Local Government, Housing and Planning Committee

Meeting date: Tuesday, May 17, 2022

Official Report 761KB pdf

---

Affordable Housing

Under the next item, we will take evidence on affordable housing. We will discuss the topic with two panels today. The first panel focuses on the rural context. We are joined by Donna Birrell, chief executive officer of Rural Stirling Housing Association; Roslyn Clarke, director of Applecross Community Company; Mark Rodgers, executive chief officer in housing and property at Highland Council; and Mike Staples, chief executive of South of Scotland Community Housing. Donna Birrell and Roslyn Clarke join us online. I welcome you all to the meeting.

It would be helpful if members could direct their questions to a specific witness, if possible, although I will be happy to bring in others who want to contribute—if you want to comment, please indicate that to me or to the clerk, and I will bring you in at an appropriate point. Donna Birrell and Roslyn Clarke can indicate that they want to comment by typing R in the chat function in BlueJeans.

I will begin with a question for all four witnesses. What are the challenges to delivering affordable homes in your areas of operation? How are you addressing the challenges? Can you share good examples? I will start with Donna Birrell.

Good morning, and thank you for inviting me to give evidence. Rural Stirling Housing Association has a long track record of providing affordable homes in areas that desperately need them and growing rural communities. However, unfortunately, when it comes to the challenges that you talked about, I am sorry to say that that track record is seriously in doubt.

The biggest challenge that we face is that of increasing costs. Tender costs are coming back way in excess of our assumed budgeted figures. That renders projects unviable and unaffordable.

For the purposes of financial appraisal, our cost per unit is about £143,000. That assumption is used at the outset of a project, when we are developing it, to establish both the grant that will come in and our private finance.

I will put the challenge in context. At the moment, we have two projects for which total development costs per unit are in excess of £200,000—the figure for one sits at approximately £252,000, and the other sits at £253,000. As you can see, that is considerably in excess of our standard assumption of about £143,000. To put it bluntly, if we were embarking on both projects today and planning our due diligence and financial appraisals, we would not develop either of them.

Thank you. That is such a stark example. You talked about tender costs being way in excess of your assumptions. Do you have a sense of where those costs are coming from?

There are labour shortages and material shortages, and works costs are increasing. In addition to the standard cost per unit, we have to introduce into new-build schemes additional quality measures to meet various standards—for example, fire suppression systems are needed to meet new building standards. Although allowances are provided through the grant system to cover those additional costs, in reality, they do not bear any resemblance to the actual costs. For example, the assumption is that it costs about £3,000 per unit to provide the automatic fire suppression systems that are required, but the actual costs are closer to £10,000.

The Scottish Government, including its more homes division, has been working closely with us and has been very supportive, but I have a concern—as I think most development organisations have, particularly in rural areas—that the cost benchmarks are not keeping pace with what is happening on the ground.

Delivering much-needed affordable housing in rural areas comes with its own challenges, which we have seen over the past 30 years. However, I do not think that I have ever known it to be quite so difficult. In rural areas, there is always a premium when it comes to contractors’ overheads and prelims because of the locations, some of which are quite remote.

In addition, we do not get the same level of competition among contractors; it is normally a smaller field. Some of the big-name contractors that operate in more urban areas are not interested in the smaller developments of 10 or 12 units that are typical in rural areas.

Thank you. Mark Rodgers, is the picture similar in Highland Council? How is it going there for you?

There are similar challenges, particularly with tender costs. I have responsibility for non-housing buildings as well as for housing. The cost of a school is coming in at up to 50 per cent higher than the original price, just within six months. Stuff that was priced at £40 million in September is now coming in at between £60 million and £62 million. That is also true across housing. That is a big challenge.

Infrastructure is one of the big challenges for us. I will give an example. I am building two houses on the Isle of Rum. Building a house is building a house, but the challenge is that the electricity supply on Rum is very fragile. For example, the supply to the school is only 40 amps, which is about a fifth of what it would be in a normal new house. Therefore, in many respects—in addition to all the points that you heard from Donna Birrell—infrastructure is a massive challenge in rural areas. It is very difficult to fund such projects within the constraints of the money that we have available. As you heard, in some areas, the unit build cost is in excess of £0.25 million, and, on the islands, it can easily exceed £300,000. That is a particular challenge.

It is absolutely true that we have a limited choice of contractors. Another challenge is the lack of development partners.

There could be an unintended consequence of the drive for greater energy efficiency in housing. For example, a lot of my stock is, on average, 60 years old. I have a choice to make about the money that is available to me. Do I invest in retrofit to make sure that properties are brought up to, and maintained at, the Scottish housing quality standard and the energy efficiency standard for social housing, or do I put that investment into much-needed new housing, in particular for social rent, because there is an absolute crisis of supply and demand in the Highlands?

Those are some of the challenges. I do not want to dwell on the other points, because those were very well covered by Donna Birrell.

What you said about the infrastructure and the difficult choices that you have to make is very helpful.

Mike Staples, how is it going in the community-led housing sphere? What are the challenges?

As a community-led housing enabler, we come at the issue from a slightly different perspective, although we definitely face similar challenges. For the portfolio of projects that we are supporting with communities and that have come to site since Covid, the average increase in cost has been about 35 per cent.

There are definitely challenges in the construction market. A lot of the projects that we support in rural areas are low in scale but high in impact for rural communities. In that smaller scale of development, it is difficult to tender because of issues with infrastructure and aligning to build costs through the rural housing fund. That can be challenging.

However, in a housing environment in the south of Scotland that has shifted massively post-Covid—there have been issues particularly with second home ownership, which have been part of the narrative elsewhere in Scotland, albeit not previously in the south—a significant challenge for us is that there are more communities. We are engaged with far more communities now than we were at the outset. The challenge for us, as an enabler, is in meeting that demand through the resources of our organisation. That is a big issue for us.

Rural housing enablers in Scotland were funded by the Scottish Government until March 2020, but they are not funded in that way at this point in time. Part of the Bute house agreement involves revisiting that position. For us, that could make a big difference, because models that use a community-led approach can help, particularly through driving partnership and through land reform powers, which can assist with overall development costs.

Thank you for giving that perspective.

Roslyn Clarke, from Applecross Community Company, I know all about your achievement in the housing project that you recently completed, and I see that you are going to embark on some more housing. I am curious to hear about the challenges that you have faced and those that you will face with that new project.

Thank you for inviting me. As you mentioned, we recently completed three all-access houses for affordable rent for our community, which are the first community-owned houses, and the first houses for affordable rent in 18 years, to have been built on the Applecross peninsula. We are pleased that we have been able to achieve that, and we thank all the funders—the rural housing fund and SSE’s sustainable development fund—for helping us to achieve that.

As you are aware, there is a housing crisis in Applecross. Highland Council’s housing needs register is a long list—there are, I think, 42 people on it, most of whom are looking for one-bedroom houses. We have undertaken our own surveys, and similar numbers are showing up there. The lack of affordable housing is preventing young people from staying in our community, preventing others from coming back to it and causing knock-on effects on our economy, such as our local businesses not having enough staff.

09:45  

One challenge that we faced with the An Toll Bàn housing development was the lack of competition at tender stage, which has been commented on. We received only one tender for our project. The cost was also higher than expected. I have been advised that that was due to our rural location, where there is a lack of both contractors and competition. We had to finance that additional cost, which has placed financial pressure and risks on the company, as we have accessed loans that we will have to carry. It has also put pressure on other aspects of our company that provide community broadband, the petrol station and various other vital community services.

Access to land is a key issue for us. It took more than five years for us to access the piece of land for our development, which was only a quarter of an acre. We live on a 26,000-hectare peninsula, but that was the only piece of land that we were able to purchase during the asset transfer from NHS Highland. It took time and effort—and so much grant funding through the development office for funding at Highlands and Islands Enterprise—for us to even get to that point. The time and costs are causing problems, and we are not able to address the crisis quickly enough. Our community is suffering because of that, regardless of whether people are moving away or not moving back.

We have been going through a planning process and have recently produced a community land use plan in which we have worked with the local landowner to identify a piece of land for future development, which is really great. We have recently purchased 6 acres for such development. However, rising prices for materials and construction and the issue of how we will be able to finance future housing developments are big concerns for us.

Thank you very much for that answer, which included even more useful detail. It is quite astounding to hear about the land issues that you have experienced.

I have a few more questions, after which I will bring in other members. I will start by directing my next questions to Mark Rodgers, but I ask other witnesses to indicate should they wish to come in. To what extent does the existing housing funding and planning system help to meet the specific challenges of developing affordable homes in rural areas? How successfully has the Scottish Government helped to address such challenges?

In purely numerical terms, if we look at outputs we can say that delivery of affordable housing has been fairly successful. I will give the example of Inverness, in which the number of units delivered shows a slight overachievement against the original local housing strategy target as determined by the housing needs and demand assessment methodology. However, the challenge is to ask ourselves whether we are building the right homes, of the right size, in the right place, at the right time, for the right people and of the right tenure. I have to say that the answer is absolutely not. I can be looking at situations in which homeless individuals have a wait of up to three years, in some circumstances, to be able to access permanent housing successfully. That presents a massive challenge.

Going back to a point that Roslyn Clarke from Applecross mentioned, I think that there is a significant challenge in relation to the need for one-bedroom homes. We need to be a bit more creative in how we deal with that.

I would not necessarily suggest that building one-bedroom properties is the answer. The marginal cost of construction for that second bedroom is small and, while the Scottish Government continues to mitigate the bedroom tax issue, it makes sense to build two-bedroom units to meet the one-bedroom need. People form and break up relationships all the time, and there is a need for people to have somewhere where a child can come to visit, as well as somewhere where they can start a new relationship with someone and expand their family without incurring the cost of moving. I suggest that we need to think about that.

We have had some success, but we have met some cost challenges. Across the Highlands, the cost of purchase of a property ranges from five and a half times average earnings to nine times that amount. That is the big challenge that we face. If we are going to make a substantial difference to that, we will have to significantly increase the amount of social rented housing that we are able to deliver. There is a huge supply and demand mismatch. In areas such as Inverness, Lochaber, Mid Ross, Badenoch and Strathspey, and Skye and Lochalsh, the total number of applicants for rented housing outweighs the total number of available lets by a factor of at least two times and, in some cases, upwards of four times.

Although we might be successful in numerical terms—that is, in terms of numbers of units—I do not think that we have the right stuff in the right place, particularly in relation to social rent. That is the big challenge. Are we talking solely about numbers—for example, 50,000 houses over a certain period of time—or are we trying to get the right supply in the right place? There is a critically important dichotomy. There is a big housing pressure challenge in Inverness, but we must also think about the massive difference that building a couple of houses in a remote location such as Applecross or Rum could have in terms of avoiding depopulation and enabling people to return to or stay in an area and create opportunities for employment. However, as you have heard from everyone who has spoken this morning, the cost of doing that is significant and, although the grant rates are more generous than they were previously, that does not touch the sides when you are talking about a cost of upwards of £250,000 to deliver a unit.

