Helen Shaw - Housemark Executive Insight Session - 29 March 2023
Good morning everyone, its good to see everyone today.
I have been asked to give an update on things from the Regulator’s perspective and I wanted to talk about three broad areas:
- Firstly, I wanted to talk about the financial health of the sector;
- Then I am going to touch on what we see as the key challenges facing the sector;
- And finally I’ll say a few words about our planned review of our Regulatory Framework.
So firstly, the financial health of the sector.
I think it is clearly recognised that the macro economic headwinds which social landlords are having to deal with are putting real stress on business plans at a time when there are also increasing demands which being put on landlords to support their tenants through the Cost of Living crisis, maintain and invest in their existing homes and build new homes.
We are currently finalising the outcomes from our annual risk assessment and will be publishing details of this on Friday 31 March. This will include refreshed engagement plans for all social landlords and an updated regulatory status for all RSLs.
As things currently stand, I am pleased to say that the vast majority of RSLs are compliant with our Regulatory Standards and regulatory requirements. A small number either have their status under review or do not meet Regulatory Standards and requirements and are working towards compliance. And we currently don’t have any ongoing statutory interventions. This is a positive news story for the sector. But it is important that the sector isn’t complacent and continues with the good work it is doing to deliver good services and safe warm homes for their tenants.
I attended the National Federation of Housing’s Finance conference in Liverpool recently and I was struck by the some of the key messages being discussed at that conference. There the message from the regulator was that the sector in England was not in a good place in relation to some high profile issues around stock and service quality. It faces a number of significant economic challenges which are very much reflected in the sector here. But at the same time there has been significant scrutiny on stock condition and service quality which has undermined confidence in the sector in England. One quote which made me pause was that investors had previously seen the social housing sector as stable and non cyclical but that view had now changed and while trust had not been lost, it had been shaken.
We haven’t got any evidence this is the investors view of the sector in Scotland and indeed lenders and investors continue to tell us that they remain keen to lend to what they consider a stable sector but for me, the comments from investors down south did emphasise the importance of the sector in Scotland continuing to do all that it can to protect its good reputation. It is also feasible that lenders and investors will want to know to what extent the properties they have security over have issues such as damp and mould. This makes it even more important that landlords know their stock.
The recent work that the sector has been doing to look at for example, how landlords respond to complaints from tenants about damp and mould will be an important part of ensuring that the sector protects that good reputation.
Since the introduction of the moratorium on rent increase for both social and private rented tenancies introduced by the Scottish Government last September, there has been an even stronger focus on rents. And that is right when we consider the challenges that tenants are facing with the cost of living crisis. We have recently published data on the planned rent increases which landlords will apply from April 2023:
- The average increase in weekly rents that social landlords will charge in 2023/24 is 5.07%
- The average for local authorities is 3.80%; and
- The average for RSLs is 5.34%
Now these figures also show a range of increases from 0% to 8% with the median rent increase being 5%.
So the sector has delivered on the voluntary agreement reached to maintain average rent increases to 6.1% for RSLs and £5 per week for local authorities.
But we know that landlords costs have gone up by significantly more than that. And the sector is still seeking to understand fully the consequences of the Scottish Government’s unprecedented intervention on rent policies.
Our recently published analysis of RSL finances found that in general RSLs’ financial performance was robust and that together with its strong liquidity, RSLs are in a strong position to respond to the financial challenges ahead. But these challenges are significant. And the pressure to maintain rents at an affordable level for tenants is still very much at the heart of what social landlords are about and isn’t going to go away. The recent media coverage of our report on the planned rent increases didn’t focus on the fact that the sector had delivered on the voluntary agreement with Scottish Government but instead talked about those landlords who were increasing their rents above the average level for the sector.
The other point I would make is that our report on the financial health of the sector is based on information that landlords provided to us up until the 31 March 2022. And while we know at that point the level of economic volatility and uncertainty facing social landlords and their tenants was unprecedented , we also know that since then the complex and uncertain environment that landlords operate in has only got worse.
