08/09/2022
On 31 August, the Government opened its consultation on its proposals for keeping social rents affordable for the twelve months from 1 April 2023 to 31 March 2024. This article summarises the key aspects of the rent cap consultation.
What is being consulted upon?
In 2019, the most recent rent settlement allowed registered providers to increase social and affordable rents by no more than CPI plus 1%. This settlement was intended to remain in place until 2025, and was set based on the appropriate inflation forecasts at that time (which predicted inflation to be at around 2% in 2022 and 2023). As we all know, various global events have pushed inflation up to surprisingly high levels, with CPI hitting 10.1% in July this year. A CPI of 10.1% would allow social rents to increase by as much as 11.1% under the current rent settlement; this at a time when the country is facing an unprecedented cost of living crisis (with domestic energy costs spiralling due to upward increases in the energy cap).
The Government is therefore proposing to direct the Regulator of Social Housing to set a new regulatory standard on rents that would be binding on private and local authority registered providers of social housing.
The Government’s proposal is for rent increases to be capped at 5% during that period. Whilst the consultation makes it clear that the 5% cap is the Government’s preference, alternative cap levels of 3% (which would give greater protection to tenants but an increased financial burden on providers) or 7% (which would assist landlords but give less protection to tenants) are also under consideration and those alternatives are also being consulted upon.
The 5% cap has been chosen by the Government as striking the best balance between three different competing objectives facing the Government: (i) the need to protect tenants, (ii) the need to protect taxpayers (by minimising the amount of tax revenue that has to be committed to welfare rent contributions), and (iii) the need to support the organisations that deliver new social homes and maintain and manage existing social housing stock.
The proposed direction, which would only apply to rents in England, would impose a cap on rent increases imposed during the one year period beginning on 1 April 2023. However, consultation responses are invited on whether the cap should apply for two years rather than one, bearing in mind that inflation is still expected to be high well into 2023.
Scope of the proposals
Annex C to the consultation sets out the proposed amended version of the Policy Statement on Rents for Social Housing (the “Statement”). Paragraph 1.3 states that the amended Statement will apply to “low cost rental accommodation” (as defined in section 69 of the Housing and Regeneration Act 2008), but not to (i) “low cost home ownership” (as defined in section 70 of the 2008 Act) or any of the excepted types of accommodation set out in chapter 5 of the amended Standard.
This means that the proposed rent cap will not apply to the following types of accommodation:-
- Low cost home ownership accommodation
- Intermediate rent accommodation
- Specialised supported housing
- Relevant local authority accommodation
- Student accommodation
- PFI social housing
- Temporary social housing
- Care homes
Each of these accommodation types is described in more detail in chapter 5 of the amended Statement, which should be read in full when considering whether a particular accommodation type will be caught by the cap or not.
As things stand, the Government does not intend to make further exceptions for particular types of social housing (e.g. it does not propose to exempt all supported housing, even though the Government recognises that financial models are often “less resilient to financial pressures”). However, consultation views are invited on this and the Government has indicated a willingness to reconsider its position on this if presented with clear evidence.
As is currently the case, the consultation indicates that there would be the opportunity to apply for an exemption from the rent cap if it would affect the financial viability of the organisation. Ratings agencies are forewarning a potential negative credit impact as a consequence of a proposed rent ceiling constraining revenue growth, borrowing capacity and the servicing of debt.
That said, the consultation makes it clear that the imposition of a cap will not be accompanied by any relaxation in the obligations imposed on registered providers to keep their properties maintained and safe. Providers will be expected to explore all options available to them to fund works and preserve their financial viability, including exploiting third party sources of funding such as the Building Safety Fund for tall buildings.
In a letter to local authority chief executives on 7 September urging engagement with the consultation, the Regulator acknowledged that the rent cap proposals, even though proposed for a short period, would have a lasting impact on the Housing Revenue Account of affected authorities. The Regulator made it clear in that letter that, notwithstanding this, authorities will need to ensure continued compliance with the regulatory standards and avoid any compromises regarding the safety of tenants or the delivery of essential landlord services. The Regulator concluded by saying that “all providers will need to identify how they can adjust to maintain their viability and support tenants in difficult times”.
Timeframes
The consultation opened on 31 August and will close on 12 October 2022. Beyond that, the Government’s plan is for the Regulator to be directed to introduce the new standard later in 2022. Given that the Government has carried out its own consultation, it intends to dispense with the obligation that would otherwise require the Regulator to carry out its own consultation before setting or amending the Rent Standard.
Any enquiries about the consultation can be sent by email to: Socialhousingrents@levellingup.gov.uk.
Concluding remarks
The financial consequences of a rent cap are considerable. Commentators have identified that a 5% rent increase would result in registered providers receiving around £1.3bn less in rental income than they would if no cap was imposed. At a time when all registered providers face a cocktail of unprecedented financial pressures, the financial consequences of a cap will rightly be being given very serious thought by registered providers of all shapes and sizes. The opportunity to feed into the consultation and potentially shape the rent settlement for 2023 – 2024 is therefore a valuable one.
This article was co-written by Rupert Simpson, Solicitor. If you would like to discuss this topic further, please contact Steve Eccles.
