Helen Shaw - SFHA Finance Conference - 14 November 2023


14 November 2023


14 November 2023

Helen Shaw - SFHA Finance Conference - 14 November 2023

Good afternoon everyone and it’s good to be here in Aviemore to speak to you all today.

I have been asked to discuss the economic landscape for RSLs, our current work and priorities at the Regulator and what we see in the year ahead.

So some pretty chunky topics to cover in the space of half an hour or so!

Economic landscape

I think it’s fair to say that I don’t recall a time when social landlords and their tenants have faced such significant economic challenges. The economic uncertainty and volatility over the last three years or so has been unprecedented and at times has almost felt pretty relentless.

We’ve had to emerge from all of the consequences of the pandemic, there is the war in Ukraine and more recently the conflict in the Middle East which have all had significant economic impacts on the world we live in.

As a result, the cost of living crisis has placed terrible pressure on landlords and their tenants.

Inflation remains high as do interest rates and while it looks like the rate of increase has slowed, both inflation and interest rates remain much higher than has been the case for quite some time.

Alongside that, RSLs continue to face increasing, and sometimes competing, pressures on resources.

So whilst costs have been rising RSLs also have to consider how to meet the increasing requirements on quality of homes – including on energy efficiency and zero emissions heating.

RSLs are having to consider how to invest in their existing homes and whether to provide new homes at the same time as keeping rents affordable for tenants dealing with the cost of living crisis.

It all makes for some pretty bleak times and can feel quite overwhelming but it’s important to remember that the sector’s finances are not in crisis or broken.  Despite the challenges, the sector’s finances remain resilient

We have been saying for some time now that we recognise that RSLs have been facing significant challenges. And it is to the sector’s credit that we are continuing to see most RSLs effectively managing these challenges.

Most recently, our publication of the loan portfolio analysis at the end of October highlighted that despite inflationary pressures and global instability all contributing to such a challenging economic and operational environment,  lenders are still willing to lend to the sector. This is really important and shouldn’t be overlooked.

So at the end of March 2023, RSLs had £6.7bn in debt facilities available, with £5.8bn of that debt drawn.

During 2022/23, 25 RSLs arranged new finance totalling £578m and that compares to £352m in the previous year.

So at March 2023, RSLs had available cash and undrawn facilities of £1.65bn. And as we have highlighted in our recent report, while this is a reduction of £160m compared to the previous year, we are seeing that RSLs’ liquidity in aggregate terms remains strong.

I’ve highlighted in this slide some of the key findings from our analysis of the loan portfolio returns:

How much debt do RSLs have?

  • The total value of facilities available to RSLs increased by 2.45% over the year to £6.71 billion.
  • The average amount owed per home increased by £622 from £15,595 to £16,217 per unit.
  • The total amount drawn down is forecast to exceed £6.68 billion by the end of 2028

How has that debt changed?

Most of the new funding arranged in 2022/23 was traditional bank lending.

It accounted for 93% (£538 million) with four lenders accounting for 85% of this amount.

Capital market funding, including private placements accounted for 7% (£40 million) of the total.

Who lends to RSLs?

Thirty-four different lenders and investors help fund the sector providing 1,176 loans, to which more than 2,020 lending covenants are attached.

The three largest lenders Royal Bank of Scotland, Lloyds Group and the Nationwide Building Society manage 56% of the value of all facilities available between them.

It won’t be news to anyone in this room but it’s important to remember that as the Bank of England sought to reduce inflation through interest rate rises during 2022/23, the cost of debt increased substantially.

So we saw that RSL expenditure on interest costs was £201.7 million in 2022/23. This represented approximately 13% of landlords’ income from gross rent and service charges.

In the last year, we have also seen the usual broad range of interest rates with the majority either traditional fixed interest rate loans or variable interest rate loans referenced to SONIA or the Base rate.

In 2022/23, £172 million (30%) of new loans were at a fixed interest rate compared to £406 million (70%) at a variable interest rate.

This is a reversal of the position in 2021/22 where £232 million (66%) of new loans were at a fixed interest rate and £120 million (34%) were at a variable interest rate.

This may reflect continuing economic uncertainty regarding interest rates and their future direction, potentially indicating a reluctancy to lock into the current higher fixed interest rates over the medium to longer term as RSLs anticipate possible future interest rate reductions. Sourcing variable rate debt, including revolving credit facilities, will allow greater flexibility for future refinancing.

