Member briefing: The Social Housing Rent Settlement from 2015/16

28 May 2014 Member briefing: The Social Housing Rent Settlement from 2015/16

1. Introduction On Friday 23 May Government issued the final policy for Rents for Social Housing from 2015/16, following a consultation period that closed in December 2013. They published a summary of the consultation responses, along with a Direction on the Rent Standard 2014. https://www.gov.uk/government/consultations/rents-for-social-housing-from-2015-to-2016 https://www.gov.uk/government/publications/direction-on-the-rent-standard-2014 A 10 year rent policy was announced, which will increase social rents by Consumer Price Index (CPI) + 1% each year, compared to the current policy of Retail Price Index (RPI) + 0.5%, from April 2015. It was also confirmed that provision for housing associations to increase rents by an additional 2 per week to help achieve convergence with target rents will be abolished. We have welcomed the certainty that an index-linked 10 year rent settlement provides for housing associations. A long-term settlement with annual rent rises above inflation is a positive step and will give housing associations the confidence and resources they need to plan for future development. It will also give lenders and investors the certainty they need to continue to work with housing associations to provide the finance for new homes. However, we are disappointed Government decided to go ahead with the proposal to end rent convergence despite strong objections from the National Housing Federation and many others. This means housing associations with historically low rents will have very limited provision to increase their rents to move towards target rent. This will constrain the ability of some housing associations to continue to develop new affordable homes and invest in communities and neighbourhoods and for others the impact could be more severe, meaning they will have to significantly revise their business plans and ambitions to protect their ongoing viability. On Tuesday 27 May the Homes and Communities Agency issued their Consultation on Changes to the Regulatory Framework. https://www.gov.uk/government/consultations/changes-to-the-regulatory-framework This consultation will run until 19 August 2014 and includes the Rent Standard Guidance setting out how housing associations are expected to comply with the new social housing rent policy. Waivers from the requirements of the rent standard may be issued in limited circumstances, which may include housing associations being able to increase rents by more than CPA +1% to help achieve target rent. We welcome the acknowledgement that the Regulator will consider waivers where ending convergence prevents commitments to tenants being met, as well as due to issues with ongoing

financial viability, but our concerns remain that requests for waivers will only be considered when all other possibilities have been explored. The protracted delay in issuing the final rent policy and the associated Rent Standard Guidance, which is still subject to a 12 week consultation period, has made it very difficult for housing associations to plan for the future, particularly if they need to revise their business plans and ambitions in light of the final policy and any subsequent waivers. Given this delay we have urged Government and the Regulator to delay implementation of the new rent policy until April 2016. This would mean rent convergence continuing for an additional year, giving the Regulator and associations time to properly consider, and plan for, the impact of ending convergence before it is brought in. This briefing provides further detail on the new rent settlement where it differs from the current approach and sets out the implications for housing associations. 2. Background Following the 2013 Spending Round announcement on the social housing rent settlement from 2015 onwards, in October 2013 the Department for Communities and Local Government (DCLG) published a consultation on Rents for Social Housing from 2015/16 and a draft Direction on the Rent Standard 2013, also for consultation. The consultation invited views on the proposed rent policy for social housing from 2015 onwards. It sets out the proposed changes to the current rent policy, namely: Moving from annual increases in weekly rents of RPI + 0.5% to increases of CPI + 1% Removing the flexibility available to landlords to increase weekly rents by an additional 2 per week where the rent is below the rent flexibility level (i.e. the target rent plus the relevant tolerance) and rent cap Making clear that rent policy does not apply where a social tenant household has an income of at least 60,000 a year. You can read our response to the consultation on the Federation website: /publications/browse/rents-for-social-housing-from-2015-16/ Rent policy applies to housing associations through the Rent Direction issued by the Secretary of State, and the Rent Standard issued by the Regulator. Following the outcome of the consultation, the Government issued a new direction to the Regulator on rent and the Regulator is now consulting on changes to its regulatory standard on rent.

