Written evidence submitted by Moat [RTB 104]

About Moat

Moat is a housing association providing affordable homes for people across London and the South East. For almost 50 years, we have delivered high quality general needs homes for social rent, Affordable Rent, retirement and independent living. We also have a strong low cost home ownership offer, with an excellent track record of helping people – particularly first time buyers – into home ownership. We are one of the HCA’s development partners and own and manage circa 20,000 units. On average, we have developed between 500-600 new homes per year over the past five years.

We have a strong social ethos and are committed to alleviating housing need in the areas where we operate. We are keen to see the continuation of a viable mechanism for ensuring that low-to-medium income workers are properly housed. It is in this context that we submit the evidence that follows.

Executive summary

1. Although we are waiting for the technical details of a number of policies to be presented in new regulations, we offer the following evidence based on our knowledge to date.

2. Moat is in the process of adapting its business plan to reflect the changed environment. The Affordable Rent programme requires us, in the vast majority of cases outside London, to charge rents at 80% of market value and is already funded substantially from our own resources, whether that be through private debt or unit sales of shared ownership. This product only works where our business has the financial capacity to provide this financing.

3. Although we are concerned that, over time, affordable homes may be forced off many housing association business plans, Moat remains committed to alleviating the housing need that exists across London and the South East. We recognise that in order to do so, we may need to use a different tenure mix than at present.

4. Low cost homes ownership [LCHO] products have enjoyed great success for many years in getting new buyers onto the housing ladder. Our concern here is the group of customers for whom home ownership is not an option. Housing associations and local authorities have traditionally relied on sub-market rented housing to house low income earners, giving business access to a broad workforce – leading to a more productive economy.

Right to Buy

5. We fully support the principle of helping people to own their homes. However, we believe that the Right to Buy should be weighed against other options for low cost home ownership. For instance, the average discounts within Moat’s area of operation – which approach £80,000 – are very large when compared to grant levels currently needed to provide other ownership tenures. As a comparison, shared ownership requires an average grant of £15,000 per unit nationwide[1].

6. We are looking to work constructively with government to ensure that the assets that we borrow against are properly protected. Given the size of discounts to be applied across London and the South East, the viability of future development will be highly dependent on full compensation for each discounted sale. Full compensation will also be important for incentivising investment in existing stock, for instance through large-scale regeneration programmes.

Reduction in social housing rents

7. The 1% reduction of social rents will have an immediate impact on schemes in progress. We are currently reviewing offers previously agreed with developers as the revised rent cashflow impacts on viability – especially on s.106 sites which may see the affordable housing build component reduced.

Pay to Stay

8. We support the principle behind this policy of targeting public funding more effectively. But we maintain that in order to implement this fairly, it will be necessary to use a progressive taper mechanism. We believe it is vital to ease the transition for tenants and prevent a sudden fall off a ‘rent cliff’.

9. Another key consideration will be the appropriate level of access to HMRC income data. Housing associations will be able to implement this policy most effectively with direct access.

The benefit cap

10. Resulting from the shift from capital grant to higher rents, many of which are substantially covered by Housing Benefit, the cap brings with it added complications. In particular, the collection of rent becomes much more difficult due to the added risk of arrears and bad debt. Inflating rent also becomes more difficult, which is important in the context that higher rents are needed under the Affordable Homes Programme to fund new supply.

11. We trust that the evidence enclosed will prove useful to the Committee. Should it require further evidence on any of these matters, either written or oral, we would be glad to supply it.

Evidence on specific proposals

Right to Buy

12. We are awaiting the technical and implementation details of the extension of Right to Buy. For the purposes of modelling its impact, we have assumed that it will replicate the existing Right to Buy applied to local authority stock.

13. We estimate that over 68% (7,274) of Moat’s 10,670 rented customers qualify for Right to Buy under the qualifying criteria currently applied to local authority stock. A further 790 residents will qualify by the end of this financial year.

14. In terms of actual take-up, we are guided by analysis conducted by the National Housing Federation [NHF], which has estimated that between 15% and 35% of housing association tenants have sufficient income to be able to afford a mortgage. This is based on a loan-to-income ratio of 3.5 and a 5% deposit. In the regions where Moat operates, the NHF estimate the take-up rates to be 20% across the East and South East and 15% in London[2].