When RSLs are faced with periods of economic uncertainty, which seems to have become our reality now, it is essential they maintain sufficient liquidity and also that they maintain the confidence of current and future lenders and investors. 

As the cost of debt has increased materially and financial markets continue to shift, it is also vital that Governing Bodies maintain the skills and expertise to understand and ensure that the financial products supporting their business are the appropriate ones for the RSL and that they are able to access independent financial advice.

Over recent months some RSLs have reported potential covenant breaches to us around interest cover requirements. This is primarily linked to catch-up expenditure on capitalised repairs and planned maintenance work which was delayed due to Covid. 

So it is really important that Governing Bodies continue to have a clear strategy to monitor their covenants effectively and manage their relationships and communication with funders. It is important Governing Bodies have an effective approach to Treasury Management to comply with Regulatory Standard 3.

We are also shortly about to complete our analysis of the financial projections and our report on the financial health of the sector  and we are hoping to publish this before Christmas.

Last year when  I spoke on this platform, I said that we saw that in general, RSLs had withstood some pretty difficult economic and operating conditions and their robust financial performance and strong liquidity meant they remained in a relatively strong position to respond to the financial challenges they faced.  Although we also recognised that those challenges are significant.

In this year’s AFS return we have seen that in general RSLs have continued to withstand the difficult economic and operating conditions.  This robust financial performance and strong liquidity continues to mean they remain in a relatively strong position to respond to the financial challenges ahead, although again as I have said these challenges remain significant.

In terms of what we are seeing from our analysis, at an aggregate level in 2022/23, RSL:

  • turnover increased by 4.28% to £1.99 billion;
  • affordable lettings turnover rose by 6.81% to £1.76 billion, contributing 88.36% of total turnover. This includes gross rent receivable & service charges of £1.54 billion, a rise of 4.89%;
  • operating costs increased by 5.67% to £1.64 billion, below inflation, but above average rent increases during the period;
  • planned and reactive maintenance costs rose again this year, rising by 4.16% and13.77%;
  • operating surplus after exceptional items dropped marginally by 3.40% to £367.64 million;
  • affordable lettings surplus was slightly higher than the prior year
  • despite challenges from the pandemic and the economic turmoil, RSLs continued investing in new and existing homes, with net housing assets up by £741.79 million to £15.68 billion by 31 March 2023;
  • cash balances decreased by £115.49 million to £776.72 million;
  • cash generation from operating activities increased from £603.38 million in 2022/23 to £616.57 million;
  • interest payable increases caused a 15-percentage point reduction in EBITDA MRI interest cover, which was down to 246.22% for 2022/23;
  • voids, arrears and bad debts at 31 March 2023 either remained around the previous year’s levels or showed some improvement, demonstrating the positive impact of the work done by RSLs to mitigate these;
  • in aggregate, the average rent increase for RSLs rose well below both CPI and RPI.

Some of this suggests that the sector’s aggregate financial performance is being squeezed but it is still remaining robust.  

RSLs submitted their projections to us earlier this year, at a time when the economic outlook remained extremely uncertain and volatile. And while since then the longer-term outlook has shown some modest signs of improvement, RSLs have also continued to face uncertainty in the national and global economy.

This has contributed to the cost-of-living crisis, alongside sustained and significant cost increases, higher energy costs, continuing supply chain disruption and labour scarcity.  

The Scottish Government’s emergency legislation that brought in a freeze on rent increases during 2022/23 was not extended beyond the end of March 2023 for social lettings preventing the estimated removal of up to £60 million in rental income from RSL business plans. 

Our analysis of the inflation assumptions that RSLs have made in their financial projections compared to the most recent figures published by the OBR in March 2023 shows aggregate rents increasing by more than CPI forecasts but by less than RPI forecasts in Year 1 of the projections.

And although RSL are projecting the average rent increase to fall in each of the subsequent years, they are still assuming rent increases will stay above both CPI and RPI inflation for the remainder of the projections period.

Six months on from the OBR publication, the likelihood is that inflation forecasts, for 2024/25 at least, will not be as low as previously forecast, so this means the gap between the sector’s  average rent increase assumption and CPI/RPI for next year may be narrower.

Over this financial year and last, interest rates have risen from a record low of 0.1% to 5.25%, their highest level for more than 15 years although there may now be the first clear signs that the Base Rate has finally peaked having now been held at that rate for 2 months. Despite that, we have estimated that every additional 1% rise in interest rates, could put RSLs’ aggregate debt servicing costs up by around £14.5 million a year. Rising interest rates are also likely to result in a reduction in interest cover for many RSLs. 

