Additional costs have ‘diminished’ the financial headroom of Scottish landlords

The report found that annual turnover is forecast to increase by an average of 1.7 per cent more than operating costs. This was down from one per cent forecasted in 2022-23.

The SHR found “significantly” reduced cash reserves, although still at a healthy level, with an aggregate closing cash balance of £561.3m at March 2024, down from £801m in the previous year. Cash balances are forecast to fall to £509m by March 2029.

The regulator said the sector’s interest cover remains healthy, but lower than forecast in the 2022-23 returns.

Since 2020, RSLs’ interest cover has consistently declined, falling from 246 per cent in 2022-23 to 200 per cent in 2023-24.

According to the report, future interest cover is now forecast to rise again, primarily due to interest rates having started to drop, with further reductions anticipated. Overall liquidity remains strong, with total cash and undrawn facilities reaching £1.5bn.

Meanwhile, the report forecasted “significant” capital expenditure of £1.9bn on existing homes in the five-year period to March 2029, an average of more than £5,700 per property.

In addition, the report estimated that the aggregate impact on RSLs from changes to employers’ National Insurance Contributions, announced in the Budget, could be around £15m in additional costs each year.

Shaun Keenan, assistant director of financial regulation at the SHR, said: “RSLs are operating in the most challenging landscape we’ve seen. They continue to face significant pressures including from market volatility, cost increases, higher borrowing costs, supply issues and labour shortages.

“At the same time, they continue to work to deliver quality homes and services for tenants and service users, meet challenges around net zero standards and keep tenants’ rents affordable.

“Whilst RSLs have worked to weather the challenges and the financial projections indicate a slight improvement in the medium term, finances at the aggregated level have weakened. We are engaging with more RSLs on financial matters than in the past, but most are still managing the financial pressures, albeit with tightening finances.

“As a result, RSLs have reduced capacity to respond to emerging costs, like National Insurance increases, which are not included in these projections. This means that governing bodies will continue to face some difficult choices and trade-offs as they prioritise expenditure. We will continue to engage with RSLs as they work to tackle the challenges ahead.”

Decarbonisation

On the cost of decarbonisation, the SHR said that many providers are awaiting the finalisation of the Scottish government’s proposed Social Housing Net Zero Standard for clarity on what they will be required to invest and for further clarity on potential funding sources.

It had previously estimated that the additional costs for decarbonisation in the period to 2030 could range from £4.8bn to £9.6bn while the report showed that the current aggregate level of costs included by RSLs in financial projections was £154.6m.

The SHR said: “It remains crucial for RSLs to maintain adequate liquidity, especially in this period of economic volatility.

“We will engage with RSLs with low liquidity indicators and maintain close engagement with RSLs where our analysis indicates weak financial performance, and this will be reflected in their regulatory status and engagement plans.”

In addition, a projected 22,600 new homes were forecast to be built over the five-year period to March 2029. These will be funded primarily by £2.5bn of social housing grant and £1.9bn of private finance.