Following the consultation, Government made a small number of changes to the initial proposals. Most notably they have decided to maintain the rent caps as they are not convinced there is an overwhelming case for removing the caps or that doing so will have a significant positive impact. 3. Rents for Social Housing from 2015/16 The main elements of the new social rent policy to apply from 2015/16 for 10 years are as follows: Social rents should continue to be set on the current basis Social rents should increase by no more than CPI + 1% annually The policy of rent increases of up to an additional 2 per week to allow convergence with target rent will no longer apply The rent flexibility level of 5% above the formula rent for general needs housing and 10% for supported housing will continue to apply Rent caps will continue to apply Affordable rents should continue to be set on the current basis Affordable rents should increase by no more than CPI +1% annually 4. Annual increases of CPI + 1% From 2015/16 social housing rents can increase annually by no more than CPI + 1%, compared to the current permitted annual increase of RPI + 0.5%. The change to CPI is in line with a move across Government to use this measure, as far as possible, when an inflation index is used in policy. The move to CPI + 1% will naturally lead to questions as to how this compares with the existing settlement of RPI + 0.5%. This will depend on future inflation, but recently RPI has, on average, been around 0.5% higher than CPI, suggesting the new formula should give a broadly comparable rent increase in the short-term. The inflation figures released in September 2013 showed RPI at 3.2% (used to calculate rent increases in April 2014) and CPI at 2.7%. The CPI figure released in September 2014 will be used to calculate rent increases in April 2015. In the long-term, the difference between RPI and CPI is more uncertain and forecasts suggest the gap may grow. Housing associations will need to be mindful of any potential fall in income over the long-term and factor this in to their business planning process accordingly. Annual rises above inflation should give housing associations the confidence and resources to plan for future development. It is also helpful in offering lenders and investors the certainty they need too.

Government have said in switching from RPI to CPI they hope to put rents on a more stable footing. They have taken this action following the announcement from the National Statistician that the formula used to produce RPI does not meet international standards. 5. Ending rent convergence From 2015/16, housing associations will no longer have the provision to increase rents by an additional 2 per week (on top of CPI +1%) to help achieve target rent on all properties. The last time the 2 per week increase could be applied to rents was 2014/15. Otherwise, properties with rents below target rent can be re-let at target rent on vacancy. Target rents will continue to exist after 2015 and the general expectation that housing associations set rents with a view to achieving - as far as possible - conformity with target rent also still apply. DCLG said they expect most landlords to have achieved convergence by 2015. By that point, the rent convergence policy will have been in place for almost 15 years this is a significant amount of time for landlords to make full use of the rent flexibilities the Government have provided, and most have done so. However, much of the housing stock transferred from councils to housing associations was subject to rent protection at the time of transfer. 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 rents and even using the full period of flexibility has not afforded them time to achieve full convergence with target rents. We are disappointed Government decided to go ahead with the proposal to end rent convergence despite strong objections. Housing associations with historically low rents will have very limited provision to increase their rents to move towards target rent. This will constrain the ability of some housing associations to continue to develop new affordable homes and invest in communities and neighbourhoods and for others the impact could be more severe, meaning they will have to significantly revise their business plans and ambitions to protect their ongoing viability. In the summary of consultation responses, DCLG have said they appreciate ending rent convergence will concern some landlords. They have said the decision should be seen in the context of a very challenging Spending Round and an overall package for affordable housing, including 3.3 billion of Government investment. They have recognised that for a small group of social landlords the impact will be pronounced but have said the Regulator is able to provide waivers so a strong safeguard is in place.

6. Compliance with the Rent Standard The Rent Standard issued by the Regulator requires that registered providers shall charge rents in accordance with the Government s direction to the regulator of May 2014. As set out in the consultation on the Rent Standard Guidance, where the application of the Rent Standard would cause providers to be unable to meet other standards, particularly in respect of financial viability, the Regulator is able to agree to waive specific requirements of the Rent Standard for a period of time. This would be considered in cases where, for example, a reduction in overall rent income as a consequence of the ending of rent convergence would cause a housing association to risk failing to meet existing commitments such as banking or lending covenants. We welcome the acknowledgement from CLG and the Regulator that waivers will also be considered where ending convergence prevents commitments to tenants being met, as well as due to issues with ongoing financial viability. However, our concerns remain that requests for waivers will only be considered when all other possibilities have been explored. While the Rent Standard Guidance is still subject to consultation, housing associations can apply for a waiver from specific requirements of the Rent Standard to the Regulator in writing. Further detail on the approach to waiving requirements of the Rent Standard will be set out in the Regulator s Regulating the Standards publication in due course. We know that for many housing associations, particularly those with recently transferred stock and those where rent protection applied for a number of years, not all properties will be at target rent by 2015. Where this is the case we know associations will want to think carefully about the impact this will have on their viability and capacity and business plan assumptions. It is important to note the responsibility of boards is to protect the solvency and viability of their association and this is reflected in the Regulator s Governance and Financial Viability Standard. We have sought initial advice from Devonshires Solicitors and believe removing the existing convergence element of the rent policy for social housing raises a number of important questions. Our advice considers whether housing associations have been led to believe that they will be entitled to increase social rents using the current convergence formula until target rents are reached. So-called deemed compliance arises from the Rent Standard, in place since April 2012, which states that were there is non-compliance with the Rent Standard housing associations should: check whether there is deemed compliance about time for meeting the date for convergence. The Rent Standard places limits on the amounts by which rents can be increased each year within the allowed flexibility of target rent levels. Those limits might mean it is not possible for a particular