Those are some of the key challenges. There has been good progress, but there needs to be a refocus in order to address some of the points that I have mentioned.

Thank you—that is helpful. The point is that we are seeing increased housing pressure in Inverness because people are having to leave rural areas. I take your point that we need to get the right houses in the right places. It seems like we need to drill down to another level and take that into account.

The rural housing fund is vital. It is very important that it is there and that there is a long-term commitment to continuity around that funding. The renewal of the rural housing fund is welcome. There will always be challenges around deliverability at grant levels against development cost—I think that we are looking at 40 per cent of development costs coming from the rural housing fund. Again, we feel that using the models that can come through community-led housing that are based on partnership with registered social landlords or using mechanisms such as the land fund or asset transfer to acquire land and buildings can help that deliverability and increase some scale around that.

On the issue that Mark Rodgers raised, we welcome the commitment to 10 per cent of affordable homes being built in rural Scotland. We know that consultation is taking place on the remote, rural and island action plan. It is important that its targets are outcomes based with regard to the social benefits of small developments in the right places, the impacts on repopulation and the local economy—in the south of Scotland, we know that we need to repopulate in order to grow the economy—and a good demographic mix. All of that stuff is as important as the numbers of houses that are delivered.

Roslyn Clarke and Donna Birrell, you do not need to come in on this question, but I want to make sure that you remember to put an R in the chat box when you want to come in—I know that, sometimes, it is difficult to respond to questions in a hybrid meeting.

I will ask two more questions. I am asking these ones because I represent the Highlands and Islands and I want to raise a lot of rural and island issues.

The Scottish Government is committed to developing a remote, rural and island plan. What do you think are the most important aspects to include in it?

You probably expected that I would want to highlight the significance of the enabler support relative to the community-led aspects of the action plan. Again, I touched on the point about outcomes being based on social population and not simply numbers. The ability to build momentum and deliver more can be driven by community-led housing and forged by partnership. That partnership can be driven by the ability to work with registered social landlords and to share risk, the ability to work with landowners and with the land reform agenda. However, the enabling organisations are working at capacity and facing financial challenges. That support is vital to ensure that communities have that comfort in the long term and the support to go through complex project development and delivery.

I want to unpack assumptions and go a bit deeper. You started to touch on the fact that community enablers support communities to do the delivery of their housing, but why is the model of community-led housing so important? It has kind of been said, but it would be good to articulate that.

Yes. It is important with regard to the capacity to understand and act on very localised needs and demands. It is important with regard to the opportunities that it opens up for alternative types of delivery as a mechanism, as I have said before, for enacting partnership. I will give an example from the work that we have done. The bulk of our projects that are about to complete or are nearing completion relate to long-term-vacant or derelict buildings. The community-led approach has the capacity to tackle housing in a slightly different way, to look at delivering in places that are not being targeted by other providers. That is not to be disparaging in any way about other models, because the partnership approach is at the core of that.

However, community empowerment is critical, particularly post-Covid. We have a really supportive land reform agenda here that enables community ownership of land and buildings and a funding environment around the rural housing fund that can support development. Therefore, there is enormous capacity to upscale that, but the support to communities to undertake projects—the long-term support and expertise to do that and grow confidence—is vital to upscaling delivery.

You mentioned that community-led housing initiatives are able to provide different types of delivery. You described using derelict or vacant buildings as well as building new buildings. Would different types of delivery also include different types of tenure?

Yes, absolutely. That is another vital element of the mix around place making in particular. The committee has spent a lot of time on national planning framework 4 by looking at localised place planning and communities taking a lead around that. Many of the projects that we work on and which we know that our colleagues in the Highlands work on relate to that idea of creating new places and building a model that is not just housing. We certainly see the community-led housing agenda as inherently about place making and supporting the development of other services alongside housing.

I agree with many of the points raised. I want to touch on the idea of supply and demand. Obviously, the demand has been highlighted in Applecross, as it has been in many other rural areas in the Highlands. It is even identified in Highland Council’s “Local Housing Strategy: 2017/22”, and it is a long-term five-year priority. All those things have been identified, but it is land access that is holding things back.

10:00  

On community-led housing development, obviously we have local understanding of the requirements and what would be needed, but the issue is our capacity in our community company. We are a volunteer board with just one or two employees, and taking on such a huge project is a significant undertaking for a community company.

I highlight the importance of support from the rural housing fund and different grants, and the importance of technical support—we are not experts on building housing developments—planning support, support from other partnerships, such as support from Highland Council in our planning, understanding place-based development and how to tackle and approach that, and grant funding. It is important to have a wraparound approach that can support our communities and not to put undue pressure on our small community companies.

It is very good to hear that from the community’s perspective. Your company is volunteer led, and it can be challenging to hold that over time.

I will make a couple of brief observations. As the committee has heard, the challenge is in land acquisition. The Highland Council area is massive—we often say that its land footprint is broadly the size of Belgium. The area is huge, but land ownership is heavily concentrated, and one of the big challenges is being able to get available land. Members heard the Applecross example earlier on. The amount of available developable land in such a vast area is tiny. That is one of the biggest challenges.

A number of us have commented on the need for land ownership reform to be a key part of how we take the issue forward. It cannot be looked at in isolation; it impacts on everything that we are trying to do.

The point about planning and technical support to the delivery side was extremely well made. I do not know whether local authorities have been entirely honest about that. Have we been as good at giving direct support as we could have been? Perhaps not so much in the past.

My background is originally in homelessness. I never met a homeless person who really cared who had built the house. Homeless people expect us to work together across sectors to provide support. Sometimes we will lead on direct provision; at other times, we need to facilitate and support people to be able to deliver that. If a council is about anything, it is about having a huge range of technical experts and people who are able to provide that support. It is for us to get better at engaging with people, understanding the support that they might need, being much more open about providing that support and thinking about the wider social benefit that can be derived from that, rather than perhaps taking the approach in the past in which it was said, “We’re the technical experts. If you wouldn’t mind, leave it to us.” That has not always resulted in the most successful outcomes. I am being quite candid about that, and I think that that is a point worth making.

Mike Staples made a good point about acquiring existing properties on the open market and renovating empty properties, for example. We should not think about grants and other forms of funding being available only for the purposes of building new properties. In many circumstances, acquiring existing properties and renovating them is not only greener in respect of the energy cost of providing the unit; it is substantially quicker, and it can demonstrably provide just as much value for money. Our thinking needs to be a little wider.

I, too, have been interested in the empty homes issue and the work that is being done to bring empty homes online. That seems to be another opportunity in areas. There seem to be quite high levels of vacant and empty homes that we could tap into, as well.

Good morning, everybody. We have gone straight into the deep end. I was going to lead on questions about costs, but people have got there well before me.

I want to tease out the possible ways through this. Does the solution lie in looking at the subsidy benchmarks? Do we have to increase those again? Is anything being done to enhance the local supply chain network? It was mentioned that the costs of materials are going through the roof. I do not know whether most of the materials are being brought into the rural community or, indeed, into Scotland. Is work being done on that? Is there a role for private developers’ contributions to be changed to try to assist with that? Is there any evidence yet that some of the projects are at risk of not going ahead or being delayed because of those escalating unit costs?

That will continue to be a tricky issue until things begin to level off. We can reflect on it only from the southern Scottish perspective. In other parts of Scotland, some of the issues with supply chains and costs relating to materials are probably more extreme than those that we face.

We need to look at the issue from every possible angle. The increase in benchmarks is welcome and important. Any further work on that is important, too. However, as I have mentioned before, we also need to consider what other angles can help—driving partnership, using existing buildings, using communities as an anchor to acquire land or working with landowners.

I will give a specific example. Dumfries and Galloway Council has been a strong supporter of considering alternative mechanisms for delivery. I know that it happens in other council areas but, in Dumfries and Galloway, the income from council tax on second homes has been ring fenced as a flexible grant fund that communities and RSLs can access. That forward-thinking approach by the local authority is making the difference in the viability of some of the community-led projects that we have been delivering.

We are discussing the matter closely with South of Scotland Enterprise. It has an open ear and is keen to try to engage on supply chains, on the localised construction market and on off-site construction, which you will hear more about today. A lot of that will take a bit of time. We are also trying to work with the agency on skills development, which is important.

Many things need to come together innovatively to help projects to move forward.

The challenge is the cost of developing units in many of our locations. As well as the general rural dimension, we find that significant infrastructure is needed and there are abnormal costs, such as land remediation and decontamination costs, peat management in the Highlands or the removal of rocks. There is a lot of land, even land that is not in our ownership, that is difficult and challenging to develop.

It is helpful to have the subsidy, but I do not know to what extent it accurately reflects some of the high costs of developing in certain areas. My colleague from Rural Stirling Housing Association mentioned the challenges of scheme viability in relation to units that come in at more than £250,000. That is a challenge for Highland Council. Even though we can try to make the argument to justify it from a social value point of view, there are limits to how far we can stretch that funding to ensure that we are able to deliver the housing that we want to.

The key point that I ask you to consider is that, without additional subsidy, additional investment can, in effect, be achieved only through increased borrowing funded through increased tenant rents. That has a direct impact on the social security bill or on the incomes of tenants, most of whom are not particularly wealthy. Therefore, to a certain extent, it is a direct impact on the people who are least able to afford it.

We can try to balance out that investment need from capital grant, but—I do not want to sound like I am being ungrateful about it—in some cases, it is insufficient to deliver the housing that we talked about this morning and that we all need.

Mike Staples spoke about making maximum use of council tax. We continue to do that; we use the maximum allowable council tax on second and long-term empty homes to fund not only new council housing but development loans and bridging finance and to provide funding for land and infrastructure. We are very keen on that.

We look at a range of different ways in which we can try to increase the amount of social housing that is delivered, for example through section 75 contributions and other contributions from developers who are building homes for outright sale. The challenge can sometimes be that the type of properties that we require to meet housing need are not the type that developers want to build. There is a challenge regarding how much we can rely on direct provision by developers. They can make a helpful contribution, but not as much as some people might think.

Donna Birrell would like to come in.

There has been reference to the danger that some projects might not go ahead. We have a programme of 145 units across eight different sites. Of those, 59 are on site or have been completed, four are likely to progress and 82 are in doubt. In my opening remarks, I mentioned two projects in which we have seen huge cost increases. For our Balmaha project, tender costs are still too high. We have gone through two value engineering exercises. The first savings exercise that we undertook involved looking at different choices of materials and, when that had an impact on planning, going back to planning to seek approval for some of the changes. By the time that we got to the end of that very time-consuming process, tender prices had increased again, which was extremely frustrating.

That small development, which is an exemplar project, includes different tenures. It has housing for key workers who cannot find permanent accommodation close to where they work, two self-build plots and some shared equity properties. We are trying to deliver sustainable communities. However, as another witness has mentioned, there are pressures on rent. If subsidies are not increased, the only other option is to look at increasing private finance. However, that is pegged to rent and rent increases, and tenants are already being squeezed on all sides by rent, fuel costs, food poverty and the cost of living crisis. There is so much pressure on what we can do with rents and on our ability to raise finance.