15. The following table summarises the estimated property values of eligible residents, broken down by regions in Moat’s area of operation. The final column also shows the average size of mortgage that would be required across each region.

16. The average mortgage required across Moat’s area of operation is £121,430. The least expensive area is Medway and Stanhope (Ashford), where an average mortgage of £92,195 would be required. In this area, there are 96 Moat residents not on Housing Benefit who are ranked as having high affordability[3] and who would be eligible for an average discount of c.£70,000. We estimate that these residents would need a household income of c.£27,000 per annum obtain a mortgage, using a deposit of £4,700 (5%). We estimate that residents would need a household income of c.£48,000 in London, and c.£37,000 in Sevenoaks to obtain a mortgage.

17. We offer this analysis primarily to inform the Committee of the numbers involved across our area of operation, but we also believe there are a number of additional factors to consider:

1. We fully support the principle of helping people to own their homes. However, Right to Buy should be weighed against other options for low cost home ownership. The average discounts within Moat’s area of operation – which approach £80,000 – are very large when compared to grant levels currently needed to provide other ownership tenures. As a comparison, shared ownership requires an average grant of £15,000 per unit nationwide[4]. This grant is also recoverable as residents ‘staircase’ to buy a larger share of the home.

2. Previous Moat research has found a strong correlation between low land values and high deprivation levels[5]. Our concern is that in these deprived areas, though the size of the mortgages needed to purchase may also be lower, there are relatively few people with the job security and income needed to keep up mortgage payments. This is exemplified in Medway and Stanhope (Ashford) where we calculate that only around 5% (96 of 1,838) of eligible Moat residents would be in a position to take advantage of Right to Buy based on affordability. We are keen to see a balanced spatial distribution of the benefits of home ownership across the South East; Right to Buy should be of equal benefit to those in low and high value areas.

3. In sub-market rental tenures, we have seen a progressive shift in the distribution of development from poorer to more expensive areas, where higher land values can enhance the opportunity for cross-subsidy[6]. This is a worrying shift as many of the most deprived parts of the South East are struggling to attract badly-needed investment. As the replacement of Right to Buy stock is to be funded by the sale of high-value council stock, it is unclear how deprived areas, which may have a low percentage of high-value stock to begin with[7], will secure investment for one-for-one replacement.

18. We are looking to work constructively with government to ensure that the assets that we borrow against are properly protected. Equally, we want to ensure that stock levels remain in positive territory and that any homes sold are adequately replaced. Up to now, one-for-one replacement has been insufficient; we are keen to ensure that sold units are replenished to guard against further stock shortages.

19. Given the size of discounts to be applied across London and the South East, the viability of future development will be highly dependent on full compensation for each discounted sale. Full compensation will also be important for incentivising investment in existing stock. It is vital that housing associations are able to recover investment in existing homes, such as through large-scale improvement or regeneration programmes. This type of investment is one of the tools available to providers for dealing with failing estates, which can often serve as a catalyst for wider community regeneration.

20. In order to harmonise administrative processes and to reduce implementation costs, it is important that valuations to establish the market value of a property for a Right to Buy sale match those in place for shared ownership. Under shared ownership, valuations are instructed by Moat, but paid for by prospective buyers. If this fee was borne by housing providers instead, the volume of valuations expected under Right to Buy would very quickly amount to an unsustainable additional cost.

Reduction in social housing rents

21. The reduction in social housing rents – by 1% each year for four years – is possibly the greatest issue causing concern to providers. Although a rent reduction is welcome for the impact it will have on residents, it is difficult to square this with the funding model which is dependent on higher rents to maximise financial capacity for new development.

22. Stable rental income is fundamental. The rent escalator is designed to give lenders confidence about the robustness of social rents as an income source, which in turn, underpins future investment. When housing associations’ ability to manage rental income is challenged, the model is undermined as the cash available to support borrowing is reduced. The value of the homes used as loan security is also depressed.

