Finance and Constitution Committee

Meeting date: Wednesday, June 14, 2017

Official Report 508KB pdf

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Proposed Contingent Liability

Item 2 is to take evidence from Kevin Stewart, the Minister for Local Government and Housing, on the proposed contingent liability. He is joined by Scottish Government officials Brad Gilbert, who is head of the financial innovation unit, Nathan Goode from the financial innovation unit and Rachel England from the finance programme management division.

Members have received copies of the letter from the minister setting out the background to the request. I welcome our witnesses and invite the minister to make an opening statement.

Thank you, convener. I apologise that there is unfortunately an error in paragraph 21 of my letter, which is referenced in paragraph 11 of the committee’s paper 1. The figure should read “£2 million”.

I clarify that paragraph 21 says £2.6 million.

It is paragraph 21 of my letter and paragraph 11 in the committee’s paper 1.

Thank you.

I seek the committee’s approval for a contingent liability on the Scottish Government budget for the rental income guarantee scheme. The scheme—RIGS for short—is designed to help to attract new institutional investment to the emerging build-to-rent market in Scotland. It will help to deliver, at scale, new high-quality private rented homes that are modern, energy efficient and professionally managed.

Growing the build-to-rent sector is in line with the aims of the Scottish Government strategy for the private rented sector and is one part of the delivery of our overall more homes Scotland approach, which aims to increase housing supply across all tenures. It will make an important contribution to our broader economic strategy by boosting investment and house building.

Build to rent is a rapidly developing market, which has so far mainly been focused in London and English regional cities, such as Manchester. There have been some notable early investments in Scotland, and RIGS is designed to further boost the growth of that emerging market. Pension funds and other institutions have shown considerable enthusiasm for the sector and have set aside substantial capital for investment, which Homes for Scotland has estimated at £10 billion. I want Scotland to have a share in that investment and RIGS is a key initiative to unlock it.

RIGS has been developed through close engagement with the industry, which has told us that a rental income guarantee scheme is the appropriate financial stimulus for the Scottish market. That is because a new market brings with it uncertainty, which increases the risk for investors and can stall investment. Under the scheme, investors will still be the primary risk takers and must cover the first 5 per cent of their rental income before the guarantee comes into play. After that, the Scottish Government will take only half of the rental income risk, and only to the extent that the rental income generated by the development remains at least 75 per cent of the original projections. In that way, the Scottish Government will ensure good commercial practice by retaining incentives for investors to let those homes.

Extensive work has been done to ensure state-aid compliance. The scheme needs to be a commercially viable initiative where investors pay a fee to participate. The costs of the scheme will depend on the nature of the proposals that are accepted and supported and how many calls are made under the guarantee. Extensive modelling has been done on the Scottish Government’s exposure; the maximum projected exposure for a contingent liability will be around £15 million. That would arise only if all the developments in the scheme systematically underperform. My officials have estimated that the maximum probable cost will be about £2.6 million. We believe that, in return, Scotland could attract investment of about £500 million to build 2,500 new homes, with the associated additional construction work and wider economic benefits. Given that significant leverage, that represents excellent value for money.

Is the £2.6 million that you mentioned the number that we have just corrected in the letter? Have I got that wrong?

The £2.6 million relates to the £2 million for potential calls on the guarantee plus the £600,000 that is the cost of running the scheme.

Okay. It is explained in paragraphs 21 and 22 taken together—I understand that.

In the paper attached to the minister’s letter, the last sentence of paragraph 10 says that RIGS aims to

“significantly boost new institutional investment in Scotland to build more homes, by reducing some of the risk that investors see in this emerging market”.

I did not see much comment in the letter or the annex about what those risks are that investors see. It would be good to have an explanation, minister, as that will underpin why you have brought the proposal to the committee.

We operate in a challenging economic environment, particularly post the European Union referendum. The message from the industry has been clear that investment to support the growth of the sector and reduce risk is needed more than ever.

The Scottish Government has, over the piece, made public its exploration of RIGS and the intention to introduce such a scheme. We market tested it and received a positive response, and we worked closely with industry to develop and refine the scheme further to create positivity in the industry. If we were not to progress the scheme, we would expect significant stakeholder backlash, particularly given the extensive time and effort that was put into involving stakeholders in the proposal. It would send a negative signal about Scotland as a place to invest and do business.

