Policy Statement On Rents For Social Housing

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Policy statement on rents for social housingFebruary 2019Ministry of Housing, Communities and Local Government

Crown copyright, 2019Copyright in the typographical arrangement rests with the Crown.You may re-use this information (not including logos) free of charge in any format or medium,under the terms of the Open Government Licence. To view this licence overnment-licence/version/3/This document/publication is also available on our website at www.gov.uk/mhclgIf you have any enquiries regarding this document/publication, complete the form athttp://forms.communities.gov.uk/ or write to us at:Ministry of Housing, Communities and Local GovernmentFry Building2 Marsham StreetLondonSW1P 4DFTelephone: 030 3444 0000For all our latest news and updates follow us on Twitter: https://twitter.com/mhclgFebruary 2019ISBN: 978-1-4098-5428-9

ContentsChapter 1: Introduction4Chapter 2: Social Rent6Chapter 3: Affordable Rent12Chapter 4: Rents for social tenants with high incomes15Chapter 5: Types of accommodation not covered by this policy statement16Appendix A: Information for calculating formula rents20Appendix B: Example calculation of a formula rent243

Chapter 1: IntroductionPurpose1.1This document sets out the government’s policy on rents for social housing from 1April 2020 onwards.1.2We have directed the Regulator of Social Housing (‘the Regulator’) to have regardto this policy statement when setting its rent standard for registered providers ofsocial housing (‘registered providers’). The term ‘registered providers’ includes bothprivate registered providers of social housing (mainly housing associations) andlocal authorities that are registered with the Regulator.1.3Subject to the exceptions set out in chapter 5, the policy set out in this documentapplies to ‘low cost rental’ accommodation, as defined by section 69 of the Housingand Regeneration Act 2008. It does not apply to ‘low cost home ownership’accommodation, as defined by section 70 of that Act.1.4This document replaces the Guidance on Rents for Social Housing issued in May2014.Rent policy background1.5Since 2001, rents for properties let at ‘social rent’ (which constitute a majority ofrented social housing properties) have been set based on a formula set bygovernment. This creates a ‘formula rent’ for each property, which is calculatedbased on the relative value of the property, relative local income levels, and the sizeof the property. An aim of this formula-based approach is to ensure that similarrents are charged for similar social rent properties.1.6In 2011, the government introduced ‘affordable rent’ which permits rents (inclusiveof service charges) to be set at up to 80% of market rent (inclusive of servicecharges). The introduction of affordable rent made it possible to build more homesfor every pound of government investment, allowing more people in housing needto have access to a good quality home at a sub-market rent. Landlords can only letnew properties at affordable rent where certain conditions apply. Within the terms ofthe government’s affordable homes programmes, existing vacant properties can beconverted from social rent to affordable rent in certain circumstances.1.7From April 2015, the government made it possible for social landlords to charge afull market rent where a social tenant household has an annual income of at least 60,000. This was designed to allow landlords to make better use of their socialhousing, rather than requiring them to provide sub-market rent properties tohouseholds with relatively high incomes.1.8Government policy has also limited maximum annual changes in social rent andaffordable rent levels. From April 2016, the Welfare Reform and Work Act 2016 hasrequired social landlords to reduce their rents by 1% each year for four years (the‘social rent reduction’). This is designed to help put welfare spending on a more4

