CWAG General Meeting

1. CWAG General Meeting HRA Business Planning Environment Ben Taylor31st January 2014

2. Agenda • Business planning • Self-financing • Rents • Ring fence • Right to buy • New Build and debt cap

3. Business planning framework

4. LAs HRA under self-financing • Let us not forget… • Self-financing made all authorities are better off • Increase in assumed major repairs allowance • Rise to £1.726bn = increase of £460m • Retaining rent income as rents increase • £300m+ underneath target rent which will be made up over time • Ability for many to borrow up to the borrowing cap but unevenly spread • Headroom total £2.87bn • For debt take-on authorities, a ‘cheap’ debt gain • 85bps on £13.5bn = £100-125m • A small number struggling in short term – decent homes • A larger minority with medium term pressures • The vast majority with some borrowing and potential revenue to invest

5. The start of the journey A positive picture... Sensible prudent decision making to get the deal done Some LAs pushing ahead straight away with new build programmes Many taking time to review asset management in more detail Most have resources to invest

6. BP research: some headlines One year in… • Council housing has responded appropriately • Councils are making prudent and sensible assumptions • The sector is investing wisely • Financing programmes is primarily a ‘revenue’ undertaking • New build an increasing priority • Survey now being repeated – how will it have moved?

7. Rents

8. Legislation s24 of the Housing Act 1985 • A local housing authority may make such reasonable charges as they may determine for the tenancy or occupation of their houses. • The authority shall from time to time review rents and make such changes, either of rents generally or of particular rents, as circumstances may require.

9. Rent restructuring • A central rent policy ‘Rent Restructuring’ introduced in April 2002 • Prior to this a variety of approaches • In principle rents for the same property in the same area will be the same if Council or Housing Provider • Voluntary(!) • Each property has a ‘formula’ or ‘target’ rent based on a formula • This formula rent increases by Inflation (RPI) plus 0.5% • Rents assumed to converge by April 2015 (built into the self-financing settlement) • Actual rent not to increase by more than RPI plus 0.5% plus £2 • “To cover ‘Bricks and Mortar’ only” • Service charges assumed ‘de-pooled’

10. How are rents ‘controlled’? Voluntary but legislative and fiscal controls… • Subsidy system • Rent Rebate Subsidy Limitation It is for local councils to decide what rent to set

11. Under subsidy • Rent collection assumed guideline less 2% void • Maximise subsidy position – charge rents at guideline • Caps and limits adjustment (per property control) • Cap – maximum rent for property • Limit – unable to charge at guideline due to RPI + 0.5% +£2 cap (constrained rent) • Adjusts average guideline – built into settlement

12. Rent rebate subsidy limitation • RRSL introduced (1996) via a limit rent mechanism • Incentivise council’s to control cost and hence rents • If a Council’s average rent is higher than the limit rent then the council (i.e. tenants) will have to fund a proportion of any rebates above the limit. • The limit rent was set to converge with formula rent in April 2015 • RRSL does not apply in the Private Registered Provider sector – rent standard

13. How have rents moved?

14. Business planning as it was.. • Under rent convergence • Declining rate of increase in the run up to convergence • RPI+0.5%+’negligible’ • Smoothing the path to convergence is not uncommon • Increase locked into settlement • Spending round announcement and subsequent consultation • RPI + 0.5% to CPI + 1% from 2015/16 (for ten years) • End of rent convergence

15. Impact of rent changes • CPI change moves rents in line with benefits/pension uprating but link broken in short term • CPI forecast to be lower in the long run leading to lower rent increases • Hold cost base to CPI + 0.5% = no change to current assumptions for many • Removal of convergence is a loss (significant in some cases) of revenue to business plans • Is it affordable? What needs to change? • What happened to equity between social renters? • National rent policy incoherent – affordable rents v social rents v benefit bill

16. What can be done? • Time for a more fundamental review of rent setting approach? What could that look like? • CIH tried to open the debate • We need to talk about rents • http://www.cih.org/resources/PDF/Policy%20free%20download%20pdfs/We%20need%20to%20talk%20about%20rents.pdf

17. What we still don’t know • CLG consultation gives some pointers but not all • How will convergence ‘end’? • Average level or property level? • Actual rent or limit rent? • re-lets at formula • The big unknown (still) • What ‘control’ mechanism • after 2014.15 limit rent? • under UC?

18. What have others been doing? • One last shot at reaching target • Why plus £2? Why not plus £4? • RPI 3.2% - how big would the rise be to reach target? • To target with cap on maximum increase • Model BP impact giving options • Informed conversations with members and tenants in light of the self-financing regime • Greater transparency – link between rent and services/investment is now explicit

19. HRA Ring-fence

20. Inside Housing

21. Ring fence issues HRA ring fence introduced 1990 Applies to revenue not capital But some sources of capital finance are ring fenced – principally revenue-backed (depreciation) Increasingly applies to debt - but not in a legal sense History repeating itself Early 1990s ‘deflation’ – GF vs HRA relative position Council vs ALMO or Corporate vs Housing or General Fund vs HRA Previous government looked to strengthen guidance Around the ‘who benefits’ principle Not taken forward: downside of localism? Important that the debate now takes place on a rational basis around service delivery

22. Ring fence issues (2) The council housing/ALMO & general services debate Assets and where they are sitting Services on estates and in communities Strategic housing services Sharing and support services Reserves and other resources How can landlord services assist in this debate? HRA reserves Cross-subsidisation of services - transparently Transparency essential – but so is showing the housing contribution to the whole

23. Right to Buy

24. Right to buy – National picture

25. Right to buy – National picture

26. RTB progress • The downside...? • Increase (doubling?) in activity; initial spike in applications working through the process and more interest in recent announcements • The upside...? • Beyond the self financing settlement numbers, all additional receipts retained...

27. New build

28. New build council housing • A landscape with growing diversity and flexibility - already • A persuasive narrative... • Appetite for new build ‘under the cap’ already demonstrated • Stimulated exploration of other options: ALMOs and SPVs, JVCs and institutional investment • Working closely with pension funds, insurance companies, private equity • Self financing has opened the debate: by no means is this just about ‘council housing at social rent in the HRA’ • Range of tenures and flexibility around ‘products’ • Capacity and knowledge is growing

29. Raising or abolishing the debt cap…? Councils will deliver programmes from the headroom that they have (some borrowing but mainly revenue/reserves) A three-way ‘lobby for growth’: ongoing Changing borrowing rules Abolishing the debt cap Raising the debt cap – on a formula- or bid-basis • “Let’s get building” • New build in plans – our estimate 20-25,000 in first 5-10 years • Financial capacity overall up to 200,000-250,000 homes: need land(!) • £7billion capacity and appetite - 60,000+

30. Debt cap budget announcement Significant attitude change even if not significant money Role for the LEPs in distributing funds Encourage LEPs to think about housing (!) Detail not yet known Process - How onerous? Available to who? Links to selling high value stock? What vfm tests? Risks of not delivering…

31. Are we still all better off?

32. Questions and debate Ben Taylor – Assistant Director CIH consultancy e-mail: ben.taylor@cih.org Tel: 07974724041