Andrew Watson, Deputy Chair - Scottish Rural and Islands Conference - 27 October 2022


27 October 2022

Andrew Watson, Deputy Chair, Scottish Rural and Islands Conference

Good morning, I am delighted to be here with you today alongside Sally in this beautiful part of Scotland.

In the last few years, it has felt like Government policy and priorities have been very dynamic and ever changing whether in response to the Pandemic, Brexit and/or significant uncertainty in the national and global economy including a cost-of-living crisis. A lot has changed over the last few weeks and months.

Several weeks ago, when thinking about what I would say to you today, I couldn’t be confident that the landscape for tenants, other users of landlord services and social housing landlords wouldn’t be markedly different by the time of today’s session. And indeed, that has turned out to be the case!

As you will know, the UK Government announced a package of measures in its mini budget most of which have since been reversed. These included the Energy Price Guarantee for people for two years which appears to now be for six months and uncertainty as to what will be in place after that. The implications for people of the change from two years to six months will only become clear when we know what policy will be in place beyond March. The path of energy prices is also incredibly unclear – it may be that by the time of April or shortly after, wholesale energy prices will have dropped to an extent that means the cost for businesses and people will be at the level of the Energy Price Guarantee anyway or below. We can certainly hope energy costs drop especially for those who are struggling to pay.

The original announcements in the mini budget and the signal of further tax cuts led to markets pricing in higher interest rates than were expected, which meant higher costs on new borrowing and variable rate borrowing. These have fallen back slightly given more recent announcements but remain above the level prior to the mini budget. Time will tell whether they fall back further though the Chancellor’s statement due on Monday may have an impact one way or the other. Then the Scottish Government will consider its spending decisions and budget allocations shortly afterward.

Before moving on to the main theme of energy efficiency, I thought it would be worthwhile saying a few words on the rent freeze.

You will of course be acutely aware that the Scottish Government has introduced emergency legislation to bring in a freeze on increases in rents until at least the end of March 2023 for homes provided by social and private landlords. The emergency legislation also gives Scottish Ministers the power to continue this intervention beyond March. This is part of a package of measures the Scottish Government is introducing in response to the cost-of-living crisis. We still don’t have certainty about what will happen beyond March 2023, although Scottish Ministers must advise what the position will be no later than the middle of January.

While the rent freeze as it stands will have no immediate impact on almost all social landlords, I think it is clear how critical the Scottish Government views the role of rents in tackling the cost-of-living crisis and its willingness to intervene on rent policy. And the Scottish Government has indicated that it wants to work with social landlords to agree what happens beyond March 2023. As regulator, we are involved in what is called the Short Life Task and Finish Group, which the Scottish Government has established to take this work forward. The Group includes representatives from the sector including SFHA, GWSF, ALACHO and COSLA. The Scottish Government has said that a key aim is to ensure the best possible balance between keeping rents affordable and continuing social rented sector investment of rental income in quality homes and appropriate support to tenants. This group – chaired by Scottish Government – is the main way it will consult with the sector on its plans and listen to what landlords are saying about the rent freeze and any potential extension or cap beyond March 2023.

I recognise that the forthcoming annual rent setting exercise will be one of the most difficult you will have faced. You will need to consider rising costs and inflation in your organisation in the context of the financial hardship that is a reality for many of your tenants. And you have Government intervention in rents to take account of. This will inevitably mean that you, together with your tenants, will face some difficult choices and decisions as a result.

We have advised landlords to proceed with rent consultation to determine what level of rent increase you require for 2023/24, including engaging with your tenants to ensure that you understand what is important to them and what they want, and can afford, to pay for. I know this is not easy given uncertainty as to what will happen on the rent freeze or cap beyond March. However, to not proceed could leave you in a position where you are not able to increase rents on 1 April 2023 if you are permitted to do so. In other words, if you don’t consult you can’t increase rents. We have also asked you to let us know what rent increase you plan for April 2023 if any, after you have consulted with tenants and the governing body has made that decision. This is a rapidly changing position, and we will issue further advice to landlords as this develops.