My initial reaction is that the industry would say that, wouldn’t it, because this sort of scheme would be helpful for it. You have heard that from stakeholders and others who are involved, but what information has the Government gathered from other sources to show that it is not just the house building sector that says that there is a need and that the risk is real?

We have done extensive work, including putting in place a private rented sector champion. Officials and the industry have a PRS working group, and we have tried to create a balance. We recognise that industry will always say that there are risks and that Government should intervene, but there have been difficulties out there for institutional investment, particularly since the EU referendum.

RIGS is designed to give early movers in the purpose-built PRS market greater certainty of income in the early years of letting by providing a limited Scottish Government guarantee. The market in Scotland is so limited that a proven investment would give investors the confidence to back early development in Scotland.

I will bring in Mr Gilbert, who has been at the forefront of discussions between industry and Government in the PRS working group and other fora.

There has been considerable discussion with all the market players—investors, developers and local government stakeholders—in the private rented sector working group. There is agreement about the potential demand for BTR in Scotland of between 7,000 and 10,000 homes. However, realising that potential requires us to ensure that we put in place the right conditions and support to achieve it. A range of measures has been put in place, of which RIGS is one element. As the minister says, it is about trying to provide support for the sector, which is the only tenure sector that does not currently receive some form of intervention from Government.

I will give the committee an example from Manchester, where a housing investment fund was introduced to deliver housing for sale and rent. Although it is relatively small scale, as it is delivering 119 new PRS homes, it has sent a positive signal to the market that PRS development is encouraged. Subject to launch, RIGS will send a similar signal to the market in Scotland.

You explained that, if everything was to fail at once, the maximum cost would be £15 million but, from the paper that I have seen, it seems that the reality is that it would cost more like £2 million if there was a problem. You estimate that, as a result of putting that up as a potential guarantee to be drawn on, the scheme could draw in up to £500 million of new investment in the sector in Scotland, which seems on the face of it to be a good deal. What level of confidence do you have in that number of £500 million and why do you have that level of confidence?

A huge amount of modelling work has gone on. The £500 million figure and the associated jobs are part of that modelling. We have had not only Scottish Government officials but the Scottish Futures Trust, Scott-Moncrieff and, of course, the PRS working group consider it. A pretty significant amount of work has gone on in that regard over the past 18 months.

Mr Gilbert might want to add to that.

The figure of £500 million of new investment is based on an estimated £200,000 per unit for each of 2,500 units that could be supported through the guarantee. That is an estimate of the number of units that the scheme could cover and it is judged that that is the appropriate level of support to help to establish the market for build-to-rent housing at scale in Scotland.

I have strayed into modelling. Adam Tomkins will deal with that.

If the figure of £500 million is based on the 2,500 units figure, how robust is the latter figure?

I will shortly bring in my colleague Nathan Goode, who has done a lot of the modelling in the RIGS work. We have considered what would be a reasonable level of exposure, and the judgment in the modelling is that 2,500 units would be the appropriate number to accommodate.

09:15  

With respect, this is beginning to sound a little bit circular. The amount of money to which you are prepared to expose the taxpayer is dependent on the number of new homes that you want to build—or the number of new homes that you want to build is dependent on the exposure to the taxpayer. Where is the starting point?

The key thing is that we want more than those 2,500 homes to be built. We have indicated that that number is basically a starting block, which will entice future development. I return to my point about the investment that Manchester made in a small number of PRS homes, which allowed the sector in Manchester to grow once there was confidence in the area.

Is the Manchester scheme, to which you have referred a few times, a UK central Government scheme, or is it a greater Manchester local government scheme?

There is a UK Government scheme that provides a guarantee on borrowing. The Manchester scheme has its own housing investment fund, as far as I am aware.

Why do we need to do it through central Government in Scotland, rather than through Glasgow City Council, for example?

As regards waiting for others to do it, it is right that the Scottish Government takes the lead. As we have already said, the measures could lead to £500 million of investment. It is right that, as a Government, we show willing and get on with the job of enticing folk to see Scotland as a good investment, and build the houses.

