Welfare and Work Bill Committee

Written evidence submitted by The Riverside Group Ltd (Riverside) (WRW 24)

1. Introduction: About Riverside

1.1 This submission is being made by The Riverside Group Ltd (Riverside). Riverside is one of the largest charitable housing association groups in the country, owning and managing over 53,000 homes.

1.2 With a substantial national profile and over 80 years of experience in developing affordable housing, we work in some of the country’s most challenging neighbourhoods. Our large supported housing and retirement living division, Riverside Care and Support, provides high quality support to more than 12,000 service users, with a diverse range of housing needs.

1.3 In providing information and recommendations, we believe that we can draw from our considerable experience in providing housing to people in lower paid work and who often rely on support from the welfare system. Two thirds of our homes are let to low income households at a social or affordable rent.

2. Executive Summary

2.1 The Government is unveiling a set of changes through the Welfare Reform and Work Bill which will impact on the provision of homes for low income households in England as well on the ability of tenants to afford them.

2.2 In completing this response we have focused on the areas where we feel we can propose constructive amendments to the Bill which will help the Government meet its overall objectives, whilst avoiding unforeseen consequences.

2.3 Our detailed response follows the order of the Bill but in summary we have two main recommendations:

(i) Clause 20: that two additional exceptions are introduced to the face of the Bill to cover particular categories of housing where rent reductions may threaten scheme viability, or lead to a potential breach of contract. These are supported housing and social housing provided through the Private Finance Initiatives (PFI).

(ii) Clause 7: that the Government clarifies the basis on which it has chosen an overall benefit cap of £20,000 per annum (£23,000 in London) with reference to national household income distributions, and commits to an annual review based on criteria which include changes in living costs and earnings, as well as national economic situation.

3. Our Response in detail

3.1 Our detailed response follows the order of the Bill with comments followed by recommendations.

4. Clause 7-8: Benefit Cap

4.1 As an organisation housing a high proportion of low income households we are concerned about the impact of the reduction to the benefit cap on the livelihoods of our tenants, especially those of working age and with three or more children.

4.2 At its current level (£26k) the cap affects only a very small numbers of our tenants - c 80, mainly in London. This is because our rents are relatively low, and we have applied our own ‘capping’ mechanism to affordable rents in higher value areas.

4.3 However, despite relatively low rents, we now estimate that at the lower rates the numbers will grow to 500+ (over 6% of working age tenants), and this will extend to affect families outside London where the majority of our stock is located. Without a commitment to review the level of the cap, this number has the potential to grow over time, particularly when any benefit freezes come to an end. Despite the range of exceptions that will apply, this will mean that an increasing proportion of tenants may not have sufficient income to meet the whole of their rent liability.

4.4 Given this significant risk, it is not clear on what basis the level of the lower cap has been identified. The previous £26k cap related to median incomes. We also note that the Bill only requires the Secretary of State to review the level of the cap once every Parliament, with the only specific criterion that he or she is bound to consider being the overall state of the economy.

4.5 We recommend that in the interest of transparency, the Government clarifies how the lower cap levels have been selected with reference to national household income distributions, and that the scope of the impact assessment is extended to assess the numbers of social housing tenants who will not be able to afford to pay their rent.

4.6 We also propose that the level of the cap is subject to a process of annual review against an extended set of clear criteria, which includes changes in earnings and living costs.

5. Clause 19: rent reduction

5.1 The proposal to reduce rents for social housing tenants by 1% per annum for the four years from April 2016, presents very significant challenges for the sector, representing a sharp reversal of long-standing Government policy with little time for landlords to prepare.

5.2 This is clearly very good news for tenants, particularly those in work who are meeting all or some of their housing costs, and will improve overall affordability, albeit in a poorly targeted way.

5.3 Registered providers will need to adjust quickly to a sustained reduction in income for the next four years, confounding expectations of inflation linked rent increases for a ten year period introduced in April 2015. This represents a paradigm shift in the funding of social and affordable housing and will have long-term repercussions across 30 year business plans, with rental income ‘rebased’ at a lower level from 2020.