Roslyn Clarke, do you have a final comment?

I agree with many of the comments. We would welcome any benchmark increase to the rural housing fund, which would go a long way towards supporting future housing developments.

We recently completed our An Toll Bàn project on budget, which was excellent. That was just prior to some of the cost increases coming in, so we were very lucky. We are very nervous about the expected price of future development.

Infrastructure costs are also important. We are in a grid-constrained area. We expect that the infrastructure costs for facilitating a larger development will be significant. That is an additional cost that is not easily reflected in the rural housing subsidy benchmarks. Any support that would enable that would be incredible.

Miles Briggs has some questions.

I will touch on something that Donna Birrell said about affordable homes helping to sustain local communities. In a rural context, what different models could be, or have been, developed to support key workers in moving to work in different communities? Are there any new models that you have already highlighted, or that you would want to see the Government developing and supporting?

10:15  

Key worker housing is a massive challenge. I will give you two examples. We are building two houses on Rum because building that accommodation is the only way that the school can stay open. If the school does not stay open because there is nowhere for the teachers to live, the viability of the island as a place to live is seriously challenged. That is a challenge for us because the unit cost is very high and the infrastructure is heavily constrained in the way that was just mentioned.

Skye is another good example of that situation. I have regular conversations with NHS Highland about the fact that the challenge is not necessarily the ability to attract staff to apply for and be appointed to jobs; it is that they have nowhere at all to live. There is a range of reasons why that is the case. Housing that would previously have been available for let or that would have come on to the market for purchase is being used for a range of short-term letting activities. The challenge is made much more difficult by the lack of affordable land.

There are two dimensions to the issue. It is partly about how we finance house building and which different financing models we should look at—I have some thoughts on that, which I am happy to share. However, at its most fundamental level, the challenge is land as much as anything else, particularly in Skye, and infrastructure. You can talk about the different tenures that you might like to see and how to finance things, but in some cases there is absolutely no land to build on in the first place, so you must start with that and fix the problem before you can move on to get underneath the bonnet of the issues that you have raised.

I grew up in rural Perthshire, and without looking back at my childhood through rose-tinted glasses, I note that both our local nurse and policeman had tied accommodation. Those houses have been sold, and, obviously, there has been a restructuring of how we deliver those services. Do you have a relationship with other public services, such as the national health service, that would enable you to develop different models for key workers, especially in rural and remote communities? Could you share the risk and develop different funding models with the wider public service?

That is a good point. There are two dimensions to that. The housing that we are building on Rum will be accommodation that is tied to employment, so there are examples of our doing exactly that.

If we set aside the land challenge for a minute, the NHS angle is interesting, as is the involvement of other public services. If we use the NHS example, you might argue that it would be useful if it made a capital contribution to the provision of housing for specific types of staff. You could widen that further—there is often a viability gap when you talk about housing for people with specific health challenges, particularly those who are long-term sick and are bed blocking. If we were a bit more constructive about how we use the mix of the Scottish Government grant funding, local authority funding and NHS capital grant funding, we could do a lot to resolve bed blocking issues, as well as to provide accommodation for key workers. That approach works in a number of different dimensions.

There is a wide range of ways in which housing could be funded. We could think about the role of pension funds in contributing to the capital costs of providing those properties. Real estate investment trusts are another example. There is a wide range of ways in which innovative private sector funding can be brought to the table.

Pension funds and REITs are quite well used on a large scale by housing associations south of the border in England. I wonder whether we could consider across the sector how that might be much more widely introduced in a Scottish context.

The challenge that we have right now, which you were quite right to mention, is that the stock that used to be available for tied accommodation for key workers has been sold off and has not been replaced, as yet. As I said, we have made progress and are taking good steps with regard to numbers and output, but it will take many years to plug the gaps that have been created by 40 years of right to buy. That is the truth of the issue.

I do not know whether Donna Birrell or Roslyn Clarke wants to come in on that question.

Do either of you want to? You do not have to. They are not indicating that they want to respond, Mr Briggs, so let us move on.

The Scottish Government’s “Housing to 2040” policy document emphases the importance of place, and one of the key issues in developing sustainable places and new communities is the provision of a rail link. As far as building new communities is concerned, is any work being carried out—and, indeed, being carried out with you—on the potential reopening of railway stations and the potential to develop larger communities around them? Moreover, have you been looking at developing new towns in your areas?

Perhaps I can start with Mike Staples, and anyone joining us virtually can put an R in the chat function if they want to come in.

From a community-led perspective, the principles of place and connectivity, and alignment with concepts such as 20-minute neighbourhoods, are really significant. The experience in Dumfries and Galloway, where the bulk of our projects have been developed, is that the point that you have highlighted is a big challenge. Being able to live and work in a lot of places in rural Dumfries and Galloway without being a car user is very difficult to envisage. As a result, in looking at creating communities and place making, we are also looking acutely at opportunities to live and work in the same place to address some of those issues. We know that the opening of the Scottish Borders rail link has had a big positive impact on the communities there, and we would certainly welcome the same thing happening in certain parts of Dumfries and Galloway.

We have seen how communities have expanded with the opening of the Borders railway, but people are still commuting into Edinburgh every day for work. Of course, that situation might have changed during the pandemic, but where are things not connecting up in order to develop communities? Is that anything to do with the infrastructure first approach, which we have been hearing a great deal about and a lot of which is about public services? How do we streamline that to ensure that services are in place and communities have what they need?

That is a big question, and it is perhaps difficult for individual communities to influence certain factors such as connectivity and being joined up. A lot of our work is orientated towards sustaining the communities that are already there. As for the new towns and new settlements that you have asked about, they can be very much driven by community-led housing projects creating new sustainable communities.

At the moment, we are working to support a master plan for the edge of Dumfries, which involves a much bigger housing development. Although it is ostensibly rural, it does not fall within the rurality parameters of the rural housing fund. However, it will have a big impact on the rural housing market and, indeed, on conditions with regard to key workers, which have already been mentioned. How such links are extended to communities is a bigger question.

Thank you.

I call Marie McNair.

My question is directed to Mark Rodgers. Will you tell us more about Highland Council’s approach to net zero homes? What investment and progress has been made?

That is at the heart of everything that we do. We have a challenge with our existing stock, which is very difficult to bring up to standard. Wherever possible, we use passivhaus principles for our housing developments. We want to ensure, as best we can, that housing running costs are reduced as much as possible. The easiest way to do that is to embody those design principles in the new stock that we build to make it as energy efficient as possible. For those reasons, everything that we have been doing in relation to our new build housing has been absolutely targeted towards that, and it is a key part of our design principles to make those properties as efficient as possible.

Sometimes, the challenge is encouraging tenants to use those properties in that way, particularly when it comes to things such as mechanical heat and ventilation systems. There is sometimes a perception that they are expensive, or they are perceived to be expensive because you can hear the motor running when, in fact, overall, the energy consumption and costs of running such homes are very much reduced.

Our off-grid properties are a particular challenge with regard to energy efficiency. A large chunk of our stock is not and never will be on the gas grid—it is as simple as that. Therefore, the issue is the availability of alternatives, such as ground-source or air-source heat pumps. Yes, those alternatives are available but, again, there are issues with the perception of running costs for those properties. Part of the challenge is about the physical building and part of it is the perception of the running costs of the heating and ventilation. We are trying to address those issues coherently and to bring tenants on board, because, in the medium to longer term, the benefits are absolutely clear.

Mark Rodgers, I want to pick up your point about funding. There is an opportunity to expand the use of pension funds and real estate investment trusts. Why is Scotland not as advanced as the rest of the United Kingdom in that regard?

On a related matter—I will open up the question—you referred to the ownership of land in the Highlands. Are there any opportunities to work with landowners so that selling their land, including for housing, is a more attractive option for them? What barriers do you see to that?

I will start with your second point. The challenge for us is that landowners often have high expectations of land values and they do not necessarily understand the impact of constraints. For example, earlier, I mentioned abnormal costs and the impact of developer contributions on land values. We found that many landowners do not actually need to sell their land, so zoned sites can lie dormant. I have also talked about the general issues around land ownership across much of Scotland, particularly in the Highland context. Those issues are well understood, but they have a critical impact on housing delivery. As I mentioned, that is a key factor, but land ownership reform will be essential in overcoming that.

The four key things that we need to build are: land assembly, planning permission, money and infrastructure. One of the biggest brakes on that is getting any land at all and/or getting land that is developable. That is one of the biggest challenges.

It is a bit more difficult for me to comment directly on your first question because, for example, the pension trust and real estate investment trust dimension has been explored much more by housing associations in an English context. I have worked about half my career in England and half in Scotland—half in local government and half in housing associations. There is an inherent conservatism—with a small “c”—in the approach that is taken in Scotland. In many respects, that is not necessarily a bad thing. In fact, in many respects, it has been a very good thing in avoiding some of the challenges that we have seen in the English context. However, we need to be a bit more attuned to being open to using alternative sources of funding.

10:30  

Sometimes, the challenge is that those connected with pension funds—I have experience of this from talking to those people in the past—want a certain rate of return to be guaranteed over a period. That can become quite difficult in relation to being tied into contracts in which an income increase according to the retail prices index or the consumer prices index is expected over a period. We need to be very careful that an unintended consequence of that is not, among other things, that the rent that is imposed on tenants also increases by RPI-plus or CPI-plus, because most people’s wages will not go up by that amount and that would create an affordability or sustainability gap for residents.

That approach might solve the infrastructure problems, because funding would be used to build housing, but there would be challenges for organisations in being able to afford to keep the housing, and challenges for tenants in the housing being affordable in the medium to longer term. The matter is not without its challenges, but it should be explored further.

How can RSLs and councils develop new homes more efficiently to reduce costs and ensure value for money? That issue has been touched on, but does anyone want to add anything?

I will make one quick point. We find that our partner RSLs in the Highlands either are not developing at all or are not developing at the scale that they used to because, understandably, they are diverting their money into ensuring that their stock is compliant with standards for decent homes, such as the energy efficiency standard for social housing.

From a strategic point of view, we are talking about the need to increase the rate of housing delivery across a range of tenures, particularly in the social rented sector. However, I would argue that, perhaps counterintuitively, some of the things that we are doing to improve existing stock are acting as a direct brake on the ability to use that money to increase the total number of units that are available in the system.

Investment decisions relating to getting existing homes up to standard are impacting on the ability or desire of RSLs and councils to build new houses.

Yes. I can use my stock as an example. The units are, on average, 60 years old, and I have 14,000 of them, so I have to get the balance right with my portfolio. I definitely want to accelerate the rate of new build provision, because 10,000 people across the Highlands are on the waiting list. However, if my stock becomes non-viable, the first thing to happen is that I will, quite correctly, get a telling-off from the Scottish Housing Regulator because my stock is not meeting the standards. Ethically, that is correct, because it relates directly to the cost of living in that stock; if the standards are not met, that makes it more expensive for tenants to live in it.

