Written evidence submitted by the London Borough of Southwark (Southwark Council) [FSS 072]
Background
Our successes
Our challenges
Asks to Government
1.1 Increased funding for an ambitious launch of a second iteration of the Decent Homes Programme, guaranteeing warm, safe and green homes.
- Given that reimbursement by the government of direct funding lost through rent caps as well as increased funding to deliver on actions legislated in The Building Safety Act 2022 is unlikely, the council is faced with further financial and operational challenges and will only be surmounted through an ambitious and urgently needed new initiative of new home building.
1.2 Cancelling historic debt assigned to Southwark in 2012, with the introduction of self-financing (c.£400m) combined with further lower, discounted and improved Public Works Loan Board (PWLB) interest rate set specifically for housing stock.
- Offering debt relief would significantly cut interest payments within the HRA. The self-financing model in 2012 was based on a sustainable model underpinned by a 30-year HRA business plan. This is no longer sustainable because of four years rent reduction from 2016, losing Southwark £1bn. The situation will worsen when the promised rent convergence to target rents has been abandoned). It would also facilitate controlled targeted borrowing on the affordable new build homes programme and could benefit improvements/upgrades to our own stock e.g. district heating. There is also great uncertainty in the financial markets with volatile rates, which increases risk and makes future new build projections difficult to predict.
1.3 Replacement of the current funding mechanism for decarbonisation with funding, through a devolved model, with local councils responsible for delivery and implementation.
- Decarbonisation should happen locally. Local authorities should have both sufficient funding (allocated and not subject to a competitive bidding process) and the autonomy to decarbonise at a local level (through the aforementioned second iteration of the Decent Homes Programme) is required. At present the principal method of funding is currently through the Social Housing Decarbonisation Fund and, it is in no way sufficient to deliver on what is required; secondly, it requires council match funding at a time when we have all the other pressures identified. It is a form of competitive funding requiring local authorities to spend vast amounts of time and energy bidding against one another when a collaborative, coordinated approach would be a better fit for the purpose.
2.1 Substantially increasing grant funding including permitting combining grant funding with Right-to-Buy Receipts and locally raised money.
2.2 Allowing Southwark to retain more Right-to-Buy receipts, 1-for-1, and on a longer-term basis.
2.3 An increase in grants administered for the Affordable Home Programme new homes and estate renewal
There is also a significant capital-funding gap for the required level of retrofit and new build to progress towards carbon neutrality. In total, we estimate that £2.6bn of capital expenditure is required.
1. How would you assess the financial resilience of the social housing sector currently? Are increasing pressures and requirements putting financial viability at risk?
1.1. It is clear that the social housing sector is facing its worst crisis in many years. This in the main because of global economic problems coupled with the additional operational obligations being put onto the housing sector and without the additional financial resources being made available. It is a problem that has been in the making for 10 years or so but recent developments have exacerbated the position.
1.2. The implementation of self-financing to the HRA in April 2012 was intended to give more autonomy to landlord local authorities and to allow authorities to retain their rental income so that strategic decisions could be made with regard to local circumstances and needs. It was a move away from the short-termism approach which was inherent in the previous housing subsidy system where financial settlements were determined on an annual basis. There were several rent changes implemented by the government after self-financing that have impacted the council’s finances and were a move away from the government’s long-term objectives.
1.3. For example, the self-financing settlement was predicated on a 2016/17 convergence date. In May 2014 the government issued the publication “Guidance on Rents for Social Housing” which stated that from 2015/16 social housing rents were to increase by CPI+1% rather than increasing as per the rent restructuring guidance. This significantly reduced projected income for the majority of authorities where convergence had not been reached including Southwark. Southwark remains around 8% below target rent.
1.4. The Welfare Reform & Work Act 2016 required social housing landlords to reduce rents by 1% a year for four years from April 2016. This policy equated to a loss in rental income to the HRA of £820m over the thirty years of the business plan when compared with the previous rent policy.
1.5. Following the imposition of the rent cap in November 2022, the council has agreed to a capped rent increase of 7% for all housing stock except supported accommodation for the 2023/24 financial year. Under the current national rent policy, the rent for 2023/24 would have been set at 11.1%. The rent cap results in a loss of £9m in rental income for 2023/24, with the impact compounded in subsequent years. The cumulative loss of resources from the changes in rent policy has resulted in a loss of over £1bn over the lifetime of our business plan.
1.6. The Building Safety Act 2022 has brought about statutory compliance costs which have to be funded from within existing council resources, with an estimated cost of £80m per year for three years. This is particularly difficult for those authorities with significant numbers of high-rise blocks, and here at Southwark, there are 187 high-rise buildings.
