In this webinar, Andrew Markham (Director of Development Consultancy, SDS), Paul Kristensen (Technical Manager, SDS) and John Stevens (Lead Consultant, SDS) are joined by guest Duncan Smith (Commercial Director, Walsall Housing Group) to discuss today’s development challenges.
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Rent caps vs. rent ceilings
John Stevens kicks off the webinar by discussing a hot topic in the UK affordable housing sector today: rents.
John explains the difference between rent caps and rent ceilings. The terms are widely used interchangeably, but they are different. The rent cap is an overall maximum for social/target/formula rent setting that travels from Social Rent Reforms 2001, which annually increases by CPI+1.5%. It is the original maximum that the government wanted to set, back in the year 2000, and it has travelled as a cap over time. This data is calibrated into ProVal.
The current policy consultation on rents (DLUHC Consultation on Social Housing Rent Policy from 1 April 2023 - England) actually relates to rent ceilings.
John provides some context for the current conversation around rents. He refers to policy documentation dating back to 2000 that states rent setting should not generate rents that are unaffordable to social tenants, but should also not compromise the financial health of the registered social landlord (now registered provider). He adds that, at the time, there was a rent convergence debate centred around aligning local authority property rents with housing association rents and, hopefully, bringing them together. This was the beginning of rent setting in the UK social sector.
In Inside Housing’s latest edition, a sustainable model of rent setting is suggested as the way forward. John notes that this is what the Housing Green Paper 2000 / Guide to Social Rent Reforms 2001 suggested, with the standard being set using a social/target rent formula. This formula used variables such as number of occupants and bedrooms, and earnings, and, from there, a rent cap was identified.
So how does this relate to the present day? Examining the CPI rate for September of last year, when applying the CPI+1.5% for rent inflation, the result is approximately 10% rent inflation by April of next year. This is the reason for the consultation, where breaks on the CPI ceiling have been suggested. Current climate considered, RP client bases are already experiencing increased costs for fuel and energy. Social rents are being examined alongside these considerations.
When the government released this consultation, a proposal of 3, 5 or 7% maximum rent ceiling was suggested for the 2023 financial year, rather than the over 10% produced by the current CPI rate. It also suggests a potential 2 year duration (to 31 March 2025) - although the government financial impact assessment analysed it over 5 years (2023 - 2028).
The government is also saying that households outside of housing support will pay £3.8bn less in rent over this predicted 5 year period. This 5 year model also produces a reduction in Housing Benefit costs of £6.1bn, making total savings £9.1bn. John questions the implications of these figures: for example, will strategic partnerships require renegotiation?
John also makes clear that ‘the devil is in the detail’: the government has modelled with respect to a 5% inflationary increase to rent, only applying to existing tenants, not new properties or re-lets. RPs also retain the freedom to set lower rent increases (or freeze or reduce rents) should they wish. Where complying with the revised rent standard would jeopardise a Registered Provider’s financial viability, that provider will be able to apply for an exemption.
John then shows inflation over a period of two decades and demonstrates that this is calibrated into ProVal.
So what about shared ownership rent inflation? Reviewing the Capital Funding Guide, shared ownership is based on RPI + 0.5%. It is not based on CPI. Local Housing Allowance is inflated annually by government figures based on BRMA. All of these figures are accessible within ProVal.
John concludes his section of the webinar by commenting on how the various cogs inside our viability assessments - sales, rents and costs - are being tweaked in different directions.
From the mini budget, to mortgage products being taken away, to the topping out of the housing market, to the consultation on rent ceilings, as well as the inflation on costs, materials and labour. And whilst the recent consultation has drawn focus to rents, how all of these cogs relate to one another will be more impactful long term.
Impact on Housing Groups
Guest speaker Duncan Smith discusses how this consultation affects business plans, particularly development ambitions, for everyone in the sector.
Duncan suggests that housing demand has increased exponentially post pandemic, post and current cost of living crisis, and any ceiling on the amount of rents that providers (and, to some extent, local authorities) can increase will fetter their ability to deliver new affordable housing for those customers.
Duncan also notes that he has experienced enhanced inquiry levels about housing groups’ confidence in selling shared ownership. However, he remains an advocate for shared ownership schemes and believes that the demographic and earning profile for shared ownership customers is likely to evolve. Rising costs and scheme approval continue to challenge housing groups. And whilst he can only speak for himself, he would welcome the introduction of mortgage rescue policies. He does not foresee a long recession.
Conversation then turns to the supply and delivery of affordable housing. Andrew Markham points out that there is still a supply shortage of affordable, shared, and outright sale homes in the right location. He asks Duncan: should we be worried?
Duncan states that he cannot see sale prices reducing drastically due to these supply issues. And with mortgages costing more, he reiterates that the top end of the market (who may have previously bought) will trickle into the shared ownership space, which is not necessarily a bad thing, although there may be some rebalancing for a time before things settle down again. Andrew points out that he is seeing some price reductions on sales but Duncan does not imagine that this will be long-lasting.
One attendee asks Duncan whether he thinks contractors will be moving away from fixed price contracts. He agrees that he cannot see a position where groups will entertain inflation-linked contracts because guaranteed maximum prices are how organisations reduce risk.
He recommends that providers strengthen their due diligence around contractors. Duncan also mentions the important role that contractors play in the development process, and that the visibility of small and medium-sized enterprises may be unfairly affected by certain insurance requirements. Therefore, he encourages having an open dialogue with your contractors.
ProVal Updates
Paul Kristensen talks a bit about the new cash flow model in ProVal. In the past, the application has had a dual cash flow model.
In response to changes in the market and the need to model things like NPV and IRR from the first day that money is spent, a single cash flow model has been adopted. This means you can model long-term interest, NPV, and, consequently, IRR, right from the very beginning.
Paul then demonstrates some new settings in ProVal and how these can be adjusted to produce results.
Session conclusion
The session concludes with a Q&A round before Andrew Markham makes guests aware of a new SDS User Group Meeting, taking place in London on the 8th of November. He encourages all customers to sign up for the meeting for a chance to share their feedback and network with others in the sector.
If you are interested in joining our panel of industry speakers, please contact cassie@s-d-s.co.uk for more information.
Speakers:
John Stevens: Lead Consultant, SDS
Paul Kristensen: Technical Manager, SDS
Duncan Smith: Commercial Director, Walsall Housing Group
Host:
Andrew Markham: Director of Consultancy, SDS
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