5.4 From a Riverside perspective the scale of lost income will be huge. Making a direct comparison with our approved business plan (2015-20), our early provisional projections indicate that the impact will be a reduction in income in excess 16% over four years, a cumulative total of almost £100m. Without any form of mitigation this will reduce our operating margin by 9.5%. This is a critical measure for credit rating agencies, and there is a strong possibility that Riverside (and other providers) could face a ratings downgrade, resulting in an increase in long term borrowing costs which would in turn affect development capacity.

5.5 Of course Riverside will seek to mitigate this unprecedented loss in income, and we are currently discussing a wide range of options with our board, with efficiency considerations to the fore. However it is highly unlikely that efficiency savings alone will offset lost income and we will need to reconsider the scale and nature of our development programme, whilst seeking to maximise delivery of new homes in the context of the new financial reality and other related issues such as Right to Buy replacement. We estimate that the proposed rent reductions will require an additional internal subsidy of £12k per new home built (for rent) funded by Riverside. Based on our current 2014-17 programme this will require an additional internal subsidy of up to £12 million (a 50% increase).

Phasing

5.6 Given the fact that the Bill is still at an early stage in its passage through Parliament, we believe there is a strong case for giving registered providers some discretion over the phasing of the rent reductions, provided that the same overall cumulative reduction is achieved by April 2020.

5.7 The process of rent variation can be complex, and at Riverside it commences in early autumn as part of the budget and business planning round. Implementing rent decreases at this scale is unprecedented, and getting the detail of legal notices right across all tenancy types will be essential, particularly if future rent increases (post 2020) are to be valid. Adequate time for preparation will be important, yet there is every possibility that the Bill will not receive Royal Assent until after the point that notices will need to be served for the April rent variation. Time will also be required for the regulator to consider the case for organisational exemptions.

Rent on re-letting a property

5.8 Whilst it is accepted that annual rent reductions will apply to existing tenants, it is proposed that in some limited circumstances there should be an opportunity to rebase rents to a higher level when a property is re-let in accordance with current regulatory standards, with subsequent decreases applying only to the new tenant.

5.9 This will continue the process of rent convergence, and enable developing landlords to continue to generate additional income to services loans for new development, in accordance with contracts with the HCA. There are three particular circumstances where this should be permitted:

(i) Affordable rent conversions: Social landlords who have built or are building new homes under the Affordable Homes Programme (s), are permitted to ‘convert’ the rents of a number of existing properties to an ‘affordable rent’ (80% of market) when they are re-let. Whilst the new converted rent is then varied in accordance with regulatory guidance (currently CPI + 1%), the rent is subsequently rebased to the market every time there is a subsequent re-let. This is one of the fundamental principles of the affordable rent regime, and landlords have entered contracts to develop new affordable homes at a lower level of capital subsidy assuming this additional income. The numbers of affordable rent conversions are strictly limited and set out in funding contracts entered with the HCA – they currently account for 4.7% of Riverside’s annual re-let rents. It is proposed that during the four year period of rent reductions, these affordable rent conversions are still permitted (for those landlords developing new homes under a contract with the HCA), with subsequent decreases applying only where there the property is tenanted.

(ii) The end of secure tenancies (housing associations): Some housing associations have a diminishing number of pre-1989 secure tenancies, where a fair rent is set with reference to a rent registered by the rent officer. For historic reasons some of these rents remain very low, and under rent convergence it has been the long-held regulatory position that these legacy tenancies should be re-let at ‘target rents’ (the default position for social housing) once the original ‘secure’ tenant moves on. This accounts for around 2.1% of Riverside’s annual relets. In order to promote consistent and transparent rent setting, it is proposed that this position should continue, with subsequent annual rent decreases applying only to the new tenant after the home has been re-let.

(iii) Rents below target: In a similar vein, there are a number of historically low rents for properties let on assured tenancies, which had been ‘converging’ towards target rents through the policy of rent restructuring introduced in 2002. Whilst this policy largely ceased with the regulatory changes introduced in April 2015, social landlords are still permitted to re-let these low rent properties at target once vacated, for similar reasons of consistency and transparency. It is proposed that this position should continue.

6. Clause 20: Exceptions

6.1 The Bill lists a number of exceptions to the rent reduction provisions including housing for low cost home ownership and housing which has been repossessed by a mortgagee. We believe these exceptions should be extended to cover two additional forms of social housing: supported housing and housing developed under the Private Finance Initiative.