So, I am keen to hear today from you about your wider operating environment – and how the rent freeze, and a potential freeze or cap beyond March 2023 – will impact on your business and tenants, especially in the context of efforts to meet the demands placed upon you on energy efficiency and decarbonisation.

The Energy Efficiency Standard for Social Housing (EESSH) was introduced in 2014 with an initial milestone set for December 2020. Landlords have largely delivered on this – the vast majority of social homes met that EESSH milestone. Indeed, social landlords lead the way for energy efficiency and decarbonisation in homes. A second milestone (EESSH2) was set requiring all social housing to meet EPC Band B (Energy Efficiency rating) or is as energy efficient as practically and technically possible, by the end of December 2032.

In addition, the Scottish Government’s Heat in Buildings Strategy outlines the ambition that by 2045, emissions of greenhouse gases from heating homes and buildings will have all but disappeared, with demand for energy reduced and space and water heating provided by zero emissions alternatives.

In March 2021, the Zero Emissions Social Housing Taskforce (ZEST) was convened by the then Minister for Local Government, Housing and Planning. Sally was one of the co-chairs. It was asked to look at the opportunities, barriers and solutions required of social housing to maximise its contribution to climate change targets.

ZEST’s recommendations, which it made last summer, include:

  • there should be clear metrics and sufficient budgetary investment to ensure this is successfully realised;
  • promotion of a Fabric First approach;
  • the Scottish Government should work with social landlords to ensure capital investment for social housing is adequate; and
  • Social landlords and the Scottish Government must work together.

A Fabric First approach means ensuring that buildings are as efficient as possible so that energy used is reduced or at least it is not wasted. This will reduce energy consumption and, if demand is reduced, then heating systems should be less expensive to run. A Fabric First approach also paves the way for more effective use of zero emission heating systems technologies when installed in later years.

ZEST also said that Scottish Government should consider reviewing the EESSH2 standard, and it has agreed to do this. It has established a working group to help it with the review, and the group includes landlord representatives. Scottish Government will shortly provide landlords with interim guidance on EESSH2 which will supersede existing guidance. There may be actions for landlords flowing from this guidance. And this interim guidance will be replaced in mid-2023 when the Scottish Government anticipates completing its EESSH2 review.

The reason I mention this policy context in some depth is that much of it has still be decided and is evolving. This in turn means there is uncertainty for landlords, and we recognise that makes it difficult to plan ahead.

In short none of this is easy. Landlords have many challenges in delivering net zero, and particularly those of you working in rural areas and the islands. You are facing uncertain but significant and new costs for investing in energy efficiency and to achieve the decarbonisation of heating. More than that, many of you continue to invest in building new homes at a time of increasing costs for, and supply shortages in, labour and materials.

A theme in this session is new build v retrofit and which is the priority, and can both be achieved in the timescales? In an ideal world it would be both!!....but of course this may be very difficult to achieve. But that question can only be answered by each landlord based on its own position, resources, etc.. Clearly landlords will have to prioritise their statutory obligations, including those on tenant and resident safety, but we are acutely aware that beyond those there will be some difficult decisions to be made about how obligations and asks are met.

And you are having to think about these in the economic and policy context I have described. Moreover, our sense at SHR is that you have other significant cost pressures, whether for example in:

  • materials and labour for repairing, maintaining and improving existing tenants’ homes;
  • pressure for pay increases for staff and other staff costs;
  • energy costs for offices, costs for other office supplies, and vehicle fleet costs; and
  • increased costs of borrowing.

These are challenging and uncertain times for landlords and you face some difficult choices and decisions.

