Written evidence submitted by the Department for Levelling Up, Housing and Communities [FSS 062]

The current state of financial resilience of social housing providers

1. Registered providers of social housing (RPs) are facing a more challenging position than in recent years. It is vital that RPs manage their resources effectively to ensure that their financial viability is maintained and that they deliver on their responsibilities to their residents. The Government recognises that this will involve difficult trade-offs in some cases, and that this will potentially affect the delivery of new homes and discretionary improvements to existing homes over and above regulatory requirements.

2. Our evidence sets out the Government’s view of the financial resilience of Private Registered Providers (PRPs) and Local Authority Registered Providers (LAs). Some of the data is presented separately for PRPs and LAs, due to differences in their financial and regulatory arrangements.

3. PRPs with 1,000 or more homes, who together hold more than 95% of PRP homes, remain broadly financially viable in aggregate. According to the forecasts they made in June 2022, their five-year forecast interest cover was 147% and their projected indebtedness as a multiple of turnover remained stable. This is after having factored in £40.7bn of forecast expenditure on repairs and maintenance over five years (a 16% increase compared to the forecasts made in June 2021)[1] and £87.5bn of forecast development spend.

4. The Government recognises that the scale of the financial challenge PRPs face will have increased further since they made their June 2022 forecasts. This is due to a number of factors, including further inflationary pressure, higher borrowing costs and the Government’s decision to cap most social housing rent increases at 7% in 2023-24 in order to help ease cost of living pressures on tenants. PRPs’ financial position may also be affected by weaker housing market conditions (although the number of properties they hold that have been unsold for more than six months is lower than it was two years ago).[2]

5. The financial viability regrades published by the Regulator of Social Housing (RSH) towards the end of 2022 reflected the increased degree of financial challenge, but RSH also noted that the PRP sector remained in a strong financial position overall.[3] We will be looking carefully at RSH’s summary of the forecasts to be submitted by PRPs this June.

6. LAs also face increased financial pressures. LAs’ aggregate Housing Revenue Account (HRA) surpluses have declined from a high of £467m in 2014-15 (with a turnover of £8.7bn) to £-88m in 2021-22 (with a turnover of £8.3bn). Councils are not permitted by law to budget for a deficit in their HRA. If they foresee a deficit arising in-year, they must adjust spending to prevent it or else meet the shortfall from HRA cash reserves. HRA cash reserves have therefore started to fall by roughly the amount of the negative surplus. Aggregate HRA reserves remain close to £3bn in the most recent published figures (2021-22), but they are not evenly spread across LAs.

7. There are a number of important protections in place to mitigate risks to the financial viability of individual PRPs and LAs. These include RSH’s work to monitor and (where necessary) enforce compliance with its Governance and Financial Viability Standard for PRPs. In extremis, both PRPs and LAs are able to apply for exemptions from the requirements of the Rent Standard where their financial viability would otherwise be jeopardised; so far, none has done so.

8. PRPs and LAs will be reprioritising their resources as a result of the increased financial pressures that they face. Ensuring that their residents have safe and decent homes must clearly be RPs’ first priority.

9. The Government acknowledges that in some cases RPs might need to divert resources that would otherwise have been used to undertake discretionary activities – including the delivery of new homes. The available evidence indicates that some PRPs have reduced their development forecasts, although their overall actual and forecast investment in the acquisition and development of homes has not dropped significantly so far – with £12.6bn having been invested in the 12 months to December 2022 and a further £16.6bn forecast in the 12 months to December 2023.[4]

10. The Government is continuing to invest heavily in delivering new social housing through the £11.5bn Affordable Homes Programme (AHP). We are doing everything we can to ensure the AHP is able to deliver as many homes as possible for the funding available. We are supporting LAs’ development ambitions by allowing them to keep 100% of their Right to Buy receipts from sales in 2022/23 and 2023/24 and by bringing forward a new discounted Public Works Loan Board (PWLB) borrowing rate. We are also supporting LAs through the £750m Local Authority Housing Fund (LAHF), ensuring that communities that have been most generous in welcoming Ukrainian guests, alongside supporting Afghans out of unsuitable bridging accommodation, face less future pressure on waiting lists. As of May 2023, we have already made over £120m of payments to participating LAs as part of the initial £500m first round, which we expect to deliver 3,000-4,000 homes by March 2024. In the long-term, this will increase the supply of social housing. 

11. The Committee’s terms of reference for this inquiry refer to the role of ‘cross-subsidy’. The Government believes that cross-subsidy from RPs – including where this is generated by building homes for sale – can continue to contribute to meeting the cost of delivery new social housing, alongside borrowing and AHP funding. This helps the available taxpayer funding to deliver more social homes than would otherwise be possible. However, the Government also recognises that there are limits on the scope to do this. We are working with Homes England and the Greater London Authority to confirm the 2021-26 AHP’s capacity to deliver as part of a review of programme commitments in light of economic challenges for social housing developers. We expect this to be completed in June.