To return to the question of how we decided on 2,500 units, I will underline what the minister said: our estimate of the total potential build-to-rent number is 7,000 to 10,000 units, based on the work that we have done with the PRS working group. We think that a subset of that is appropriate for the level of support that is required to entice in the investment in the sector overall.

Is the £600,000 figure that has been quoted part of the contingent liability, or is it separate from the continent liability?

That amount is separate from the continent liability—it is the cost of using the delivery partner to implement the scheme to administer the applications for and assessments of guarantees, and the implementation of individual guarantee offers.

That cost will be drawn from this year’s budget. What budget line will it be allocated against?

I will correct you on that. That cost will not be allocated from the departmental expenditure limit budget per se. According to the accounting term for this, the cost can be covered by using the income from the guaranteed fees, because they are classified differently. That is from the annually managed expenditure budget, rather than from the DEL budget.

Do you want to add to that, Mr Gilbert?

No. That was an accurate description.

So, are you trying to say that there is an income line that that sum will be set against?

Yes. Basically, there are two elements. One is the provision that comes from the DEL budget to cover the cost of administering the scheme, and the other is the calls on the guarantee.

I am sorry, but I am not clear on where the £600,000 will come from. It is £600,000 that will have to be spent if the scheme goes ahead—I understand that, but I am not clear where it will come from.

It will come from the directorate’s resource budget and it has been factored into forward budget planning.

Okay—so it is from the resource budget.

Ms England will provide a full explanation of how that will work, over the piece.

The £600,000 is the administrative cost of making the scheme work over the lifetime of the guarantee; it is not the total cost in one year. It is spread over the whole term for which the guarantee will operate and it covers the cost of the work that is to be undertaken by the delivery partner. It will be a DEL cost from the resource budget, but it will be over several years.

How many years will that be?

We expect to pay roughly £175,000 in each of the first two years and we expect that the cost will reduce as the scheme becomes established.

The minister’s opening statement outlined that there will be a call on the contingent liability only if there is underperformance in the scheme. What would cause underperformance?

Underperformance would be caused if investors were unable to find tenants to rent the properties. However, a number of safeguards are in place to reduce that risk, including chartered surveyors going in to look at local rent levels to see whether they would entice renters, as well as looking at the local market as a whole to see what the element of risk is.

Has your modelling covered what appropriate rent levels would be to attract people to rent the properties?

Again, that comes down to chartered surveyors going to look at the market in particular areas and coming up with realistic rent levels that could be garnered there. That safeguard is in place to reduce the exposure and the possibility of a call on the guarantee scheme.

I am sorry, but I am not clear on that. Has there been appropriate modelling covering different scenarios on rent levels?

I will pass to Mr Gilbert to talk about the modelling.

The answer is yes. Perhaps I will invite my colleague Nathan Goode to say a little bit more on that front.

To work out the overall potential exposure for the Government, we needed to make assumptions about the rent levels that would apply to those units. It is a Scotland-wide scheme so, in practice, the rent levels could vary significantly, depending on where projects are located. To analyse that further, we looked at void rates in areas to assess potential exposure and how it might vary between locations according to local market conditions.

As the minister said, when it comes to considering applications in practice, we will have a mechanism in place in which chartered surveyors will give a view on whether the proposed rent levels for the project are consistent with local market conditions.

I am interested to know how the Scottish Government has estimated demand for the RIGS scheme.

As I said earlier, there have been numerous discussions over the piece with the PRS champion, through the PRS working group and with the industry, and there seems to be a great appetite out there for such a scheme. Investors believe that it would help them to enter the market; once some investors have entered the market, more will follow suit. From my perspective and from the communications that I have had, it is fair to say that the appetite out there is substantial. The demand is industry led; Homes for Scotland has estimated that there will be demand for 7,000 to 10,000 homes over the next five years.

We are currently in a fairly unstable economic situation. Do you estimate that demand will be fairly steady, or will it be influenced by a change in the economic situation caused by Brexit or something of that sort?

