Is the local housing allowance (LHA) cap creating a postcode lottery for the most vulnerable in our society? Where rents are at their lowest in the poorer areas of the UK, the development of new homes is often being redirected to less needy areas in order to gain higher returns.
With various freezes and cuts in its rate, the cap is now more distant from reality, despite being branded as a panacea for the setting of all rents. It is not sensitive enough to local nuances and therefore not fit for purpose.
The NHF’s policy officer, Nick Yandle, said, “The impact of the LHA cap has a very strong regional element, because of the variations in headroom between existing rents and the local housing allowance across the country. The cap will prompt important questions about how best to deliver an organisation’s mission, the type of housing developed and the people allocated to new homes.”
The hunger for new homes is such that demand for all property types is usually there anyway but tenants with the most pressing social needs may be disregarded from the equation. Despite more social housing being needed, we may find that because of the LHA, developments will have to include more sub-market rents, shared ownerships, market rents and homes for outright sale.
Balancing the long-term investment is overshadowed by immediate concerns around the capacity of people to pay for their homes and services. With above-inflation building cost increases, are housing providers taking greater risks or finding opportunities in a less regulated market?
Donna Johnston, CEO of South Western Housing Society, said, “The LHA cap has inevitably led to us assessing where we can develop in order to meet viability criteria. Growth becomes concentrated in higher-value areas where the LHA cap yields higher returns. This has the potential for communities in lower-value areas to miss out on new affordable housing. To redress this, we are working very closely with our relevant local authorities to secure alternative subsidy revenues to support the building of new homes where they’re needed.”
The need for greater development efficiency is increasing; Savills predicts residential-rent growth of 15 per cent during the next five years while LHA rates are frozen for four years and social rents are being reduced by one per cent for four years.
Mind the gap
If you apply those percentages to the affordable rents in relation to market rents, this would mean that the affordable rents cap should decrease from 80 per cent to 67 per cent of market rents by 2020 to maintain affordability (and from 65 per cent to 54 per cent in London).
Financial plans are scrutinised regularly but I am always surprised by how little development appraisals and assumptions are challenged during that cycle. There is still a disconnect between development and finance, with development assumptions uplifted by inflation annually, but the real challenge of whether or not those assumptions mean anything isn’t always there. The financial plan may be challenged in ‘perfect storm’ scenarios but are the development assumptions in appraisals still valid? Only retain those that are relevant to your business.
Development risk should be assessed against the changing environment and we need to avoid inventing KPIs to reassure ourselves, defining top performance for our organisation and having a golden thread between assumption parameters and KPIs. The complexity of development appraisals is growing in line with the number of factors being brought into consideration and the company structures set up to mitigate risks, making appraisals difficult to understand for our customers and our boards. Furthermore, the deal-based rent approach for future rent settlements will only serve to muddy the waters.
Housing providers have lowered their expectations in terms of their return on investment in the past 10 years, from 25 to 40+ year payback programmes for scheme appraisals, often after significant internal subsidies. If we don’t want to pay loans back to the bankers, merely to reach a borrowing equilibrium, why measure it?
We should be clear on our appetite for risk. With a lower internal rate of return (IRR) than in the past, linked with lower interest rates, the need to incur a higher level of debt implies an increase in development risk. Timing is key; the net present value (NPV) discount and period need to relate to the business we are in.
Quality and sustainability in appraisals need to be factored in to reconcile development efficiency with efficient building management. In our drive to create capacity to develop more, we need to assess which part of the business is paying for the internal subsidy and the long-term impact of our actions.
More homes by 2021
How many homes and the path to get there is not clear, with opportunities and stumbling blocks along the way. There isn’t a one-size-fits-all answer and, because housing needs are high no matter what, the potential rental income (with its impact on return on investment) drives the development type, sometimes to the detriment of the more vulnerable.
We should check who the real beneficiaries of the schemes are and question whether social housing tenants are shareholders, customers or merely one source of our income.
Using the LHA cap as a yardstick for rents in social housing is not helpful, especially not for supported housing. Not only does it exacerbate local differences with its geographical lottery, but it’s relevant to neither the tenant nor the housing provider.
The LHA cap is benchmarking apples against pears; it’s time for a rethink.
Pascale Mezac is a consultant at SDS.