New challenges to the social housing sector

12. RPs are already directing more resources towards maintaining and improving their existing properties in order to ensure that residents’ homes are safe, decent and energy efficient. Total major repairs and maintenance spend by PRPs increased to a record £6.5bn in 2021-22.[5] In December 2022, PRPs were forecasting capitalised major repairs expenditure of £3.4bn over the following 12 months, which would be 36% higher than the actual expenditure of £2.5bn over the previous 12 months.[6] PRPs are planning these increases in spend while continuing to remain viable in aggregate.

13. LAs spent a total of £6.0bn on maintenance (revenue) and major works (capital—from the Major Repairs Reserve) in 2021-22. This too was the highest on record. Spend data for 2022-23 will be available when LAs begin submitting provisional data returns from September, but our engagement with LAs indicates that many are readying themselves for the passing of the Social Housing Regulation Bill, through updated stock condition surveys and focused spending on maintenance.

14. Building safety remediation represents a significant cost for some RPs. Approximately 10% of the five-year repair and maintenance spend forecast by PRPs in June 2022 related to building safety works.[7] The Government recognises that the Building Safety Act, which provides important protections for innocent leaseholders from unacceptably high bills, will have resulted in a larger share of the costs of remediation falling on RP building owners. However, the Act provides new measures to allow RPs to pursue those who were responsible for defective work. We also expect some RPs to benefit from the remediation pledges made by housebuilders (where they now own the buildings concerned).

15. The Department has committed £400 million to support RPs to remove and replace unsafe ACM cladding on buildings over 18 metres. RPs are also able to access the £4.5bn Building Safety Fund (BSF) for remediating unsafe cladding on buildings over 18 metres in relation to costs that would otherwise have been attributable to their leaseholders. RPs can apply for additional BSF funding where their financial viability is jeopardised. We anticipate that RPs will be able to access funding for the remediation of unsafe cladding on 11-18 metre buildings on a similar basis to the BSF.

16. The tragic death of Awaab Ishak in Rochdale due to the damp and mould in his social home has shone a light on the appalling conditions in some social housing. All social housing should already meet the Decent Homes Standard, but recent events have demonstrated that some RPs do not have a strong enough understanding of the condition of their stock. This renewed focus on tackling the scourge of unsafe homes means that many RPs are rightly allocating additional spending to ensure their homes are decent. The number of social homes that have been classified as non-decent reduced from 20% in 2010-11 to 10% in 2021-22, but the Government has set an ambition for non-decent homes in all rented sectors to be reduced by 50% by 2030 – with the biggest improvements in the lowest-performing areas. The Government remains committed to reviewing the Decent Homes Standard, to make sure it is setting clear minimum standards to provide safe and decent homes for social housing residents.

17. The Secretary of State also wrote to all social housing landlords setting out how he expects standards to be maintained in social housing, with a particular focus on damp and mould. The Regulator followed this with a letter to all larger social landlords asking them to submit evidence about the extent of damp and mould in tenants’ homes and their approach to tackling it. The Regulator published its initial findings from this in February this year and will publish its full findings later this year.

18. Another important area of investment for RPs will be on improving the energy efficiency of their homes. The Government will consult later this year on energy efficiency standards in social housing. Having clear regulatory standards will help providers to plan investment in their stock. The Government is already supporting this investment through the Social Housing Decarbonisation Fund (SHDF). The 2019 Conservative Manifesto committed to a £3.8bn SHDF over a 10-year period. The SHDF will upgrade a significant amount of the social housing stock currently below EPC C up to that standard, delivering warm, energy-efficient homes, reducing carbon emissions and fuel bills, tackling fuel poverty, and supporting green jobs. Currently the total committed funding for the SHDF is just over £1bn.

19. RPs’ first priority must be to ensure that their residents have safe and decent homes, and they will need to allocate a sufficient level of resource in order to achieve this outcome. The Government believes it is entirely possible to combine this with delivering new homes and indeed many RPs do so. Whilst the Government recognises that higher costs relating to the existing stock might require RPs to divert more resources from discretionary activities, we welcome the fact that many RPs remain keen to deliver more social housing. As recently as December 2022, PRPs were forecasting a further £16.6bn of investment in the acquisition and development of homes over the following 12 months.[8]

20. RPs’ eagerness to deliver more social housing is also evident from LAs’ positive response to the Government’s recent announcements on Right to Buy receipts and the preferential PWLB rate. These measures follow the abolition of the HRA borrowing cap, which gave LAs greater flexibility to borrow to build new social homes. LAs delivered nearly 7,800 affordable homes in 2021-22, the highest recorded number of LA completions since 1991-92.   

21. The Government supports LAs working innovatively to deliver more homes, including through partnership working. This can enable providers to share skills, capacity and development risk. To deliver the objectives of the Local Authority Housing Fund, we expect LAs to work closely with their PRP partners who stand ready to assist and, in some cases, might be the most appropriate delivery vehicle to achieve the Fund’s objectives.