We need to think about those challenges. As we said earlier, the issue is not just about numbers; it is about land reform and addressing the investment requirements for existing stock. We need to take a whole-system approach.

I concur with what Mark Rodgers has said. We have just carried out an energy audit of our existing stock to get a handle on, and get some understanding of, the investment needs to meet EESSH2. A study has confirmed that about £10,000 per unit will be needed to meet the standards. The investment that we need to make to achieve the regulatory requirements will have an impact on the level of investment that we have available for new builds. A very difficult balancing act is required; it is extremely challenging.

Mark Griffin, who joins us online, will ask the next questions.

I want to ask about the sites that are currently under development. What role do modern methods of construction play at those sites? For example, how are modern construction methods being employed to reduce unit costs or to increase efficiency in order to reduce costs for the eventual tenants? What is the Scottish Government’s role in pushing out that innovation in order to reduce costs for developers and tenants?

Would you like anyone in particular to start on those questions?

I am not sure. Do any of the witnesses have experience of innovative construction methods being used at their sites?

Is anybody working with modern construction methods yet?

That is what we will do on Rum. We will probably ship over an off-site pre-fabricated unit in two or three parts, build a concrete pad, connect everything up and deliver it. For a range of reasons, that makes more sense than a traditional new-build solution—breeze blocks and bricks, for the sake of argument—in that particular location.

Prior to coming to the Highlands, I was in Dudley Council, in the West Midlands, for a period of time. We partnered with the local housing association, which used factory-built units. It had its own factory in the West Midlands, which it used to construct those units, so I have some experience of that. We are perfectly open to doing that where it makes economic sense.

When we are looking to build at pace, we should be open to all forms of construction. One size does not necessarily fit all. I have experience of many years of working with a range of housing archetypes, and I would say that the only challenge is that you have to be sure that they will be fit for purpose in the medium to longer term. Council housing, in particular, is littered with lots of examples of approaches that were considered innovative at the time but that have, sadly, proved to be not particularly great in terms of their long-term costs or viability. As a result, some housing had to be statutorily declared unfit for purpose. We have to be a bit careful about that. However, we should be open to innovation when we can use it to deliver units more quickly or when it is more appropriate for a particular geographical location.

We are open to using modern methods of construction, and we are actively looking at doing that in one of our most northern schemes, in Tyndrum. We can see where it would produce efficiencies, but the problem is that our schemes tend to involve small numbers of units, and there is a difficulty with scale. If there was more Scottish Government support to make that work, it is something that we would be very interested in.

I have a question for Mark Rodgers. Would it help if the Scottish Government considered placing a factory in the Highland area for scaling up with modern methods of construction?

We would be very interested in having that conversation.

On Donna Birrell’s comment, a company in Barra, in the Western Isles, is using modern methods of construction and will be supplying the houses for six of the smart clachans in South Uist. Building in a factory can be done on a small scale—I have become aware of quite a few companies across the Highlands that are delivering on a small scale, and it is really working for them. More discussion around that would be great.

We are very supportive of innovative types of construction for housing. For the houses that we have just completed, a traditional style was undertaken, but we hope to link our future houses with our community-owned hydro station, which is beside the project, and to have almost a district heating scheme that provides embedded renewable energy to those homes, which will help with fuel poverty in our area and support the net zero agenda. Again, the question for us is around the cost and whether we are able to access funding to support that sort of initiative on a small scale.

Mark, do you have any further questions?

I will move on to affordability of rent, if that is okay. I know that it has been touched on already. Are investment programmes essentially funded by rent rises? As we see the cost of units far outstripping the grant allocation from the Government, is it unsustainable to fund new builds through rent rises? What impact is that having on affordability levels for your tenants?

It is a key challenge. I will give you an example of the breakdown of previous and current grant rates. For the 2015-21 programme, a unit cost was about £145,000. Capitalised rent is £70,000 of that, the Scottish Government subsidy is £60,000 and our own land bank subsidy is £15,000. For the 2021 programme, going forward for the next five years, the typical cost for a unit is £175k, although there are some exceptions that I have already touched on—that is not the figure for the most rural communities. The capitalised rent element is £70k and the Scottish Government subsidy is £90k, which is a significant increase that is very welcome and helpful. There is also a land bank contribution.

The challenge, as Mark Griffin has identified, is in how the gap in costs will be filled when we start to look at unit costs in excess of £250k. That is also true for the Rural Stirling Housing Association, which Donna Birrell mentioned at the start of her comments. Whether we are talking about Donna going for private finance or me raising finance through council borrowing that is secured against the assets to deliver those units, the answer is that the gap ultimately has to be filled by rents. That will be the challenge unless one of two things happens: either the grant element is further increased or we look at how the burden of that gap in funding can be shared. If the answer is that the funding is not coming from anywhere else, it will come from tenant rents.

Mark Griffin makes a very valid point in asking what that means in terms of affordability, which becomes a challenge. Even if you pool your rents across the totality of your stock and you have a large enough stock base to do that, it will, nonetheless, become challenging over time to keep rents at levels that deliver affordability in the proper sense to people who do not have a lot of money to start with. That is the dichotomy at the most fundamental level. To give the Scottish Government some credit, it has recognised that through the increase to the subsidy element.

However, although that works in a number of settings, the question is to what extent it helps us to address the challenges of developing in particularly isolated rural communities, where one or two houses can have a big impact in terms of depopulation—or repopulation, to be positive about it—and employability. I suspect that how we can fund that development is a conversation that all of us across the sector will have to have, and the Scottish Government will have to play a key role in that for the isolated rural and island communities, in particular.

It could be argued that greater capital grant allowances should be considered to address the challenges in remote and rural areas—islands and remote west and north coast settlements, and the argument is equally applicable in the Borders and in Dumfries and Galloway. It is for the Scottish Government to think about the social value element of that and how it wants to invest in that, but that also needs to be tied in.

As I said earlier, it is not just about building the house, which is the same process wherever you build it; it is about getting contractors who can do that, in the first place, and the infrastructure challenges. Can you get a road to where that development is going to be, and, at the most basic level, will the electricity, water and sewerage supply stand that development happening? The investment around infrastructure, as well as the unit cost of delivering the physical bricks and mortar, is really key.

Thank you. Does Donna Birrell want to talk about the balance between investment plans, including how they have been funded, and the affordability of rents?

I echo what Mark Rodgers said: the gap cannot be plugged from our rental income. This year, our rent increase was 3.9 per cent, which is a below-inflation increase, but our business plan is modelled on above-inflation increases. The gap cannot be funded by our tenants, who have the least ability to shoulder it.

We also need to have our private funding in place before we commit to a project. With the two schemes that I talked about that may be in danger of not going ahead, we have already looked at increasing our private finance element by about £5,000 a unit to see whether we can help to bridge the gap, but I do not think that there is scope to move that any further.

10:45  

Another point is that, before we go on site, we must have a commitment that private funding is in place. Because schemes are now taking so much longer to be approved and have funding put in place, if we commit to private finance too early and the scheme is further delayed, we will incur additional fees and non-utilisation costs because we will not be drawing down the finance in accordance with the programme that the lender has agreed with us. We can therefore incur fees that are added to a pot that has already been squeezed, which means that existing tenants will be paying for the finance difficulties of future developments. The environment is therefore difficult on all fronts at the moment.

I have a different perspective, which is from the community-led side of things. An obvious point is that, if communities are picking up the mantle of attempting to address issues of localised housing supply by themselves, the organisations that support them will want to minimise the risk. For community-led development the issue of access to finance and borrowing on projects is important, as Roslyn Clarke will have experienced in Applecross.

It is important to note that community organisations are borrowing commercially. They normally borrow from ethical lenders, but that is not always tremendously affordable. The Scottish Government could provide support on the relationship with finance and borrowing for community-led housing. I know that conversations are being had with the Scottish National Investment Bank on that issue.

An issue that has not already come up in our discussion is the use of rural housing burdens as a mechanism for achieving affordable sale. Again, we would welcome Scottish Government support on the recognition of that product for delivery and for mortgages.

Thank you for bringing up that point about rural housing burdens.

That concludes our questions. [Interruption.] The clerk is telling me that Roslyn Clarke wants to come in as well.

If any witness wishes to respond to that question, they may do so. I also offer a little time for them to bring in any other critical points that they want to mention to the committee, such as the one on rural housing burdens. I will go around the witnesses to see whether anyone wishes to come in. I ask Roslyn Clarke to respond to that question first. If she needs to add other points to ensure that we hear them, she should please do so.

I just wanted to say that accessing a private loan for the housing development that we have just completed was quite tricky. We had to supplement that with additional funding from our community company. We were stretched right to our limit to be able to achieve those three houses.

I also point out that, as we are not commercial developers, we cannot have the same risks on commercial loans that would normally apply. As we look to develop further houses, we are not sure how we would sit as regards any future loan and how the company could carry such risks. It is important to say that any support—in the form of either advice or financial support—that could be made available to small organisations would be really appreciated.

Thank you very much for that. Mike Staples, do you have anything to add? You do not have to, but I want to give you the opportunity to do so.

It would be useful to add a few points from our perspective.

I previously mentioned the significance of the rural housing fund in the long term. It is important to recognise that there is now a significant pipeline for rural community-led housing in Scotland. As you will know, we are working closely with the Communities Housing Trust and, between our organisations, we have a significant forward programme. As I have mentioned several times, the ability for enablers to support that and bring it to fruition, and the level of resource within such organisations, will be critical. From the perspective of community confidence and the pipeline, though, we are in a really strong position to be able to upscale the sector.

Thank you very much. Mark Rodgers, do you have anything else that you want us to hear?

For me, the approach should be very much about increasing the social rented stock that is available. In some housing markets in the Highlands, there is very little private rented property at all, and what is there is quite expensive. Owner occupation is out of reach for many people when we are talking about between five and eight times people’s average earnings being the multiples of income required for people to be able to buy something. That is a challenging issue. In the Highlands, particularly in rural areas, employment is often seasonal and has relatively low earning potential, which makes it difficult even for two people who are in employment to obtain a mortgage. I mentioned earlier the other challenges that that presents.

We should also look at such challenges through the prism of housing need. Only 25 per cent of people who are on our list of those who need accessible housing are currently being housed successfully. Extreme overcrowding represents only 2 per cent of all applications, but only 6 per cent of applicants with that cumulative need are successful. The challenge for me is that I have applications from 10,000 people in need, across a range of categories. That number is not going anywhere any time soon, and building our way out of the situation will be challenging.

Finally, the current housing needs and demand assessment methodology does not help rural organisations at all. I will not go into detail on that, but our argument would be that, although that methodology works pretty well in the context of central Scotland, it is not delivering outcomes on identifying the stock that needs to be built and delivered across the Highlands. We need to have a much better link with what our own waiting list assessments are telling us about people’s requirements, particularly regarding people who need affordable and social rented housing. Either we must not be so tightly bound by the current housing need and demand assessment or we must at least be prepared to discuss whether we should use a different method of assessing such need and output requirements for rural parts of Scotland.