Inflation took an unexpected rise again last week to 10.4% resulting in interest rates now sitting at 4.25%, the highest they have been at for 14 years. And while the Bank of England has indicated it expects inflation to fall to around 4% later this year, it is unlikely that we will see the costs of material and labour drop back in any significant way for the foreseeable future. And commentators expect that this will mean further increases in interest rates before this stabilises later in the year.
When you also consider that the increases in inflation are being driven by soaring energy costs and rises in the cost of food and that pay increases for many people aren’t keeping up with rising prices, it is clear that this has the greatest impact on those with the lowest incomes. And it is also important to bear in mind that even if inflation does start to come down that doesn’t mean prices will fall. It just means that they stop rising as quickly.
And that takes me on to the challenges which we see facing the sector.
We have talked extensively about the events which have shaped our world over the last couple of years – a global pandemic , Brexit, the war in Europe, political turmoil in the UK and soaring inflation which has all led to huge disruption, uncertainty and volatility. And there is no indication that that difficult and unpredictable context isn’t going to continue for some time to come.
That means a world of:
- Inflation running well above the headline rate of CPI for social landlords – sometimes up to 20% ;
- Higher interest rates impacting particularly on the current and future cost of borrowing; and
- Significant demand on landlords to continue to support tenants facing real financial hardship.
Alongside that there are increasing requirements on the quality of homes that social landlords own – including on energy efficiency and zero emissions heating. And we know that landlords have not yet been able to fully quantify what that will cost and how that will be funded.
There are new and continuing issues which are impacting on social landlords such as increases in insurance costs and indeed difficulties obtaining insurance in the sector, alongside problems such as the issues that landlords are facing with energy companies reconnecting energy supplies in empty homes.
We are seeing record numbers of people in temporary accommodation and rising levels of homelessness. Our recent report on homelessness found that some councils are finding it increasingly difficult to fully meet their statutory duties on homelessness, particularly providing temporary accommodation to people experiencing homelessness.
While we saw that councils were making considerable efforts in very challenging circumstances to deliver effective services, we also found an emerging risk of systemic failure in homelessness services. And while we said that there are actions that councils can and should take to respond to these issues and we know that the Scottish Government has put in place in a wide range of policy actions aimed at ending homelessness in Scotland, we also said that the Scottish Government may need to consider what further urgent measures it can take to support Councils to respond to the immediate challenges they face in delivering services to tenants.
There is also still a lot of uncertainty in relation to the policy context that social landlords operate in. We now have a new First Minister in Scotland so we will need to wait to see what, if anything that means for the Scottish Government’s Housing to 2040 strategy.
We are also awaiting the outcomes of the Scottish Government’s review of EESSH2 and the conclusions of the government’s work on a common understanding of rent affordability. And there is a Housing Bill scheduled for later in the year which will look at rent controls in the private rented sector and what this may mean for example for those social landlords who provide Mid Market Rent accommodation as well as homelessness prevention duties.
And with an eye to what is happening down south on mandatory standards for dealing with mould and damp problems and proposals for mandatory qualifications for housing managers there is clearly a lot to consider.
We are aware that all of this uncertainty and volatility can impact on the resilience of the sector to deal with the scale of the challenges.
We have seen the planned retirement of a number of senior and experienced staff from the sector and some of this may have been expedited by the challenges of the last couple of years.
And we have heard discussions starting about the capacity and confidence of the sector to address all of the pressures and challenges it faces. Some of this is around the technical skills to deliver on some complex agendas around for example net zero and decarbonisation.
We know that landlords are also facing issues with contractors, suppliers, partners and other public services which social landlords rely on to deliver a service to their tenants.
How do governing bodies make informed decisions about
- the standard of service to provide to their tenants,
- how do they ensure that they know they are providing their tenants with warm, safe homes which their tenants can afford to live in; and
- how do governing bodies decide on where to strike the balance between investing and maintaining existing homes and providing new homes.