As I said earlier, since the referendum on the EU a certain amount of instability has been created for investors. We can attract investors if we have something such as RIGS in place. We know that there is demand for housing, including for housing in the private rented sector. We have already seen a small amount of builds in Aberdeen, for example, and there have been proposals in Edinburgh. What we are proposing would mean that building will increase. It is fair to say that the likelihood is that the vast bulk of demand and investment will be in the four main cities, first of all.

Mr Gilbert said that build to rent is the only sector that does not receive any interventions from Government. If we do not proceed with RIGS, what model would we need to fund and deliver the 7,000 to 10,000 houses?

If the scheme does not come to fruition, we are likely to see less investment in Scotland. At the moment, the vast bulk of institutional investment in such housing has been in London, the south-east of England and the major English regional cities. There have been some small developments in Scotland: Dandara has built 292 units in Aberdeen and there have been some recent moves in Fountainbridge in Edinburgh. It has been pretty slow in Scotland compared to other areas; the RIGS is designed to create attraction and to pump-prime further growth.

The conversations that we have had over the piece suggest that the scheme will balance risk between the Government and industry to get the sector into a much healthier state than it is in Scotland by attracting the investment that is currently going elsewhere—that £500 million—and by creating jobs in the construction industry.

To clarify a point about the liability that you are asking for from the committee today, how many units do we get for that potential investment?

The maximum number of units is 2,500.

09:30  

If that is successful, would it be your intention to come back at a future date for another opportunity to do something like this, to support up to between 7,000 and 10,000 additional units?

I hope that the scheme will be successful enough to attract investors who will not feel the need in the future for a rental income guarantee scheme. It is to show investors that the market here in Scotland is healthy; the great hope is that we attract additional investment in the sector in the future without the need for the scheme.

I draw the committee’s attention to my entry in the register of members’ interests with respect to rental property.

I thank the panel for coming along to give evidence. There are a few things that I want to touch on, but first I want to clarify a couple of the numbers that have been mentioned. I thank the minister for clarifying the point about the £2.6 million versus the £2 million, with reference to paragraph 21.

I would also like to compare paragraphs 15 and 22. In paragraph 15, you state:

“the scheme is expected to be financially neutral with a fee income of £1.4 million being balanced against the expected calls ... and administration costs.”

In paragraph 22, however, you talk about a likely guarantee cost of £2 million, plus the £600,000 of fees on top of that. Is there a disconnect there? I would like to tidy up those numbers to start with.

I will bring in Mr Gilbert.

To clarify, we talked about paying out £600,000 in administration to run the scheme, and we have talked about a range of predicted calls between £200,000 and £2 million. The base case is in the middle.

So if that comes in at £800,000, you are balanced.

Yes.

It is essential to be clear on that.

The modelling is based on assumptions, and the reality may be a little bit different.

That is fine. In general, the concept is great, because it is an intelligent intervention to focus on the gap in the investors’ concept and to give them a reassurance that it is derisking for them. What you say about the void seems to include underoccupancy as well as shortfall in rent. As I understand it, you are combining both of those to estimate what the rental income will be, and it could be made up of either one of those components. Is that correct?

A substantiated level of void rates in line with the local market conditions will be factored into the independently verified rental projections, so any call on the guarantee would come into effect only at that point. Is that helpful?

You have said that you will assess a rental income for each set of units, depending on where it is, and that, if the actual income is 95 per cent or less, you will pay out the guarantee. Is that correct?

The 95 per cent represents a 5 per cent buffer on top of what would be expected from normal void levels. That 5 per cent is borne by the beneficiary to act as an incentive to secure that regular rental income. Void rates as a whole are well below 5 per cent in Glasgow and Edinburgh, and we would expect build-to-rent properties to have lower void rates than that. If I remember rightly—I look to Mr Gilbert to correct me—the original proposal that was received from the PRS working group included, as might have been expected, a request that the Government take on 100 per cent of rental income risk within a smaller band. I hope that Mr Gilbert can correct me if I am slightly skew-whiff on that point.

That is correct, minister. The original proposal from the industry was that the Government would take 100 per cent of the rental risk. Clearly, we deemed that that would not be acceptable, which is why we reached the current proposal, where there is 50:50 risk sharing between the defined bands at 95 per cent and 75 per cent. It is very much about finding the balance between commercial objectives and the Scottish Government’s interests.

