Rental Income Guarantee Scheme, Build-to-Rent Programme: FOI release

FOI reference: FOI/17/01533
Date received: 4 July 2017
Date responded: 1 August 2017

Information requested

Information about the Scottish Government's Rental Income Guarantee Scheme (RIGS) and in particular the Build-to-Rent Programme that relates to:

1. The origins of this policy intervention
2. The basis upon which the £15 million contingent liability figure was chosen
3. The role of the Scottish Futures Trust in the Scheme
4. The evidence that underpins the necessity for the Scheme

Response

1. The origins of this policy intervention.

Demand in Scotland for new housing stock is expected to grow significantly over the next decade. While the Scottish Government has set an ambitious target of 50,000 new affordable homes to be delivered over the next five years, it also recognises that there is a need for new housing across all tenures.

Build to Rent (BTR) is purpose-built accommodation for rent, providing high quality, professionally managed privately rented accommodation at scale. Expanding the BTR sector is one part of the More Homes Scotland approach, focusing on increasing housing supply and directly supporting Scotland's Economic Strategy.

This specific policy intervention is the result of a collaboration with industry and largely based on the specific recommendations of an expert working party ("the PRS Working Party"), tasked with identifying mechanisms for promoting BTR in Scotland. The working party included both public and private sector representatives and was facilitated by Homes for Scotland ("HFS"), the representative body for the housing sector in Scotland. Having been presented with the working party's recommendations, the Scottish Government subsequently undertook detailed analysis and soundings, including an open engagement exercise, in order to make its own assessment of the appetite for the scheme and the appropriate risk profile for the Scottish Government.

The Scottish Government's strategy for the private rented sector, "A Place to Stay, a Place to Call Home", commits to support growth, provide quality homes, inspire consumer confidence and attract investment to Scotland. BTR is a key component of this.

2. The basis upon which the £15 million contingent liability figure was chosen.

The £15 million contingent liability figure was derived by estimating the likely rental income for a target number of units in the programme over the life of the guarantee programme, then assessing the maximum proportion of rental income (10%) to which the Scottish Government could in theory be exposed under the terms of the scheme. It should be noted that this is different from the assessed probability of calls under the guarantee, which is expected to be much lower.

The contingent liability exposure will be monitored on an ongoing basis and will act as a cap on the amount of guarantees written under the scheme.

The figure of £15 million is the maximum theoretical exposure based on the remote and unlikely scenario of all guarantees being called.

3. The role of the Scottish Futures Trust in the Scheme.

Scottish Futures Trust (SFT), were closely involved in the Scheme, on the basis of their extensive expertise in the housing sector, both in the development of the RIGS concept once the recommendations of the PRS Working Party were presented to the Scottish Government, and in subsequent market soundings to refine the scheme design.

SFT will act as the primary point of contact for guarantee applications and will undertake the necessary due diligence on guarantee applications and approve applications on behalf of the Scottish Government according to pre-agreed criteria. Detailed delivery arrangements will be concluded with SFT in advance of the launch of RIGS and formalised in a Memorandum of Understanding (MoU) between SG and SFT.

SFT will be mandated to monitor the contingent liability exposure, ensuring the cap is not exceeded beyond the approval limit. SFT will also manage fee income on behalf of Scottish Ministers and provide quarterly management reports, ensuring close monitoring of the Scheme.

4. The evidence that underpins the necessity for the Scheme.

Joint work with HfS and a Government-funded Champion has built stakeholder consensus around required actions to stimulate the BTR sector. This work helped to shape a package of measures to stimulate market growth, of which RIGS is one component.

Institutional investment is seen as key to developing a well-managed BTR sector at scale which meets the needs of tenants.

While the UK Government has provided debt guarantee support for the BTR sector across the UK, feedback from the industry in Scotland clearly indicated that debt guarantees were not what was needed to support sector growth in Scotland. The issue for the Scottish BTR sector was not seen so much as availability of finance, but greater uncertainty of revenues, because BTR is a nascent sector and there is a commensurate lack of relevant data for investors.

RIGS is therefore responding to this specific identified "risk" gap, which needs to be filled in order to encourage institutional investment by reducing some of the perceived revenue risk. This is intended to be a limited term stimulus, in order to help the BTR sector get off the ground in Scotland.

Market feedback has also indicated that, in addition to the specific financial support offered by RIGS, this measure is seen as an important qualitative signal of the Scottish Government's commitment to the sector.

RIGS is a high leverage economic stimulus in the form of a housing guarantee scheme for the BTR market. It is estimated that that it will contribute towards the development of 2,500 homes for rent while attracting private investment to Scotland of around £500 million and £33.5 million in Gross Value Added (GVA) benefits from construction to arise over the next five years along with over 300 attributable jobs per annum as a result of RIGS.

Wider indirect benefits from accelerated provision of good quality new homes with important economic benefits could also be substantial (e.g. in tax revenues from new households and in attracting and retaining a skilled workforce).

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