Ian Brennan - Social Housing Finance Conference - 19 May 2021
Thank you Callum and thanks to everyone for being here.
It’s so nice to see all of you albeit in a virtual setting.
Here’s hoping that it won’t be too long before we are gathered together in the real world.
I was having a look through my last few speeches and I have noticed the tendency for people to describe them as “wide-ranging”.
I think that might be a polite way of saying that I talk too much.
And I suspect today will be more of the same.
So grab a coffee, settle yourself down, you’re going to be here for a while.
You are about to be “wide ranged” by the Scottish Housing Regulator.
My brief is to give the view from the regulator.
Simply put the view from the Regulator is that most regulated bodies have coped well with the challenges of the last 14 months.
And only last week we published our latest financial analysis and this is what my colleague Shaun Keenan had to say.
The analysis that we published is a bit of a hybrid.
It looks back at the past through the annual financial statements to the year ended 31 March 2020.
And of course most of that period was before the pandemic.
But we also look forward via the financial forecasts.
And we have also have had the benefit of the monthly returns that landlords have been completing.
And as Shaun says we can take comfort and assurance from the state of sector finances at the start of the pandemic.
But we know that big challenges lie ahead.
I will talk about some of those challenges shortly.
But first just a few highlights from our report.
RSLs reported generally strong financial performance for 2019/20
Liquidity was robust and RSLs continued to raise significant levels of new private finance from banks and the capital markets.
Turnover increased by more than 5% to £1.8bn.
There was an aggregate surplus of £251.1m.
And that showed a continuation of the upward trend of recent years.
Cash balances rose by £102m to £835m
We saw increased cash generation.
Interest paid on debt rose by £17.0m to £191.2m.
But despite that interest cover actually increased by 29%.
RSLs invested more in new and existing homes, with net housing assets up by 7.6%.
Debt facilities increased to £6.2bn.
£5.2bn of that was drawn down.
And there is a balance outstanding of £4.5bn.
Rent increases were above inflation
And in aggregate rents are forecast to increase by more than inflation for the next 5 years.
However we know that many RSLs are looking to moderate their planned rent increases for 21/22 in response to the pandemic.
On pensions, the move towards defined contribution continues.
But at a slower rate than in previous years.
69 RSLs now only provide a DC scheme, that’s up from 64 in the previous year.
For those RSLs who retain DB schemes the challenges are growing.
You may have seen the article in Inside Housing the other day which is predicting that pension costs will rise by around 30% due to rising inflation and falling bond yields.
So what does all this add up to?
Taking all of that together our view is that the sector is well placed in financial terms to face the coming challenges.
But we know that those challenges are going to be formidable.
One of the advantages for me in speaking at the conference is that it forces you to stop and take stock and then decide what is important.
So I made a list of what I would see as the top 10 challenges facing RSLs at present.
I love lists, I really do.
But no two people’s lists are ever the same. So please let me know if you think I have missed anything.
None of the challenges on my list will surprise anyone.
But what unites the issues on my list is that the pandemic gives each of them an added twist.
First of all tenant and resident safety
Since the Grenfell tragedy in 2017, this issue has had a heightened profile with landlords being keen to ensure and demonstrate compliance with all of their statutory duties.
Here in Scotland there have been a number of occasions - the statutory interventions and in other engagements – when we have looked closely at the evidence around compliance with health and safety regulations and legislation.
And we have found some quite serious issues that had hitherto escaped the attention of the landlord concerned.
And we know that COVID19 has presented new challenges in relation to gas safety and fire safety.
Our advice has been and remains that that where landlords are unable to comply with statutory duties then the non-compliance should be noted.
And then addressed as soon as this can be done safely.
It is important that governing bodies should retain close oversight of the issue of tenant and resident safety and receive regular updates in relation to any non-compliance.
Governing bodies should be making sure that, as a minimum, there is adequate provision in the business plan for all of the expenditure that’s associated with compliance.
My second key challenge relates to lenders.
We think it’s vital that in these circumstances RSLs should run as close as possible to their lenders and investors.
And many landlords are telling us that one of the few upsides in the past year is that they are talking more to their lenders than they have ever done before.
And also that lenders have shown great understanding and flexibility in taking account of the pandemic upon the business.
This is very encouraging to hear.
This type of dialogue between RSLs and investors will be crucial in managing the aftermath of the pandemic.
