The impact of cuts to social rents across London – briefing note
Summary
1. This briefing note summarises the anticipated scale of the financial impact on London
local government of the Government’s new policy on social rents announced in the
Summer Budget. This will see rents cut by 1 per cent a year over the four years 2016-17
to 2019-20, rather than increase in line with Consumer Prices Index (CPI) plus 1 per
cent as had previously been agreed in the Government Spending Round 2013. It
provides overall estimates of lost revenue as well as additional local estimates of the
consequent impact on investment, debt repayment and house building.
Our analysis shows that the cumulative financial impact to HRA business plans
could be an estimated £800 million in London over the first four years in cash
terms, and £13.3bn over the 30 year business plan period, assuming a return to
CPI+1% after four years. Survey findings from London boroughs corroborate the
analysis with an estimated £824 million cumulative financial impact to 2020.
This reduction in income is likely to make it more difficult for councils to invest in stock
improvement, potentially leaving tenants with poorer housing conditions. It will also lead
to stock-owning councils having to review their development plans, reducing their ability
to invest in new housing at a time when London’s housing shortage urgently needs
addressing. The rents cut is also likely to make replacing properties sold under the
Government’s policy to require the sale of higher-value council voids even more
challenging.
Some details of the policy are yet to emerge and the Bill may be subject to amendments
as it goes through parliament. This note therefore reflects only our current
understanding and is subject to some broad assumptions and estimates.
Analysis
2. Early analysis, comparing “theoretical” estimated rental income under the prior
assumption (CPI + 1%) with the new one (-1% per annum over the next four years),
shows that the estimated cumulative financial impact to HRA business plans could be
almost £800 million across London and over £2.6 billion for local authorities across
England by 2019-20 (see Table 4 below).
Table 1 – Gross dwelling rents (£m): CPI + 1%
England
London
2015-16*
7,310.4
2,222.2
2016-17
7,471.3
2,271.1
2017-18
7,673.0
2,332.4
2018-19
7,887.8
2,397.7
2019-20
8,116.6
2,467.3
2015-16*
7,310.4
2,222.2
2016-17
7,237.3
2,200.0
2017-18
7,165.0
2,178.0
2018-19
7,093.3
2,156.2
2019-20
7,022.4
2,134.6
2015-16
2016-17
2017-18
2018-19
2019-20
Table 2 – Gross dwelling rents (£m): - 1% p/a
England
London
Table 3 - Difference (annual)
England
London
0.0
0.0
233.9
71.1
508.0
154.4
794.5
241.5
1,094.2
332.6
2015-16
0.0
0.0
2016-17
233.9
71.1
2017-18
742.0
225.5
2018-19
1,536.5
467.1
2019-20
2,630.7
799.7
Table 4 - Difference (cumulative)
England
London
*Source: DCLG, 2015-16 RA Budget returns1
3. When councils took control over their HRAs in 2013, original 30 year business plans
were based on the Government’s assumption of annual increases of Retail Price
Index (RPI) inflation plus 0.5%, with loan and repayment arrangements geared and
set against this assumption.
4. Councils then needed to amend debt and borrowing profiles within their HRA
business plans after the Spending Round 2013, when the Government announced
that rents would increase by CPI plus 1% until 2024-25. Whilst there was an impact
on financial and debt plans, boroughs were able to readjust these plans around the
relative security of steady rent increases over the ten year period. This latest change
is significant and means boroughs will have to completely rework these plans. The
nature of the change, so soon after what was thought to be a fixed ten year rate, has
the potential to adversely affect plans to maintain and improve housing stock and
most significantly to deliver estate and area regeneration and in turn more homes for
London. Ultimately the impact of this lost revenue will mean fewer homes will be able
to be built at a time when they are desperately needed across London.
5. Figure 1 below shows the estimated rental income across London local government
between 2015 and the end of the current 30 year business plan period under the
original RPI + 0.5% assumption; the revised CPI + 1% assumption; and the latest 1% per annum assumption for the period 2016-17 to 2019-20, returning to CPI + 1%
thereafter. Clearly, losses would be even greater in the event that rents do not return
to CPI + 1% increase after four years.
6. It should be noted that there is provision in the Welfare Reform and Work Bill for
exemptions for particular tenants, tenancies, or accommodation as prescribed by
regulations. There may also be exemptions in primary legislation – the bill is still
going through parliament. The details are not yet known and these exemptions have
therefore not been factored in to the calculations.
1
Line 4001 Dwelling rents (gross). This includes general needs, sheltered accommodation,
temporary accommodation and social homebuy. Some of these categories may be excluded in the
final legislation and data should therefore be considered approximate until more detailed information
is known.
