A 1% Rent Cut, the Privatisation of Social Housing & a Redefinition of Supported Housing: Challenges & Opportunities
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The purpose of this Briefing is as follows:
- To look at the 1% rent reduction requirement as an example of the UK Government’s strategy to reduce public funding and to further develop the mixed social market model by encouraging social landlords to use private capital and rewarding them with greater freedom and looser regulation.
- In relation to the 1% rent reduction, to examine what a rent actually is and how it’s structured. It might sound obvious, but it’s not and it may well surprise and interest you.
- To look at “Specialised Supported Housing”, which is exempt from the 1% rent reduction. What is it? What is its significance? How will the 1% apply to other accommodation?
- To describe how private sector capital funders are looking at social housing, especially for people with additional needs, as a serious investment proposition that could be a game-changer for the sector.
- To communicate the fact that the DWP & DCLG intend to come up with a redefinition of “supported housing” and a quantification of spend on it via the Housing Benefit budget. This is in advance of devolving the budget to local English authorities and presumably national governments outside England.
- If “supported housing” is to be defined and the budget devolved, what will become of Exempt and Specified Accommodation?
- To suggest future unified commissioning arrangements and the creation of a Community-Based Prevention Fund.
This Briefing is about fundamental change. It looks to analyse what form that change might take and where the opportunities lie for providers looking to offer good services to people with additional needs. Please share this briefing with anyone who may have an interest.
It’s Not Just About a 1% Rent Cut
As part of the UK Government’s Welfare Reform and Work Bill, English social housing providers will be expected to reduce their rents by 1% per year, based on a 2015/16 benchmark, from 2016/17 until 2020/21. Taken at face value this would be much more than a revenue reduction of 4% over the period. If we include the currently prescribed annual social and affordable rent increase rate of CPI + 1% then the loss is likely to be 20%+.
However, we need to see this requirement to reduce rents by 1% annually as reflection of a much more fundamental shift in approach by the UK Government towards a greater emphasis on a reduction in and targeting of state funding (both capital and revenue) and the encouragement of the use of private capital, particularly in England given that housing is a devolved power. Essentially, this is a further development of the “mixed social market” that Support Solutions UK has been describing for some time.
Recently we have read about David Orr of the NHF telling a UK Parliamentary Select Committee that by 2020 English Registered Providers (housing associations) will be setting their own rents. We are sure that he is quite right about that and we are equally sure that’s precisely what the UK Government wants English Registered Providers to be doing as part of a journey towards becoming “quasi-social” landlords who set their own rents, raise their own capital and are more loosely regulated.
Certain CEOs of large Registered Providers in England have already speculated positively about a possible life outside the restrictions of HCA regulation. As this briefing was being drafted it was announced that 3 private capital investors had struck deals with RPs to develop social housing.
Both the NHF and the OBR have given estimates of reduced social housing development as a consequence of the 1% rent reduction (ranging from 14000 to “at least” 27000). At the same time there is significantly increasing interest from private sector investors in social housing, this is doubtless exactly what the UK Government intends.
Private sector investors are especially interested in housing for people with additional needs. For these pension fund-backed investors “social business” is attractive as a low risk investment. To the tenant and the provider, a service developed using private capital, and with access to enhanced levels of revenue, will look no different in operational terms to the general needs, supported or sheltered housing scheme developed by a Registered Provider using public capital.
Public funding, both capital and revenue, is being reduced. Private capital and non-statutory revenue are being encouraged and public revenue is more available to schemes funded through private capital, such as Specialised Supported Housing (see below).
These are changes to the fundamentals of the way we do things, but many people are still focused on the consequences of change, not the nature of change itself, primarily the “social market” funding model, which we need to acknowledge as a paradigm shift.
The 1% rent reduction is a reflection of a wider more fundamental agenda; the development of the mixed social market and the move away from public investment; however, it is important in its own right and deserves to be looked at in detail.
But what actually is “rent”?
Our primary concern in this Briefing is with housing for people with additional needs, whether it is supported, sheltered, extracare or “general needs” housing that happens to accommodate a tenant or tenants with additional needs (“tenancy sustainment” services).
Rents for such accommodation typically look different from “ordinary” social housing rents. They’re higher because of the existence of service charge (and possibly some core rent) costs within the total rent, often as a result of Intensive Housing Management charges that meet some of the additional needs of tenants.