You would need to be living on a different planet if you haven’t heard the letters “ESG” over the past year.
I heard Nick Pollard talk about this yesterday and I know that Jon Turner is also speaking at the conference.
It’s been interesting to see the progress of the Link Group in relation to ESG.
The use of ESG reporting standards has the potential to further increase the range of lenders and investors in our sector.
It’s likely to bring new stakeholders and new accountabilities and RSLs should be aware of this.
And where you have lenders you have treasury management.
The uncertainty and unpredictability associated with the pandemic creates new challenges
And we know how hard landlords are working to make sure that funding is in place to support their activities.
Steven Henderson was talking yesterday about the Wheatley Group’s Golden Rules in relation to treasury management.
We don’t prescribe regulatory golden rules.
But for me having a set of golden rules as part of your internal control system is an excellent approach.
We know that interest rates are currently at their lowest level since the Black Death in the 14th century.
But only yesterday we heard Andrew Bailey, the governor of the Bank of England say that the bank is on the alert for signs of a prolonged spike in inflation. And that it won’t tolerate persistent overshoot of its 2% target. With the obvious implication that rates may rise.
So a great deal to think about on treasury management.
Turning now to arrears, RSLs have gone to considerable lengths to minimise the impact of arrears on their businesses while providing increased support to tenants.
This is a real success story.
Our figurers show that since April 2020 78 RSLs have improved their arrears position with 66 worsening.
But within that 66 there are landlords who are facing historically high levels of arrears.
And as government initiatives such as the job retention scheme come to an end there is a clear risk that arrears levels will increase further.
For RSLs it is vital that their business plans reflect the new reality and that they understand the impact of higher arrears upon their business plans and on their covenants.
We have heard a great deal from landlords throughout the pandemic about the outstanding work done by their staff to take care of tenants and residents.
And a lot of this goes far beyond what might be considered as the traditional landlord role.
So its clear that staff are going that extra mile to take care of tenants and residents.
But who is taking care of the staff?
The pandemic has posed particular challenges for employees.
So it’s important that landlords understand their responsibilities as employers and the duty of care that they owe to all of their employees.
A prudent RSL will make sure that it is able to demonstrate how that duty of care is being discharged.
And the governing body will be seeking assurance of that compliance.
Sensitivity analysis, stress testing and scenario planning have always been key tools for RSLs in managing risk.
Right now when carrying out sensitivity analysis, it would be prudent for RSLs to consider the potential for key variables to show greater volatility than they have in the recent past.
And scenario planning and stress testing can help an organisation to develop insight into the circumstances in which it may become impossible to maintain solvency.
And where an RSL identifies a serious risk to its stability or viability in the course of its sensitivity analysis, stress testing or scenario planning it should inform us in accordance with our guidance on Notifiable Events.
Moving on now to governance.
For me governance is inextricably linked to financial health.
My number one tip for any organisation is this.
If you want to have good financial health then first make sure that you have good governance.
The pandemic brings big governance challenges.
From my own experience as a governing body member I am in no doubt that governance is tougher in the virtual world.
Not having that ability to sit across a table from executive and non-executive colleagues is a real loss.
And every Board member that I have spoken to feels that loss.
So landlords need to be aware of the fresh risks and issues that this can bring.
Moving on now to cyber security.
Early in the pandemic we wrote to all landlords to stress the importance of keeping their cyber guard up.
And since then we have seen a number of attacks.
Only last week the Department of Health in the Republic of Ireland reported a very serious incident.
The number and the sophistication of cyber-attacks has risen since the start of the pandemic.
A key resource for landlords is The National Cyber Security Centre which is part of GCHQ.
It has excellent material and tools on its website to aid your defences.
I know there’s been a lot of debate about whether an organisation should ever pay a ransom to its attackers.
I am sure that one will run and run.
But prevention is always better than cure.
If your internal auditors haven’t already looked at this then it might be an idea to ask them to do so.
And organisations need to be realistic here.
It’s likely that the cost of staying cyber-safe and protecting data will increase.
So make sure that you are making proper provision for that in your business plans and financial forecasts.
Moving on to Regulatory Standard 3.
Regulatory Standard 3 requires RSLs to be financially sustainable while keeping rents at a level that tenants can afford.
Given the current and likely future economic context that will be much more challenging than before.
I know there’s a huge amount of debate in the sector at present about rents and affordability and the merits and the risks of rent freezes.
Lots of questions but few answers.