Figure 1 - Estimated HRA Dwelling rent yield (£bn) across London boroughs under 3
scenarios – 2015-2045 (cash figures)
7.0
6.0
Total rental income £bn
5.0
4.0
3.0
2.0
RPI + 0.5%
CPI + 1%
1.0
-1% (next 4 yrs)
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
2024-25
2025-26
2026-27
2027-28
2028-29
2029-30
2030-31
2031-32
2032-33
2033-34
2034-35
2035-36
2036-37
2037-38
2038-39
2039-40
2040-41
2041-42
2042-43
2043-44
2044-45
0.0
7. The difference between original RPI plus 0.5% policy and the latest policy totals £1
billion for the four year period 2016-17 to 2019-20, with an estimated cumulative
difference of £26 billion over current business plan period to 2045. Even compared
with the CPI plus 1% policy, London boroughs will lose out on an estimated £13
billion by 2045 (see Table 5 below). Annex A at the end of the paper includes a full
breakdown across years for London, as well as detailed assumptions.
Table 5 – Estimated cumulative difference in rental yield under three social rent
policies across London and England - 2015-2041
Time period
Comparison
London
England
Boroughs
2016-2020
CPI + 1%
£0.8 billion
£2.6 billion
2016-2020
RPI + 0.5%
£1 billion
£5 billion
Whole 30 yr business plan
CPI + 1%
£13 billion
£44 billion
Whole 30 yr business plan
RPI + 0.5%
£26 billion
£86 billion
Local information
8. In addition to this high level modelling, London Councils surveyed London Boroughs
asking for detailed local information about the financial impact of the new rent policy
and its impact on house building. Results from 16 boroughs are outlined below.
Three anonymous case studies are outlined at Annex B.
Funding gap
9. Boroughs’ estimates of lost revenue funding are broadly in line with the high level
modelling above (being on average 3 per cent higher than those modelled over the
2016-17 to 2019-20 period). Therefore, if anything, the £800 million pan-London
figure could be an underestimation because many boroughs will have been assuming
larger than CPI plus 1 per cent increases. Another reason for the variances is that
some were using different CPI figures to the OBR figures used in the above
modelling. None of the modelling accounts for the loss of rental income from the
need to sell council housing assets to support in large part housing association Right
to Buy discounts.
10. One borough, with substantially larger figures than those estimated, had included
loss of investment income on reduced balances, as well as the loss of rental income
itself, within its estimate of the financial impact on the HRA.
11. In addition, if new build plans from councils and housing associations are reduced
then councils will forego the anticipated additional Council Tax. There may also be an
additional cost of temporary accommodation for homeless families which may have
been mitigated by new build. However, no boroughs have been able to quantify this
yet and it is difficult to predict the scale.
Housebuilding
12. Six of the 13 stock-holding boroughs that responded to the survey have not been
able to calculate the impact of the new rents policy on housebuilding numbers, likely
to be because of the complexity of the calculations and the large degree of funding
uncertainty caused by the policy.
13. However, one borough estimated a “significant” impact of around 1,300 homes at a
cost of £318 million (assuming £250k per unit). Another reported that its current
2015-18 programme, which was due to deliver nearly 100 new homes, is now under
review. It estimates that around a third of these homes may not now be built. If it
continues to fully fund the programme, it will now have to sacrifice funding for major
improvements on the remainder of the HRA stock. Another borough reported that
expected investment in new affordable housing “may no longer be feasible”. One
responding borough considered that by reviewing tenure mix, use of reserves and
borrowing headroom the delivery of existing regeneration schemes and a council
build development programme remained viable, but in adjusting investment and
funding assumptions this could affect future plans to improve and regenerate other
estates with significant development potential.
Investment in stock
14. Ten of the 13 stock-holding boroughs who responded to the survey reported that the
policy change will have a “significant” impact on investment capacity within the HRA2.
One borough anticipated “minimal” impact and reported that there would have to be
additional borrowing, but they would still be below the debt cap. The other two
reported ‘minimal’ and ‘no impact’ between them.
15. In terms of what type of capital investment would be impacted specifically, boroughs
reported new build and major regeneration and improvement programmes having to
now be reviewed or put on hold. One reported that its HRA will now “only be able to
2
Within a scale ranging from “No impact”; “Minimal impact”; “Moderate impact”; to Significant impact”.
sustain the ongoing investment in existing stock”. Another suggested its programme
of improvements to bring stock up to the Decent Homes standard will be affected,
potentially leaving tenants with poor quality housing conditions. Another borough,
with stock of around 23,000, reported that planned capital expenditure on existing
buildings now has a £68 million funding gap over the next 4 years.
16. Repairs and maintenance contracts are likely to be adjusted, with programmes of
stock improvement, maintenance of kitchens and bathrooms for example reduced.
This may have a knock-on impact on the work available for suppliers and traders
operating in London.
