In a welcome move for the property industry, a "market engagement" paper has been published setting out proposals for a Rental Income Guarantee scheme (RIGS) which, if implemented, will see the Scottish Government sharing a proportion of rental income risk associated with qualifying build-to-rent private rented housing in Scotland.

The publication of the paper is a joint initiative between the Scottish Government and the property industry-led Private Rented Sector Working Party, and interested parties are invited to respond to the proposals by 22 April.

Eligibility criteria

Section 3.2 of the paper (a link to which is provided below) sets out eligibility criteria for the RIGS. These include:

  • The project is either (1) a new build for rental development not already under construction, (2) a new build project that has demonstrably stalled and is switching from a build-to-sell model, or (3) a refurbishment involving change of use from non-residential (e.g. a warehouse or an office);
  • The development comprises at least 30 units capable of separate residential occupation;
  • The site has outline planning consent;
  • The project is capable of being completed and occupied within 3 years of an in-principle agreement to a guarantee being provided by the Scottish Government;
  • The project development plan has a clear structure that shows an intent to hold completed units as rental stock for the duration of the guarantee;
  • The project has a credible financing plan for the construction and ownership of the project, assuming the completed units are held as PRS stock for the duration of the guarantee; and
  • The beneficiary of the guarantee would be the direct landlord of the project, and must be a body corporate in the private sector. (The paper envisages that in some circumstances this may be a Special Purpose Vehicle incorporated for the project, but this is not considered essential.)

The guarantee

Section 3.3 of the paper sets out the key features of the RIGS, and explains that the  guarantee is intended to compensate for a financial shortfall in qualifying projects arising as a result of lower than expected rental income.

The proposal is that the guarantee would work as follows:

  • An adjusted revenue projection is agreed for the project. The adjusted projection is derived after making an adjustment for voids and bad debts.
  • A standard adjustment for voids and bad debts would be set at 5%.
  • The adjusted projected revenue figure would be independently validated by a qualified third party.
  • During the period for which the guarantee is valid, in the event that the actual revenue is below a set percentage of the projected adjusted revenue ("the ceiling"), the Scottish Government would compensate the landlord for 50% of the shortfall, down to a lower adjusted revenue figure ("the floor"). (An example calculation is given at section 3.3.1 of the paper.)
  • It is proposed that the ceiling is set at 95% and the floor at 75% of the adjusted revenue.
  • A claim could be made under the guarantee over a maximum period of 3 years from the date that the accommodation first becomes substantially capable of occupation. (The paper seeks views on whether the proposal for a maximum 3 year period is sufficient or if flexibility should exist to request a longer guarantee period where this is required for developments to proceed.)

Responding to the paper

The market engagement paper acknowledges that the proposed RIGS mechanism only represents one form of guarantee and that there may be other forms of support for the sector that could deliver better value for money.  Property industry stakeholders who believe there are viable alternatives to the proposed scheme are encouraged to respond accordingly.

The initial period of the market engagement exercise will remain open until 22nd April 2016, although the Scottish Government has indicated that it may decide to extend the deadline at its discretion. It should be noted that the proposals do not cover the social rented or the help-to-buy / shared equity sectors.

The market engagement paper and response form are available on the Scottish Government's website.