In a world of change our view remains constant.
To comply with Standard 3 RSLs must look closely at how they can manage their businesses efficiently to ensure that rent levels are kept as affordable as possible.
We expect RSLs to pay close attention to Standard 3 when they are carrying out their assurance processes.
And for me the key question is this:
Given the current uncertainty how does the governing body satisfy itself that it is maintaining rents at a level that tenants can afford?
Last but certainly not least I want to talk about development.
The lockdown has meant that many developments have not been completed on schedule.
We heard from Nick yesterday about the impact of this upon the Link Group.
For all RSLs this impacts upon the business plan through a reduction in revenue.
From our analysis of your forecasts we know that this is unlikely to cause problems in the short term.
But landlords will have to consider the effect of this lost revenue on longer term solvency.
And lenders’ covenants.
Some of you may recall that in 2017 we did a thematic review of the management of development.
We looked at a number of successful developers
And we tried to distil the good practice that they demonstrate.
We came up with a list of ten positive practice principles.
A bit of a tongue twister.
Given all of the risks and issues around development I think that now would be a good time for landlords to revisit these principles.
So what did these successful developers get right?
- In terms of strategy they were clear about why they were developing. And how development fitted within the overall business strategy.
- They weren’t risk averse but they were risk aware. They understood risk and they managed and mitigated the big risks.
- They understood the housing need in their areas. And they delivered the right product to meet that need.
- They made sure that they had capacity to develop. So they had the right people, the right structures and the right partnerships.
- They got the importance of governance. They had the appropriate skills and experience in the management team and on the Board.
- They understood the importance of appraisal and they carried out robust appraisal at all key stages.
- They had an appropriate treasury strategy which ensured access to funding as required.
- They had a solid culture of project management.
- They had a strategic approach to procurement that takes compliance into account keeps it under review.
- And finally they actively managed and built relationships with key stakeholders like tenants, funders and local authority partners.
And again if you haven’t already asked your internal auditors to look at development then now might be a good time.
And I think we have given you a starter for 10 on the audit program.
If it were me I would be asking my auditor to review our practice against these principles
So a formidable range of challenges and we have all had to accept the need for change.
A key change for us is that we now attach a regulatory status to each RSL’s Engagement Plan.
Attaching a regulatory status was a significant moment in the implementation of the current regulatory framework.
As you will be aware this was delayed by a year as a consequence of the pandemic.
But we got there at the end of March 2021.
And as you can see the vast majority of RSLs were deemed to be compliant with standards and requirements.
So 14 months in what have we learned?
One lesson that I have taken from the past year is that we are perhaps better at managing in an uncertain world than we thought we might have been.
Landlords have demonstrated great resilience and ingenuity in dealing with challenges that few of us had anticipated.
But that has taken a toll on personal resilience.
And organisational resilience.
Most forecasts are indicating that the economy will bounce back rapidly.
I was looking at an economic forecast the other day that said by the end of 2021 we should have returned to the level of GDP that we saw in 2019.
Sadly that may be out of date due to recent developments.
But even if there is a strong recovery there are big issues for landlords around all of the things that we have discussed.
The zero carbon agenda is gaining momentum every day.
And as yet we have still to see the associated costs reflected in business plans.
And there are heightened risks from the impact of Brexit on supply chains and market disruptions that may exacerbate the pandemic challenges.
You will all be aware of the government’s expectations of the role that RSLs will be playing in addressing the needs of people who are or may become homeless.
So how does our sector deal with all of these challenges.
There is no silver bullet.
There never is.
More than ever you need to listen to your tenants and service users and wherever possible act upon what they are telling you.
And you have to stay on top of tenant and resident safety.
You need to run close to lenders and investors.
You must be aware of your responsibilities as an employer.
You need to take care of governance, cybersecurity and arrears.
And you need to do all of this while keeping rents affordable.
This is a formidable to do list.
But the sector and its stakeholders should take comfort from the fact that in SHR you have a regulator that will act where it’s appropriate to do so.
And you also have a regulator which has concluded that around 94% of RSLs currently comply with regulatory requirements.
So in closing I would say that we all have a lot of work ahead of us.
I was watching Back to the Future the other day and I noticed that Dr Emmett Brown said that the future had not yet been written.
But I think President Johnson probably said it better.
There’s nothing we can do about the past but we have a huge and “wide ranging” agenda for the future.
Thank you for listening.