PRP to achieve target rents by 31 March 2012 (or 2013 as appropriate). Where that is the case, the PRP s rent plan should demonstrate the date by which, taking into account the allowed flexibility of target rent levels, target rent will be achieved. The consequence is that this date could be beyond April 2012 (or 2013, as appropriate). In such cases, this will be the date for achieving convergence with target rents. Specific agreement from the Regulator to that date for compliance was not required and the PRP is deemed to be compliant. Deemed compliance implies housing associations will be able to continue to increase rents in line with the rent plan, until target rent will be reached, and it is clear this does not need to be done by a certain date. Our advice also suggests there are substantive legitimate expectations that arise from provisions in the Rent Standard and the implementation of stock transfers. There are particular implications arising from the valuation of stock at the time of transfer, which in many cases was based on an assumption around achieving convergence with target rent, and the Regulator s involvement in the transfers, in particular in approving business plans. The lack of an express waiver for these LSVTs should not prevent them continuing to converge beyond 2015 where the Corporation was directly involved in their rent setting plans (as part of their business plans) or the valuation of the stock at transfer was based on target rent being achieved in the future. LSVTs in this situation can claim to have a legitimate expectation that they would be allowed to follow through with convergence. If the Regulator resiles from a substantive legitimate expectation, arising from deemed compliance or otherwise, our advice suggests a judicial review claim has good prospects of success as matters stand. We believe a significant number of housing associations have either relied on deemed compliance or had legitimate expectations of convergence continuing, or both, and have rent plans and business plans which assume continuing increases until well after 2015. Our advice also outlines the wider issue of the fundamental objectives of the Regulator, which need to be considered in the context of the impact on housing associations ability to maintain their building programmes. These objectives include: To support the provision of social housing sufficient to meet reasonable demands (including by encouraging and promoting investment in social housing) The policy to end convergence could potentially put the Regulator in breach of its fundamental objectives, which could give rise to good grounds for a public law challenge based on Wednesbury unreasonableness, irrationality and perversity.

A number of housing associations also currently have properties above target rent. There is no expectation that convergence should be brought forward to achieve target rent by 2015 on these properties. However, the Rent Standard Guidance does state that where rents are over the flexibility level then further rent increases must be at less than CPI + 1% until the appropriate level is reached. It should be done in a way that brings the rent within the flexibility level within a reasonable period of time, whilst ensuring financial viability is maintained. The Regulator considers the application of increase of CPI only to be a reasonable approach to bring down rents currently above the flexibility level. Housing association with rents above target should talk to the Regulator to discuss their position in light of the final rent policy and Rent Standard Guidance. For the very small number of housing associations who have a waiver in place with the Regulator, which allows them to continue to charge rents above target for a set period of time, this agreement will continue to apply. 7. Other aspects of the rent policy Formula rent: The calculation of the formula rent (essentially the target rent) based on the current pre-set method will continue to apply from 2015/16. The calculation is derived from a combination of property values, local earnings and property size. For the majority of social rent properties a formula rent has already been set so housing associations will only need to calculate a formula rent for new social rent properties they acquire. Housing associations can rebase existing valuations, for example to take account of improvements to the property, to recalculate the formula rent. As the CPI + 1% limit will apply on annual rent increases from April 2015, if a revaluation occurs, rents could only catch up to the new target rent on re-let. Affordable rent: Affordable Rent terms can only be used where a delivery agreement for the supply for social housing is in place. Homes let on Affordable Rent terms should be made available at a rent level of up to 80% of gross market rent. The maximum annual increase on an Affordable Rent property is CPI +1%, in line with social rent. Rent caps: Rent caps set an absolute cash limit on the rent that can be charged and are based on the number of bedrooms in a property. Where the rent cap is below target rent for a particular property, the rent cap will determine the upper limit of the rent that can be charged. Rent caps will continue to apply from 2015/16 and will increase by CPI + 1.5% annually, in line with the current approach where they rise by 0.5% more than the formula rent.

