The finances and sustainability of the social housing sector

The problem of a continuing chronic shortage of social housing that we identified in our 2020 Report, Building More Social Housing, remains. In line with the conclusions of our 2020 report, we conclude that the Government must support, regulate and invest in the social housing sector so that the country can increase delivery to 90,000 social rent homes a year. The Government should consider and publish its assessment of the capacity of and targets for the delivery of the overall housing market and social housing in particular. This should be carried out on an annual basis.

The social housing sector as a whole remains relatively financially resilient. However, it does face the simultaneous financial pressures of higher costs and lower income. Despite the sector’s overall resilience this is a clear and direct challenge to individual social housing providers’ business models and financial stability that must be taken seriously: this cannot be ignored. In addition, damaging restrictions on how local authorities use money from sales under the Right to Buy scheme place further constraints on councils’ housing budgets and ability to fund much needed development.

Making social housing more energy efficient is crucial for the country’s decarbonisation goals, but, of course, it is also a significant cost for social housing providers. Because energy efficiency improvements do not return savings to social housing providers or private investors, there is little, if any, scope for borrowing to fund decarbonisation measures and private finance is not well developed. The Government must deliver grant funding to cover decarbonisation if these costs are not to be paid for by social housing providers or their residents. Although Government funding exists to cover a fraction of the costs it is insufficient, and therefore puts social housing providers under financial pressure. To mitigate this the Government must bring forward the next tranches of the Social Housing Decarbonisation Fund urgently.

Noting that the role of private investment in decarbonisation has so far been limited, we encourage the Government to review what role private investment might play in meeting net zero, noting the advice from witnesses that this could involve the use of equity rather than debt and should result in more homes becoming available to rent, for example by returning homes that could not previously be rented to the market.

We also reaffirm the conclusion of our Local Government and Net Zero report that the Government should set out its longer-term funding plans beyond 2025, and to encourage and outline the share of funding for retrofitting it anticipates will come from The Finances and Sustainability of the Social Housing Sector 43 private investment. The Government has acted on our recommendation to encourage the UK Infrastructure Bank to support private financing of retrofitting: it should now investigate how to bring in other sources of private financing.

Necessary fire safety work has resulted in significant additional costs for social housing providers, as the Government has acknowledged in its written evidence.

The Government’s focus on holding social housing providers responsible for remediating building safety work is producing an unhelpful disparity between the private and social housing sectors. There is no justification for private sector landlords to be treated more favourably. We once again reiterate the recommendation from our 2020 Report, The Regulation of Social Housing, that “Social housing providers must have exactly the same access to funds for building safety remediation as private sector landlords.”

We welcome Homes England’s flexibility on additionality for regeneration funding where that has been possible. The Government must give greater weight to the positive benefits of regeneration so more funding can be made available for regeneration. Homes England should increase the flexibility it offers housing providers on replacing housing that it is not financially viable to remediate.

The ultimate responsibility for ensuring that existing and future social housing is fit for habitation lies with the housing providers. Those housing providers facing the highest maintenance costs may not be the most financially resilient. Nonetheless, where registered housing providers have homes that require major improvements and significant reserves, the Regulator of Social Housing should encourage them to deploy their reserves to remediate and regenerate their existing properties, or to replace them with new ones if necessary. In response to this Report, the Regulator should set out what steps it is doing to achieve this and its assessment of how successful it believes the steps that it has taken have been.

Regeneration should respect the experience of existing tenants, whose lives will be disrupted, as well as those who will benefit from the new or additional homes in the future. An additional challenge is presented when estates contain both social housing tenants and leaseholders, who may be in a more challenging position when looking to move to an alternative property. When the Government, Homes England or the Regulator of Social Housing are involved in regeneration projects, they should insist that the regeneration takes full account of and meets existing tenants’ needs wherever possible.

We welcome the Regulator’s efforts to ensure that regeneration projects are properly explained to tenants, and that tenants have had some opportunity to share their views. However, we believe the Regulator must go further to ensure registered providers not only listen to, but appropriately act on, tenants’ views, by considering the level of input tenants have in any regeneration projects as part of its consumer standards and requiring that the developers take on board priorities that have been agreed with existing tenants as part of the standard.

The Government’s policy on social housing rent increases, and the rent settlement it puts in place to implement this, are the basis of the social housing sector’s finances. It is undoubtedly the case that uncertainty about future rental income makes business planning more difficult. Sudden changes to planned rental income, such as the Government’s decisions to rescind the planned index linked permitted rent increases and cap permitted rent increases below inflation, caused an increased level of uncertainty and required unplanned business changes for the sector. Rent certainty, particularly for the long term, is greatly valued by private finance and housing providers alike.

Accordingly, the next rent settlement should be set for at least five years and should also be linked to inflation. As part of setting the rent settlement, the Government should publish a non-exhaustive list of the types of events that would, in its view, likely lead to the reintroduction of rent caps in the future.

We remain very concerned about the impact of rent increases on social housing tenants. These are some of the most financially vulnerable people in our society. We believe housing associations must bear this in mind when they are setting rent levels, and reflect on the levels of their reserves they may be able to use to hold down rents.

