Written evidence submitted by Resonance [FSS 060]
Executive Summary
Resonance is a social impact property fund manager which launched in 2002 with the mission of connecting capital to social enterprise. We provide life changing homes and solutions for people and communities facing crisis.
Through our pioneering social impact residential property funds, we work with institutional investors and expert housing partners to provide safe, affordable homes with wrap around support.
Resonance has seven residential homelessness property funds that have seen investment of over £300m from a combination of local authorities, foundations, local government pension funds and other social-minded investors. Since 2013 around 3,000 people, including over 1,000 children, have been housed by these funds.
We will answer three questions to the inquiry as these are the areas where our expertise and experience are best placed to answer. These are:
The current state of financial resilience of social housing providers
6. To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?
What are the policy and regulatory challenges to the Department and the Regulator?
5. On our inquiry into Exempt Accommodation, we found that issues have arisen when providers are not registered with the Regulator. How does the Regulator of Social Housing engage with Housing Associations whose registration is voluntary?
Submission
The current state of financial resilience of social housing providers:
6- To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?
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What are the policy and regulatory challenges to the Department and the Regulator?
We propose an introduction of fairer LHA.
Half a million more families need social housing than recorded on official housing waiting lists which equates to 4.2 million people, including 1.3 million children, and so the need for a steady and consistent social rent setting policy is a significant one that is currently overlooked.
Local Housing Allowance is too low to attract landlords and some investors into Impact Funds to house families reliant on housing subsidy.
In 2013 LHA was reduced from 50th percentile to 30th percentile to save the government money – this reduced rents by approximately 6% at a time that open market rents were going up by close to 10%. At the same time private sector landlords were hit with a 3% premium on SDLT. More recently tax and regulatory change (much that is progressive) have further encouraged casual landlords to exit the market.
As a result, the supply of property in the private rental sector is shrinking against a growing demand. Second home ownership, extensive use of homes as AirBnBs, and a lack of new house building have made the demographic challenges even more acute. There are now over 100,000 families stuck in temporary accommodation costing Local Authorities hundreds of millions of pounds. According to Shelter, Councils spend £1.1bn in temporary accommodation a rise of 78% in the last 5 years. And yet the freeze on LHA penalises those private landlords and investors that want to offer a quality home to families in favour of those that want to make high returns for nightly accommodation at the expense of council taxpayers.
The private rented sector is a hugely valuable and flexible tool in allowing families to have a home where social housing and home ownership cannot.
The Private Rented Sector comes under much criticism for profiteering and providing poor service to tenants. Some of this is absolutely fair. However, the relatively crude design of Local Housing Allowance over quite large geographies (defined as Broad Rental Market Areas BRMAs) encourages a form of ‘gaming’ to concentrate properties in pockets of lower value areas and to find ways to protect income levels through acquiring properties with smaller and smaller bedrooms. An 18sqm studio flat generates the same rent as a 58sqm 1 bed house in the same BRMA.
Successive reductions in LHA have only exacerbated this problem and might be described as "all stick and no carrot". LHA might be imperfect, but it was well conceived as a quasi-market benchmark to encourage landlords to open up their properties for families on benefits. For many years landlords had no idea whether housing benefit would cover the rent they set and so it was simpler just to refuse a tenant on benefits. Signs stating ‘No DSS’ was commonplace in agents’ windows.
The introduction of LHA changed all that and for the first-time enabled landlords and investors to know exactly what rent they could get and so they became open to families on benefits. But if the government continues to restrict support for LHA tenants at the same time as open market rents are increasing at close to 10% for the second year running and social rents are ‘capped’ at 7%, then both the quality and the volume of private rental homes for those on benefits will continue to shrink. Ultimately the cost will be transferred to Local Authorities and the families in temporary accommodation warehoused in substandard properties will face health, safety, and isolation challenges - all of which very quickly start costing the government money in other ‘budgets’.
It is right that those on benefits are financed to access lower value accommodation, but it needn’t be of lower quality.
Many private sector landlords really want to invest more in the homes they own to drive up standards. Tenants are their customers and good landlords know that it is good business to look after your customers. But to date the legislation pits landlords against tenants and vice versa. There is much that is already improving in this regard but still there is only the blunt tool of regulation. Quicker change is possible with a little creativity to align interests.
What if the level of LHA wasn’t just decided by the postcode and the number of bedrooms in a property? What if there was a way of a higher level of LHA flowing to better quality homes to encourage landlords to invest in better and enabling new investment to flow towards those landlords that did.
All properties must have an EPC certificate available on a publicly accessible database. This indicates several things, but it primarily reports on the energy use of a home. With the world fighting to find ways to reduce its energy bills to combat energy spikes but also to drive towards net zero, there is a desperate need to make our private rental stock more energy efficient. One way to do this is to simply rush towards smaller homes. It is much easier to obtain a good EPC rating for a smaller home than for a larger one. But this potentially compromises people's living circumstances and wellbeing, particularly for families. And so, we need a measure that judges quality both on EPC rating and the size of the home together.
All EPC certificates have a Gross Internal Area as part of the certificate, and we already have a well published national space standard.
It would therefore be easy to award higher levels of LHA to those homes that met better EPC ratings AND also met the national space standard for the size of property. This is open data collected by third parties, so it is both available and consistent.
The government has declared that a property will be unlettable post 2025 if it doesn’t meet EPC C and yet even well-funded housing associations are not seeing a way to achieve this and requesting a longer transition period. The same is true for private landlords. Rather than having an absolute binary position on this, better to simply financially penalise the landlord through the rents if they do not meet the standard. This might be done by limiting private rents to 20th percentile for properties that both do not meet the national space standard or EPC C. (There would be a good argument to also freeze social rents that don’t yet meet EPC C).
Currently landlords have little incentive to invest in energy efficiency measures. Such interventions are often costly, disruptive, add little or no value to the homes and when reliant on Local Housing Allowance do not increase the rent. As a result, landlords invest the minimum they can.
If landlords at the bottom end of the market could be assured of more income, then there is immediately a commercial incentive to improve their properties. Good for the tenant, good for carbon reductions (in most cases), and cost effective for the government.
It is estimated that landlords will need to spend £20-30k per 1-2bed home to bring it in line with government carbon reduction ambitions. Without some revenue incentive, the government will be faced with a very large capital bill. By increasing rents as energy bills are reduced the overall cost to tenants is likely to be less and the government pays perhaps a small premium which could unlock most of the capital required to improve the existing housing stock.
If a flat is currently eligible for LHA support of £10,000 then uprating it back to 50th percentile from 30th percentile would cost the government an additional £600 pa. However, with rental yields in many areas this extra £600 would unlock £12,000 of capital at a 5% yield. This is not going to be enough to drive behaviours for everyone, but most landlords want to pursue this path anyway - they just need a little encouragement.
May 2023