1.7. Surveys of high-rise buildings may result in remedial works, which at this stage cannot be quantified. Southwark is particularly impacted by the funding crisis due to the scale, age and complexity of our housing stock, which makes us an outlier in terms of the impact of the new burdens.
1.8. A major concern is that because interest rates are increasing then it will constrain the ability to borrow monies and would further limit the capital works that can be actioned. The Bank of England base rate is now 4.25% when in 2020 it was 0.1% and is currently projected to be 5.2% by the fourth quarter of 2023. Additionally, inflation is 10.4% but build and repair cost inflation is significantly higher.
1.9. Here in Southwark, all of the above factors have created a position in which some new construction has had to be curtailed and the required asset management works have become unaffordable without significant reforms in the financial model. These would have otherwise been ready to go, had the model been reformed earlier. The self-financing model introduced in 2012 is now a broken concept and under the current arrangements it is anticipated that our HRA will become financially unviable within two to three years.
2. What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?
2.1. High inflation has impacted tenants, the wider public, businesses, but also social housing organisations. CPI is currently 10.4% and RPI is 13.5%. Tenders received by the council for construction and asset management contracts have been well in advance of these inflation rates. The imposed 7% rent cap is obviously below these inflated costs which have subsequently impacted on the financial position as the rent increase fails to match the increased inflated costs.
2.2. Following the Housing Ombudsman’s recommendations in their spotlight report on damp and mould and the tragic death of Awaab Ishak we have increased resources for staff and remedial works to address such issues in our properties.
2.3. We have already committed £1.5 - £ 2 million for staff and necessary work since November 2022. Like other housing providers, we have given an overview of our new processes to respond to damp and mould to the Regulator and continue to respond to individual queries in detail which has added pressure in this area.
2.4. Increased energy bills have seen a greater reluctance for residents to warm their homes sufficiently and open windows to ventilate. This practice will significantly exacerbate issues with damp and mould in our properties, which will add to the resource and costs required to resolve them.
2.5. One of the key additional costs arises from the move towards decarbonisation. The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body for assessing the science related to climate change.
2.6. The IPCC has stated that to avoid climate catastrophe global emissions must be halved by 2030 and at net zero by 2050. In March 2019 the council declared a climate emergency. This declaration stated that the council would “do it all can to make the borough carbon neutral by 2030” going further than the IPCC statement.
2.7. These include £95m to get the stock to an Energy Performance Certificate rating of ‘C’, which is now a minimum requirement in the private sector and will soon become so in the social housing sector too and £600-800m to move towards net zero by using heat pumps and renewables.
3. To what extent can social housing providers maintain output levels in housing development to provide a counter-cyclical balance in otherwise tightening market conditions?
3.1. The simple and stark answer is that local authorities are finding it extremely challenging to develop new homes in such a difficult economic climate. To develop social rented homes there is a financial loss to the council, even with a grant applied. With increased build, material and labour costs it becomes even more difficult, and contractors want to pass any risk onto the local authority.
4. What impact have changes in the housing market in recent years had on the strength of housing associations’ balance sheets?
4.1 N/A
5. Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?
5.1. Market sales have been developed in Southwark on a very limited basis so far. However, due to the financial constraints on the new build programme, including the inability to combine grant funding with 1-4-1 RTB receipts, cross-subsidy with market sales seems to be a key mechanism in order to build more socially rented homes. However, pursuing such a strategy has risks, with the cost of living crisis and increasing interest rates slowing housing demand.
5.2. To pursue a cross-subsidisation model at scale would also be a risk for Southwark as sales and marketing, and sales aftercare are areas where the council currently lacks experience and skills. There will always be an appetite for a cross-subsidisation model from social housing providers as long as the economic conditions are favourable, but that may not be for some time in the future.
6. To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?
6.1. The council does get approaches from Pension Funds to invest in social housing but the terms and longevity of the commitment present unacceptable financial risks for social housing providers.
Section 2 - New Challenges to the Social Housing Sector:
1.1 The additional obligations on safety, arising from the Building Safety Act, the increased emphasis on damp and mould, and the investment required for our high-need estates have increased costs to such an extent that some essential works are unaffordable.
1.2 Since 2011 the HRA here at Southwark has achieved £73m of efficiency savings to ensure viability. The capital programme’s lifting of the borrowing cap has helped the council build new homes to generate additional rental income, but there is a limit to what can be borrowed. Increased debt interest charges to the revenue account reduce the monies available to fund vital services, including asset management costs. Increased interest rates further worsen the position.