I am totally clear about that, and the concept is fine, but that is not the point—I am drilling down into the numbers. However, you have confused me a bit further by what you have just said. The way I read it was that a chartered surveyor would say that the market rent for a certain property was X, and you would say that, if it was rented out for 52 weeks of the year, the income would therefore be Y, and that would be the 100 per cent baseline. Then, if the figure fell below 95 per cent of that, the guarantee would kick in. However, if I understand what you have just said correctly, you will take what you expect to be the income over 52 weeks and then factor in an industry standard void rate and set that as the 100 per cent baseline. Is that correct, or was my original interpretation correct?

I invite Nathan Goode to confirm that.

The issue is important, as it is about attractiveness to the market.

Yes, it is important.

You are absolutely right, Mr McKee. The need to get that balance right is why we have spent so much time thinking about the issue. The way that you described the process the second time was correct. We expect an assumption about voids and bad debts to be plugged into the original baseline number that will then be used for assessing whether the actual outcome is 95 per cent of that target.

Okay. So the 100 per cent number on which you will base the deal with the investor is a net number that takes out risk and so on.

Correct—it is a net number.

My next question is about what happens on the upside. There are two parts to that, and I expect that Patrick Harvie will come in on some of the issues later. First, if the yield is 110 or 120 per cent, will the Scottish Government get some kind of clawback on that? Secondly, what implications are there for market rents? Do you envisage any kind of rent capping to deal with that situation? Will you say to investors that you think that the rent should be X, and it is unfair that they are charging X plus 10 or 20 per cent? Have you considered either of those aspects?

We considered those issues carefully with the working group and internally and we came to the conclusion that the proposal needs to be simple and straightforward for the market. Having landed on a 50:50 risk share—a situation where we are never fully indemnifying; we are taking on half of the risk at any point in time from the industry—we came to the view that we could not look for an upside clawback mechanism, because that was not consistent with the level of benefit that we were offering as part of the proposal.

Rent capping was also debated extensively. Brad Gilbert might want to pick up on the issue, but the conclusion was that there are other mechanisms to manage rent levels in Scotland’s cities, and we should rely on those to deal with that issue.

We have talked about the due diligence in RIGS, which will ensure that rents are in line with those in the local market. The Private Housing (Tenancies) (Scotland) Act 2016 will add protection for tenants against excessive rent increases in two ways. The landlord will be able to increase rents only once every 12 months, and tenants will have the right of appeal if that is considered to be unreasonable. There is also the facility for local authorities to exercise discretion to provide evidence to make the case that rent increases are excessive and to use the rent pressure zone mechanism. Those protections are built into that tenancy reform legislation.

On some of the mechanics, I assume that, if the investor sells the property on, the scheme moves with the property, and I assume that you have in place an audit process to check that what you are being told about rental incomes and so on is verified.

Yes, but Mr Goode can give you more detail about that.

One thing that we were concerned about was ensuring that there is no cherry picking. We do not want investors selling off property that they are having no difficulty letting and leaving others within the scheme and claiming within the guarantee. The structure will say that an investor either is part of the guarantee scheme or is not. The guarantee can transfer if the ownership of the entire scheme transfers, provided that the transfer is to an entity that the Scottish Government is comfortable with as a counter-party.

The minister introduced the issue of state aid, and I know that Liam Kerr has questions about that.

Before I turn to state aid, I would like to follow up on a couple of earlier questions. You have obviously done extensive modelling of the various scenarios, but I think that you do not intend to publish any of that modelling. Why not? It seems odd that a lot of what is going on is based on modelling that no one is able to see.

There are areas of commercial sensitivity. Mr Goode can explain further why we feel that we cannot go fully public on all of them.

The essential point is that we are using the modelling to set a price for the guarantee, and we do not want the people who are going to be taking up the guarantee to have access to our workings. We are providing them with an offer, and it is for Government to determine what the appropriate balance of reward and risk is within that analysis. That is not information that is to be shared with our counter-parties.

You talk about the UK’s guarantee support for the sector, but you say that feedback from the industry indicated that that was not what was needed in Scotland. Could you develop that point? What is different about Scotland, and did that approach work in the rest of the UK?