23. The prospectus for the 2015-18 Affordable Homes Programme [AHP] states that providers are expected to charge ‘rents of up to 80% of market rents to maximise financial capacity’[8]. This is a critical point as the AHP depends on higher rents to maximise financial capacity in order to drive build capacity. If rents are artificially depressed, the model no longer stacks up and development levels are reduced.

24. To exemplify this point, Moat has modelled the impact of the reduction on its own stock. The reduction reduces our capacity to provide new homes as it applies not just to the new homes we build but also to most of our existing portfolio of some 12,000 units. By year four, we anticipate that our turnover will be circa £12m less than anticipated in that year alone. Everything else being equal, this will halve our development pipeline from the anticipated 750 homes per annum.

25. The immediate impact on schemes we have in progress is also significant. We are currently reviewing offers previously agreed with developers as the revised rent cashflow impacts on viability. On a typical s.106 mixed tenure scheme consisting of 20 units, we expect a reduced offer from around £3.2 to £2.6m. This will almost certainly lead to a reduction of the affordable housing build component of s.106 sites.

26. Our development programme is funded substantially from our own resources, whether that be through private debt or unit sales of shared ownership. Future development only works where our business has the financial capacity to provide this financing. At the Spending Round 2013, the Government set out a rent policy to apply for ten years from 2015/16[9]. It said that this commitment was necessary ‘in recognition of the benefit of long-term certainty to landlords, in helping them to plan for future investment’[10]. Between 2013 and July 2015, the 10 year certainty provided by the CPI+1% formula indeed became a compelling driver for securing private investment.

27. The decision to overturn the formula has had a significant impact on confidence among lenders and investors. With certainty broken once, confidence in any future commitment is also very low. An upward revision of risk as a result will have an impact on the cost of borrowing and/or our ability to secure investment for future development.

28. It should also be noted that uncertainty remains about the treatment of rents after the four year period (eg. whether rents will return to CPI+1%). Providers will struggle to understand their future housing costs, or to plan for future investment whilst this question remains unanswered.

29. Housing associations are currently considering a combination of three main options:

1. Tap undrawn credit facilities[11], increasing overall debt but more or less maintaining existing development levels. It must be noted that few housing associations would be in a financial position to do this in a way that does not breach their interest cover, security or gearing.

2. Scale back or postpone development in order to reduce the need for new debt whilst also limiting the impact on balance sheets[12].

3. Examine options to alter the tenure mix, including the reduction of sub-market rented development and increasing homes for market rent and sale. At least one major housing association has announced that it intends to phase out social and affordable housing to focus on market rented stock[13]. Our concern here is the group of customers for whom home ownership is not an option.

30. As shown in the figures above – particularly relating to s.106 schemes – we are concerned that, over time, affordable homes may be forced off Moat’s business plan. We remain committed to alleviating the housing need that exists across London and the South East, but we recognise that in order to do so, we may need to use a different tenure mix than at present.

Pay to Stay

31. The new Pay to Stay thresholds are likely to accelerate sales under the extended Right to Buy. Higher income earners will be incentivised by Pay to Stay to purchase rather than to remain and pay a higher rent, dependent on the ability to secure mortgage borrowing.

32. We support the principle behind this policy of targeting public funding more effectively. But we maintain that in order to implement this fairly, it will be necessary to use a taper mechanism, thus avoiding the ‘blunt instrument’ approach of the current system. We are aware of recent reports suggesting that the Government is investigating the use of a taper[14]. We are encouraged by this approach and would support it as it would ease the transition for tenants and prevent a sudden fall off a ‘rent cliff’.

33. A tapered progressive approach with multiple escalation points would be welcome; this approach would increase housing association rental incomes whilst minimising the collection risks associated with a sudden rent rise. A rent cliff approach, on the other hand, would likely lead to an increase in arrears and bad debt.

34. Another key consideration is access to HMRC income data. In relation to the introduction of the original Pay to Stay, the Government stated that:

Social sector landlords currently have no powers to require tenants to disclose income for the purpose of setting their rents. Linking rents to income would be breaking new ground. Our present view is that primary legislation will be required to enable landlords to access tenant income data if this policy is to be fully effective[15].

