What next for the post 2025 rent settlement?

Posted: 6th March 2024 Jim Lashmar, Director

Under the current five-year rent settlement to 2024/25, registered providers (RPs) have been permitted to raise rents by the Consumer Price Index (CPI) plus one per cent – the deal theoretically providing certainty to tenants, RPs and investors in the sector. However, as we now know, rent settlements are not always adhered to and we live in a climate of rapidly increasing inflation and a cost-of-living crisis. Thus, in November 2022 Chancellor Jeremy Hunt capped rent increases for general needs properties at 7%. While this decision was largely supported by RPs, in the light of affordability concerns for tenants, it has led to boards making difficult decisions around the ability to invest in existing homes whilst delivering new homes for the future.

The break from the settlement is not without precedent, with the four-year -1% rent reduction from 2016/17 to 2019/20 breaking from the previous settlement. Breaking away from the settlement does not just affect RPs, it also affects how important sector stakeholders – such as lenders, investors, and rating agencies, view the sector.

2024/25 has seen a return to the settlement with RPs being permitted to increase rents by up to 7.7% (September CPI of 6.7% +1%) and we are seeing the majority of our RP clients assuming a CPI-only increase going forward in the absence of any new guidance.

Although actual rents were capped at 7% in 2023/24, formula rents were permitted to increase by 11.1% (September CPI of 10.1% + 1%) and hence actual rents for all formula rent properties immediately fell below formula levels. Under the current system there is no mechanism for RPs to close this gap going forward until the property is relet and hence the cap will have a long-term impact on income across the sector.

There is a clear requirement for a longer-term planned approach to provide certainty on social housing rents and create stability. This is essential for RPs and lenders to the sector to confidently invest for the future both in existing stock and the development of new homes. 2016/17 to 2019/20

In September 2023 the National Housing Federation (NHF) put forward proposals for an inflation-linked rent rise, but with a floor and ceiling built in, to protect tenants from very high increases. It further put forward a proposal to return to a system of rent convergence which would allow RPs to close the difference between actual rents and formula rents over a period of time. This would allow RPs to close the gap between the 11.7% formula rent increase and 7% cap in 2023/24. It would also allow convergence for properties where rents have been below formula for some time due to failure to converge under the previous rent restructuring regime.  The NHF estimates at a sector level, convergence will generate over £1bn of additional revenue while ensuring rents remain affordable. The proposals appear to achieve the required level of certainty and affordability, though will require thorough and accurate modelling and implementation.

The Department for Levelling Up, Housing and Communities (DLUHC) is due to consult on future social housing rent policy, but no fixed date has been given for this. In its response to the consultation on the seven per cent rent cap last year, the government said it continues to support the principle that social housing rents should be “index linked over the long term, to support investment in both new and existing social homes”. DLUHC has also promised to launch a call for evidence on whether RPs should be permitted, gradually over time, to bring rents back up to the level they would have been had a seven per cent cap not been applied.

In September 2023 the previous Housing Minister, Rachel MacLean announced in that the government would “publish our consultation on rent policy from 2025 later this year, before making decisions about rents and new requirements in the first half of 2024” No announcement has yet been made, but with a General Election likely in early 2025 and polls predicting a change of government, the new policy will be down to the new government to implement, opening up the possibility to potential change for political reasons and creating further uncertainty.

In the meantime, it is crucial that RPs continue to thoroughly stress test long term financial plans, ensuring that plans can cope with a CPI-only increase if necessary, and develop mitigation plans for a range of possible future rent scenarios.

Written by Jim Lashmar, Director, Altair

For more information about financial planning and stress testing, head to our Corporate Finance and Treasury webpage.

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