Ian Brennan - SFHA Finance Conference - 16 November 2021


18 November 2021

Ian Brennan - SFHA Finance Conference - 16 November 2021

Good afternoon everyone.

It’s great to be here at this “in-person” conference.

I have gone for a simple past, present and future structure for my session today.

First of all a quick look back at some of the key moments in the last 12 months.

And then a brief reflection on where we are now.

And then, perhaps more importantly, where do we think we might be headed?

And what risks and issues are waiting for us there?

And then I will finally try to draw all of this together into some sort of conclusion.

The first thing I want to talk about is the provision of services for homeless people.

This has always been a priority for SHR.

In December last year we wrote to all local authorities asking them to flag to us any difficulties in maintaining access to homelessness services.

And we had a change of approach this year.

In our risk assessment in the previous year we selected 27 out of 32 local authorities for engagement around homelessness services

But we felt that given the challenges presented by the pandemic that it made sense to engage with all 32 local authorities.

That’s been time consuming both for local authorities and ourselves.

But I think it’s been mutually beneficial.

Authorities have a clearer idea of what the Regulator expects and requires.

And we have greater insight into homelessness services nationwide.

It’s been an interesting year for statutory interventions.

There have been no new interventions at all.

I often get asked by people what it means that we are using our intervention powers less often.

The answer is very straightforward.

It means that we haven’t come across a situation where we felt that it was appropriate to use our powers of statutory intervention.

Just last month we published a report which set out how we use our statutory powers.

We use our statutory powers proportionately

And in accordance with the Housing Act 2010 and our own regulatory framework.

And we take account of the particular circumstances in each engagement and we act accordingly.

The Regulator’s only objective at the point of intervention is to ensure that the tenants and residents have the services of a functioning social landlord which complies with regulatory standards.

We concluded 2 interventions this year.

Thistle and Ruchazie.

And these 2 interventions show that there are very different ways to take care of tenants interests.

Two entirely different outcomes.

Ruchazie continues as an RSL after it was able to resolve all of the issues that led to intervention.

And all of Thistle’s assets and liabilities were transferred to Sanctuary Scotland after an options appraisal showed that this was the best way forward for its tenants and residents.

So these 2 contrasting cases show that the path to ensuring that tenants have the services of a landlord that complies with standards can vary considerably.

But, in both of these cases, we achieved our objective for tenants and residents.

We hope to publish the reports on Ruchazie and Thistle by the end of the year.

And now we only have 1 current intervention case.

And we anticipate that that will be concluded before too long with the transfer of Fairfield’s assets and liabilities to Kingdom.

Moving on now to regulatory status.

In March this year, for the first time, we attached a regulatory status to each RSL following a comprehensive risk assessment.

This was the final part of our revised regulatory framework to be implemented.

We had planned to do this in 2020.

But the pandemic meant that we had to shift our focus to the impact of the lockdown on landlords.

So we were pleased to complete the process this year.

The outcome as you can see was that around 94% of landlords were judged to be compliant with regulatory standards.

And we have been impressed by the way in which, for the most part, landlords who were not judged to be compliant or have had their compliant status under review have engaged with us.

For me this highlights the strength of the regulatory framework and how it can help landlords to improve outcomes for tenants and residents.

Now I want to cover sector finances.

This is based on our analysis of financial statements and loan portfolio returns.

Annual aggregate turnover is around 1.8bn.

Those of you who have been around for as long as myself will recall when the sector turnover hit 1 billion.

Aggregate surplus was just over £250m, continuing the upward trend of recent years.

Available cash was £835m, an increase of more than £100m.

Not at all surprising really given the lockdown restrictions

Cash generated was also up, more than half a billion pounds for the 2nd successive year.

Interest paid on debt rose by £17m to £191m

And interest cover increased to 262%

Net Housing assets were up by £960m to more than thirteen and half billion pounds.

On pension provision, we saw an increase in the number of RSLs providing ONLY defined contribution pensions. That rose to 69 from 64 in the previous year.

And outstanding borrowing hit the £4.5bn mark.