It is in that context, that RSLs are looking to deliver on tenant and resident 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. And a reduction in financial headroom will reduce some RSLs’ capacity to manage any additional financial shocks. 

Around 30% of total RSL loan debt outstanding at 31 March 2023 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.

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, the sustained financial pressures on tenants means that RSLs cannot yet rule out further increases in arrears. 

The building of new homes remains a key priority for the SG and RSLs continue to play a key role in delivering this. The total number of new homes RSLs forecast to build has dropped to 26,000 but despite that, costs are only marginally down at £4.82 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.

The potential for further interest rate rises has not gone, and that along with still stubbornly high inflation, the scarcity of materials and increased labour costs can all still impact on the number of new homes RSLs can deliver.

This highlights the importance of effective oversight and management of development programmes by RSLs. Our development thematic  which we published back in 2015 is still an important reference for RSLs when they are making decisions about whether to undertake a development project. And we know that  some landlords are looking closely at whether it is the right decision for their organisation and tenants to continue to develop.

The Work of SHR

So the other topic I wanted to talk about here was our proposals to review our Regulatory Framework.

We’ve now published our formal consultation on our proposals so today is a really good opportunity to hear what you think about this. Some of our Board and our staff are here at the conference as well so please do talk to us if you get the chance over today or tomorrow.

You will be aware that in June 2023 we launched a discussion paper on the future of social housing regulation in Scotland. In the discussion paper we set out our emerging thinking on potential changes to our regulation of social landlords in Scotland, and we invited our stakeholders to give us their views on our early ideas.

We had a great response to the discussion paper. We received 64 written responses.

It was good to get such valuable feedback and the Regulatory Framework and statutory guidance we are now proposing has very much been shaped by this  feedback and will continue to be shaped by your responses to this consultation.

It would be really good to hear your views today on our proposals. And I would encourage you, if you can to submit your views to us by 15 December.

In the meantime I wanted to highlight the key changes we are proposing to the Regulatory Framework that I think will be of most interest to you today.

Regulatory priorities

In our discussion paper we suggested that the priorities for our future work should focus on social landlords:

  • listening and responding effectively to tenants and service users
  • providing good quality and safe homes
  • keeping homes as affordable as possible
  • doing all they can to reduce the number of people who are experiencing homelessness

We also proposed to continue our focus on equality and human rights in all landlords and governance and financial management in Registered Social Landlords (RSLs).

Most respondents agreed that these priorities are important.  There was a strong message that we should broaden our priorities to include specific reference to net zero and decarbonisation. 

A significant number of respondents also asked that our priorities reflect the current economic climate and the impact that this is having on landlords’ ability to provide services and improve homes while keeping rents as low as possible.  Some respondents asked that we be as clear as possible on what our expectations will be on how landlords contribute to reducing the number of people who are experiencing homelessness.

We are using the discussion paper feedback on our priorities to inform our Strategy for 2024 onwards. Our Strategy will set out our priorities, where we will focus our work and how we will communicate and engage with stakeholders.  We will aim to publish our Strategy in April 2024.

I wanted to highlight today four key areas in our consultation.

Annual Assurance Statements

In the discussion paper we proposed to add a provision to the statutory guidance to enable us to require landlords to include explicit assurance in the Annual Assurance Statement (AAS) on a specific issue or issues. We also proposed that we would communicate any specific assurance requirements to landlords in advance of their submission of the AAS.

Most respondents supported this proposal, while stressing the importance of us providing adequate advance notice of any additional assurance required

We propose to maintain the requirements in the Regulatory Framework on the AAS, and to amend the statutory guidance on AAS to include a provision to enable us to require landlords to include explicit assurance in the AAS.  And we are proposing that we would let landlords know about any specific requirements by April each year.

Annual Return on the Charter

In the discussion paper we proposed to develop and introduce to the Annual Return on the Charter (ARC) specific indicators on tenant and resident safety. We also proposed  to develop appropriate monitoring of the effectiveness of landlords’ approach to managing reports and instances of mould and dampness. 

We also invited views on the continuing appropriateness of existing ARC indicators.  We highlighted that we would bring forward revised indicators for the Energy Efficiency Standard for Social Housing (EESSH) when the Scottish Government’s EESSH Review Group concludes its work.