sustainable footing, to ensure that the social housing sector plays its part in helpingto reduce the deficit and to reduce costs for tenants paying all or part of their rent.The social rent reduction is subject to a number of exceptions. Most of theseexceptions apply for all four years of the reduction, although some only applied forthe first year.Key changes to rent policy from April 2020 onwardsLimit on annual rent increases1.9In October 2017, the government announced its intention to set a long term rentdeal for both local authority landlords and housing associations. This would permitannual rent increases on both social rent and affordable rent properties of up to CPIplus 1 percentage point from 2020, for a period of at least five years (‘the newpolicy’).1.10The new policy recognises the need for a stable financial environment to supportthe delivery of new homes and to enable registered providers to plan ahead. Thegovernment is now looking to the social housing sector to make the best possibleuse of its resources to help provide the homes that this country needs.1.11The new policy will come into effect from 1 April 2020. It will not override landlords’statutory obligation to complete the four year social rent reduction as required bythe Welfare Reform and Work Act 2016. Where a landlord has not completed thesocial rent reduction by 31 March 2020 (because its rent year begins after 1 April), itmust complete the reduction before the applying the new policy.Application of the rent standard to local authority registered providers1.12For the first time, the government has directed the Regulator to apply its rentstandard to all registered providers – i.e. to both local authority registered providersand private registered providers (the vast majority of which are housingassociations).1.13The government intends that the rent standard should apply to local authorityregistered providers from 2020 onwards because the previous arrangements forlimiting the welfare costs associated with local authority rents (the Rent RebateSubsidy Limitation scheme) will not operate alongside Universal Credit.5

Chapter 2: Social RentOverview2.1This chapter applies to accommodation let at a social rent. This means all low costrental accommodation to which chapters 3, 4 and 5 of this document do not apply.Formula Rent2.2Registered providers may set the initial rent on properties to be let at social rent at alevel that is no higher than formula rent, subject to the rent flexibility level (seeparagraphs 2.13-2.14 below).2.3The basis for the calculation of formula rents is: 2.430% of a property’s rent is based on relative property values70% of a property’s rent is based on relative local earningsa bedroom factor is applied so that, other things being equal, smallerproperties have lower rentsThis can be expressed as a formula, in which the formula rent for a property iscalculated using the following approach:Weekly formula rent is equal to:Plus70% of the national average rentMultiplied by relative county earningsMultiplied by the bedroom weight30% of the national average rentMultiplied by relative property valueNational average rent means the national (England) average rent in April 2000.Relative county earnings means the average manual earnings for the county inwhich the property is located divided by national average manual earnings, both at1999 levels. Appendix A contains details of the earnings data to be used.Relative property value means an individual property’s value divided by the national(England) average property value, as at January 1999 prices.2.5The amounts to use for the national average rent, national average manualearnings and the national average property value are set out in Appendix A.Bedroom weights are also set out in Appendix A.2.6Putting the relevant information into the above formula will give the formula rent for2000-01 for the property. The 2000-01 formula rent must then be up rated, for each6

year, using the relevant uplift set out in the table in Appendix A. Formula rents willincrease by CPI 1 percentage point each year from 2020-21 onwards.2.7Formula rent is subject to a rent cap – see paragraphs 2.8-2.12 below.Rent Caps2.8The rent caps apply as a maximum ceiling on the formula rent, and depend on thesize of the property (the number of bedrooms it contains). Where the formula rentwould be higher than the rent cap for a particular size of property, the rent cap mustbe used instead.2.9Registered providers must not allow rents to rise above the rent cap level for thesize of property concerned.2.10The rent caps for 2019-20 are set out in Appendix A. From 2020-21 onwards, therent caps will increase by CPI (at September of the previous year) 1.5 percentagepoints annually.2.11While the rent caps will increase annually by CPI 1.5 percentage points, theannual change in rent for the tenant in a ‘rent capped’ property must still begoverned by the CPI 1 percentage point limit on rent changes.2.12However, where a property whose rent has been subject to the rent cap comes upfor re-let (and formula rent remains above the rent cap), the new rent may be set atup to the rent cap level – which will have been increasing by CPI 1.5 percentagepoints, rather than CPI 1 percentage point.Rent Flexibility Level2.13The government’s policy recognises that registered providers should have somediscretion over the rent set for individual properties, to take account of local factorsand concerns, in consultation with tenants.2.14As a result, the policy contains flexibility for registered providers to set rents at up to5% above formula rent (10% for supported housing – as defined in paragraphs2.38-2.39 below). If applying this flexibility, providers should ensure that there is aclear rationale for doing so which takes into account local circumstances andaffordability.Changes to Rents2.15From 1 April 2020, registered providers may not increase rents by more than CPI(at September of the previous year) 1 percentage point in any year. This limit is aceiling and providers will be free to apply a lower increase, or to freeze or reducerents, if they wish to do so. Providers should consider the local market context whendeciding whether to implement a rent increase and the level of that increase, as wellas the levels of Housing Benefit or Universal Credit that are available to claimanthouseholds who might occupy their properties.7