Re-lets: As the concept of target rent still exists, properties can be let at target rent when they come up for re-let and the expectation is that these properties will be moved to target rent as soon as possible. However, for developing housing associations, there is clearly a greater emphasis on efficiency, asset management and conversions, particularly in the Affordable Homes Programme from 2015. So, the Government and the Regulator will be looking for associations to use vacant properties to maximise financial capacity for investment in new housing, including through conversions to affordable rent where this will provide cross subsidy for the development of new homes in the programme, in return for Government investment. Rent flexibility: The flexibility to charge rents above target within an agreed tolerance level will continue to apply from 2015/16 to give housing associations some discretion to take account of local factors and concerns in rent setting, in discussion with their tenants. For general needs housing the tolerance is 5% and for supported housing it is 10%. In practical terms, and in the context of the removal of convergence, this would means charging target rent plus the 5% tolerance, or 10% where relevant, when the property becomes vacant. 8. Rents for high income tenants In July 2012 the Government published a consultation paper setting out proposals to enable landlords to charge higher rents to social housing tenants with higher incomes. In the 2013 Budget they restated their intention to take this policy forward, by allowing landlords to charge market rent to social tenant households with incomes of at least 60,000 per year. DCLG provided further information on how they intend to implement the policy in their summary of consultation responses, published in July 2013. They explained they would take steps towards removing the regulatory controls preventing private registered providers charging market rents to social tenant households on incomes of at least 60,000 per year. There is currently no intention to make it a mandatory requirement that housing association to adopt this pay to stay policy, rather DCLG will remove the restrictions that currently prevents them from doing so. The summary of responses can be found on the DCLG website: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225313/high_inco me_social_tenants_-_pay_to_stay.pdf. Currently housing associations have to adhere to the Rent Standard, which expects them to set rents for social housing based on the formula, unless a specific exemption is provided. From

2015/16 the Rent Standard will not apply to rental accommodation let by private registered providers where the household income is 60,000 or more. By introducing this new exemption, this will remove the regulatory control that currently prevents social landlords from charging these tenants market rent. To create this exemption, DCLG have now set out what they mean by income and household, the tax year that will apply and how they will treat historic grant, as follows: Household is defined as covering tenants named on the tenancy agreements, and their partners where they reside in the accommodation. Only the two highest incomes will be taken into account in the determination of whether a household is over the income threshold. Income is defined is defined as covering total taxable income. Existing capital is excluded but the income this capital generates in included. The tax year used will be the tax year ending in the financial year prior to the financial (i.e. rent) year in question as the income period. Landlords will be allowed to retain historic grant provided the additional income generated is spent on new affordable housing. Government have also set out their intention to find a legislative opportunity to introduce a requirement for social tenant households on incomes of 60,000 or more to declare this to their landlord, along with appropriate sanctions and other changes to the primary legislation that might be needed. 9. Implementation of the new rent policy The protracted delay in issuing the final rent policy and the associated Rent Standard Guidance, which is still subject to a 12 week consultation period, has made it very difficult for housing associations to plan for the future, particularly if they need to revise their business plans and ambitions in light of the final policy and any subsequent waivers. Given this delay we have urged Government and the Regulator to delay implementation of the new rent policy until April 2016. This would mean rent convergence continuing for an additional year, giving the Regulator and associations time to properly consider, and plan for, the impact of ending convergence before it is brought in. We have encouraged individual housing associations to talk to the Regulator if the ending of rent convergence will have an impact on their viability, business plan or ability to meet the commitments set out in any transfer agreement. However, in light of the delay some housing associations have had already had to make decisions on their business plan without any reassurances from the Regulator. We have urged the Regulator to be very mindful of these decisions taken with the best of intentions in an uncertain environment, particularly where a board

has taken a decision with regard to their over-riding fiduciary duty to the organisation, when reviewing business plans and making decisions about waivers further down the line. The Regulator should ensure there is no further delay in confirming the process and agreeing and issuing waivers with individual associations once the final policy and rent direction have been issued. 10. Responding to the consultation on changes to the regulatory framework We will be responding to the Consultation on Changes to the Regulatory Framework which closes on 19 August 2014. If you have any comments or views you would like to feed in on the Rent Standard Guidance please contact Catherine Ryder (catherine.ryder@housing.org.uk). If you have any comments or views you would like to feed in to the proposals on the wider framework please contact John Bryant (john.bryant@housing.org.uk).