Thank you for that insight. That is really useful.

Donna Birrell, do you have anything that you want us to hear, or have we heard it all?

I have nothing further to add.

Thank you very much.

This has been a very useful conversation. We have gone from highlighting high-level matters such as land being a key issue to the question of infrastructure and the concept that housing is not just about building houses but about the place making aspect. In rural and island communities, the approach cannot just be about sticking up a whole load of houses; our witnesses have touched on the need for place making. We must ask ourselves how we can fund such aspects if there is money for housing but not for shared common spaces such as live-and-work settings. It has been fantastic to hear Mark Rodgers drill down into the figures and describe the reality of how we can fund housing when the cost starts to get up towards £250,000 per unit. There are also different challenges in places such as the Isle of Rum.

We are grateful to our four witnesses for giving us their differing perspectives, including Roslyn Clarke’s view on how the Applecross community has enabled aspects of housing there and Donna Birrell’s and Mark Rodgers’s perspectives on a slightly larger scale. Thank you so much for coming—I was about to thank everyone for coming in, but some of us have joined the meeting via Teams. It is very much appreciated.

I suspend the meeting to allow for a change of witnesses.

10:53 Meeting suspended.  

11:00 On resuming—  

We are now joined by our second panel to discuss affordable housing. I welcome Steven Henderson, group director of finance, Wheatley Housing Group; Frank McCafferty, group director of assets and repairs, Wheatley Housing Group; Pam Humphries, head of planning and regeneration, North Lanarkshire Council; Tom Norris, managing director, Places for People Scotland; Colin Proctor, director, construction industry and delivery, Scottish Futures Trust; Neil Rutherford, senior associate director, housing and economic investment, Scottish Futures Trust; and Elaine Scott, head of housing strategy and development, City of Edinburgh Council.

Both the Wheatley Housing Group and the Scottish Futures Trust are represented by two witnesses with different areas of expertise. In the interests of time, I will be grateful if a single witness from each of those organisations responds to any given question.

It would be helpful if members directed their questions to a specific witness where possible, but I will be happy to bring in others who wish to contribute. If other witnesses wish to comment, they should indicate their desire to do so to me or to the clerk, please, and I will bring them in at an appropriate moment.

My opening general questions are to all the witnesses, although one witness from the Scottish Futures Trust and one from the Wheatley Housing Group should respond—they will have to divvy things up from across the room.

What are the challenges in delivering affordable homes in your area of operation? How are you addressing those challenges? Do you have any good examples to share?

Good morning, everyone. We have a commitment to deliver 5,000 new homes by 2035, and we are just about to complete our 1,000th new-build home. A big part of our programme is purchasing and refurbishing ex-council houses.

We have always had challenges in North Lanarkshire with our sites and ground conditions—I am sure that others have had such challenges. We particularly focus on developing brownfield sites. A number of the sites in town centres and small existing communities were previously developed. We have challenges with ground conditions, infrastructure and Scottish Water being able to get connections. We have always had those challenges, and we have had to work through them. We have to have good lead-in times and do the design and planning work in advance so that we have done as much preparation as possible before we get on site or appoint the contractor.

Obviously, the current challenge is the cost increases—I am sure that everybody will talk about those—and the impact of those on our future projections for the delivery of the programme. Others have commented on balancing that against the existing need for stock. We have an ageing stock, and more than 36,000 homes need various levels of investment. We are committed to ensuring that they are brought up to the best quality.

There are the challenges of funding and ensuring that we continue to deliver the programme, even in the current climate. Some of the rural authorities talked about their current prices, and our tender prices are not much below that—we are now at well over £200,000 a unit. That includes some of our larger sites, where we have been able to get more than 100 units on site, so it is not just because some of the sites are quite small.

We have been addressing that by looking at different methods of procurement, such as ensuring that we use the frameworks, trying to ensure that we get economies of scale from some of the larger sites and joining sites together in town centres. That is probably not impacting on the costs at the moment. The challenges of the costs are outwith everybody’s control.

As I mentioned, the buy-back programme is particularly important for us—it always has been and is increasingly so. Not only is it good value for money—it enables us to acquire and refurbish units at under £100,000 a unit and quite significantly under that price in some cases—but it assists us with getting full ownership of mixed-tenure blocks, which enables us to progress work in those blocks when we have not been able to do so before. It ticks a number of boxes: it brings empty homes back into use and addresses issues when homes have been in the ownership of private landlords and have not been particularly well managed.

For us, the issue is getting the balance right between new build, which helps to address particular needs, particularly for people who have disabilities or who need larger homes, and using the buy-back scheme.

Thank you. Perhaps somebody from the Wheatley group can comment.

I would echo much of what Pam Humphries said. The challenges that we have are much the same, and much the same as those faced by the first group of witnesses that you heard from. There are now pressures all the way through the system for delivering new homes, right from identifying land at the start of the process.

We have a significant programme. We have built more than 5,000 houses in the past 10 years, but it will be a challenge to continue that delivery. We work across the sector with local authority partners and partners in the construction industry. We have discussed that.

I echo what Pam Humphries said on costs, and I am sure that other witnesses will say the same sort of thing. We are also experiencing costs of up to £200,000 per unit for not insignificant developments—developments of 30-plus units. That is for a number of reasons.

The other real challenge that we have is tying down prices. I give the example of a project for which we received a tender last July. We have had two increases since then. It is a substantial project and we have still not managed to get it on site but we are at a more than 13 per cent increase on the original winning tender price and are still not over the line on the project.

As you heard from the previous witnesses, the time taken to address some of the challenges is significant and can exacerbate them. In the time that it takes to try to solve one problem, the prices have increased for various reasons. Across various measures, the Building Cost Information Service and the Office for National Statistics are talking about price increases in construction of between 8 and 10 per cent over this year, and that will continue into next year.

Those are the main challenges. Some of the things that we are doing are similar to what Pam Humphries mentioned. We ensure that we discuss those issues with the contractors that we use. We are also considering other forms of procurement to try to mitigate some of the price increases. However, we need to be sympathetic to contractors and the supply chain, because there are real pressures on them. For example, I have recently experienced costs in steelwork being held by the supply chain for only 24 hours. The timing difficulty is a significant pressure.

We also experience challenges around the planning system and resources in local authority partners. There is much more emphasis—correctly in some cases—on consultation with planners, but that puts pressure on the planning system to enable us to get projects through timeously. That is another issue. Again, we are working with our local authority partners across the authorities where we are active to try to take some pressure off that by doing some consultation by ourselves and by looking at funding proposals through the planning system. We will continue to do that.

I echo a great deal of what Pam Humphries said as well as what was said about some of the other issues that were addressed earlier this morning. The challenges are the same on the same themes but with slight differences and in different areas.

Thanks for that. Elaine, how is it going in Edinburgh?

As the committee will be aware, we face significant challenges with the housing market in Edinburgh, where we operate. Private sector rent for a two-bedroom property in the city is around £1,100 per calendar month and house prices can be six times the average salary. We have a lower supply of social rented housing in comparison to the Scottish average, which means that the pressure on the social rented housing stock is absolutely enormous. Around 150 households will seek to bid for every home that becomes available for social renting.

In the light of the significant homelessness pressures in the city, around 70 per cent of our council house lets go to homeless households, with the remainder largely going to people who are given priority for accessible housing—for example, that might be to get out of hospital or to remain at home. That is the overall context in which we are seeking to deliver affordable housing in the city.

We have an ambitious programme to deliver 20,000 affordable homes in partnership with housing associations by 2027. Until the pandemic, we were making strong progress on that. In 2019-20, as a city, we approved 2,000 affordable homes for site start. The programme was to build a mix of homes but included housing for mid-market rent, so we are looking at other options in addition to the grant-funded programme.

However, we face similar challenges in the city to those mentioned by other witnesses with regard to rising costs. Between 2020-21 and 2021-22, we have seen an increase of £30,000 in the affordable housing supply programme unit cost, which brought the cost up to around £190,000 last year. However, we also anticipate pretty much every project coming in well above the benchmark as we move forward, because the cost position remains challenging.

The additional challenge for us that I will highlight is that, as a council, we are developing sites that we have purchased on to the housing revenue account from our general fund, but our RSL programme in the city is completely dependent on sites being brought forward by the private sector through the affordable housing planning policy. Therefore, of course, a big concern for us in the current context is that, if we cannot reach a viable project by working with developers on private sites, there is a risk that affordable and private developers simply will not proceed or that there will be significant delays. Therefore, there are big challenges.

As others have said is the case for them, in Edinburgh, the council is seeking to drive forward investment in our existing homes. We have 19,000 homes in council rent, around half of which are in mixed tenure blocks. Therefore, a big challenge for us is working with owners to invest in the private housing alongside the council homes to deliver the improvements that we need. Around 15 per cent of our stock is in multistorey blocks. There are significant challenges with bringing existing homes up to the energy efficiency standard for social housing and net zero carbon. Obviously, we require to fund those through rental income.

We are seeking to deliver a very large and ambitious affordable new supply programme as well as very ambitious investment in our existing estate, all of which is greatly required in the city.

Thank you. Perhaps Neil Rutherford from the Scottish Futures Trust can go next.

11:15  

I agree with a lot of the comments that have been made about the challenges so, instead of going over all of them again, I will just add a couple of comments about other issues.

On resource and capability, which were touched on earlier, we play a role in helping people deliver some of these sites, in looking at strategic sites and so on, but there is a big challenge with regard to capacity, resource and having people on the ground to help with delivery and to make the system work. Sometimes there is also an issue with the complexity of the funding system, because there are lots of different pots of funding out there. I can perhaps use Granton and our work with Elaine Scott and colleagues as an example, because it involves large-scale redevelopment that takes in a number of strands, including regeneration, net zero, housing and transport. The question is how we bring some of those funds together to get a holistic approach. Indeed, that is quite a common issue across Scotland with some larger sites.

Elaine Scott has mentioned this already, but the primary link to section 75 of the Town and Country Planning (Scotland) Act 1997 and access to land present big challenges. However, some of the approaches that we are looking at might unlock some private sector land through the use of different funding and financing tools. We are keen to look at those kinds of things.

I am aware of the complexity of the funding landscape; indeed, I cannot keep track of the different pots of money. However, that seems to be an issue not just in housing but everywhere.

I call Tom Norris.

I would echo everything that has been said but, on the question of cost, I would say that we are seeing increases but not to the point that it is affecting our pipeline at the moment. Over the next three years, we expect to develop around 1,200 homes, which equates to about £200 million of investment, and I do not think that we are at the point where that programme will be stopped. Another positive aspect is how things have been managed and our collaboration and work with partners in dealing with things.

As our goal is not just to hit numbers but to address issues of place, place making and communities, the access to land question is really critical for us. Land is becoming harder and more expensive to get, and there is more competition to deal with—indeed, I am sure that some of us round the table will be competing on land acquisitions—but the issue is really key for us, as an RSL, as we move forward.