Debt repayment
17. Boroughs generally reported a substantial impact on borrowing and debt repayment
plans. One borough, that was planning to repay self-financing debt is now
reconsidering its plans on the basis of re-gearing its debt repayment, with
implications for available funding to support estate regeneration and in turn the
provision of new supply. Another reported that it would “significantly curtail future
borrowing” plans. Another borough specifically mentioned an increase in debt of £9
million in the early years of the business plan. Others reported seeking to maximise
the use of revenue resources as borrowing becomes unaffordable.
Impact on registered providers
18. As well as directly impacting on boroughs as social landlords, there will be a
substantial impact on Private Registered Providers (PRPs) as a result of the new
policy. This includes:
 Increased borrowing costs as the level of risk for investors increases because
of the long term uncertainty over income created by the policy.
 Reduced credit scores making borrowing harder for RPs.
 Reduction in Existing Use Value (EUV) Valuations. Most RPs have to value
their housing stock using an ‘existing use’ value calculation, this determines
the level of funding they can access and the ‘gearing’ at which they operate
i.e. the value of their stock against the loans they hold. If the EUV valuation is
lower because income is lower RPs cannot borrow as much.
 Some RPs may need to put more properties into charge in order to secure
their current debt levels.
 Reduced development ambitions: the National Housing Federation has
suggested that around 27,000 fewer homes could be built as a result of the
impact of the rent shortfall on RP business plans.
 For some RPs there may be problems sustaining existing debt where there
has been high gearing in the past.
19. Anecdotally we are already hearing that uncertainties about the impacts of the rents
cut are causing some RPs to delay signing contracts on schemes and to reconsider
viability. Depending on the scale, this could seriously undermine London’s housing
pipeline.
20. In order to minimise the impact of the policy RPs will need to make significant cost
reductions, which could see them concentrating on their traditional landlord functions
and cutting back on some of the community services they currently offer, e.g. around
training and employment, financial inclusion, community cohesion work. Some RPs
have significant surpluses which may help sustain affordable housing development to
an extent.
Annex A - Comparison of estimated rental income across London Boroughs under 3 scenarios
Original assumption at
self-financing settlement
(RPI + 0.5%)
Bus.
Plan
year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Spending Round
2013 (CPI + 1%) for
ten years to 2024-25
New policy - Summer Budget 2015
Year
RPI +
0.5%
Rental
income
CPI +
1%
Rental
income
Social rent
-1%
Loss v
self fin.
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
2024-25
2025-26
2026-27
2027-28
2028-29
2029-30
2030-31
2031-32
2032-33
2033-34
2034-35
2035-36
2036-37
2037-38
2038-39
2039-40
2040-41
2041-42
2042-43
2043-44
2044-45
2.8%
3.5%
3.6%
3.6%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
3.7%
2,222
2,284
2,364
2,449
2,537
2,631
2,729
2,830
2,934
3,043
3,156
3,272
3,393
3,519
3,649
3,784
3,924
4,069
4,220
4,376
4,538
4,706
4,880
5,060
5,248
5,442
5,643
5,852
6,069
6,293
2.2%
2.7%
2.8%
2.9%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
2,222
2,271
2,332
2,397
2,467
2,541
2,617
2,696
2,777
2,860
2,946
3,034
3,125
3,219
3,315
3,415
3,517
3,623
3,732
3,844
3,959
4,078
4,200
4,326
4,456
4,589
4,727
4,869
5,015
5,165
2,222
2,200
2,178
2,156
2,134
2,198
2,264
2,332
2,402
2,474
2,549
2,625
2,704
2,785
2,869
2,955
3,043
3,135
3,229
3,325
3,425
3,528
3,634
3,743
3,855
3,971
4,090
4,213
4,339
4,469
0
-84
-186
-293
-403
-433
-464
-497
-532
-569
-607
-647
-689
-734
-781
-830
-881
-935
-991
-1,051
-1,113
-1,178
-1,246
-1,318
-1,393
-1,471
-1,553
-1,640
-1,730
-1,824
Loss v
CPI +
1%
0
-71
-154
-241
-333
-343
-353
-363
-374
-386
-397
-409
-421
-434
-447
-460
-474
-488
-503
-518
-534
-550
-566
-583
-601
-619
-637
-656
-676
-696
-967
-26,073
-800
-13,289
4 year impact (2016-17-2019-20): cash terms
Total loss (over current business plan period): cash terms
Assumptions
 Revenue Account budget figures for dwelling rents used for 2015-16 figures
 DCLG assumes rents will return to a CPI inflation-linked index (DCLG spokesman quoted in FT
article: http://www.ft.com/cms/s/0/a3974c82-2634-11e5-bd83-71cb60e8f08c.html#axzz3hlh53kmE).
 Assumed rate of CPI + 1% from 2020-21 onwards (latest OBR CPI estimate is 2% for 2020-21)