31 August 2020
To assist RSLs with their approach to business planning in the pandemic and post-pandemic environment
The pandemic and the subsequent lockdown is unprecedented. All sectors of the economy will face challenges in emerging from the lockdown. It is clear that this emergence will be a process and not an event. There may be a new normal in the short and medium term, and possibly beyond. Landlords have always prioritised the health and safety of tenants and residents. It is likely that recovery from the pandemic will bring additional challenges for landlords in relation to health and safety of their tenants and residents. It is important that all aspects of this are taken into account in each landlord’s business plan.
Individual RSLs will have to assess the impact of the pandemic upon their existing business model and business plan and consider what the next 18 months and beyond are likely to bring. From this assessment RSLs may need to develop and implement a revised business plan. The assumptions underlying the revised plan will be crucial and whilst the pandemic has raised many challenges, RSLs should be open to considering the opportunities such as advancing digital strategies and operational efficiencies.
Our advisory guidance on Business Planning Recommended Practice (BPRP) aims to assist RSLs in Scotland in their approach to business planning. This supplement is to be read in conjunction with the existing guidance.
Scottish landlords continue to perform well across most of the standards and outcomes of the Scottish Social Housing Charter. The 2018/19 National Report confirms overall satisfaction remains high and landlords continue to report strong performance in the service areas most important to tenants. The sector also showed its resilience through the pandemic by continuing to provide vital services and support tenants, other service users and their staff. This supplement aims to assist each RSL to manage through the pandemic including the return to full service provision and as it considers the best way to deliver services in the future. Like our Recommended Practice, this is advisory guidance which is largely principles based with minimal reference to processes or context. Each RSL operates within its own context and the implications of the pandemic will be different for each landlord depending on – for example – the impacts on the local economy and tenants. Therefore, the various elements within the Recommended Practice and this supplement will apply in different ways, though every RSL should have a business plan and be considering how it may need to be adapted.
We focus on five key areas:
- rent affordability;
- risk management and mitigation (including tenant & resident safety);
- asset management (including development);
- financial planning; and
- treasury management.
Consider all areas of the business
The key questions
In section 3 we set out questions that RSLs should consider for each of the five key areas. These five areas are not exhaustive, and there are overlaps between them. RSLs should therefore also consider whether and how all areas of their business plan may need to change given the new environment. In addition to the five key areas RSLs may wish to consider the other areas highlighted in the BPRP:
- vision and mission – what are the positive or less positive lessons from the pandemic that should influence the strategic vision and mission including greater use of digital ways of working and the different ways available for engaging with service users? What has changed as a result of the pandemic experience including service user expectations and the needs of key stakeholders like local authorities? Do we need to reconsider our business continuity objectives? Have we considered how we can enable board members to contribute fully to the business planning process and take account of public health guidance?
- informed consent - in light of potential changes to previously anticipated forecasts, does the governing body – supported by management – need to make changes to the longer term strategic objectives and business direction? How are we balancing the competing demands in service provision, stock quality, regeneration and new development? Are there new scenarios that have to be tested or options appraisals carried out for the post pandemic world?
- value for money - what changes have to be considered in our approach to value for money? What revised or additional value for money performance indicators need to be considered and how will these be reported to and monitored by the Board?
- stakeholder management - does the communications strategy for key stakeholders take account of changing priorities in the business plan and details of our post pandemic work-plan? How do RSLs keep tenants, lenders and other key stakeholders assured?
The questions to consider
Here we outline the five key areas, what our Recommended Practice currently says for each of them and, in a box for each area, the questions landlords should consider asking themselves given the implications of the pandemic.
There is an important relationship between rents, rent setting and value for money. RSLs should consider tenants’ ability to keep paying their rent over the longer term when deciding levels of rent increases and they should:
- be clear on what is affordable for tenants and consider future affordability when determining annual rent increases;
- demonstrate transparency on costs and a vigorous pursuit of value for money. Value for money comes in many forms and there is a challenge in identifying, monitoring and reporting on the relevant measures. This will be specific to each RSL and take into account their operational activities and the particular needs of their tenants and residents;
- wherever possible give tenants genuine options and choices during rent consultations;
- encourage dialogue with tenants about costs versus service levels; and
- be clear on how tenants’ views are taken into account.