1.3 There is no doubt that additional resources are required and so there must be recognition from the government that these funds will have to be provided centrally. Without additional government funds, the inability to invest fully in our stock will impact our ability to fully deliver homes to the highest standards for our residents to ensure their safety.
2.1. The aim of the council has always been to invest in our stock to maintain and improve decency levels but also more recently to provide new social rented homes within the borough. This policy remains but there has been a reformulating of strategy due to the worsening economic situation alongside constrained funding.
2.2. We reiterate that allowing authorities to combine grants with one-for-one receipts would help us build more homes. However, as additional borrowing becomes unaffordable there becomes a need for higher grant levels if we are going to build additional social rented homes. The increased obligations on the asset management programme will inevitably result in identified required works being postponed due to a lack of resources.
3.1. The council’s new build programme includes a mix of homes that meet local housing needs, this is predominately flats but does include several family-sized houses. Several schemes in the programme also include homes for older people (55+) and key worker homes, in both instances these are flatted developments.
4.1 N/A
5.1. The lifting of the HRA borrowing cap in October 2018 was welcomed by Southwark as a positive step in allowing local authorities local flexibility to determine their own funding decisions for their housing capital programmes.
5.2. However, the council has been mindful that increased borrowing will result in increased interest charges to the revenue account which will result in less money available for management and maintenance.
5.3. The council determined a level of acceptable borrowing as a prudential indicator which is higher than the previous debt cap, and so has contributed to an increased supply of new socially rented homes.
6.1 N/A
7.1 N/A
8.1 N/A
9.1 In short the answer is currently no. Hopefully, this might change in the future.
10.1 In order to deliver schemes in the coming years the council is open to a range of approaches, including more collaboration and formal partnership working with registered providers, where this jointly satisfies objectives for each partner. The council has formal partnerships in place with register providers on major estate redevelopment schemes, namely Aylesbury.
11.1. Having a range of tenures, as part of a mixed portfolio, enables the council to meet a range of local housing needs which is important, however, shared ownership tenure also goes some way to enable financially viable schemes.
11.2. The primary need for housing in Southwark is social rented tenure and the council’s objective remains to maximise social rented tenure on all schemes as much as possible.
12.1. In Southwark there has been no housing company activity.
13.1. This is a difficult question to answer generally. It will depend on the purpose of each company, what homes they are developing e.g. private sector for rent, affordable homes; and the robustness of their business plans. Some will be impacted more significantly than others by the economic downturn.
14.1. This question is difficult to answer until the details of the Act are finalised. In essence, the proposal is to incorporate affordable housing into the levy along with every other planning payment. That payment has to be justified in terms of viability. Initially, there is a concern that the changes will impact on affordable housing capacity as the rate set will be a lower subsidy than onsite delivery as the rate charged will be subject to a viability assessment with 3rd party verification. Nationally many councils will choose no affordable housing and instead direct payments to other areas.
1.1. The focus on safety and building new homes is laudable and one we agree with. To deliverable this to the standard required additional central funding is required, However, not all government policies are aligned to this objective which will limit its success or worse undercut the ability of councils and partner organisations to be able to deliver on this objective.
The Building Safety Act 2022 has presented the council with further financial and operational challenges. The council is the landlord to around 52,000 properties, of which around 37,000 are tenanted, and 15,000 are leasehold properties. The stock under Southwark’s control is unusually large and varied in its composition. The council owns 171 buildings, which are 18 metres / 7 storeys and above which are defined as higher-risk buildings. Resident safety is of the highest importance to the council therefore any reduction in income is of concern to the council
2.1. N/A
4.1. It is clear that our pausing of the new build programme will continue unless there is a significant increase in grant rates. Similarly, many required investment works into our existing stock will not be actioned unless there is an injection of funds from the central government.
5.1. N/A
It will be challenging, but we with the correct reform and implementation of policy and additional funding allocated we will be able to deliver on our ambitious plans.
For example, we have a pipeline of housing projects ready to go should government reform the finances and sustainability in this area – we are aiming to deliver 11,000 homes by 2043. As part of this programme, the council has achieved its initial target of starting construction or delivering 2,500 new council homes by May 2022 and for a longer-term ambitious house-building target as soon as funding become available and the wider model is reformed.
With the correct model and necessary policy changes (which fundamentally do not put the financial burden on Tenants), we have an ‘oven ready’ programme to continue to build more council homes (as stated above).
May 2023
[1] https://www.gov.uk/government/statistical-data-sets/live-tables-on-affordable-housing-supply
[2]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1154477/Live_Table_1011.xlsx