Rent Setting Policy 2016-2017 Contents 1. Scope 2. Policy statement 3. Monitoring and evaluation 4. Conditions and exceptions to policy 5. Policy equality and diversity statement 6. Resident/Tenant involvement Appendices
Rent Setting Policy 2016-2017 Communities and Neighbourhoods Review completion date: Nov 2015 Approved by and date: Customer Experience Committee 9 th November 2015 East Thames Group Board, 23 rd November 2015 and East Thames Board March 2016, Minor updates approved by CEC 26 July 2016 and board August 2016 Date of final approval: March 2016, August 2016 Effective date: 1 April 2016 Date of next review: November 2016 Author: Laurence Khellas, Head of Customer Accounts Policy owned by: Laurence Khellas Regulatory code: Welfare Reform and Work Act 2016 Housing Act 1988 2011-2015 Affordable Homes Programme Framework Capital Funding Guide Regulatory Reform Order 2003 Tenancy and leases agreements HCA Regulatory Framework: The regulatory framework for social housing in England from April 2015 (Rent standard Guidance) Related East Thames policies: Service Charges Policy Allocations Policy 2
1. Scope 1.1. This policy covers rent setting arrangements for all properties owned by East Homes both those managed directly by East Homes or its approved agents. 1.2. For the avoidance of doubt, the homes directly affected are all general needs, affordable rents, supported housing, foyers, shared ownership, market rent, intermediate rent including rent now buy later and those managed by other RSL s who have an agreement or lease to manage dwellings on its behalf. 1.3. In setting rents, East Homes will ensure that it: Sets its rents according to the Homes and Community Agency Rent Standard so that rent charged does not exceed formula rent and capped rent. Reviews its rents annually in accordance with the Rent Standard to ensure that increases do not exceed the Guideline Limit. Delivers efficient use of subsidies to produce the maximum number of homes. Applies additional values to all rental properties where Decent Homes work has been carried out. Reflects current market rents using combined average rents from external independent sources using RICs approved methodology. Applies additional values to all rental properties with added value attributes such as parking and private gardens for flats or negative values such as a poor or unsightly views Applies additional values to market related properties where communal service charges are considered to be over and above those generally delivered such as 24 hour concierge and CCTV Applies increases in accordance with leases for shared ownership rents Builds up reserves to cover future maintenance liabilities for properties and improvements to our stock. Maintains adequate financial reserves to ensure the financial well being of the Association. Makes sufficient trading surpluses to meet the requirements of lenders. Maximises income collection and minimises bad debts. 3
2. Policy statement 2.1 Social and Supported Housing 2.1.1 Formula for rent Setting East Thames set its Social and Supported Housing rents in accordance with the calculation of a formula rent based on a pre-set method defined within the Housing and Communities Agency Rent Standard. Details of the formula are set out in appendix 1. East Homes continues to ensure that no rents breach the rent caps set by the Government. The caps are based on a bedroom factor so that, other things being equal, smaller properties have lower rents. The table of rent caps can be found in appendix 2. Supported Housing - non self-contained units Where a scheme is of non-standard design and hence not possible to value using the existing use valuation method, a depreciated replacement cost can be used in place of the existing use valuation. East Thames uses a formula produced by SITRA. See appendix 3 Fair rent tenancies An application for registration of a fair rent will be made to the Valuation Office Agency. At the time a registration is due, the Rents Officer will decide whether an application should be made based on the current registered fair rent and the equivalent formula rent. The rent to be charged will be the lowest of either the registered or formula rent. 2.1.2 Rent reviews Rents for Social and Supported Housing are reviewed in April each year. Following the implementation of the Welfare and Work Act March 2016 Social Rents will be reduced by 1% using the rent charged in 2015/16 from the first Monday of April 2016. Supported Housing Rents will be increased by September CPI +1% or the equivalent of 0.9% effective from 4 th April 2016. For Fair Rents, the rents will be reduced by 1% on the anniversary of their previous rent review. However, if there will be no change to the rent if the fair rent set by the rent officer is lower than the social rent rate (formula rent less 1%). 2.1.3 Rents for relets Where a social rent property is relet to a new tenant, the rent may be either: the formula rent (as reduced by 1% each year), termed in the Bill the social rent rate, or the rent charged as at (in most cases) 8 July 2015 (again, as reduced by 1% each year). This is the assumed rent rate. 2.1.4 Rents for new developments 4