It will be important that landlords consider how the pandemic affects their cost base and rental income.
- To what extent do our rent assumptions for future years need to be adapted and what is the impact on rent levels in the various scenarios, including the worst case?
- How have our inflation assumptions been affected, and how susceptible are our costs to higher inflation than the general inflation rate?
- How would we need to adapt the business in a persistent low, zero or even negative inflation and/or interest base rate world?
- If our costs are higher, to what extent could this be paid for through higher rents and/or in cost efficiencies?
- How do we ensure rents remain affordable, and what would effective consultation look like?
- How do we ensure value if some services have to be reduced given Government guidance?
Risk management and mitigation
RSLs should be aware of the inherent risks in their business plan and have adequate risk management and mitigation measures in place to ensure that tenants and other services users are protected. We expect each RSL to identify the risks to its business. At present most RSLs will be affected by risks arising from welfare reform, pension funding, covenant compliance, treasury management, diversification, development, maintaining Scottish Housing Quality Standard (SHQS) and achieving the Energy Efficiency Standard for Social Housing (EESSH).
It will be vital to understand whether there are new risks and uncertainties, evaluate the impacts and decide how to manage and mitigate. Similarly, is there greater likelihood of existing risks, and/or are the impacts of them materialising likely to be more significant? This will require a review of the existing or pre-pandemic risk profile. In assessing risk we expect RSLs to take account of the risks to tenant and resident safety and to staff safety.
- What changes do we need to make to ensure we continue to meet our statutory duties and other obligations for health and safety eg in relation to gas safety, electrical testing, asbestos, legionella and fire safety?
- To what extent are we susceptible to delays in completion of contracts for development, SHQS, EESSH etc? Is there higher risk of contractors going out of business or choosing to exit the sector?
- How can higher health risks be managed in care settings?
- How can health risks associated with social distancing be managed for staff, tenants and other service users?
- Do we have adequate contingency plans in place should there be future waves of the pandemic including resilience in systems for working from home?
- How do we manage a higher risk of rental income falling from higher arrears and voids? Do we need to consider how we engage with our tenants about this?
- How do we manage any additional risks associated with changes to letting policy in response to the pandemic? Are there any changes we need to consider in our approach to housing homeless people while maintaining our obligations such as on equalities and human rights?
- What more do we need to be doing if anything to ensure we meet our statutory duties and other obligations for equalities for staff, tenants and other service users?
- How do we ensure the governing body remains effective, and that succession planning is still fit for purpose?
Asset management (and development)
A strategic approach to asset management is fundamental to future viability. Each RSL should ensure consistency between its business plan and asset management strategy. RSLs should have a good understanding of the long-term value that individual properties and different groups and types of stock bring to the business. Informed strategic asset management decisions will help ensure that resources are used effectively and should reduce the risk of longer term inefficiencies occurring.
We commissioned a survey of landlords in Spring 2020 as part of a review of our Strategic Asset Management Recommended Practice. Some of the findings from this survey work include: taking an integrated approach to developing the asset management strategy including all departments of the organisation; use of metrics on financial efficiency, value for money and other KPIs in the strategy; the importance of tenant consultation and how this should influence priorities; and, the benefits of options appraisal.
Landlords need to review the impact of the pandemic on existing asset management strategies and programmes. This will include careful consideration of the health and safety implications of pandemic delays and future obligations and targets/deadlines for stock management. Plans will need to be reviewed to take account of risks of managing catch up repairs, planned maintenance delays and likely materials and procurement challenges and the resultant impact of future programmes.
- What level of review and risk assessment of asset management priorities is needed?
- Does our review include the implications for regulatory obligations to maintain and achieve the Scottish Housing Quality Standard (SHQS) and achieve the Energy Efficiency Standard for Social Housing (EESSH) by 31 December 2020? Are EESSH2 milestones factored into the review?
- Has our review taken account of the requirement to meet the Fire and Carbon Monoxide Detector Standard by 1 February 2021?
