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When costs are rising twice as fast as rents, how do housing associations cope?

The Government called its 7% cap on social housing rent increases “an appropriate balance” between protecting tenants and supporting landlords.

Housing associations have welcomed the cap, pledging to keep it even if the Government removes it. But as costs continue to rise, that balance is increasingly hard to strike.

What are the new rules?

Under standard policy, landlords are allowed to raise rent by 1% more than consumer price inflation (CPI) each year. With inflation topping 10%, rents could have risen by up to 11.1% this tax year. The Government estimates that the temporary rent cap for 2023-24, introduced from April 1st in response to a consultation, will save tenants £200 a year – a lifeline during the cost-of-living crisis. 

If complying with the rent cap jeopardises a provider’s “financial viability” or their ability to meet their health and safety obligations to tenants, the Government does allow landlords to apply for an exemption, and supported housing is exempted automatically because of its tighter operating margins. 

The National Housing Federation (NHF) said the Government's response had considered all the points the NHF made in the consultation, such as the fact that most housing associations were willing to cap rents voluntarily, and that any cap would reduce their income and ability to invest in existing and new social housing. 

How will the rent cap impact providers?

With core income for Housing Associations rising by only 7% and costs often increasing by double that, business plans and funding arrangements are under pressure. A recent survey of landlords by Housing Magazine and Anthony Collins Solicitors revealed widespread challenges, despite common approval of the cap:

  • 53% of respondents had seen cost inflation of 10-15% in 2022.
  • 87% of respondents were planning to implement the full 7% increase.
  • Nevertheless, 11% were “very satisfied” with the 7% rent cap.
  • 40% were “satisfied”.
  • 30% were “neutral”.
  • 16% “dissatisfied”.

While every area of non-profit finance is grappling with inflation, social housing faces a slew of extra financial challenges, such as the ongoing building safety crisis, the urgent need for decarbonisation and material and labour costs, already driven up by COVID and Brexit, rising still higher over the war in Ukraine.

Cap to cost £3.2bn

The Government estimates that the 7% cap will cost housing associations £3.2bn and local authorities £1.7bn over the next five years. Survey respondents were asked where they planned to cut spending to manage this. The top three areas were:

  • Development of new homes–61% said they were likely to review spending here.
  • Decarbonising homes–half planned to review this.
  • Repairs and maintenance.

Major landlords were already cutting back on new developments well before the announcement of the rent cap, with L&Q notably cutting 70% from its annual housebuilding target over the rise in fire safety costs. The rent cap poses an additional threat to the Government’s ambition of building 300,000 homes per year by the mid-2020s.

Cutting decarbonisation, meanwhile, means housing associations face a struggle to meet the requirement for all social housing to be in Energy Performance Certificate Band C by 2030. And repairs and maintenance have little room for cuts, given recent scandals around poor conditions.

Which relationships will suffer?

While 7% is a low figure for landlords, it’s a high one for rent-paying tenants, and the survey reflected this. It asked which relationships they expected to be “most challenged” in 2023.

  • Over 65% of respondents chose relationships with residents.
  • 56% said contractors–reflecting the cost pressures around repairs, maintenance and development.
  • 50% said developers, probably for the same reason.
  • 29% said funders, with the cap putting pressure on covenants.

In March, we attended the Housing Finance Conference. The agenda touched on some of the issues raised by the rent cap, as well as other key issues for the sector.

Many of the professionals we work with and for, such as CFOs and FDs of housing associations, are dealing with issues arising from the rent cap.

Whether you’re looking for people, work, or just an overview of the latest developments in the market, get in touch today for a free, friendly chat with our experts. 

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