Current rent policy will be taken into account when agreeing rents for new developments. Where the Association has been awarded grant for the purposes of building new homes the rent levels agreed during the scheme approval, will be the rents charged at the start of the tenancy, unless authorisation is given by the board and funding body to introduce an alternative starting rent. These rents will then be reduced for 4 years from 2016/17 in line with the requirements of the Welfare Reform and Work Act 2016. For new properties without grants, the rents will be recalculated at the time of hand over and set accordingly. 2.1.5 Rents for temporary decant Where the Association intends to carry out major works and the current residents are temporarily decanted into another East Homes property until the works have been completed, rents as at the transfer date will be aligned to the former property s rent by way of a decant allowance. Rents for the former property will continue to either increase or decrease year on year with the decant allowance at the temporary property fluctuating by the same amount. At the time of transfer into the refurbished home the decant allowance will cease and the revised rent applied. 2.1.6 Appeals Assured and Fair Rent Tenants, where their tenancy agreement refers to Section 13 (1b) of the Housing Act 1988, have the right to appeal to the First Tier Tribunal, who will determine the maximum rent to be paid. Their decision is binding on both sides. 2.2 Market Rents 2.2.1 Formula for calculating market rent levels Initial rents, which are inclusive of service charges for these properties, are calculated using current Market Rent information by property type and postcode using a RICS approved methodology based on independent information from comparative rent levels. The average Market rent can be enhanced or decreased based on some aspects of valuation. See appendix 4. 2.2.2 Rent Reviews - Market Rents Market Rent will be increased by the September CPI+1%, representing an increase of 0.9% effective from the 1 April 2016. 2.2.3 Relets - Market Rents Where a market rent property becomes vacant, the existing average market rent level will be revisited and the new rent set in relation to current market rent levels for a similar property in the same postcode. 2.3 Intermediate Rents and RNBL 2.3.1 Formula for Intermediate and RNBL rent setting Initial rents for these properties are calculated using the same formula for calculating market rents. The rents are inclusive of service charges and are calculated using 5
current Market Rent information by property type and postcode using a RICS approved methodology based on independent information from comparative rent levels. The average Market rent can be enhanced or decreased based on some aspects of valuation. See appendix 4. A reduction of 20% (or different if agreement and scheme approval states otherwise) is applied. 2.3.2 Rent Reviews - Intermediate Rents and RNBL Rent for Intermediate Rent or RNBL properties will be increased by the September CPI+1%, representing an increase of 0.9% effective from the 1 April 2016. 2.3.3 Relets - Intermediate Rents and RNBL When these properties become vacant, we will carry out an evaluation to determine if it should be sold in line with our stock rationalisation policy. If we determine that the property needs to remain as a let, the existing average market rent level will be revisited and the new rent set in relation to current market rent levels for a similar property in the same postcode. A reduction of 20% (or different if agreement and scheme approval states otherwise) is applied. 2.4 Affordable Rents Affordable rent properties are let on Lifetime Assured Shorthold Agreements or Fixed Term Assured Shorthold Agreements (for a fixed term of 10 years inclusive of first year probation) at sub- market rent levels in accordance with individual agreements and scheme approval. 2.4.1 Formula for Affordable Rent setting Initial rents for these properties are calculated using the same formula for calculating market rents. The rents are inclusive of service charges and are calculated using current Market Rent information by property type and postcode using a RICS approved methodology based on independent information from comparative rent levels. The average Market rent can be enhanced or decreased based on some aspects of valuation. See appendix 4. Affordable rents inclusive of service charges will be set at no more than 80% of the market rent. Additionally the Group set two caps when the scheme was introduced to ensure that these rents were not unaffordable. Parameters used for the calculation are set out in appendix 5. Supported Housing Affordable Rent setting We acknowledge that housing for vulnerable and older people often includes a range of services to support the particular needs of the client group. When setting an Affordable Rent, the gross market rent comparables will be based on similar types and models of service provision. Where there are insufficient comparables for similar types of provision in the local area, we will identify comparables from other areas, and extrapolate our best view of the gross market rent that would be applicable in the 6
location in which the property is situated. We will set the initial rent at up to 80% of that level. 2.4.2 Rent Reviews Affordable Rents Affordable Rents will be reduced by 1% from the rent charged in 2015/16 and effective from the 1 April 2016. Supported Housing Affordable Rents will be increased by September CPI +1% or the equivalent of 0.9% effective from 4 th April 2016 2.4.3 Relets - Affordable Rents Where a property becomes vacant, the existing average market rent level will be revisited and the new rent set in relation to current market rent levels for a similar property in the same postcode. For Affordable Rents, it will be set at no more than 80% at the time of the start of the tenancy. The rent will also be limited by the two caps set by East Thames when the scheme was introduced to ensure that these rents were not unaffordable. Parameters used for the calculation are set out in appendix 5. When the probationary period of an affordable rent tenancy comes to an end, the rent will remain the same until it is due for a review each April. The rent will then be subject to a reduction of 1%. 2.5 Shared ownership rents Shared Ownership residents buy a percentage of their property with a personal mortgage and are charged rent on the remaining equity of the property value in accordance with individual agreements and scheme approval. 2.5.1 Formula for calculating shared ownership rents The agreed rental percentage which varies according to leases and is set in accordance with scheme approval is applied to the outstanding equity of a property purchased as Shared ownership. For example: Value of property: = 240,000 Value of unsold equity e.g. (60%) = 144,000 Rental percentage of 2.75% = 3,960 Monthly rent is rental percentage divided by 12 = 330.00 Staircasing for shared ownership properties Shared owners may staircase during the year by purchasing an additional percentage of their existing property. This additional share can be up to 100% of the value of the property, 75% for Fixed Equity Shared Owners. When a Shared owner increases the percentage of the property they own, the rent is reduced accordingly by uplifting the original rental percentage by annual inflationary 7
