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.