35. We therefore anticipate these powers in the new Bill. If these were to be left out, the Government would, in effect, be disregarding its own best practice approach. We are also keen to consider how this data could be used beyond Pay to Stay – for instance, to inform interested residents about home ownership products available to them based on appropriate affordability criteria.

36. In short, we support appropriate access to HMRC data primarily for two key reasons:

1. Access to income data would be accompanied by the responsibility to implement rent increases where appropriate. It would also eliminate the need for HMRC or another relevant body’s involvement as a third party. Reducing the number of human hands in the administration of the policy would have a positive impact on the speed and responsiveness of the process and increase accountability.

2. It would potentially give housing providers greater knowledge about their tenants, which in turn, could be used to develop more carefully tailored products and services. For instance, it would allow a housing association to target assistance to out of work residents, or to encourage some tenants to take advantage of LCHO products.

The benefit cap

37. Moat has previously outlined concern about the impact of the cap on benefit dependent households. It is important to consider that a high proportion of housing association residents receive either part or full Housing Benefit (or the housing element of Universal Credit). This is a direct result of housing allocation priorities determined by local authorities, which tend to include people from vulnerable backgrounds and those furthest from work.

38. In the areas where Moat operates, this profile is not only limited to social landlords. Separate research published by Moat titled A tale of two regions, found that an increasing proportion of benefit-dependent and vulnerable households are finding a home in the private rented sector [PRS] due to the shortage of social rented stock. In the cases where these households are accommodated in the PRS, there is every likelihood that the rent to be covered by benefits will be greater than if they were housed in the social sector, due to the juxtaposition between rent levels and Housing Benefit[16].

39. Resulting from the shift from capital grant to higher rents, many of which are substantially covered by Housing Benefit, the cap brings with it added complications. In particular, the collection of rent becomes much more difficult due to the added risk of arrears and bad debt. Inflating rent also becomes more difficult, which is important in the context that higher rents are needed under the AHP to fund new supply.

40. Lowering the benefit cap must also be weighed against the national rollout of Universal Credit, which will be paid directly to tenants rather than landlords. The DWP Demonstration Projects saw a sharp increase in arrears in the first few months following migration, before gradually stabilising over time[17]. Housing associations are anticipating a financial impact as a result, leading to further reductions in build capacity.

41. In setting rent levels, Moat has taken steps to ensure that no family moving into a property would be set an unaffordable rent. A tipping point is reached when the cumulative effect of rent plus the non-housing element of Universal Credit is greater than the benefit cap. We consider this the point at which a family is placed at risk of unsustainable debt (eg. high credit card use to pay for basic needs) or deprivation (eg. by limiting food or heating). Children in particular may experience material deprivation at this point.

42. The following example, based on actual Greenwich Affordable Rent figures[18], shows how this would work for various household types under the reduced benefit cap of £20,000pa (£385pw) in London:

Affordable Rent in RB Greenwich under the new benefit cap

43. The blue portion above represents the amount of Universal Credit intended to support people to prepare for work. This should therefore cover all utility bills, food, transport and other costs associated with looking for work. In the above example, a couple in a two bedroom flat with two children would be entitled to £283.26pw to cover these costs before rent is taken into account. Actual average Affordable Rent levels paid in Greenwich are displayed in red. As this family would be subject to the benefit cap, their assistance would be limited to £385pw.

44. To prevent this family from going into arrears, all rent above the £385 line (shown in diagonal stripes) would need to be found from another source, with the most obvious one being the non-housing element of Universal Credit. Using the same family as an example, once the rent above the line has been covered by the blue Universal Credit portion, it would leave this family with £207.31 to cover bills, food and transport costs. This is well below the relative poverty threshold of £325pw for a couple with two children after housing costs[19].

45. It is worth noting that in London, such as in the Royal Borough of Greenwich, a benefit dependent couple in a one bedroom property with one child are very close to hitting the cap. This is contrary to the popular belief that it is only large families in large homes that are at risk. However, it is true to say that larger families in larger homes are disproportionately at risk.

August 2015