I already pointed out that certain areas, including Manchester, went above the UK scheme. Potential investors have pointed out that the UK scheme is not the right thing for Scotland. Accordingly, we put together the PRS working group to come up with a mechanism that would ensure that the necessary investment was delivered. Mr Goode can give you more details.

The UK scheme is a debt guarantee scheme, so it provides lenders to projects with an underwriting. That is fundamentally different from what we are proposing, which is a rental guarantee scheme. Developments in Scotland can apply to be part of the UK debt guarantee scheme, and they have done so. The two schemes are potentially complementary.

You ask whether the UK scheme has worked. It has certainly been slow to take off, and there are a number of reasons for that, which we do not have time to go into today. The jury is out on the UK scheme.

The reason why it was felt that Scotland needed something different involves not a finance issue but one of visibility of future rental income. Because there is a lack of a track record in the build-to-rent sector in Scotland, there is little on which investors can base their investment assessment that is already in place in Scotland. That is discouraging people from deciding to invest in Scotland. Like everyone else, investors are often a bit parochial, so they tend to start with London and then move out to the English regions. What we are trying to do here is to find a way of helping Scotland to jump the queue, in effect, and become more attractive to the investors who would otherwise just play a waiting game with Scotland and not come here until quite a bit later. The fundamental idea of the scheme is to bridge that analytical gap for investors and to provide a tool for them to get over the line in relation to investability in Scotland.

09:45  

That leads on quite nicely to state aid. You have designed it as a fee-based scheme in order to reduce the risk of an issue with state aid. I see that

“The State Aid Unit considers the risk of state aid being present in RIGS is low”,

but a low risk is nevertheless a risk, so the question is what happens if the unit is wrong. What if it is state aid? What is the impact if it is judged to be state aid? Why is there no assurance? Is there no possibility to just go and find out whether it is state aid?

We talked to the state aid unit and, as you rightly point out, it says that the risk is very low and that it is

“satisfied the charging of a fee to beneficiaries of the guarantee, which is linked to commercial considerations, addresses the risk of non-compliance”.

As well as doing that—

Forgive me a second, minister—

Let him finish.

As well as doing that, we commissioned Scott-Moncrieff as independent financial adviser to assess the approach to ensuring state aid compliance and to confirm that state aid principles have been followed appropriately.

I accept that. I just want to clarify something quickly. You said that the risk is “very low”, which is slightly different from your letter, which just has it as a low risk. Can you clarify that? Also, what if that assessment is wrong? What is the practical implication of it being wrong?

Mr Goode will comment on that.

The way that state aid works is that the risk arises as a result of a potential challenge from a party who feels that they have been unfairly treated as a result of the state intervention. The first question that arises is who would challenge and why they would do so. It is difficult to find a rationale for such a challenge, so we see the risk as being conceptually possible but largely theoretical.

The consequences of a challenge would in effect be for the value that beneficiaries have received and there is a provision in the guarantee documentation that will make sure that beneficiaries of the guarantee are aware of the state aid position. They will be stepping into the scheme knowing that that is the situation. We think that a challenge is highly unlikely and, as the minister said before, we have the appropriate assurance that we need.

Another point is that we could adapt the scheme very quickly if it appeared that some form of state aid challenge was likely.

I want to follow up on one or two issues around the numbers and then go on to a wider issue. You cite the industry estimate of the build-to-rent potential as being in the range of 7,000 to 10,000 homes over the next four to five years, with an estimated 4,000 units in the pipeline. That includes

“projects already being built or with planning approval, and early stage opportunities with identified investor interest.”

Am I right in assuming that those 4,000 units will not be eligible for the scheme given that they have got to where they are without support?

The information is based on informal intelligence from the industry, and the developments in that pipeline are at different stages. Some developments, of which there are recent examples, are proceeding without Government support. RIGS is designed to accelerate developments by providing a bit of support, particularly for developments that would not otherwise proceed.

I accept that that is the intention, but does that mean that your projected up to 2,500 homes are on top of the current 4,000 that are in the pipeline, or are they within that figure?