2.16Registered providers must adhere to this limit on rent increases even if a tenant’srent is below formula rent, or if they have previously applied a lower – or no –annual increase. Where this is the case, the provider may only move the rent up toformula rent when the property is re-let following vacancy (subject to the rent cap).2.17Where the rent for a property exceeds the rent flexibility level, the provider:(a) must not increase the rent by more than CPI (rather than CPI 1 percentage point)each year, until the rent is brought within the rent flexibility level; and(b) must set a rent that does not exceed formula rent (plus the rent flexibility level)when the property is re-let.Special arrangements for the first year2.18In the year following the final year of the social rent reduction period, registeredproviders are required to calculate the maximum rent increase for existing tenants –for both social rent and affordable rent properties – using the “2020 limit”. Thepurpose of the 2020 limit is to manage the transition from the social rent reduction(which is based on the rent payable in respect of a particular year) to the new RentStandard (which, like previous rent standards, regulates weekly rent).2.19The 2020 limit requires registered providers to use as a baseline the averageweekly rent payable by a tenant for accommodation in respect of the fourth and finalyear of the social rent reduction. It makes an exception where the weekly rentchanges because the accommodation is re-let during the final year; in thosecircumstances, providers are required to calculate the average weekly rent basedon the period since the property was last re-let.2.20As the 2020 limit is based on the rent payable in respect of the final year (or partthereof, where the exception described above applies) of the social rent reduction,any rent free periods should be disregarded in the calculation of the average weeklyrent. So for example, if a registered provider charges weekly rent 48 times a year, itshould calculate the average using 48 as the denominator. Registered providersmust not change their rent charging arrangements (e.g. the number of times theycharge weekly rent) in order to circumvent the requirement that rents shouldincrease by no more than CPI 1% each year.Property Valuations2.21To ensure consistency, a common approach must be followed to the valuation ofproperties for rent purposes as far as possible. Valuations must be in accordancewith a method recognised by the Royal Institution of Chartered Surveyors (RICS).RICS sets out its principles for valuations in ‘Royal Institution of CharteredSurveyors Valuation – Professional Standards’ (known as the Red Book). This isavailable free to their members and can be purchased online or as a hard copy.2.22In calculating the formula rent, the value of the property should be based on anexisting use value, assuming vacant possession and continual residential use.However, where it is not appropriate to value supported housing properties on this8

basis, registered providers can use a Depreciated Replacement Cost (DRC)method of valuation. Existing use values must be produced by the comparativemethod and not by a discounted cash flow method.2.23Existing use value is not the same as ‘existing use value – social housing’, which istypically used for resource accounting purposes, and makes a downwardadjustment to the existing use value to reflect the lower value of properties whenused for social housing.2.24As set out above, the valuation must be made at January 1999 prices.2.25A downward adjustment to open market valuations – to reflect factors such as submarket rents – must not be made for social rent purposes.2.26Registered providers are not expected to carry out an individual valuation for eachproperty, although they will need to attribute a value to each social rent property inorder to calculate its formula rent. Rather than carrying out individual valuations,registered providers may decide to rely on more generic valuations for particulartypes and sizes of properties in different locations.2.27As the price base is constant, the valuation of a property for social rent purposesshould generally remain the same over time. However, a registered provider mayre-value where it has carried out major works that materially affect the value of theproperty. This is only likely to arise in exceptional circumstances, as ‘major works’do not include normal stock management activity such as repairs, maintenance orupdating of properties (for example, fitting new kitchens or bathrooms). Majorstructural alterations (such as adding an extra room or extension) would be anexample of ‘major works’ for the purposes of this paragraph.Fair rents2.28The principles set out above are subject to ‘fair rent’ requirements.2.29A tenant who enjoys ‘fair rent’ protection must not be charged more than the lowerof:(a) The ‘fair rent’ set by the rent officer; and(b) Formula rent (subject to the rent caps and the rent flexibility level).2.30As with other social rent properties, private registered providers may not increaseany tenant’s rent by more than CPI 1 percentage point in any year (even if atenant’s rent is below the formula rent level and the maximum fair rent is increasedby more than that amount).2.31Upon re-let of a property where a tenant previously enjoyed a fair rent, social rent oraffordable rent (where applicable) should be charged.9