Many landlords and their representative bodies have asked how a freeze or a cap is consistent with the obligations and asks placed upon them on net zero and decarbonisation. They have asked:

  • How can we afford to do this if rental income is lost through a freeze or cap? A rent freeze clearly benefits tenants in the short term but not necessarily in the longer if it means that landlords cannot invest as planned in the quality of their housing stock or in other measures that benefit tenants.
  • How could we have afforded it any event?! The costs associated with net zero are difficult to gauge but most estimates put them in the billions. Resources are finite and tenant affordability is a key driver
  • Who pays for the new build requirements and retrofit? If the burden falls solely on landlords this will mean a) some will lack the resources to fund them and b) for those that can, some of the costs could eventually flow through to tenants, which as noted, may run counter to ensuring tenant affordability
  • Is it fair on current tenants to ask them to pay for energy efficiency measures through higher rents? This is a trade-off – but if savings in energy bills are greater than any increase in rents then overall tenant affordability is enhanced.

You might be disappointed, but not surprised!, to know that I am not going to attempt to answer these questions today! I am though keen to hear what you think and to feed back to my Board colleagues.

If the Scottish Government were speaking here today instead of me, they may well say that efforts to de-carbonise and achieve net zero are even more vital now than they have ever been given the energy cost crisis and the threat to the planet. I would though also want to say that leaving all that to one side for just a moment, the current energy cost crisis emphasises that there are real and tangible financial benefits for current and future tenants from investing in these measures.

At the Regulator my Board colleagues and staff recognise these are difficult questions to answer at the best of times, never mind right now given the challenging operating environment. The Scottish Government places the obligations and asks upon you, and so it is important that we at the Regulator know and understand what they mean for you in terms of deliverability, cost and capacity. This is because we have the task of monitoring, reporting and assessing on your progress in meeting such obligations.

We also need to understand what these obligations may mean for your finances and whether there is some other area of your service you are having to stop to free up resources and time to undertake them. And as part of our Five-Year Financial Projection return for 2022/23, we asked whether RSLs have considered the future cost of decarbonisation, and if so, what estimated costs have been projected. As I mentioned earlier, one area which landlords cannot step away from is tenant and resident safety. We have seen some landlords face real challenges in meeting the new obligations in relation to connected fire alarms and smoke detectors and electrical safety compliance checks. And this impacts on the overall level of compliance with SHQS. It is now more important than ever that landlords are assured about their compliance with these requirements. We know this will not be easy.

But ultimately, we need to know what all of that may mean for rents and their affordability for tenants.

We know that most landlords look closely at how they can manage their businesses efficiently before passing costs on through higher rents. It is now even more vital that landlords vigorously challenge every element of their expenditure to ensure that it is necessary. Landlords will also need to be able to demonstrate – principally to their tenants – that they are operating as efficiently as possible. Any planned increase in rents that is permitted needs to represent value for money, whether that’s to pay for energy efficiency measures or anything else.

And landlords should continue to have meaningful and effective dialogue with tenants around what is important to them and what they want, and can afford, to pay for. As part of that, landlords should consider how the net zero and other relevant obligations placed upon them are weaved into these conversations.

Nevertheless – and this is vital I think – there may be some real trade-offs here or very difficult choices for landlords. If you can’t do everything that you would wish to do, then what do you prioritise? I recognise there are no obvious answers to this question and many others. This is why the Scottish Government may need to consider what more it can do to help landlords to keep rents affordable and to assist with the realisation of net zero objectives. And part of this may need to be providing more direct support to landlords to support net zero objectives. I know Sally and colleagues are campaigning for increased investment above what is already available.

As you might expect we have regular dialogue with Scottish Government about all of these issues and many others. We feed back to them what we hear from the sector, and give our own view on risks, opportunities, pinch points and challenges.

I know too that Sally and her colleagues will have spoken to Scottish Government. SFHA and SHR are also on the Scottish Government’s EESSH review group, where we both have the opportunity to provide a perspective as part of the Scottish Government’s policy development process.

I look forward to hearing your views.

In conclusion, perhaps 3 points to take away:

  • We know that landlords face conflicting pressures from tenant affordability, rising costs, rent freezes and unquantified investment requirements. Reconciling these is not easy and we want to know how you are approaching this.
  • We advise you to proceed with the work to determine what level of rent increase you require for 2023/24, if any.
  • This is a challenging time and the policy position is developing at pace. Please be assured that we will take account of this in our engagement with landlords

Thank you.