There was general support from respondents for indicators on tenant and resident safety, although some noted that they did not feel they could comment until we gave more information on the specific indicators we were thinking of including.

Some respondents highlighted that these matters are already included in the Scottish Housing Quality Standard or may be difficult to define and operate effectively.  There was a strong view, especially amongst landlords, that indicators on damp and mould will need to be carefully developed and defined – a number suggested that we establish a cross-sector working group with appropriate experts to develop these.  Respondents highlighted a number of existing indicators which they felt were of limited value.

Taking account of this feedback and recognising that the Scottish Government’s EESSH Review Group has not concluded its work, we believe that there is merit in taking the time to undertake a comprehensive review of the ARC indicators involving relevant experts and people from the social housing sector. 

We propose to establish an appropriate working group, or groups, to work with us to consider all of the indicators in the ARC and advise us as we develop appropriate indicators for tenants and resident safety, damp and mould, and EESSH.  We would then use the input from these groups to determine what indicators to include in a revised ARC. 

We would aim to consult formally on the revised ARC indicators next year with the new ARC being in place for collection year 2025/26. In the meantime, we would continue with the existing ARC. We would use the AAS to require landlords to give us specific assurance on their compliance with their tenant and resident safety obligations, including their performance in dealing with instances of mould and damp.

Notifiable events

In the discussion paper we proposed to streamline our approach to Notifiable Events to ensure that landlords bring the most critical issues to our attention while not being overburdened by notification requirements.

While respondents welcomed the principle of streamlining the Notifiable Events process, many respondents noted that the current process works well, with some suggesting a range of relatively minor changes, for example, that some events could simply be a notification and rather than being reported as a notifiable event. 

We propose to make some changes to the statutory guidance on Notifiable Events to ensure it is clear that we require landlords to notify us of the most significant issues only.  We will further emphasise the importance of landlords contacting their lead regulation manager  to determine whether something is a Notifiable Event.  We will also look to develop ways to share more information with landlords on the type of Notifiable Events we receive and what we do with those.

Regulatory Status

Our current regulatory framework introduced a regulatory status for RSLs and this has been an effective addition for us, delivering greater transparency on our regulatory view of RSLs.  Some stakeholders had suggested that we should use more direct language around the working towards compliance status and some suggested an additional regulatory status between the compliant status and the working towards compliance status. 

So in the discussion paper, we asked for views on both of these areas.  

There was a mix of responses and no clear consensus amongst respondents on changing the format of the regulatory status, with some supporting the current approach while others supported further development of the approach to regulatory status.  More respondents supported a shift to more direct language in the working towards compliance status. 

We propose to maintain the current approach of having three regulatory statuses, and to amend the language in the second and third statuses to make clear that these are non-compliant statuses.

We are also consulting on proposed changes to the statutory guidance which accompanies the Regulatory Framework.  Most of these are simple updates to reflect changes in relevant legislation and regulations that have happened over the last five years. They are also designed to reflect our application of guidance over the last five years, and to ensure that equalities are appropriately referenced in guidance that is relevant to tenants and service users.

Of most interest to the audience today will perhaps be:

  • Annual Assurance Statement
  • Determination of accounting requirements for RSLs
  • Financial viability of RSLs
  • Notifiable events
  • Preparation of financial statements
  • Section 72 reporting events of material significance

I am hoping that given the relatively minor changes we are proposing,  people will think these are all sensible changes but please do have a look at these and let us know if you have any comments on these.

We are also now doing some work to review all of the advisory guidance that supports our Regulatory Framework. This includes for example our business planning recommended practice. While we aren’t required to formally consult with stakeholders on this, we have already committed to sharing our thinking on any planned changes with the SFHA and other stakeholder representative bodies.

What does the year ahead hold?

For us as a regulator, as well as our review of our regulatory framework which we will require to implement on April 2024, we have now started our next annual risk assessment. We will shortly be publishing information on the risks we will focus on in this year’s annual risk assessment. But I don’t think there will be too many surprises in this for people.

Our annual risk assessment is one of the key ways we decide on the regulatory engagement we need to have with landlords. And in the uncertain and volatile environment I have mentioned earlier, this is a critical piece of work. We will continue with a strong focus on the performance of social landlords and the governance and financial management of RSLs.

I also wanted to highlight that as a relatively small public body, we like others in the social housing world, have seen a number of our key staff retire over the last year or so or plan to retire in the coming months. We have been able to recruit a number of new people with  a range of financial, regulatory and analytical skills and if you have a new regulatory contact and you haven’t already spoken to them to introduce yourselves, I would encourage you to make that contact.