Conversion of Social Rent Properties2.32The rents of properties previously let at social rent must continue to be set inaccordance with the principles set out in this chapter on re-let. This also applies toproperties previously let at social rent where a higher rent is being charged totenants with high incomes (see chapter 4).2.33In particular, social rent properties may not be converted to:(a) affordable rent, except where this has been agreed by Homes England, the GreaterLondon Authority or the Secretary of State (under the terms set out in the definitionof affordable rent housing in paragraph 3.3 below);(b) market rent (other than in the circumstances set out in chapter 4); or(c) intermediate rent.Service Charges2.34In addition to their rent, tenants may also pay service charges. Rents are generallytaken to include all charges associated with the occupation of a property, such asmaintenance and general housing management services. Service charges usuallyreflect additional services which may not be provided to every tenant, or which maybe connected with communal facilities rather than being particular to the occupationof a dwelling. Service charges are subject to separate legal requirements and arelimited to covering the cost of providing the services.2.35Registered providers are expected to set reasonable and transparent servicecharges which reflect the service being provided to tenants. Tenants should besupplied with clear information on how service charges are set. In the case of socialrent properties, providers are expected to identify service charges separately fromthe rent charge.2.36Service charges are not governed by the same factors as rent. However, registeredproviders should endeavour to keep increases for service charges within the limit onrent changes, of CPI 1 percentage point, to help keep charges affordable.2.37Where new or extended services are introduced, and an additional charge mayneed to be made, registered providers should consult with tenants.Definition of supported housing2.38In this policy statement, the term ‘supported housing’ means low cost rentalaccommodation provided by a registered provider that:(a) is made available only in conjunction with the supply of support;(b) is made available exclusively to households including a person who has beenidentified as needing that support; and10

(c) falls into one or both of the following categories—(i) accommodation that has been designed, structurally altered or refurbished inorder to enable residents with support needs to live independently; and(ii) accommodation that has been designated as being available only to individualswithin an identified group with specific support needs.2.39 For the purposes of this definition, ‘support’ includes:sheltered accommodationextra care housingdomestic violence refugeshostels for the homelesssupport for people with drug or alcohol problemssupport for people with mental health problemssupport for people with learning disabilitiessupport for people with disabilitiessupport for offenders and people at risk of offendingsupport for young people leaving caresupport for teenage parentssupport for refugees11

Chapter 3: Affordable RentOverview3.1Affordable rent housing is exempt from the social rent requirements outlined inchapter 2 of this policy statement.3.2Affordable rents are typically higher than social rents. The intention behind thisflexibility is to enable properties let on this basis to generate additional capacity forinvestment in new affordable housing.What is Affordable Rent Housing?3.3Affordable rent housing means accommodation that is:(a) provided by a registered provider pursuant to a housing supply delivery agreementbetween that provider and the Homes and Communities Agency (now known asHomes England) or the Greater London Authority and the accommodation ispermitted by that agreement to be let at an affordable rent;(b) provided by a registered provider pursuant to an agreement between a localauthority and the Secretary of State and the accommodation is permitted by thatagreement to be let at an affordable rent; or(c) provided by a local authority and the Secret

Formula Rent . 2.2 Registered providers may set the initial rent on properties to be let at social rent at a level that is no higher than formula rent, subject to the rent flexibility level ( see paragraphs 2.13-2.14 below). 2.3 The basis for the calculation of formula rents is: 30% of a property’s rent is based on relative property values