We await the development of the Welfare Reform & Work Bill to see what parts of what we call “rent” are affected by restrictions within it. As drafted, the Bill includes the whole “rent”, including by implication fixed service charges.
Support Solutions UK are almost certain that when the Bill appears in its next draft it will be clarified that service charges will not be subject to the 1% reduction. We are reliably informed that it was not the intention of the Government to include service charges within this policy development.
In the case of “Affordable Rents” the 1% reduction applies to the whole of the rent, including any service charge.
It does, however, beg the question of whether “rent” includes weekly charges levied on Licensees (“license fee”) and the “Weekly Maintenance Charge” (WMC) levied on the residents of Almshouses? Support Solutions UK takes the view that the draft legislation in its current form does not include weekly charges (e.g. license fee, WMC) that are not technically “rents” given the constitution and rules that govern the letting of accommodation by Almshouses and other organisations. Provider organisations that manage hostels, refuges and other often-transitory accommodation issue license agreements that specify a “weekly charge” not a “rent”.
This is an important issue that does not seem to have yet been addressed by the draft Bill or by the responses to it as far as we can see. It is important that clarity is provided; however, rent is rent, not “weekly charge/license fee” or “Weekly Maintenance Charge”.
In addition to not making a distinction between rent and service charge and between rent and weekly charge/licence fee and Weekly Maintenance Charge, the draft Bill doesn’t identify whether the 1% reduction applies to the gross core rent or the net core rent.
Before you lose the will to live whilst stranded in a technical rent maze, let us explain the structure of a social rent where a tenant has additional needs.
The “net rent” (or core rent) is what we believe the UK Government will apply the 1% annual rent reduction to. Not the “gross rent”, which is the rent plus Intensive Housing Management, service charges and ineligible charges.
So the 1% will probably only apply to the net rent component of a supported, sheltered or tenancy sustainment service in general needs. It’s also worth making the point that the HCA appears to have informally acknowledged the revenue funding challenges of supported and sheltered housing (and tenancy sustainment in general needs) and the otherwise problematic nature of social housing rent structures. It does so by disregarding Intensive or Enhanced Housing Management charges and service charges when looking at Registered Providers’ compliance with the Rent Standards, as per the diagram above.
This is very significant as effectively exempts supported & sheltered housing and tenancy sustainment services in general needs stock from the usual restrictions around rents applied to social housing providers. Support Solutions has long argued the need to formally exempt housing for people with additional needs from the Social Rents regime, which is inappropriate for these purposes.
What the HCA has done is to acknowledge the distinction between net core rent on the one hand, and gross core rent and service charges on the other. Net core rent needs to be compliant with social rents but gross core rent and service charge are effectively excluded from compliance with:
- Social Rents
- Annual rent increase restrictions
- ……and the 1% annual rent reduction, which we believe will only apply to the net core rent component of the rents of “Specified Accommodation” as distinct from Specialised Supported Housing.
If this is so it will be possible for registered providers in England to limit the impact of the 1% social rent reduction policy by implementing intensive/enhanced housing management services in their supported, sheltered and general needs housing stock and levying a charge to reflect that service outside of the net rent, assuming the 1% reduction doesn’t apply to the service charge component of the rent.
Welsh and Scottish Associations can construct rents inclusive of Intensive Housing Management, as there is limited rent control for supported housing in Scotland and Wales, albeit rents need to be justifiable.
Despite the recent rejection of the NHF’s proposed amendment to exclude the “rents” of Specified Accommodation from the 1% rent reduction we believe that this matter (i.e. what “rent” is being restricted?) is far from settled. We believe that the actual outcome could be that the 1% rent reduction is applicable to net rent only.
Specialised Supported Housing
According to “Inside Housing” on 15th September 2015: “(UK Government) Homelessness Minister Marcus Jones said: ‘We acknowledge that there may be some circumstances where the rent reduction policy should not apply.
‘In particular, the types of accommodation that are currently excepted under the Rent Standard, such as specialised supported accommodation, are likely to remain excepted.’
“He added: ‘We are considering whether the existing definition is appropriate in light of the revised policy and will be setting out the details in legislation’.”
The last paragraph is particularly interesting in the context of the DWP’s stated intention to come up with a revised definition of “supported housing”. Please see the “Redefinition of Supported Housing” section below for more discussion on this fundamental issue. Before that; however, what is Specialised Supported Housing?