increases during their tenure and applying to the new remaining equity figure. Example of calculation is set out in appendix 6. When a Shared owner staircases to 100% no further rent is applicable. Downcasing for shared ownership properties Shared owners, fulfilling the agreed criteria, may downcase during the year by selling back a percentage of their existing property to East Homes. When a Shared Owner decreases the percentage of the property they own, the rent is increased accordingly by uplifting the original rental percentage, mainly 2.75%, by annual inflationary increases during their tenure and applying to the new remaining equity figure. 2.5.2 Rent Review Shared Ownership rents are increased in accordance with the lease and effective from the date specified therein, generally the 1 st April. 2.5.3 Appeal Leaseholders have the right to Appeal to the First-tier tribunal for service charges only. 2.6 Ground Rent Ground rent is payable under a long lease for the use of the ground on which the building stands. East Thames will charge ground rent as prescribed within the lease/freehold or title document by way of a demand using the form prescribed under s166 of the Commonhold and Leasehold Reform Act 2002(1). East Thames will adhere to the terms of the lease when increasing its ground rent. Additionally, when granting an informal lease extension, East Thames will state the terms to enable ground rent to be charged. An informal lease extension is for shared owners or long leaseholders who have not owned their property as a 100% ownership for a period of 2 years. Through the informal route a valuation is done to ascertain the current market value and the valuer gives East Thames a premium which is not negotiable. The leaseholder then has to decide whether they wish to proceed or not. 3. Monitoring and evaluation 3.1 This policy will be monitored by the Head of Customer Accounts and Policy and Research Manager who will review this policy periodically and where appropriate make recommendations to East Thames Group Executive based on best practise, customer feedbacks and legislative changes to inform their review. 8
4. Conditions and exceptions to policy 4.1 Funding conditions In some cases, a funding body may have provided funding on condition that future rent levels are set within specific parameters. Under such conditions, the Association will comply with these conditions and they shall take precedent over the formula rents set for other stock in the area and not affected by such conditions. Where homes are built to specific funding conditions they shall be dealt with on a scheme by scheme basis and reported separately to Board and other stakeholders that require the information. 4.2 Supported Housing Reductions to Supported Housing rents have been defered until April 2017. 5. Policy equality and diversity statement 5.1 Affordable Rents analysis We have undertaken a review of our affordable rents policy to assess the extent to which tenants on low incomes benefit from the rent caps. Whilst these significantly reduce the majority of our rents to below 80% of the market they are still unaffordable without the help of housing benefit for any size household where there is only one adult working at lower quartile earnings or even London Living Wage. Rents would need to go down much further if we were to help tenants in low paid work to get out of the benefit trap and gain more in their net incomes as their earnings rise. However, we have decided to continue to link affordable rents to lowest quartile wages in each borough as this better ensures that households can benefit from increases in their net incomes as their wages rise. 5.2 Supported housing rent cut We are concerned that the rent cut expected in 2017/18 will have a negative impact on the level of services that we will be able to provide residents in some of the more costly supported housing schemes and are undertaking financial assessments to ensure that they are not negatively impacted by the change. 6. Resident/Tenant involvement Rent notification letters will be sent out in January as usual and information about the rent change will be included in the January/February edition of Street by Street. The content of Street by Street is reviewed and discussed by the Residents Communications Panel and we will especially be asking them to comment on the clarity of the information about the rent changes given the change from an increase to a decrease. 9
Appendices Appendix 1: General Needs and Supported Housing Formula Rents The formula rent is calculated using the following considerations: 30% of a property's rent should be based on relative property values; 70% of a property's rent should be based on relative local earnings; A bedroom factor should be applied so that, other things being equal, smaller properties have lower rents. This statement can be expressed as a formula, in which the target rent for a property, after the completion of the restructuring period, is calculated using the following; weekly rent is equal to: 70% of the average rent for the sector (LA or RSL) multiplied by relative county earnings multiplied by bedroom weight plus 30% of the average rent for the sector (LA or RSL) multiplied by the relative property value 10
