Summary of Registered Social Landlord Financial Projections: 2022/23 - 2026/27

Read a summary about this report and the highlights or download the full report below.

Published

14 December 2022

Updated

14 December 2022

About this report

This report provides an overview of the aggregate financial forecasts and business plan data submitted to the Scottish Housing Regulator (SHR) by all Registered Social Landlords (RSLs).

We collect five-year financial projections (FYFP) from all RSLs annually. The returns set out the financial projections from RSLs business plans across a five-year reporting period. They incorporate the main financial assumptions applied by each RSL along with the key financial statements plus additional details on development and decarbonisation plans.

We derived the data in the report from the FYFPs submitted to us by RSLs in May 2022 for the period from April 2022 to March 2027 as it relates to the first five years of RSLs’ business plans.

The business plans should set out their aims, objectives, and financial plans. They should also set out how the RSLs will resource those plans for a specific period at a given point in time and as such there can often be substantial changes made to forecasts between years.

This year has seen several key factors impacting RSLs’ business plans that are likely to have led to RSLs making significant changes to their financial projections since they submitted them to us. These factors include:

  1. Scottish Government intervention on rent setting;
  2. the increasing requirements to address the quality of homes, including on energy efficiency and decarbonisation;
  3. the ongoing economic uncertainty and volatility including – high inflation, rising interest rates and ongoing supply-chain disruption, including from the war in Ukraine; and
  4. the lasting long-term impact of Brexit and the Covid-19 pandemic.

As we highlight above, the current context for RSLs means that they are likely to have made significant changes to their financial projections and business plans since they submitted them to us in May. It is important to read this report with that in mind.

 

 

Highlights

RSLs’ projections show aggregate financial performance should remain robust. 

At an aggregate level RSLs forecast:

  • continuing surpluses;
  • turnover to increase by 0.4% more than operating costs over the next five years;
  • net assets to grow by an annual average of 5.0% over the five years, with modest but steady growth from 3.3% in 2022/23 to 6.0% in 2026/27, taking aggregate net assets to £5.41 billion by 2026/27, with net housing assets up to £18.77 billion over the same period;
  • significant, but reducing cash reserves, with an aggregate closing balance of £892 million at 31 March 2022, dropping to £562 million by 2027;
  • interest cover remaining healthy;
  • rent arrears peaking at 4.7% in 2022/23 before returning to more historic levels of between 3.0% and 3.5%;
  • significant capital expenditure on existing homes of £1.7 billion over five years, an average of more than £5,000 per property; and
  • more than 30,000 new homes, up by 1,000 from the 2021 FYFPs, with funding of £2.44 billion from social housing grant (49.5% of total cost) and £2.07 billion from private finance (41.9%).

RSLs submitted their projections at a time when the economic outlook remained extremely uncertain and volatile, and since then, the outlook has worsened considerably. RSLs have faced uncertainty in the national and global economy which has contributed to the cost-of-living crisis, alongside significant cost increases, higher energy costs, continuing supply chain disruption and labour scarcity.

The Scottish Government has also introduced emergency legislation to bring in a freeze on increases in rents until at least the end of March 2023, with the possibility of this being extended into the following year. Scottish Ministers will advise landlords on what happens after 31 March 2023 by 14 January 2023. We estimate that a rent freeze in 2023/24 would remove almost £60 million in rental income in that year from RSL business plans.

Interest rates have risen from a record low of 0.1% to 3.0%, their highest level in 14 years and are forecast to rise further. We estimate that every 1% rise in interest rates, could put RSLs’ aggregate debt servicing costs up by £13 million a year. Rising interest rates are likely to result in a reduction in interest cover for many RSLs.

It is in that context, that RSLs are looking to deliver on building safety, decarbonisation and stock quality commitments as well as continuing to invest in building new homes. This planned activity will result in a further reduction in RSLs’ forecast interest cover. A reduction in financial headroom will likely reduce some RSLs’ capacity to manage any additional financial shocks.

Around 27% of total RSL loan debt outstanding at 31 March 2022 is on a variable interest rate, highlighting the importance of governing bodies ensuring they manage risks from existing debt and understand the sensitivity of business plans to increases in interest rates. Further analysis of RSLs’ annual loan portfolio returns at March 2022 can be found in our annual loan portfolio report for 2022

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, as the financial pressures on tenants increase, RSLs may see increases in arrears.

Analysis of the FYFP inflation assumptions compared to the forecast figures published by the Office for Budget Responsibility in November 2022 shows aggregate rents increasing by less than both CPI and RPI in Years 1 and 2 of the projections.

The building of new homes remains a key priority for the Scottish Government and RSLs continue to play a key role in delivering this. The total number of new homes RSLs forecast to build is over 30,000 at a cost of more than £4.9 billion. Engaging in development brings its own set of risks and the level of volatility and uncertainty in the economy is likely to impact RSL development programmes. There is the potential for further interest rate rises, higher inflation, scarcity in materials and labour costs to impact on the number of new homes RSLs can deliver. This highlights the importance of effective oversight and management of development programmes by RSLs. RSLs should refer to our development thematic when making decisions about whether to undertake a development project.

 

 

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