In England the HCA’s Rent Standard allows higher rents in “Specialised Supported Housing”, which is also exempt from the 1% rent reduction. (We have already commented above that the inclusion of Intensive Housing Management charges in accommodation that is not defined as “Specialised Supported Housing” perfectly achievable by putting those charges in the gross core rent or service charge.) Specialised Supported Housing is:
- Where a scheme offers a high level of support for clients, for whom the only acceptable alternative public or voluntary sector options are care homes, and
- Where no, or negligible, public subsidy has been received by the scheme, whether in the form of capital grant or free land, and
- Where the scheme has been commissioned in line with local health, social services or Supporting People strategies and priorities
The number of “Specialised Supported Housing” units in the UK is unclear, although some commentators believe it to be small. “Inside Housing” quoted a figure of around 10,000 units of accommodation, though that could be an underestimation as the sector may have the same problems in quantifying what it has as the DWP has in quantifying how much Housing Benefit it spends and on what.
We do believe; however, that the number of “Specialised Supported Housing” units will increase significantly because the UK Government wants to see social accommodation of all types increasingly funded through a social market mixture of private capital and public & non-statutory revenue.
This being so it is important to look in more detail at the 3 criteria needing to be fulfilled to establish “Specialised Supported Housing” compliance.
- The scheme offers a high level of support for clients, for whom the only acceptable alternative public or voluntary sector options are care homes: this would be understood on the basis of an assessment of peoples’ needs at the most basic level. Given the determination of many LAs, often with good reason, to deregister “care homes” this criterion should act to encourage the development of “Specialised Supported Housing” schemes (and the reclassification of some other supported housing as “Specialised Supported Housing”) in the short-term; however, in the longer-term the commissioning direction is away from “care homes” so perhaps we should be looking at a different definition such as “more institutional accommodation”
- No, or negligible, public subsidy has been received, whether in the form of grant or free land: this would exclude revenue but include HCA and other public capital and land. Providers should be able to identify easily which of their properties are unencumbered in this way and should also note the fact that the revenue position, as far as the Welfare Reform & Work Bill is concerned, is moving in favour of schemes that use private capital and not public capital. Some providers may want to calculate the cost-benefit of paying off any residual public capital in order to benefit from the improved revenue position for privately financed schemes.
- The scheme has been commissioned in line with local health, social services or Supporting People strategies and priorities: what this means is that schemes that receive non-Housing Benefit revenue funding from the statutory sector will almost certainly be deemed to comply; however, that doesn’t mean that non-funded services, or those that just receive enhanced Housing Benefit, aren’t “commissioned in line with local health, social services or Supporting People strategies and priorities”. How often have local authorities, for example, had to say to decommissioned providers “it’s not that your service isn’t strategically important, we really value it, but we just can’t afford to fund it”? For this, and to some extent the other 2 criteria, to have meaning and robustness over the long term it is important that all parties agree a common understanding of this definition with a keen eye on the future mixed social market model with its preference for private capital.
As Marcus Jones commented, the UK Government may want to reconsider the definition of Specialised Supported Housing (see below for more on this). If they do so they will look at a wider redefinition of “supported housing” and one of the outcomes will be a greater emphasis of private capital.
All of these Specialised Supported Housing schemes will also be “Specified Accommodation” (or “Exempt Accommodation” given the significance of caselaw in these matters).
Specialised Supported Housing schemes will be exempt from the 1% rent reduction requirement in its entirety and “Specified Accommodation” that isn’t also Specialised Supported Housing may have the service charge elements of the rent exempted from the 1% reduction.
Private Sector Capital Investment
Will the apparent elevation in status of Specialised Supported Housing encourage the growth of private investment in the development of new services? The private sector is currently delivering about 40% of developments for older people so it isn’t a newcomer to accommodation for people with additional needs.
Part of the wider context around the 1% rent reduction may be the current UK Government’s interest in a “mixed social market” where the use of public capital in the development of services may result in a more restrictive revenue regime going forward and the use of private capital may have the opposite implication, as with Specialised Supported Housing.
There are problems, as people will know, in both securing public capital grant and in lead-in times for the development of social accommodation for people with additional needs. This has led to providers looking at using existing private sector accommodation for social purposes and working with Support Solutions UK to develop mechanisms to enable enhanced revenue to be paid to such schemes in exactly the same way as happens with social accommodation for people with additional needs.