There were three new investors in Scottish social housing – Scottish Widows, Sun Life and the Pensions Insurance Corporation.

For me the entry of these new investors in addition to the continuing commitment of so many long standing investors that represents a considerable vote of confidence in how the sector is managed, governed and regulated.

In the past 12 months there have been significant developments in relation to the Economic, Social & Governance (ESG) agenda. The publication of the Sustainability Reporting Standard for social housing is a particular milestone and there is keen lender and investor interest in this subject. I am pleased to see that there is a session on ESG at the conference.

And finally in this section I want to mention some intelligence that we have gleaned from the aggregate Annual Report on Charter or ARC returns.

Here I think you can see quite clearly what we might call the pandemic effect.

Void losses increased by more than 50% and average days empty increased by around 80%.

And arrears increased by around 10%.

I recall that early in the pandemic, conventional wisdom was that arrears would be up by around 20%.

But we know that at least part of this story is that special measures such as the furlough scheme were in place.

And these special measures have mitigated the impact of the pandemic especially in relation to areas such as arrears.

I also want to focus briefly on what the ARC tells us about rents and rent levels.

Landlords tell us through the ARC about the rent increase that they are planning for the following year.

The average increase from the 2020 ARC in 2021 was around 2.7%.

But the planned increase in the 2021 ARC is less than half of that, 1.2%.

And just to put that in historical context, we have never seen that number so low in recent times.

Over the previous 6 years it has been as high as 3.2% and as low as 1.9%.

Clearly this reduction in the planned rent increase will be welcome news for tenants.

Especially given increasing energy costs and the end of the £20 universal credit uplift.

But equally clearly this reduction means that, for many landlords, their actual income will be less than they had previously projected in forecasts and business plans.

And I know that landlords are already turning their attention to what that will mean in terms of cost control, value for money and driving improvement.

So where are we now?

Last month our colleagues at the English regulator published their annual sector risk profile.

It’s a good read, I would thoroughly recommend it.

They concluded that landlords reacted well to the pandemic and developed new ways of working.

But they also sounded a note of caution about the scale of challenges that landlords are likely to face given the uncertain economic outlook.

Those sentiments apply equally in Scotland.

Our view is that the sector moved at pace to adapt to the new and challenging environment in which landlords found themselves operating.

And did so in a way that provided a good level of protection for their tenants and service users.

But there remains a lot of uncertainty for landlords to manage around the future economic context. And I will come on to this shortly.

Moving on now to future trends and risks.

We will be publishing towards the end of this month our view on sector risk and the risks that we will be focussing on.

But for now I want to share some early analysis with you from the risk assessment that we are currently undertaking.

Our analysis shows that the average rent increase per year forecast by landlords for the next five years is inflation plus 0.4%

And the average increase in costs forecast over the same period is inflation plus 0.2%.

My overall reaction is to wonder to what extent is this going to be achievable.

For example with inflation on its current trajectory will it really be affordable for tenants to increase rents in real terms by almost half a per cent each year?

And with the current well known issues around supply chains, materials shortages and a highly stressed labour market can the increase in operating costs be held at inflation plus one fifth of one per cent?

So clearly cost control, value for money and driving improvement need to be at the heart of every landlord’s business plan.

I want to say something now about the broader risk landscape that landlords are facing.

First of all on the decarbonisation agenda.

I am sure you will be familiar with the work of the Zero Emission Social Housing Taskforce or ZEST.

This was convened by the Minister for Local Government, Housing and Planning to consider and provide practical recommendations on what is required of the social housing sector to maximise the sector's contribution to the Scottish Government's ambitious climate change targets.

The Zero Emission Social Housing Taskforce (ZEST) has recommended a “fabric first” approach for social housing. It’s important for landlords now to be considering what this might mean for their stock and their business plan.  And, as part of our Five Year Financial Projections return next year, we plan to include a line for decarbonisation costs.

Tenant safety remains a key priority for landlords as it does for the Regulator.

Tenant safety has been an issue in a number of our recent intervention cases and in other engagements.