With these staff changes we have also been able to restart some key pieces of work eg the annual assurance statement visits and a small thematic programme.

When you look at the year ahead, it is hard however to get away from the continuing economic uncertainty.  If I had to say what would be most important priorities, I would highlight:

  • Maintaining a focus on liquidity and treasury management will be vital alongside risk management. I have mentioned already the impact of the recent rapid increases in interest rates on the costs of borrowing.
  • RSLs are planning to cut back or delay investment in existing homes, with an aggregate figure of more than £15 million being cut from expenditure plans in some of the next five years. What is the impact on tenant satisfaction, asset management and tenancy sustainability?
  • Many RSLs undertake a range of activities which benefit their tenants and communities but are not core housing services, such as welfare and energy advice. This is a relatively small area of expenditure for most RSLs, but they plan to almost halve expenditure on these other activities in the future. Again what impact will this have on tenancy sustainability.

Interest rates may have steadied in the last couple of months but they still remain high and we know that the longer term financial plans of RSLs are based on interest rates returning to lower levels. The question is will this happen?

And what will happen with inflation and will this impact on costs? I’ve mentioned already the impact of rising building costs. And landlords are also telling us they are facing significant increases in for example  insurance premiums and energy costs as well as upward pressure on staff costs.

And as part of our Five Year Financial Projection return last year, we included a line for decarbonisation costs.  35 RSLs included costs on decarbonisation last year.  This year that has dropped to 26.  On the face of it we would have expected/hoped more RSLs would be making an assumption on costs.  However we’ll get behind the reasons for this over the coming weeks.

EESSH2 review and the decarbonisation agenda

The Scottish Government will be consulting on its proposals for EESSH2 and while the guidance was that where possible landlords should continue to invest in energy efficiency measures where they can, as I have said, we can see  fewer RSLs  have made provision in their financial projections for this work. It is therefore really important that landlords have clarity on what they will be expected to deliver and by when so that they can plan for this.

Other things to be aware of

  • Forthcoming housing bill - the impact of for example future rent controls in the private rented  sector and the potential impact for example on further increases in levels of homelessness applications. 
  • Continued focus on homelessness - not just as an issue of housing supply. 

Our recent thematic review of homelessness services in Scotland found that some local authorities are finding it increasingly difficult to fully meet their statutory duties on homelessness, particularly providing temporary accommodation when it is needed. And RSLs have a key role in this.

We said in our report that the Scottish Government may need to consider what further urgent measures it can take to support local authorities to respond to the immediate challenges they face in delivering homelessness services especially for some local authorities where  there is a risk of systemic failure.

In July 2023, in response to the recommendations made by the Temporary Accommodation Task and Finish Group, the Scottish Government announced plans aimed at reducing the number of households in temporary accommodation.

The latest homelessness statistics published by the Scottish Government showed in the year to the end of March 2023 the number of homeless applications rose, there were more people and children than ever before in temporary accommodation, and that they are spending longer in such accommodation.

And we have now received Annual Assurance Statements from all social landlords at the end of October and we are embarking on a further round of conversations with all local authorities about the progress in their area on homelessness.

We plan to consider all of this intelligence and publish an update to our thematic later this year.

For many the answer lies in an increased supply of new social homes and I’ve already flagged what we are seeing in terms of the challenges of delivering new homes.  


I concluded my speech at the SFHA Finance conference last year with a reference to this quote from our correspondence to the sector in 2022. I think this is still extremely relevant today:

“An urgent and comprehensive review of business plans, and keeping these under review, will be critical to ensure landlords fully understand and factor in the current and developing context to understand the impact of this on their rent levels and their ability to deliver effectively for tenants and other service users. It will be important that RSLs stress test their business plans around a range of assumptions, including increasing interest rates, above-inflation cost increases, increasing levels of arrears, sustained high inflation, and sub-inflation rent increases.”

SHR letter to sector 7 October 2022

As a regulator, we have seen the way in which the sector has responded to a range of challenges over the years, adapting to these new challenges, developing the resilience of organisations and ensuring a clear focus on what is important for the tenants who are at the centre of what housing associations are all about.

In closing, I would say that an organisation that knows what is important to its tenants, has a good understanding of its houses and is regularly reviewing its business plan to understand what the impact of the economic challenges is will be in as good a place as possible to deal with whatever the year brings.