In addition to “socialising” existing private accommodation we are now actively working with private investors to develop new buildings for social use. This can be a scheme that is designed and built to a specification, or purchased on the open market and adapted and redeveloped as necessary.
Providers who want access to private capital or advice on how to bring private sector properties into the sphere of enhanced public revenue for people with additional needs should contact us.
Private investors are also very interested in the acquisition of existing supported and sheltered housing stock, either as an asset disposal or as a “leaseback” arrangement where the investor buys it from the existing social landlord and then leases it back to them (or their managing agent).
The private investors in question represent pension funds that are looking to invest in social projects with modest but reliable long-term returns. Supported and sheltered/extracare housing are very much reflective of this.
Increasing levels of private investor interest are leading to the development of organisational infrastructure; such as HCA registered providers (in England) to take leasehold interests in privately developed property to attract enhanced levels of revenue to reflect the additional needs of tenants. The properties in question would qualify as Specialised Supported Housing and Exempt Accommodation or Specified Accommodation with a registered provider legal interest (ownership or lease). This enables the local authorities to reclaim from the DWP the enhanced Housing Benefit that they pay to meet the entire cost of the accommodation and accommodation-related (preventative) services provided within these schemes.
There are other potential benefits of private capital, for example, the Social Housing Pension Scheme is an area within which private sector capital may be a game changer. The Social Housing Pension Scheme, which many provider organisations are contracted to, is in deficit to the tune of £1.3bn and this deficit has to be met by provider organisations as employers, and presumably by employees as well in terms of potentially reduced pension benefits. The financial impact on some organisations is potentially crippling; however, private investors known to us would be able to provide capital in return for an interest in property. Providers wanting advice and assistance in managing, or clearing, Social Housing Pension Scheme liabilities should contact us.
So the UK Government is looking to shift the funding paradigm for the social housing sector and to encourage much more significant private sector investment whilst simultaneously reducing the amount of public capital within the system.
“Supported Housing” to be Redefined
We recently attended the NHF Sheltered Housing Conference in London where a speaker from the DWP set out some of the UK Government’s thinking on the future of supported housing.
The speaker accepted that the DWP doesn’t know the size of the supported housing sector or the cost, which is no surprise to us given the difficulty of defining what supported housing is. The speaker estimated the cost of enhanced Housing Benefit to be anywhere between £2-8bn per year of the total Housing Benefit bill of £26.4bn (2013/14). This is interesting not simply because of the amounts potentially involved but also the vast difference between the lower and higher estimates.
There will be a joint DWP/DCLG project to examine future funding of Supported Housing. It will use “quantitative and qualitative methods for a snapshot” of the current position. It is expected to report in early 2016 (Q1). There will be no policy design before the report and it will be 2020 before any fundamental change occurs.
Ministers think there’s poor control over costs and localisation (of the enhanced Housing Benefit budget) is likely to be considered as we have long predicted. We hope Ministers in both departments (and the Treasury) accurately quantify the cost-benefit of enhanced Housing Benefit and factor that into their thinking around cost control. They want to see a relationship between commissioning arrangements and outcomes and primary legislation is due in the summer or winter of 2016.
Whatever the cost to the budget of enhanced Housing Benefit, the DWP would be unwise to see it as anything other than funding for investment in prevention that has a positive financial and social return, and you do not logically cut investment that brings a financial and social return. Their problem is that they have no data that shows this, although much is available in the public domain.
The DWP & DCLG joint working party is to look at a quantification of amounts paid for supported housing and the actual size of the supported housing sector. The intention is to come up with a redefinition of supported housing and to possibly control costs through localising the expenditure associated with what will then qualify as “Supported Housing”. We have long predicted that this will then become a fixed revenue pot at local authority level (possibly national Government level outside of England), which will presumably be cash limited/capped and subject to eligibility criteria associated with compliance with the new definition of Supported Housing.
We agree with the need for a redefinition of “supported housing” but disagree that this exercise should act as a form of cost control, at least not at commissioning level. However, we do believe that supported housing services should be able to quantify its financial and non-cashable benefits to be entitled to public revenue.
We propose that any new definition of “Supported Housing” should be framed along the following lines:
- The right to funding for services should not depend on the legal identity of your landlord. Why should private sector tenants with additional needs have no access to enhanced Housing Benefit in its current or future devolved form?
