Briefing: Rent Convergence

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1 30 September 2013 Briefing: Rent Convergence Summary of key points: The end of rent convergence threatens to cause issues with viability and capacity for some of our members. The Federation has communicated our concerns to the Treasury and the Department for Communities and Local Government. A consultation on the rent settlement is expected in October 2013 and the Federation will produce further briefings at the conclusion of these discussions.

2 1. Introduction Following the announcement of the new rent settlement for social housing in the July Spending Review, we have been working with members and Government to understand the detail behind these announcements and the impact they may have on housing associations. This briefing is intended to give an update on our discussions and seek views from members on the proposed way forward on some of these issues. 2. Background In the 2013 Spending Review the Government announced the ten-year rent settlement for the period between 2015/16 to 2024/25. As members will be aware, the new rent formula means that social rents will increase annually by the consumer price index (CPI) plus 1%. In our briefing on the Spending Review and subsequent FAQs the National Housing Federation welcomed the ten-year announcement, as it provides housing associations with certainty over rent levels and enables our members, and their lenders and investors, to begin planning for future development. The previous briefing and FAQs can be found on the Federation website - /publications/browse/spending-review-briefing. The move from a rent formula of the retail price index (RPI) plus 0.5% to CPI plus 1% has been met with some scepticism. In the past 12 months RPI has, on average, been around 0.5% higher than CPI, meaning that in the short term the rents provided by the different formulas should be broadly comparable. However, there are worries that in the long-term CPI might produce a lower measure of inflation, meaning that housing associations will suffer a real-terms loss in their rental income. Housing associations will need to factor this potential income loss into their business plans. CPI is now used across Government, as it better meets international standards as a measure of inflation, so this part of the settlement is unlikely to change. In our briefing on the Spending Review we noted that the new rent settlement made no mention of the provision of +/- 2 per week to allow convergence towards the target rent. However, in response to a subsequent enquiry made by the Federation, the Department for Communities and Local Government (CLG) confirmed that the policy of rent convergence will end from 1 April The Federation is aware that for some housing associations the loss of the ability to increase rents by 2 per week could mean they will be unable to continue as viable businesses or will, at the least, lose significant capacity to develop additional housing or invest in neighbourhood or community services. Although it is difficult to predict the total loss of income, some of our

3 members have predicted losses of 20 million over the 10-year rent settlement period. As members will be aware, we have been communicating with the CLG and the HCA about these concerns. As set out in their letter to the Federation in July, CLG thinks that the 15-year period of rent convergence would mean that most landlords would have achieved rent convergence by However, this does not take into account that much of the housing stock transferred from councils to housing associations was subject to rent protection at the time of transfer. We have informed Government that many housing associations have been unable to use the full period of rent convergence and consequently still have a significant number of properties below target rent. Similarly, some properties transferred had particularly low social rents and even using the full period of flexibility has not afforded them sufficient time to achieve full convergence with target rents. CLG are due to consult on the new rent settlement in autumn Progress In order to better understand the impact on housing associations of ending rent convergence, we sent a survey to all members in August. We are grateful to all the housing associations that completed the survey as the evidence gathered has helped us to strengthen the case to Government on the negative impact of ending rent convergence. The purpose of the survey was to understand the impact, in terms of cumulative rental impact lost, of increasing rents by CPI + 1% only from 2015/16, compared with increasing by CPI + 1% plus 2 per week (for properties below target rent, until they reach target rent). We asked members to follow a standard methodology in order to ensure consistency in responses. We were also keen to understand the extent to which housing associations had used the existing rent policy flexibilities, whether they had a waiver or exemption already in place and the impact the loss of rent convergence would have on viability or development capacity and / or investment in community activities. The results of the survey showed that for many housing associations the impact will be manageable within the context of their current business plan. However, there are a number of housing associations where the consequences for viability and / or capacity could be significant. While it is difficult to suggest the total value of the net rental income foregone across the sector, we have several examples of housing associations where the loss exceeds 20 million over the 10-year period. Some housing associations would have 70% to 90% of their housing stock not at target rent by April 2015 under the current settlement. For these housing associations the cumulative impact