22. In relation to PRPs, mergers have proven to be one means of addressing financial and performance difficulties that sometimes emerge. There is no obvious reason why this should not continue to be the case in the future. Government is also setting out demanding expectations for what social landlords should be delivering for their tenants. PRPs will need to think about how they are best able to deliver the improvements necessary. Some might consider whether a merger would make them better able to respond to those challenges. Where they do, the Government would expect providers to put tenants at the heart of that process and listen to what they have to say. Whilst the Government does not believe large landlords are necessarily too big to deliver for tenants, there are risks and landlords need to ensure these risks have been properly thought through and addressed.

23. Profit-making RPs have existed in the social housing sector for some time and the first such provider was registered with RSH in 2010. There are now 64 profit-making RPs, although they remain a relatively small part of the RP sector (owning just over 20,000 homes). This has brought with it additional sources of investment into the sector. While this can be welcome, alternative models of funding can bring different or additional risks to manage. As highlighted in RSH’s Sector Risk Profile, it is for the Boards of those providers to make sure they understand and are managing those risks.[9]

24. The Government is committed to ensuring that the new Infrastructure Levy (proposed in the Levelling Up and Regeneration Bill) is capable of delivering as much – if not more – on-site affordable housing as at present. The Levy will aim to capture land value uplift at a higher level than the current developer contribution regime, allowing local authorities to use the proceeds for providing the affordable housing and infrastructure that communities need. The analysis that the Government commissioned from the University of Liverpool found that on some greenfield sites, substantially more value capture is possible. Local authorities, therefore, will be able to charge higher greenfield rates where appropriate, while supporting ongoing brownfield development.[10]

25. A key priority in the design of the Infrastructure Levy is to ensure that proceeds are invested in affordable housing, while at the same time giving local authorities an appropriate degree of flexibility to make decisions about what is needed to mitigate a development within their area. The Levelling Up and Regeneration Bill would require local authorities to take the desirability of delivering at least as much affordable housing into account when set their Levy rates. We will set further mechanisms through regulations to enable local authorities to require developers to deliver a set proportion of their Levy contributions as onsite, in-kind affordable housing. Developers will not be able to negotiate their affordable housing obligations downwards, offering a significant protection compared to the current system. The Government has published a consultation on the detailed design of the Infrastructure Levy and will be introducing it through a ‘test and learn’ approach, to monitor and evaluate its performance.[11]

What are the policy and regulatory challenges to the Department and the Regulator?

26. The Department’s priorities are to improve the quality of social housing, including by ensuring that residents are able to live in safe and decent homes, and to increase the supply of social housing.

27. Homes England is delegated to deliver the AHP outside of London. The Department sets Homes England objectives for the Programme in line with Ministerial priorities and the AHP’s business case. Through our governance framework, the Department monitors Homes England’s delivery on a monthly basis to ensure it is delivering the objectives of the programme and meeting annual performance targets.

28. The £11.5bn Affordable Homes Programme represents a significant level of public investment to support the delivery of new social housing. The primary source of funding for the management, repair and maintenance of existing social homes is RPs’ rental income. This exceeded £21bn in 2021-22, the majority of which is funded through the welfare system. Government capital funding is helping RPs to meet the costs of carrying out building safety remediation and making their homes more energy efficient. We will keep the case for further grant funding under review.

29. The terms of reference for this inquiry include a number of questions about the regulation of social housing, including in relation to mergers. Changes made through the Housing and Planning Act 2016 mean RSH no longer has a role in consenting to mergers proposed by PRPs. This was one of a number of changes necessary to ensure PRPs were reclassified as private sector bodies. This consent was replaced with a requirement to notify RSH when these changes are taking place. The same regulatory standards intended to ensure financial viability and good governance apply equally to a new organisation formed through merger and RSH has the same range of powers available to it. RSH’s Tenant Involvement and Empowerment Standard requires that where a merger is proposed a provider must consult with its tenants – setting out potential advantages and disadvantages (including costs) in the immediate and longer term. The landlord must be able to demonstrate to tenants how they have taken the outcome of the consultation into account when reaching a decision.

30. RSH proactively regulates its standards for PRPs on governance, financial viability and value for money. It is, however, ultimately for PRPs to ensure they are meeting these standards. Where a provider is not complying with regulatory standards, RSH has a range of powers to intervene where it thinks it necessary, and these are being strengthened through the Social Housing Regulation Bill.

31. The housing association sector has become more complex in recent years. RSH continues to adapt to those challenges and it has had access to the funding necessary to continue to regulate effectively. Alongside the Social Housing Green Paper, the Department also considered whether any changes to the regulatory framework were necessary. The Social Housing (Regulation) Bill contains a number of refinements to that framework to ensure it enables RSH to continue to deliver against its objectives. The Bill also removes a number of restrictions that currently exist on the use of some of RSH’s powers in relation to profit-making RPs. This will ensure the regulatory framework for both non-profit and profit-making providers enables RSH to meet its fundamental objectives.

April 2023