Supported Housing

6.2 Supported housing is a high cost/low margin form of social housing provision, which provides essential homes and services for some of the most vulnerable groups in society: those with physical disabilities and learning disabilities, the homeless etc. The proposed rent reduction is likely to threaten the viability of many supported housing schemes, and indeed the overall financial viability of a number of smaller specialist providers who deal exclusively with this type of provision. From a fiscal perspective, this would be counter-productive, in that a number of national studies have demonstrated that supported housing services provide excellent value for the public purse, especially in relation to outcomes that reduce health, care and criminal justice costs. [1]

6.3 Riverside owns and manages around 4600 units of supported housing (less than 10% of our stock). Because of the specialist needs of service users, it is expensive to develop and costly to manage and maintain, and so supported housing generates a much lower margin than other forms of social housing in our portfolio. Our supported housing currently generates an overall net operating margin of 7%, which is around 17% below the Group average. We estimate that a year on year reduction in rental income would make this element of our business loss making, with the net margin falling to 1% with a deficit being generated once interest payments are taken into account.

6.4 This will present Riverside with very difficult choices, and whilst it is unlikely that we would withdraw from supported housing altogether, it does mean that we will need to consider which services we retain, based on an assessment of viability rather than need. This will play out across the whole sector, where supported housing is likely to shrink as a form of provision and would also act as a significant disincentive to sector restructuring, acting as a break on merger and acquisition activity where housing providers have significant supported housing businesses.

6.5 To ensure that the full range of high need supported housing is captured within any exception, we propose that the ‘specified accommodation’ definition of supported housing used in Welfare Reform Act 2012 (regulations) is used to define the exception, ensuring consistency.

Private Finance Initiative (PFI)

6.6 Riverside currently owns and manages 148 PFI funded social housing dwellings (with a further 328 on site) and provides management and maintenance services to a further 1051 owned by a local authority. These schemes are located in areas as diverse as Hull, Derby and Sandwell.

6.7 Typically PFI schemes require registered providers to fund and develop new homes and then provide services to a strict specification under inflexible long-term contracts, predicated on predictable income streams. The rent reduction provisions set out in the Bill will reduce the viability of these contracts, and over time, they could start to make a loss as providers have little room for manoeuvre in terms of cost reduction.

6.8 The unique nature of PFI schemes has already been recognised by the Social Housing Regulator in its rent standard guidance, where rent setting sits outside the target rent regime. It is logical that a similar exception should be explicit in this Bill, with rent continuing to be set in line with business plan expectations.

7. Future welfare changes

7.1 Though we have focused on Clauses 7-8 and 19-20 in this response, we would like to make a final comment on the potential removal of automatic entitlement to the housing element of Universal Credit for 18 -21 year olds, announced by the Chancellor in the Summer Budget, but not set out in this Bill. We understand that this important change is likely to be introduced through regulations.

7.2 As we currently understand it, the change will not impact on young people receiving Housing Benefit, but only those with housing costs in Universal Credit. We also believe that it is planned that there will be a six month grace period for young people coming out of work to help them get back into work without being put at risk of losing their home. We welcome both of these proposals and the commitment to protect vulnerable young households, including those with children.

7.3 However we are concerned about how any exceptions to the policy for vulnerable households will be applied in practice, and in particular how vulnerable young people who have formerly lived in supported housing should be protected through a continuing entitlement to receive Universal Credit to meet housing costs where there is no safe family environment to return to.

7.4 Whilst young people living in supported housing may continue to be entitled to receive help with their housing costs where these continue to be met by housing benefit in the case of ‘specified accommodation’, in due course many will move into general needs homes, and at that point look to Universal Credit to meet their housing costs. It is essential that these young people remain entitled to benefits to meet housing costs, given that most will not, by definition, have a stable parental home to return to. Move on accommodation is an essential part of the journey towards a sustainable tenancy, and in the long-run help with housing costs for 18 - 21s in these circumstances will prevent more expensive interventions arising from ‘bed blocking’ in supported housing.

7.5 Whilst we will respond to any future consultation in due course, we would urge this committee to recommend to the Government that housing costs relating to 18 – 21 year olds who have previously lived in supported housing, continue to be eligible to be met through Universal Credit.

8. Further information

8.1 We trust the Committee will consider this evidence in its detailed consideration of the Bill.

September 2015

Prepared 16th September 2015