4 in terms of lost rental income will clearly be great. For some housing associations convergence would need to continue until at least 2025/26 for them to meet target rent on all of their stock. In most instances these are large scale voluntary transfers (LSVTs) whose rents were subject to a rent guarantee at the point of transfer. The length of these guarantees were typically five years, but others were for up to 15 years, meaning they were unable to use the full period of rent flexibilities the convergence policy afforded. It is worth noting that almost all respondents had been using the full flexibilities available, where possible. The potential impact of the loss of convergence cannot be taken in isolation, with many of the hardest hit LSVTs also losing capacity through increased Right to Buy sales. On 17 September, David Orr wrote to the Housing Minister Mark Prisk MP and Danny Alexander MP, Chief Secretary to the Treasury, voicing our concerns about the loss of income resulting from the end of rent convergence. We raised two main concerns viability risks and the loss of business capacity. In our letter to Government we relayed the concerns from a number of members that the loss of rental income might result in their businesses facing serious viability problems. Members have told us that the loss of income, which affects their projected cashflow, could push them into breaching loan covenants. Loss of rent convergence also risks some housing associations exceeding or delaying peak debt, or others finding that they are unable to increase their borrowing to meet their income shortfall. While some housing associations will be able to renegotiate the terms of their debt repayments, others will be unable to demonstrate sufficient income and might be forced to default. Given the implications of any housing association losing viability on the pricing of debt in the wider sector, we have raised this issue with Government as a matter of urgency. We have suggested to the Government that where a housing association faces viability issues because of the end of rent convergence, they should be provided with a waiver from the HCA so that they can continue to use the 2 a week increase to move towards target rent beyond Waivers should be granted to housing associations whose viability problems are explicit and immediate. They should be in the widest possible terms in order to allow housing associations to continue planning their rents on the basis of the 2 flexibility until they are able to put their finances in order. In addition, waivers should also be granted to associations whose loss of rent, as outlined above, could lead to them breaching loan covenants, mean that they delay or exceed peak debt, require them to take on more borrowing, or to re-profile debt repayments. Again, we have argued that the terms of such waivers should be as wide as possible, to allow housing associations the best chances of renegotiating their lending agreements. We have also suggested that the waivers should be agreed before the Government s consultation on the policy, as this earlier time frame will allow members who need to refinance to do so as a matter of urgency.

5 A larger number of our members have concerns that lower rents will lead to a reduction in their capacity. Owing to a loss of capacity, housing associations will have less money available with which to invest in developing new housing or to fund existing community services. In this sense, the end of rent convergence is inconsistent with the Government s stated ambition to increase housing supply. At a time when some housing associations are also facing pressures from lost capacity from Right to Buy, these changes do not help uncertainty about future affordable housing funding. Our suggestion to Government to mitigate the effect of this lost capacity is to phase the ending of rent convergence over a period of time rather than at once in April The Government could use the consultation to decide what period of time would be reasonable. It could also explore whether any flexibilities in the short term might further mitigate the impact of lost capacity. For example, would an increase of more than 2 a week for a very limited period after 2015, allow housing associations to meet target rents over a shorter period of time? These suggestions would still allow the Government to end rent convergence in the long-term and yet better protect the capacity of housing associations. If you have any views on our suggestions to Government or the impact on the end of rent convergence on your organisation please do not hesitate to contact Catherine Ryder (catherine.ryder@housing.org.uk). 4. Next Steps The Federation is, as noted above, currently engaged in conversations with CLG, the HCA and the Treasury and are working to influence the content of the expected consultation due in the autumn. We will, of course, publish a further briefing once we have concluded these discussions and the consultation has been published. We have also taken legal opinion about the decision to end rent convergence. Once the consultation has taken place and the final policy has been announced we will explore further whether there are any legal implications associated with the decision.