Some of the homes could be within that figure. As was mentioned, the 2,500 are a subset of the overall 7,000 to 10,000 potential homes, and some of the developments that are in the pipeline may well seek guarantee support on the basis that the investment decisions have not yet been taken and may not be taken.

Yes, but I presume that you do not want those who do not need the support to access the scheme.

Absolutely.

I am not sure where the cut-off is. Is eligibility to apply for the scheme based in some way on demonstrable need?

Each application will be looked at intensely by officials here, Mr Harvie, to see whether RIGS should apply to a particular scheme. The development at Forbes Place in Aberdeen, where the units are already in place, is up and running and would not qualify for the scheme. However, in some cases where the development is in the pipeline, there may be a need for a call on RIGS to make the scheme a reality. Each case will be considered individually.

The bulk of the 2,500—at the maximum—homes could still be within the 4,000 that are identified as being in the pipeline.

They could be, but they may not be.

How does the scheme connect to wider Scottish Government housing policy? In looking at the financial merits of the scheme, we should be looking at the value that is obtained. Is that value judged purely in numbers of units or in terms of the type of house building that is going on? We surely do not want the urban equivalent of gated communities, and we do not want investment to be speculative with only high-end properties being built. We want to build to meet the need that exists for housing that people can afford to live in.

You have cited London as an example of where the build-to-rent model has been more successful. Surely, I hope, we do not want to get to the point that London is about to reach, where private renting is the biggest tenure—or do we?

The Government has said clearly that we want to see a mix of tenures. It is obviously not all about numbers; I want to see quality in all builds that take place in Scotland. The scheme will have no effect on the resources for the Government’s ambition to deliver 50,000 affordable houses, including 35,000 for social rent, during this session of Parliament.

We know that private renting has grown over the piece—the number of properties in the private rented sector has tripled since the 1990s—and that, UK-wide, it is likely to hit 20 per cent of tenure by 2020. I do not want to restrict people’s choice of tenure. I choose to stay at home with my folks at the age of 49—I choose that, but I do not know whether they choose that. I do not want to restrict anybody and prevent them from going into whatever tenure they want to go into. However, I also want homes, whatever the tenure, to be the best that they can be. This is not just a numbers game; it is about providing the right homes for people in the right places and under the tenure that they want.

Having visited the development in Aberdeen recently, I know that the quality of the product is very high indeed. If we can achieve that standard, we will be doing well.

The scheme itself will set thresholds and standards. You say that it is not just a numbers game. The scheme will have standards for rent levels, integration with the wider community and the proportion of homes for social rent as we have for other developments.

We will look at each of the developments individually. If the properties are not of the quality or standard that means that they can achieve the expected rent, that will make it difficult for us to say that that level of income is achievable. That, in itself, will restrict our making that guarantee.

I do not want to be too prescriptive about what we are looking for. In order for all of this to work properly, rental value must be achieved. If the properties are not right, their rental value will not be achieved.

I take the point. It reinforces the idea that, if the public sector is taking half the risk, maybe the private sector keeping all the profit is not the right balance to strike.

How will we judge the success of the scheme as it goes forward? You said that the modelling will not be published, and you have given some reasons why you think that that is appropriate. I presume that details in respect of each application—such as the application of the scheme, the type of development that is able to access it, the extent to which the developments have drawn on the guarantee that has been provided to them and whether the fees match the cost of providing the guarantee and the calls on the guarantee—will be given to Parliament in due course so that we can judge whether the Government has achieved value for money.

We will report to Parliament on the costs of the overall scheme if it goes ahead. Reporting on individual developments might cause some difficulty. I would like to clarify that and write to the committee about it.

I am not sure how we will be able to judge the merits of the scheme until we have an answer to that question.

I will need to check the possibility of reporting on individual developments. We can give you the overall numbers, but the cost of providing the scheme to individual developments might be commercially sensitive. I would like to get back to the committee on that point.

You might have to get back to us confidentially.

Absolutely.

Neil Bibby, do you have some questions?

No, I think that they have been covered.

I thank the minister and his officials for their evidence. The committee will consider its response to the Government’s request in private, later in the meeting, and we will write to the minister to confirm the committee’s decision.

09:59 Meeting suspended.  

10:03 On resuming—