These are all decisions for individual governing bodies but there are some things that we would consider important for landlords to think about when they are making these choices:
- have you got the right information to make these decisions? Do you have good quality comprehensive data about the condition of your homes and do you have a good understanding of your tenants priorities?
- How do you build the right capacity and expertise within your organisation to help support these decisions and deliver the services and homes that your tenants need?
- How do ensure that you have the investment and plans in place to deliver that?
We recently published updated Asset Management Recommended Practice which I would encourage you to read, if you haven’t already. This sets out a principles based approach to asset management which shows how landlords can connect the assets it owns, with its investment plans and the needs of its tenants.
And we have also started to hear conversations about how the sector can focus on the most critical and immediate issues that it faces. So for us what that means is not forgetting about the long term focus on where the sector wants to get to but also thinking about how we deliver in the short and medium term on the most pressing priorities. It will be important for the sector to have a candid discussion about what those short, medium and longer term ambitions are. From my perspective, the sector has a long track record in delivering for the needs of its tenants adapting to new challenges which have emerged over the years. It is important to hold on to that. And the fact that the Scottish Government has now convened the first meeting of the Housing to 2040 Strategic Board will be a first step towards taking these important strategic discussions forward.
And that leads me to the final area that I wanted to talk about.
We have now started our review of our Regulatory Framework. The current Framework came into operation in 2019 and we are required to review this Framework after five years.
Based on early conversations we have had with stakeholders, we have been getting a strong sense that:
- Our current Framework still relevant and works and much of the Framework remains relevant and appropriate:
- It remains right that we put landlords assuring themselves, their tenants and us remains at the heart of our regulatory approach;
- But that there could be more emphasis in the importance of landlords listening to their tenants and
- an even stronger focus on the quality of services, quality of homes and tenant and resident safety.
We are also getting a strong sense that given the wider challenging context, most landlords are looking for more certainty rather than more change at the moment.
We have had some feedback that there is a fair degree of support for the Annual Assurance Statements that landlords submit to us each year. Some landlords have told us that their Annual Assurance Statement has helped governing bodies and committees effectively consider their compliance levels. One thing we might want to test however is whether we should seek greater assurance on the veracity of Annual Assurance Statements.
In this coming year, we will restart a programme of Annual Assurance Statement visits to find out more about the self-assurance work landlords carried out to enable them to create and submit their AAS. We intend to carry out visits to around 10 landlords with the purpose being to understand the process being undertaken by landlords and ensuring the Governing Body, Management Committee or Local Authority Committee has assured itself about its compliance and the accuracy of the data they have reviewed.
This work will have two key focuses; firstly considering the level of information and assurance the Governing Body, Management Committee or Local Authority Committee has assessed on a specific area, namely compliance with its tenant and resident safety duties. And secondly; considering how the Governing Body/Committee has assured itself on the accuracy of the data provided in the Annual Return on the Charter (ARC).
We will publish an Outcome Report detailing what we learned from this programme of visits and we will also consider the outcomes of this process as part of our review of the Regulatory Framework.
Other areas for discussion as part of the framework review also include the suite of Charter indicators we collect and we are considering whether we need indicators around tenant and resident safety. We are also considering our approach to Notifiable Events and also our work on thematic studies. Those are some early thoughts on areas to consider and we are very keen to hear views from the bodies we regulate to help shape our thinking on this.
Our intention is to follow a similar process to the last consultation we carried out on our Regulatory Framework. So we intend to issue a discussion paper ahead of the formal consultation and used this information and feedback to firm up our formal consultation.
We anticipate that we would issue the discussion paper in June and take forward our conversations over the summer, with a view towards commencing the formal consultation towards the end of October.
The consultation would then close just before Christmas and we aim to publish the new Framework ahead of it being implemented on 1 April 2024.
I would be particularly interested in hearing from people today about their views on the Regulatory Framework so I’ll pause these and happy to take any questions.