On top of that, we need to invest in our current stock. Although we are developing more and although we feel that we have the capacity to do even more in Scotland, we are investing more in our current stock. After all, we have EESSH2, net zero, SHQS and all sorts of requirements that we have to fund for our existing customers. One of the nuances of this debate is the need for both social rent properties and homes that are more energy efficient and cheaper to live in, and achieving that mix or stretch is a challenge for us. That said, we are upping investment in all those areas.

Finally, on different forms of financing, I should point out that Places for People Scotland is part of a larger group that also includes PFP Capital, which is a fund manager that has a fund in Scotland and is bringing institutional investors into mid-market rental opportunities in Edinburgh and Glasgow. We have some interesting examples of other ways of bringing investment into the mid-market sector, and the approach has been successful. I should also say that the fund is £182 million in scale.

There are other ways in which we can do things. Our core aim is affordable housing and social rent, but we face a challenge in continuing to keep development going and the numbers flowing through. That is a pretty consistent issue not just for the sector in Scotland but for our UK businesses, too.

Thank you very much for those responses to the question about the challenges that you face, which also touched on some other areas.

Good morning, everybody. On the cost issue, I was going to ask our local authority colleagues whether they are experiencing the same cost overruns that you appear to be experiencing. Are the unit prices that you have mentioned, which are significantly higher than we had before, coming about purely because of the cost of sourcing new materials to service the industry? I am glad that Colin Proctor is here because, hopefully, he can help us understand why costs are going through the roof. Are the costing models based on existing methods of delivery? We have heard about off-site construction, prefabrication, sourcing alternative materials and so on. Are we changing the model of construction or is it too early to tell whether such a move will be successful?

There is an interesting dynamic with costs. There are already cost increases in the system because of the new requirements, and the market is experiencing high volatility at the moment. The challenge is that we cannot let the latter overcome the former; we still want to build to the new requirements because that is a good thing to do.

There are short-term and long-term issues, which you have alluded to in your question. There are things to do now and things to think about for the longer term. We have heard that a lot of people are willing to think about innovation and to do things differently. There are different ways of delivering and different procurement methods. We should also think about whether there could be bigger and longer-term changes to the system.

You are right that the market faces labour and materials issues. We are also observing particular market issues in housing. Some of those are geographical. We have also heard already today about lack of competition in the market. That has an impact when demand is high and the supply chain is less able to deliver, leading to increased costs. There is an interesting dynamic and different sources for increased costs. One common issue across construction is materials. Many materials and components are imported, so a long-term answer might be to do more in Scotland. As has already been said, there are also labour issues. It is an interesting cocktail, and a challenge.

We are beginning to see an issue with prioritisation. People in this meeting have made comments about decisions as to whether schemes should be stopped or how they should be prioritised. Mark Rodgers spoke about the desire to have the right houses in the right places. If we are to move the programme forward, it is important to be able to prioritise. To avoid stopping development, we must think of ways to fund and support it in the short term as we think of longer-term practices.

Can we begin to solve the issue through local supply chains, or are we completely reliant on imported timber for house frame construction? Can we solve it?

We have been working with the Scottish Government to explore ways of increasing off-site construction. We have been discussing the potential to use local timber with Forestry Scotland. There is some potential, and work is under way to analyse that. A lot of timber is imported, but there is the potential to use local sources which, from what I hear, are not being used as well as they could be.

There is also the potential for other materials or components. The net zero opportunity brings the potential for new components, such as new window and door assemblies. We should be looking to improve Scotland’s manufacturing capability. That is a medium or long-term action, but the scale of the programme to build 110,000 houses creates an opportunity that should be explored.

Does anyone else want to come in?

Our Edinburgh and south of Scotland demonstrator project is significant in relation to what Colin Proctor raised. It is a partnership of Offsite Solutions Scotland—which involves off-site manufacturers in Scotland—the Scottish Futures Trust, the Scottish Government, the City of Edinburgh Council and our regional partners. That involves looking at a new method of procurement, linked to off-site construction, to deliver net zero carbon homes.

We are well into the pilot, having one project under construction and another site identified, and we are looking to build up that pipeline in order to demonstrate that it can make a difference if we do it at scale. That will give the industry the confidence to invest in the transformation that is needed in how we do things. However, the costs for those initial pipeline projects are high in comparison to what we can afford in the long term, so we need to look at ways of supporting that pilot pipeline programme so that it can become sustainable and deliver in the medium term.

Thank you for that. I will move on to another question, which, again, is probably for my local authority colleagues. During the first evidence session, we heard from Mark Rodgers. I am reminded that, two years ago, when Audit Scotland looked at the issue of affordable housing, it said that it was not clear how the national targets linked with local housing needs. Mark Rodgers referred to that in his contribution. I hope to get the views of North Lanarkshire Council and the City of Edinburgh Council on that. Do they share that view, or are things different in the urban setting? Do we have the numbers right, or does the model need to change?

It is not easy to translate the overall target and overall needs in the housing need and demand assessment into what can be a localised need. For example, North Lanarkshire is a diverse area. If someone was looking only at housing pressure and supply and demand, they might say that, in some areas, the gap between supply and demand is not huge, as we have a good turnover of existing stock. However, the issue is about whether that is the right type of stock in the right areas. People do not necessarily want to move from one part of the authority to the opposite part. There are also issues about accessibility and transport. The picture is therefore much more complex than what can be seen from just looking at the figures.

However, even on that basis, the model is probably very light in its assessment of absolute need. It does not reflect the needs of the area. There is also a whole load of hidden housing need—often within households.

The picture is complex, and it is difficult to get one methodology that can accurately assess, predict and put targets on an absolute figure or the absolute amount of land that is needed. However, certainly in the central belt, we work collaboratively. In Glasgow and Clyde Valley, we work together on our housing need and demand assessment.

Overall, it is as good as it can be, but it is a more complex picture than can ever be done with the methodology that we use at the moment.

Elaine Scott, does the model work for Edinburgh?

As Pam Humphries said, the housing need and demand assessment tool is a complex area. We as a region are looking at that, and we have just carried out our housing need and demand assessment 3 for submission to the Government. Overall, that continues to demonstrate very high levels of need for affordable housing, which is an important point. However, we have also recognised that it is not as strong as it needs to be in helping us to understand what the overall need is for accessible housing across tenures. Recently, we commissioned additional work, in an accessible housing study, to assist with identifying the need and demand for wheelchair-accessible housing and other forms of accessible housing. That is even more difficult in some ways because of the range of different data sources that potentially need to come together to be able to give that information. However, through that study we have sought to hear and consider the real-life experience of people who are seeking to find accessible housing so that we can improve access to our accessible housing stock.

11:30  

Roslyn Clarke and Mark Rodgers mentioned this issue, I think, but are we providing enough access to housing for, for example, young, single professional people? They are single wage earners, obviously, which affects their ability to access the different housing models. Are we doing enough on that, or do we need to do a little bit more to reach out?

I guess that a lot of the work that we have done over the past few years on mid-market rent and reflecting the fact that there are different needs within the housing system, how people enter it and how they work is relevant to that. A number of those approaches grew from the national housing trust initiative. Other members of the panel have been in that space as well.

Perhaps because of people’s future aspirations when it comes to renting and owning, shared ownership and shared equity models have fallen out of favour a little bit. However, they have a role to play again and we need to think about how they might come back.

A lot of the work that has been going on is almost additionality. We have the grant programme and then a series of other tools and levers that can help us to deliver housing. Grant can come in different forms. It can come through land and we have had experience with financial transactions—money that is lent, in effect. LAR Housing Trust, which is a mid-market approach, is a good example of a different way in which we can help to deliver housing.

There is a recognition that the system is addressing the issue to some extent. It could go further, so we need to understand how some of the models fit for people, which brings us back to some of the HNDAs and other measures of demand and need. We need to understand different economic circumstances and what kind of housing is needed where.

Are we gathering that sort of data locally to pinpoint or understand what groups people are not accessing the housing market in the way they would wish? Are we examining that and feeding it to the Scottish Government and others so that we can adapt the models?

It is difficult at times, because a lot of our analysis of housing need is based on waiting list data, which is clearly imperfect. Often, the people to whom you are referring would not think of council housing or social rented housing or would be advised that their level of need was such that, for the areas that they were considering, they would not be high priority so they would ask themselves what the point would be of putting their names on the list. We try to give people good housing options advice. Part of the impact of that is that people might decide that it is unlikely that they would get a particular house in the area where they are looking so would have to try to meet their needs elsewhere.

We use whatever data is available. In particular, we try to monitor closely what is happening in the private rented sector to see where the higher pressure is. With the SFT and others, we have been looking at mid-market rent models and considering whether there are different models that we can introduce that would help to meet the need. We have not been able to make that work in our area because the local housing allowance is quite low so the gap is too large. We would need to find a way of filling that and our priority is focused on our social rented programme.

That is a long answer to say that we are trying to find ways that we can identify and meet that need, but our main focus is on the most acute need and delivery of the social rented programme.

It is not my area of expertise, but I hear some folks saying that there is an opportunity not only to re-examine the existing models and methodologies but to take a step back and look more strategically across Scotland. It is good to hear that the City of Edinburgh Council and its partners are considering a regional approach—is that different from a local approach and how would it be tied to economic planning? That is a different dimension but, from what I hear, it is worth looking at.

Good morning, witnesses. I will further develop some of Willie Coffey’s questions, with specific regard to Edinburgh; I am an Edinburgh MSP, so I put that interest out there.

There are areas of pressure across Scotland; Aberdeen used to be one, but now Edinburgh is acutely overheated, as many people keep telling me. Do you think that that is understood in the Government, especially given that land costs are greater there? Are those costs also becoming a key problem with meeting challenges in areas that are highly pressured?

Absolutely. The pressured housing market in Edinburgh has an enormous impact. We hear, anecdotally, from businesses about the challenges with being able to recruit and retain staff, particularly in the health and social care workforce. People’s ability to access affordable housing has a wider economic impact.

Our approach has always been to work in partnership with RSLs, developers and other partners—such as the Scottish Futures Trust—to explore every option and innovation. Mid-market rent has had a big impact on the city. We were the largest participant in the national housing trust, and we delivered around 800 homes for mid-market rent through that initiative. The learning from that allowed us to proceed to set up Edinburgh Living, which is a limited liability partnership between the City of Edinburgh Council and the SFT, to deliver mid-market rent housing. We already own a few hundred homes, and there are homes in the pipeline that we will deliver for Edinburgh Living through our own house-building programme.

We are keen to bring private sector sites into development for Edinburgh Living and others to purchase. For us, with the scale of challenge that we face, we need to look strategically, across the board at the range of opportunities and mechanisms that we can use to support the delivery of affordable housing, regeneration and place making across the city. Most of the land is in private ownership, and we are keen to explore what else we can do to get more private sector sites into development to meet the need for affordable homes in the city. Affordable home ownership and social rent are a huge priority for us in the light of the homelessness pressure that we face.