Appendix 2: Rent Caps For 2016/17, formula rent caps are outlined below (yet to be confirmed by HCA). Bed-sit and one bedroom properties 141.43 Two bedroom properties 149.74 Three bedroom properties 158.06 Four bedroom 166.37 Five bedroom 174.69 Six bedroom and larger properties 183.00 11
Appendix 3: Supported Housing rents for rooms SITRA calculation uses the following data; Square meterage of property- to calculate the assumed build cost Area of the total land occupied (i.e. including grounds, gardens etc.) Local Authority area Relative Earnings Number of units self-contained or shared Adjusted by : Adaptations Lifts Central Heating Baths and Kitchens more/less than 10 years old 12
Appendix 4: Market Rent enhancement and reduction The average Market Rent is enhanced where independent assessment shows that features add value to a property. These features are: a flat which has its own private garden a flat which has access to a communal garden/shared roof garden a property which has off street communal and secure parking additional bedspace where property has two double beds compared to one double and one single bedroom a property with room(s) in excess of 15 square meters a flat which has self-contained access a property with a separate and secure utility room a flat with a balcony a property with en-suite bath or shower room a flat on 4 th floor or above The Market Rent is decreased where independent assessment shows that features decrease value to a property. These features are: a flat with no parking a property with poor or unsightly views/insufficient light a property with intrusive noise a property with a box room less than 5.9 sq meters all single rooms a property where white goods are not included a property with an open plan kitchen flat on 3+ level without lift ground floor flat within clear line of sight from pedestrians poor location lack of schools shops transport The Market Rent is enhanced where communal service charges are considered to be over and above those generally delivered. These service charges are: CCTV Electronic gates Concierge Gym Communal service charges delivered by a Managing Agent 13
Appendix 5: Affordable Rents In determining affordability, the Group set parameters when the scheme was introduced in 2011. Specifically, the Group agrees that a rent will be affordable if it: is no higher than 80% of the market rent is initially set so as not to exceed 45% of Total Net Income based on 25 th centile for the borough in which the dwelling is situated is no higher the Housing Benefit Local Housing Allowance rates Total Net Income is a combination of the following factors: Annual net income inclusive of net income based on: Average Gross Weekly Pay (25 th percentile) from ASHE for all employees within the borough the property is in, data sourced from the latest Government released figures. Gross weekly income is then converted to net weekly income by using the calculator from www.incometaxcalculator.org.uk, plus: Working Tax Credits and Child Tax Credits based on: Net annual income and number of bedrooms, plus: Child Benefits based on: Number of dependent children The Market Rent is then reduced by the percentage required to ensure that it does not exceed 45% of Total Net Income, in compliance with the general acceptance in the Capital Funding Guide of 45% Cap in London, capped at 80% of Market Rent if applicable. 14
Appendix 6: Formula for calculating staircasing rents A shared owner (part rent, part buy) with 40% shares purchases an additional 10% of the equity. This transaction is known as staircasing. Once the transaction is complete, this leaves 50% of the equity unsold. The value of the unsold equity, for the purposes of rent setting only after staircasing, remains the same as the valuation of shares at the first sale but any subsequent rent increases since the first sale are applied once the new base rent is determined. In practical terms this equates to:- Worked example Value of the property/equity for rent setting only = 240,000 Value of the unsold equity (50%) for rent setting only = 120,000 Annual rent is 2.75% (rental percentage) of 120,000 = 3,300 New base monthly rent is 3,300 divided by 12 = 275.00 If we assume actual rent payable by time staircasing has occurred is 285.00 per month due to inflation increases as per lease over time then the new rent would be:- 285.00 divided by 60% (the original share not purchased) multiplied by 50% (the revised share not purchased) = 237.50 15
Policy controls sheet Date of last review, who reviewed and date approved Laurence Khellas, Head of Customer Accounts Management and Katie Shaw, Policy & Research Manager. November 2015 Approved by CEC and Board December 2015 and update February 2016 Date of last review, who reviewed and date approved Reviewed in October 2014 by Head of Customer Accounts, approved by East Homes Board November, 2014 Main changes and why (i.e. change in legislation, change in internal processes) Reduction in social rents of 1% for four years from April 2016 as required by Welfare and Work Bill. Supported housing rents are excluded from 2016/17 (announced January 2016). Removal of the flexibility to increase general needs social rents by up to 5% above formula rent. Inclusion of a new paragraph on ground rents End of re-let of IMRs as part of stock rationalisation programme. Removal of 225 affordable rent cap and removal of annual review of 45% rent cap. Main changes and why (i.e. change in legislation, change in internal processes) Annual Rent Review 2015-16 Date of last review, who reviewed and date approved Main changes (i.e. change in legislation, change in internal processes) 16