Social housing providers should involve their tenants in discussions about rent levels. When rent rises are being considered providers should explain to residents why such rises may be necessary. The Regulator should proactively assess how registered providers use their reserves not only as an indication of financial viability, but also as an indication of providers’ governance, value for money and responsiveness to tenants.

A significant percentage of rent in the social housing sector is ultimately borne by the Department for Work and Pensions through benefits. As a result, rent increases could end up transferring costs onto central Government finances.

The Government should set out in its response to this report what role the Department for Work and Pensions will have in future discussions about rent settlements. When a rent settlement is agreed, the Government should write to us to inform us what impact it expects the change in rent to have on housing benefit costs.

The for-profit financial models involved in social housing are evolving and can be more complicated than traditional financing models. However, we are optimistic that new financing models have some role to play in generating the investment that the sector as a whole needs, although these new models do need careful and effective regulation.

We are pleased that the Regulator has taken steps to ensure that it has the adequate skills and resources which are required for it to have an effective understanding and scrutiny of the new financing models emerging in the sector, particularly equity investment and for-profit registered providers. Nonetheless, for the Regulator The Finances and Sustainability of the Social Housing Sector 45 to properly understand the role of new financing models it will need to adopt a rigorous process of continuous improvement, including assessing whether its skills and resources remain adequate.

Accordingly, we recommend that the Regulator must regularly conduct reviews of its own understanding of and ability to scrutinise new financing models in the social housing sector. These reviews must be published biannually in order to provide reassurance and transparently share some of the key challenges that the Regulator faces.

Furthermore, the Regulator must ensure that, as part of its governance ratings, it examines whether registered providers’ boards and executive teams have individuals with sufficient expertise in the financial models the provider is using. Registered providers must demonstrate that they properly understand any capital markets and financial products they are exposed to.

It is deeply concerning that as a result of financial pressures on social housing providers less new social housing will be built. This will further exacerbate the chronic shortage of social housing and will place further unacceptable pressure on those in need of social housing.

The current low levels of direct Government grant available to housing associations to build new social homes has received justified criticism from housing associations for being inadequate. We reiterate the conclusion in our 2020 report that the Government must invest significantly to fund the building of new social homes.

The Government should make an assessment of the extent to which a significant increase in grant funding for social housing development would allow the sector to build more homes and the overall balance of revenue and capital funding together with other sources of private finance and available subsidies.

The Government must also calculate the increase in grant funding for social housing that would begin to have a significant impact on the provision of more new homes.

Properly motivated and regulated private investors present a real opportunity to increase the building of social housing. The Government should set out its assessment of how many new social homes for-profit registered providers can be expected to build over the short and long term. In addition, the Government should engage with local authorities to explain the role it wants institutional investors to play in the social housing sector.

The Government has failed to set out the rationale for the decision to focus the inadequate grant on developing affordable rent homes. There should be an early assessment of the adequacy of grant funding allocations within the remaining Affordable Homes Programme and how much social rent is to be supported, together 46 The Finances and Sustainability of the Social Housing Sector with an assessment of the role of appropriate private investment providing affordable rent or other forms of tenure in order to free up grant funding to better support more social housing provision.

The Government must start by providing a clear direction for the social housing sector: it should publish a target for how many social rent homes it intends to secure, and explain the reasoning behind it. The confusion and delay around targets must end now. The Government should set clear targets for net additions of social rent, affordable rent and shared ownership under the Affordable Homes Programme and should provide these in its response to this report.

The Government and local authorities should more actively use their planning powers to ensure that the price of land does not inhibit the development of new social homes. We believe that land value capture should be part of the process for funding new social housing, especially for new towns and large sites. We recognise that the Government has gone some way towards this in the Levelling up and Regeneration Act and the Secretary of State should now be prepared to demonstrate greater flexibility in granting permission for local authorities to adjust value mechanisms under the Act.

The Government should critically review the results of the Infrastructure Levy pilots and carefully consider suggestions for improvement, including a possible requirement to deliver a certain amount of the Levy as on-site social housing. This should include the possibility of replacing the Levy with a reformed section 106 system.

Reducing local authorities’ debt could be an effective way for some authorities to provide greater funding for building social housing. It may be possible to cancel some of the additional £8bn debt attributed to local authorities in 2012. We were not able to ask the Minister for the Government’s position on this. We recommend that this is reviewed on a case-by-case basis.

We recognise that the social housing sector is, as a whole, financially resilient. However there remains a very real possibility that individual housing associations may come close to insolvency. One housing association defaulting on its loans could have a knock-on effect on rest of the social housing sector’s ability to attract investment and thereby increase the financial pressures other housing providers are under, especially regarding the very largest associations.

We are concerned that some of the largest housing associations may face more financial risk, because they have higher fire safety costs and they have been building more homes. At the same time, we are also concerned that the Regulator of Social Housing’s ability to manage the insolvency of a large housing provider is limited. Although we have been reassured that the sector has confidence that the Regulator has the tools to manage the insolvency of a large housing association, these tools are as yet untried and a situation where such tools are employed should be avoided.

We are pleased that the Regulator is already engaging more regularly with larger housing associations. However, the Regulator must specifically set out what early measures it would be able to take and by when in the event that this engagement identified any notable problems.