- Does the strategy include plans to carry out electrical safety inspections in line with the SHQS guidance as these obligations are to be met by the end of March 2022?
- Have we considered the local authorities’ carbon neutral plans and what impact these will have on our investment plans?
- How have the pre-pandemic medium and long term planned maintenance programmes been affected and do these need to be recast in light of pandemic delays and catch up work?
- Are the monitoring plans, KPIs and management targets for asset management still appropriate?
- Does the information in the asset management systems or survey data need to be updated?
- What are our contingency plans or shadow programmes to manage shortages in materials or problems with procurement in particular areas?
- Have we reviewed our new development plans to measure the impact of the pandemic? In light of this have we reviewed the implications for the forward programme on our development priorities, timescales and costs?
- Have we taken account of any changes to our forward new development programme on future cash flows, checked the covenant implications and ensured there are adequate cash reserves throughout the life of the plan?
Good financial planning and strong governance should ensure that RSLs are able to avoid the experiences of recent cases which resulted in near insolvency for providers of social housing. The Recommended Practice sets out a number of core financial planning principles which should help ensures financial well-being and economic effectiveness. Experience in the sector shows that following these principles gives clarity around the health of the RSL.
It is imperative to understand the financial impact of the new risks and uncertainties identified and ensuring changes continue to align the financial plan with the strategic objectives at all stages of the business planning process. Good financial planning is critical to the financial health and wellbeing of an RSL.
Linking the financial plan to key strategies
- What additional and/or amended key performance indicators need to be considered and reported on?
- What has the impact been on our approach to value for money?
- What has been the impact on procurement costs and processes?
Developing financial plans
- What base assumptions need to be re-assessed and what new assumptions may be required, such as slower completion rates for developments and mid-market rent supply & demand changes?
- What additional or revised stress testing is needed with updated Bank of England inflation and base rate assumptions and how have the pressure points been affected?
- What revised rent affordability assumptions need to be considered for the current year and beyond, for both social and non-social rent?
- What impact will the cessation of relevant government financial support e.g. the furlough scheme, have in the short and medium term?
- What is the impact on cash flows in the short, medium and long term?
- How have covenants been impacted?
- What additional pandemic related costs have arisen, both one-off and recurring?
- What has the impact been on debt and covenant compliance, including the investment profile?
- What is the longer term impact on rent affordability?
- What has been the impact of delayed committed and/or uncommitted development works and repairs, including contractor cost changes and contractor ability to deliver?
- What new or revised contingencies may be required?
- What different and/or new sensitivities are needed?
- How to assess what would be reasonable to include in the revised worst case scenario?
- Have we considered and managed any potential impact on subsidiary companies and non-social housing activities – most notably for care – and the impact for the overall group?
Producing adequate financial plan outputs
- What changes may be needed to monitor and report on the short term cash and covenant compliance?
- What impact will the pandemic have on the regularity of reporting key performance indicators and the content?
Each RSL should be able to demonstrate effective treasury management arrangements. Effective systems should be in place to monitor and report regularly to the governing body on covenant compliance, cash flows and key treasury requirements. RSLs should be aware of lenders’ timescales for testing covenants and ensure that the implications of any breach are understood. Information systems should be in place to detect any material risk of breach as soon as possible.
It will be crucial that RSLs consider the impacts of the pandemic on the approach to treasury management, ensuring covenant compliance and maintaining good communication with lenders.
- What additional sensitivities have been run in respect of forecast low inflation and interest?
- What is the impact on liquidity and cash holding positions?
- How does the low base rate impact on existing and proposed future borrowing in the short, medium and long term?
- What is the impact on the affordability and timing of debt repayments?
- What is the impact on covenants in the short, medium and long term?
- What do you need to keep your lenders advised of and how will this change the nature and regularity of communications?
- What is the impact of not drawing on existing facilities due to development delays or changes in strategic direction re development?
- How are policy required minimum cash levels maintained with potentially volatile cash levels?
RSLs should continue to take account of Regulatory Standards in the strategic business planning processes which they undertake.