Landlords that had thought they were compliant with all of their legal duties around the safety of their tenants later discovered that they weren’t.

I would urge all landlords to use the annual assurance process to get comfort that all is in order in relation to tenant safety.

As recently as September this year we wrote to all social landlords around gas safety.

And we said that landlords should have the necessary training, skills, experience and knowledge in place to recognise danger and take appropriate action to ensure tenant safety.

We said this in the context of gas safety.

But those sentiments apply across the entire field of tenant safety.

We have heard a lot recently about supply chain issues and landlords having difficulty getting access to the materials that they need and the expertise that they need to perform landlord functions.

Governing bodies will be seeking to assure themselves that they fully understand this challenging operating environment and how this impacts on the delivery of services for tenants.

And of course all of this will have to be done while keeping rents affordable for tenants in a highly uncertain economic context.

I would ask all landlords to look closely at Regulatory Standard 3 on rent affordability and financial sustainability when you are completing your annual assurance statement.

It’s important to understand not simply what you do now to comply with Standard 3.

But also what you may have to do in the future.

Scenario planning and sensitivity analysis are key tools here.

We have heard a lot in the past 12 months around cybersecurity.

I would like to take the opportunity to say thanks to the Scottish Environmental Protection Agency.

In 2019 they suffered a serious cyberattack.

Their openness and willingness to share lessons learned has been exemplary and has raised awareness across Scotland and beyond

I would recommend the material available online to anyone with an interest in this area.

And to talk about this at Board level.

And this is a very useful area for your internal auditor to review.

Moving on to pensions.

I know that a number of landlords are adjusting their business plans based on the likelihood that providing defined benefit pensions will cost more in the future than it does currently.

It’s for each landlord to take a view on whether it wishes to provide defined benefit pensions.

From a governance perspective its vital that you consider pension affordability in the context of Regulatory Standard 3.

I talked earlier about cost control. And clearly in the current economic climate that has to be a high priority for every landlord.

In our business planning guidance we suggest that zero based budgeting is a useful tool. If you haven’t already implemented zero based budgeting it might be a good time to start to look at this.

I mentioned earlier decarbonisation and fabric first.

In order to move forward on that agenda its crucial for landlords to have the best possible understanding of their existing stock.

We have had ambitions for some time to publish advisory guidance in this area. We hope to progress that as soon as possible an certainly over the next 6 months.

And finally on development.

We know how challenging this has been during the pandemic.

I was talking to one landlord recently who told me that in the current context they had found it helpful to revisit the self-challenge questions that we published following the development thematic in 2017.

These can be used to appraise how you are doing development and make any necessary changes.

Again, perhaps a useful area for your internal auditor to review.

And also on development, I want to share with you some early analysis that we are doing as part of this year’s financial risk assessment.

We are seeing a considerable gap between forecast delivery and actual delivery of new homes.

That is undoubtedly a consequence of the pandemic.

But even prior to the pandemic there was a quite a big shortfall in actual versus planned.

This is something that each individual developing landlord will want to consider.

And, in particular, what does any shortfall mean for your tenants.

And for your business plan going forward and future compliance with Standard 3.

So I said that I would try to pull all of this together into a single regulatory view of where we are and where we might be headed.

Our analysis shows a sector that is in good financial health.

But there’s no question that the scale of the future challenge exceeds anything that we have faced in the past.

So that means that tough choices are going to have to be made.

Simply put, if you can’t do everything that you would wish to do then what do you prioritise?

Help is at hand in the form of the Regulatory Framework.

Section 2.3 of the Framework requires landlords to be self- aware, analytical, open and honest about performance and always seeking to drive improvement.

I have no doubt that the future belongs to organisations that are self-aware and analytical and open and honest about their performance.

And use that self-awareness to build resilience and capacity.

And constantly seek to drive improvement.

Scotland’s Registered Landlords have demonstrated those qualities in abundance in the past.

And I know you are committed to delivering the best possible future for your tenants and residents.

Thank you very much for listening and I look forward to taking your questions.