what that says about the support for new housing. 

Net zero 

We still await the outcome from the Scottish Government’s consultation on new Net Zero Housing Standard for social landlords. Until we see the outcome of the consultation it remains difficult for landlords to understand what is expected of them and to factor this into their plans. This certainly adds to the challenge for social landlords’ budgeting and planning, in the short and longer terms. 

For 2024, a total of 31 RSLs have indicated that they have considered de-carbonisation as part of their business planning process representing 22% of RSLs. This compares to 26 RSLs in the previous year which was 19% of the total. the majority of landlords told us that they are waiting for the policy framework to be put in place and more definite costings to be available before they will include anything.  

As things stand, and given what we know about the proposed standard, and the current level of resources in social housing in Scotland, it is likely that the costs to social landlords to meet proposed standards on energy efficiency and clean heating will be unaffordable without either significant levels of government subsidy or rent increases that would seriously compromise affordability for most tenants, or significant reductions in other areas of expenditure. 

Conclusions 

As a regulator, we see the challenges that landlords are facing.  

Our analysis of RSLs’ financial forecasts show that despite the tough and uncertain economic climate, RSLs in Scotland’s finances remain robust.  

But increasingly we know that governing bodies are facing difficult decisions on trade offs as their finances tighten.  

This also means RSLs will have reduced financial flexibility to respond to further challenges as they try to continue to show restraint on rent increases while also managing cost increases. 

We have talked before about the ability of the sector to respond to the various challenges it has faced over many years.  

While this certainly feels the most challenging context that I can recall in all of my time working in housing, we believe that the sector will be as well paced as it can be to respond to these challenges and continue to provide the much needed homes for their tenants.