I echo what Elaine Scott said. In Edinburgh, MMR and its products have been successful. The Engine Yard is a good example of a collaboration of organisations. The Engine Yard, which is at the top of Leith Walk, has property available for those in need of affordable and mid-market rent, property for the over-55s and development for sale. It is tenure blind.

We have around 2,000 mid-market rent properties in Scotland, and they are ever so popular, so it is key that we have that product available for younger, working people. Mid-market rent costs about half of the average private sector rent in Edinburgh, which is quite a significant reduction, and the model works.

At the Engine Yard we developed on a brownfield site—an old tram depot—and the model worked well despite all the challenges. We are very keen to see a tenure-blind approach to development, in which there is a mix of everything to cater for a lot of people. In Edinburgh, where rent prices are high, the Engine Yard is a good example, but I recognise that the model might not stack up in other areas. However, we have experience of using the model in Edinburgh and Glasgow, through the fund that I spoke about.

That is helpful. All committee members are being made aware of land supply issues. We heard earlier about that challenge in a rural context. In an urban context, I am concerned that the brownfield site developments that are in local plans will not necessarily come on stream. Why is the national planning framework not necessarily the right place to meet the demand for land? Planning departments are also looking at that. In terms of the finance question, we are hearing about the need for that supply of land, but the finance is not necessarily there at the moment.

There are two parts to the land supply issue. One part is the overall supply of land, but for us the challenge is whether developers of affordable housing can get control of that land. Developers of affordable housing cannot go out and purchase land, because we simply cannot compete with volume builders and others. As a council, we have been purchasing land from our general fund on to the HRA and then seeking to take forward regeneration and build affordable housing—that is a land cost for the HRA to bear.

The RSL programme is about seeking to secure the policy of having 25 per cent of any development being affordable housing, but that is dependent on private developers bringing forward sites for planning consent, so we are tied into their timeframes for when they want to sell and market homes. Getting sufficient control over land to drive forward affordable housing programmes at the scale and pace that we want is a significant challenge.

I will add to that in relation to our area. As I mentioned, it is important that we consider overall allocation of land for housing—I assume that your question was wider than just social and affordable housing. We still have large areas of previous industrial land that is zoned for housing, meets the requirements of NPF4 on 20-minute neighbourhoods and is well located close to public services and public transport. It is important that there is a focus on how we develop that land, whether that is a mix of private and affordable housing or just private.

There are major challenges around the ground conditions and the issues that we talked about before, such as infrastructure and connections, but in relation to the benefits, more emphasis should be put on how we make those sites work before we start opening up more greenfield sites that do not have the benefits of location and accessibility. For us, it is about focusing on how we can remediate and bring back into use some of our brownfield sites, but we have major challenges, as you can imagine.

In relation to the cost pressures of decontamination and other additional costs, is it likely that developers will not bring forward those sorts of schemes? Are you regularly told that brownfield sites are more expensive to bring online? Is that being factored in, given all the cost pressures that we are hearing about?

Exactly; that is why a lot of those sites, even prior to the current challenges around cost pressures, have not been developed unless we have been able to bring in public subsidy. Contamination is not so much the issue; a lot of the contamination has been addressed, so the sites are safe from that point of view. Environmental standards, quite rightly, improve all the time, but there are ground condition issues. There is a range of challenges associated with putting in the infrastructure and putting in more investment to bring those sites back into use.

11:45  

Most, if not all, of those sites are in private rather than public ownership and landowners can have unrealistic expectations about land value. It is important to work in partnership and to see what—if anything—the public sector can bring and how we can work together to make those sites work. We have the land. Why would we open up greenfield sites if we can develop those other sites first?

My point is similar to Pam Humphries’s point. We should take a place-based approach to that land, dealing with a number of issues to create good outcomes.

I can give an example. We have a long-term partnership agreement with Glasgow City Council, which has been helpful to us, as a larger builder of social and affordable housing. There is no section 75 planning regime for affordable housing there. We have had certainty of land supply as sites have come forward for a multiyear period. That allows us to go out and raise private finance at scale, because we know that we will have a throughput of sites and can make larger-scale arrangements with contractors. Working closely with local authority partners is key for us as an RSL.

Could there be improvements from delivery agencies? Local authorities are playing that role, but in other parts of the country, especially in regeneration projects, we have seen other types of delivery agency. Could bringing in additional private investment help? Pension funds have been mentioned. Would that turbocharge projects and move them forward?

Our experience of working with local authority partners in recent years is that those arrangements can be very effective and can support them in their role as strategic housing authorities.

There are circumstances in which it is important to do things regionally, as part of a wider strategic planning framework.

I do not see a strong argument for adding another agency or body to the regeneration landscape. There have been examples of that in the past, such as Communities Scotland. Homes England performs a slightly different function down south, where it funds land. We are smaller and can work more closely with local authorities as a delivery body. I do not see a strong rationale for a national regeneration agency.

I go back to a previous point about net zero homes. We have heard from City of Edinburgh Council about the Edinburgh home demonstrator partnership. I would like to know how other local authorities are approaching that. Pam Humphries, please tell us about the approach that will be taken by North Lanarkshire Council. What investments have been made and what progress is there?

We have increased our standard specification for homes over the years, improving energy efficiency and bringing homes up to building standards sustainability levels 1 and 2. We are now looking to increase the number of photovoltaic panels, going above that standard. We will not be able to fit gas boilers in the future, so it is necessary to look at alternative net zero heating sources.

We have a number of pilot house-building projects on site at the moment. They are not to passivhaus standards, but our contractor, CCG, is building to net zero. We want to assess the impact of those projects. They use air-source heat pumps, an increased number of PV panels and battery storage. That is quite expensive. The total extra cost is about £20,000 per unit. We want to be able to assess the different component parts before we make larger-scale decisions. Battery storage is probably the most expensive element of that. Again, we are trying to look at what is the most efficient way to deliver net zero.

I also echo the point that was made earlier around making sure that tenants know how to get the best use out of their homes. Sometimes so much is going on when tenants move into a new home that gaining an understanding of how to operate the new technology effectively does not always happen. Then we sometimes have issues with condensation.

There are lots of other challenges around that as well, but those are some of the areas that we are looking at in terms of net zero.

The UK Government has suggested that it is thinking of introducing a right to buy housing association homes for the tenants who are renting them. Shelter has quite correctly condemned that. If that policy were reintroduced in Scotland, what impact could it have on the ability to meet the need for affordable homes? I will just pop that question out to everyone.

In terms of our ability to take forward net zero carbon, one thing that we are doing in Edinburgh, and I know that other RSLs and local authorities are doing it too, is seeking to consolidate our ownership within blocks. That means purchasing those homes when they become available in the market. Doing that has become really important.

In the context of net zero carbon, we need to find ways to support owners and social landlords within common blocks to be able to jointly bring the homes up to the net zero carbon standard. Because half of our stock is in mixed-tenure blocks, we are finding that, for owners, the costs just for bringing homes up to an appropriate fabric standard are high already. Making them net zero carbon will mean additional costs to that, so ways of jointly supporting owners and landlords to bring homes up to standard are needed.

Given the very big challenges that we face in our ability to house homeless people in temporary accommodation and others in priority need, an extension of the right to buy would exacerbate an already very challenging position.

Does anybody else want to share a view on that question?

As you would expect, we would certainly not be supportive of any reintroduction of the right to buy. As I mentioned earlier, and similar to what Elaine Scott said, a big focus of our programme is buying council houses that were purchased and bringing them up standard. We have now extended that to targeting particular blocks to bring them up to standard. If there is only one owner in the block, we will allow the owner to stay as a tenant. A large majority of the inquiries that we get are from people who want to sell their house back to us, but remain living in it as a tenant; they might be people who bought it under right to buy, but cannot afford to maintain it. We are looking at that now in limited circumstances. That is the opposite situation.

Some really good points have been made on net zero in this and previous meetings, and we are seeing some innovative work right across the country on progressing net zero. As Pam and Elaine say, they are moving on with the fabric-first approach and getting the fabric of the building right, but the heat source is really important. We are looking at those different ways of looking at sources, and it is really interesting. We hear that Applecross is looking at a heat network solution.

Looking at these things through a different lens, and maybe taking a place-based approach, allows us to think about what we are building new, as well as the existing stock, and to look at heat in a much more strategic way. Widening the lens beyond that can bring in the point around supply chains. We have a big opportunity here, with the large investment programme in new build and in upgrading of existing properties, to look at local supply chains for heat pumps and all sorts of things. That is the exciting opportunity ahead. We are just building the blocks for that.

I direct the next question also to the Scottish Futures Trust; the two witnesses can divide it between themselves. We are curious to know how your work is enabling the development of strategic housing sites and any lessons that can be learned.

I guess there are different aspects to that. Some of it is about financing innovation, some of it is about collaboration and some of it is about place. One good example of a place-based approach is at an old school site in Ardrossan. The emphasis is on how that site connects, as housing, to the wider town and other investment that is going on. Things are all being planned together, effectively, so there is access to services, with land and surplus estate, perhaps in the public sector, being reused.

Another example is in Granton. That is more about funding. It started as a place-based project, with an understanding of the role of Granton in the city of Edinburgh. There were elements around the learning journey and the partners who stood around the project. It is now coming down to funding. I made this point earlier: how do we corral all the different funding sources that sit around a project to deliver something at scale?

I can use Winchburgh as an example of the funding type of innovation. The challenge lies with unlocking some of the up-front infrastructure and helping the local authority to manage the bumps and the peaks and troughs associated with section 75 agreements, so that there is effectively a stand-by facility that has come through government and that can be drawn upon if the profile of build does not follow as planned. There are various ways in which such support can manifest itself.

Thanks very much for your response. Those examples are very helpful, and I have made notes to learn more about those places. We recently had a visit to Govan, where something similar is going on.

I will ask the same question that I asked the first panel, on private investment. How can new forms of private investment be levered into the provision of affordable homes? Are there new models that can be used more widely?

I want to expand the discussion to the build-to-rent sector, which has grown in Scotland, and the role of equity share. Perhaps you could wrap that into your answers. Tom, you touched on that in your opening remarks, so perhaps you could say a bit more about bringing in private investment, and then anyone else who wants to come in can do so.

Of course. The experience that we have had is that there is a real appetite, if the vehicles are right, for investment in housing property in Scotland. Our MMR fund is a good example of that. I talked about the rents earlier—in effect, they are still lower rents, and people are interested in investing.

Our development programme through PFP Capital initially involved 1,000 properties, with scale to grow, and £182 million was invested. We are continuing to focus on that. That is an example of a success story. Our group had some learnings in England, and we then developed the work in Scotland. As a general rule, the investment is coming from pension funds.

This is an area of absolute growth, and we are keen to be involved. As with some of the challenges that we are all seeing, it is so important that the numbers continue to work, and our organisation is committed to that. On the return, things are harder on the purely affordable social rent side, for obvious reasons, and how we can do more to bring in additional capital is another question.

There are examples down south of for-profit providers coming into the affordable housing space. We are a non-profit, but there are more moves into that area by people who are there to create profit, which shows that there is an opportunity there.

In your opinion, is there enough co-ordination across the sector? I am talking about housing providers, not just the pension providers. Is there a need for more co-ordination across the sector on private investment opportunities? Is there enough co-ordination on the part of pension providers in relation to investigating what the barriers are, how we can open things up and where the opportunities are?

12:00  

My view is that, purely because of scale, the larger organisations are often the ones that have the ability to bring in big amounts of capital. From that point of view, our approach is to use our vehicle, but that is in collaboration with the Scottish Government and others. There is more to be done in this space around collaboration and engagement, but it still feels quite early in the journey.

Do you want to say anything about build to rent or equity sharing? I will open it up to anybody else who wants to comment on that.

Like Tom Norris, we have experience of some of that institutional investment coming in. I mentioned LAR Housing Trust. There is finance that has come from institutions, alongside other tools that the public sector has.

We are also looking at other models. We have the housing delivery partnership model, which involves mid-market provision through local authorities. East Lothian Council has used institutional investment in that area and is looking at more. I guess that, for us, as the public sector, there is potential around some of those approaches. Through collaboration, we are thinking about what we want to get out of those models and how they fit. It can be quite a piecemeal process—people will come to us with deals and suggestions. That is okay, because it helps to grow knowledge, but a big part of it is what we want holistically from that sector. We are looking at those opportunities, as are some others at this end of the table.

That is interesting to know. Until last week, I had been a councillor in East Lothian for 15 years. As a constituency MSP, I am well aware of the opportunities around private investment models. I have also met LAR Housing Trust.

Does anyone else want to come in on that point?

I draw a big distinction between social rented housing, which must be owned and let by a local authority or housing association, and other forms of intermediate tenure, such as mid market, shared equity and so on. For social rented housing, there is a good history of institutional investment, particularly in Scottish housing associations. Our first public bond was listed on the stock exchange in 2014, and there are lots of insurance companies, pension funds and so on there. We have been followed by lots of other housing associations, which have done private debt placements, for example.

It is always a battle to keep up awareness of Scotland on the investor radar and agenda, because the debate around social housing tends to be UK wide, and you can get caught up in issues that predominantly relate to England, such as the right to buy and cladding. We have a different position on those issues in Scotland. A lot of good work has been done by people such as the SFT. I would also give a shout-out to the Scottish Housing Regulator, which has been very good at raising awareness among the investor community of the differences in Scotland.

We have had lots of good, positive individual discussions about ad hoc deals on build to rent and mid-market rent, some of which are on-going. Those discussions tend to focus on areas where the local housing allowance supports it, because, for mid-market in particular, the starting rent is the local housing allowance, which is capped. In Edinburgh and Aberdeen, you can do something. In North Lanarkshire, Renfrewshire and Inverclyde, it is very difficult. That relates to the structural nature of the way in which local housing allowance levels are set.

What can the Scottish Government and the Scottish Parliament do to mitigate the barriers that you have just mentioned?

I have been to evening events in the Parliament to which the investor community and so on have been invited. More of that sort of thing would be very positive, because we have a good story to tell about the positive differences in Scottish social and affordable housing. We do not have the right to buy, and we have a good and supportive grant regime that is the envy of our colleagues in England. The more we can do to tell that story and sell the positives of that among investors, the better. We get our credit rating from Standard & Poor’s and we are due to get our result in the next couple of days. You will see lots of these things played through in that report, but I am not always sure that there is awareness of that down south.

My question is similar to a question that I asked the previous panel. Do the witnesses have any comments about how their investment decisions and new-build programmes are impacting on rent levels? Are their new-build programmes essentially predicated on rent rises? If so, is that causing any concerns about the affordability of rents? I put that to Elaine Scott, Pam Humphries and Steven Henderson.

When it comes to rent increases, we plan over a 30-year period in our HRA business plan. We had assumed that there would be rent increases as we moved forward but, in the light of and in response to the cost of living crisis, the decision was made to freeze our council rents this financial year and last financial year.

However, the ambition remains to deliver our affordable housing commitments and the investment in existing homes. We therefore need to look at how we can do that, and to find ways to bring in the grant funding and other types of funding that could support that, so that all that pressure does not fall on rents as we move forward.

It is absolutely the case that we cannot deliver new build at the expense of investment in existing stock, or the other way around, so, in the Edinburgh context at least, we need to find a way of delivering both those commitments for the city. For us, that is about working with the more homes and better homes divisions, and looking strategically across the support that exists for investment in housing across the board, whether that be for new or existing homes.

We have increased the rents over the past few years, in order to support the investment programmes, including those for the existing stock. We are also reprovisioning our multistorey flats. There is a large-scale demolition programme for those, and we will replace them with new homes. The rent increase has supported that investment.

However, as Elaine Scott’s council has, we have a 30-year business plan. We have made various assumptions on costs and, as we go forward, we must constantly review and update those and assess what we can afford, recognising all the other cost pressures that tenants are facing. It is certainly a balancing act.

When we started the new-build programme, we made a decision to put a 20 per cent premium on the new-build rents. Our rents are still below the Scottish average but, when the 20 per cent premium is added, they are now just under £100 per week, on average, so we are having to start to look at that, particularly as we go forward with changes in heating types, which might mean that tenants have to spend more. We are therefore having to look at the options, including whether the rent premium is something that we will want to continue with, and the impact of that on the overall programme.

Thank you for that. Mark Griffin, do you have another question?

I do not know whether Steven Henderson has any points to make.

Yes—sorry. Steven, you were named when the question was asked.

Yes—I was third on Mark Griffin’s list.

We would not increase rents specifically for the purpose of subsidising new build. That is quite an important principle for us. Grant has to be the balancing figure because, if it is not, money ends up being taken from existing tenants and investment in their homes and being used to plug the gap in the new-build scheme. We do not think that that is right, particularly given the context of the cost of living crisis. In addition, as an organisation, we have pressures on our cost base, such as those relating to utilities and inflation.

We welcomed the change to the benchmark grant rates last November—that was a positive step—and we have just about been able to make things keep working with those, although we are already bumping up against some challenges, as has been reflected on. We also welcomed the fact that, as we understand it, the revised subsidy regime will involve an annual review of those benchmark rates. It is important that that happens one year on from last November’s resetting, and we hope that it will respond to the inflationary pressures. However, in our business plan, we do not see ourselves increasing rents to plug that gap. That is an important principle.

Thank you. Mark Griffin, do you have any more questions?

No.

I do not know whether this has been covered, but I want to ask a question about my new favourite thing, which is modern methods of construction. Is anyone working on that? We will hear from Colin Proctor, then Frank McCafferty.

I will let Frank go first, as he can talk about what is happening on the ground.

We are using and exploring modern methods of construction, which is the term that has been coined. We use the closed-panel timber frame system. The methods tend to be similar, and everyone is fishing in the same marketplace. With the regulations and especially the fabric-first approach, there is a drive towards the use of timber frames, but it is important to look at other modern methods, especially modular construction, because that will take the pressure off the sector and off trades. Modular construction is a good example. Something that is built in a factory does not use tradesmen; it is put together by skilled technicians.

All aspects of construction are valid and good, but spreading work across the different aspects should take pressure off the market, which is overheated at the moment. There is pressure right across the market, including on the supply of land and materials. That is true across the whole of industry. Anyone who has tried to buy a new car recently will know that. The lack of semiconductors translates into an issue with air-source heat pumps, putting pressure on programmes and increasing costs.

We have been looking at modern methods of construction and will continue to do so. Government support is important. We have been getting advice from the innovation centre in Glasgow about the types of construction that can be used.

Scale is important. If individual projects are bespoke, we lose some of the benefits of scale, such as production-line efficiencies. Given where the market is at the moment, there is an opportunity to take a leap and develop modern methods of construction at scale.

Thank you for that very enthusiastic response.

That was a good and enthusiastic response. It represents what we have heard today, what we hear from stakeholders around the country and the work that we have been doing to support the Scottish Government in the past 12 months.

It is important to understand that modern methods of construction—by which we mean the move towards manufacturing and off-site construction—are not new. Scotland is well ahead of the rest of the UK in delivering houses through off-site construction. About 80 per cent of homes that are built here use some form of timber frame. That is a good starting point. The examples that we have heard today show that there is a lot of momentum and interest from RSLs and local authorities that are willing to push the boundaries. We are seeing some really innovative stuff happening with modular construction in rural areas.

As Frank McCafferty said, there is an opportunity to take that to another level. The work that we have been doing makes it quite clear that some element of structural change is required. That is a grand term, which means that something new must happen at local or project level. New things should happen at national level, and there is also a requirement for something in between: some form of delivery mechanism that will enable us to move this agenda forward across an appropriate geography. That is what we are trialling in south-east Scotland, where Edinburgh is showing great leadership. We are working across all the local authorities there and several housing associations to find a new business model that will move that along.

That is what is being trialled. We have heard about different approaches to procurement and entering into longer-term partnerships. As Frank McCafferty and others have said, it is really important that, across housing providers, we look at common approaches. There will be a need for an element of common typologies of house types—that is required by industry.

12:15  

Another key point is that the process needs to be demand led and we need to be able to structure the future pipeline of work. Industry needs a much more certain pipeline of work in order to look for investment. Given that we have 110,000 houses to build, we need a bit more granularity on that, certainly in the short to medium term, to map out the process. We can then look at different business models for achieving that.

A new procurement model is emerging, which will be able to interface with industry in a different way. The industry is keen on that. Our work with the Scottish Construction Leadership Forum tells us that we need to enter into new relationships with industry.

There is a new business model across partners, which we are terming “horizontal collaboration” across housing providers. That gives us a new way of aggregating demand, shaping the products that we want to deliver and providing some sort of certainty. There is also a new economic model, which needs to be led at national level so that supply chain opportunities can be brought in and we can look to achieve consistency across the whole market.

To step this up to the scale that is required and deliver the momentum that is required, we need to consider how we make those changes. The work that is coming through in Edinburgh is really exciting. A foundation for that is being built, but we need to scale it up to national level. The Scottish Government has committed to that in “Housing to 2040”. It is the right thing to do to deliver the programme and to do it in an efficient way. It is not a white knight and it will not solve everything, but to meet some of the challenges that we are talking about, to develop a programme approach and to deal with supply chain and competitiveness issues, it is really important that we move ahead with that at pace.

It is great to hear your articulation of the new procurement, business and economic models. We have heard from this panel of witnesses and the previous one that the land issue underpins everything, so we must tackle that.

We will have to leave it there, for now. We have had another very useful conversation about affordable housing, which the committee is keen to continue pursuing. Thank you for joining us and sharing your perspectives.

I suspend the meeting to allow for a changeover of witnesses.

12:17 Meeting suspended.  

12:22 On resuming—