- Providers, which may or may not also be housing providers, should be licensed/quality assessed, irrespective of their legal identity (e.g., nonprofit or private or Registered Provider) as organisations that provide preventative services to people with additional needs
- The emphasis should not be on buildings, it should be on preventative services for people with additional needs. The provision of appropriate housing and additional services should be fundamental to this and the first step should be to identify Specialised housing, adaptations to non-Specialised housing or a pathway to housing of either type. Where buildings need to be adapted or developed for specialised purposes, the funding should reflect that.
- Providers should be able to demonstrate both financial and non-financial outcomes within funding bids based on a preventative service model.
- Providers should be able to provide services to anybody who needs them, subject to an assessment agreed with the funder.
- Funding should not be paid via Housing Benefit, which will cease to exist under Universal Credit anyway; it should be paid from a localised “Community-Based Prevention Fund” devised from pooling the devolved enhanced Housing Benefit budget with parts of other statutory sector budgets (Health, social care etc.).
- Ultimately there should be unified commissioning with no budget separation. The status quo, with segmented commissioning and cash-limited budgets is expensive to run and ineffective.
- The emphasis should be on funding prevention/intervention, which are funded by the savings made to statutory budgets as a consequence of preventative intervention.
- The funding should be paid in part on the basis of the provider’s cost and social benefit model and partly on the basis of achieving co-produced preventative outcomes (agreed by funding recipient, commissioner & provider)
This approach could help to ease the funding transition for providers as well. By “funding transition” I mean the replacement of Supporting People funding up to this point and enhanced Housing Benefit by around 2020. As part of this, and as a funding objective in its own right, providers that haven’t optimised their Housing Benefit entitlements should do so without delay because it’s a win win for them, their tenants and their LA partners.
This working party is scheduled to report in the first quarter of 2016 with the DWP confirming that there’ll be “no policy design before the report”. The DWP further said that there’d be no fundamental change until 2020, which again is consistent with our stated opinion on this.
According to the DWP speaker Ministers are concerned about the growth in rents and “contrivance”, which he defined as schemes developed to “take advantage of the supported exempt accommodation definition”. Situations such as that recently reported in London, whether or not it’s a “contrivance”, should not be used as a political justification for limiting investment in prevention; however, it is equally important that the outcomes achieved through public expenditure for people with additional needs should be transparently auditable now and in future.
The fundamental problem here is that the DWP doesn’t know what “Supported Housing” is, and they’re not alone in that; no one does. Do we include sheltered housing in that definition? What about hostels and refuges? How about “general needs” accommodation that houses people with additional needs? I could go on but if I did I’d miss the point: what we really need is a redefinition of “supported housing” that isn’t focused on the property, but focused on the needs of the people accommodated within it.
The Existing Definitions: Specified & Exempt Accommodation
The current term for much supported housing, “Specified Accommodation”, is a problematic one framed on a misunderstanding (see our Briefing for a detailed explanation) in an attempt to provide some Welfare Reform Act protection for services that “don’t meet the precise definition of Exempt Accommodation”. Lord Freud, Welfare Reform Minister, uttered the words “don’t meet the precise definition of Exempt Accommodation” but no one sought to question whether the services about which Lord Freud was talking actually do “meet the precise definition of Exempt Accommodation”, which the great majority do.
The categories of Specified Accommodation enable the formalisation of technically incorrect positions, for example, that “agency managed” services are automatically Specified Accommodation category 2. They’re usually Exempt Accommodation, as are women’s refuges and many local authority hostels incorrectly identified as Specified Accommodation categories 3 and 4 respectively, yet this hasn’t stopped the assertion that “managed properties” are not “supported exempt accommodation”. This is often simply wrong and prejudices the interests of tenants, providers and local authorities by reducing Welfare Reform Act protections, the ability of local authorities to reclaim subsidy and, consequently, the likelihood of getting the levels of Housing Benefit that offset the costs of eligible tasks.
In case you’re wondering about the distinction between “supported exempt accommodation” and “Exempt Accommodation”, there isn’t one. The former definition is just a slip of the tongue by Lord Freud when he meant to say “Exempt Accommodation”.
The idea of Specified Accommodation proceeds from a misunderstanding of case law, particularly around the meaning of “care, support and supervision” and ends up by reclassifying Exempt Accommodation (or Specified Accommodation category 1 as it is otherwise known) wrongly as Specified Accommodation Categories 2, 3 and 4.
Specified Accommodation other than Exempt Accommodation:
- Has reduced levels of Welfare Reform Act protection (tenants are protected from Benefit Cap and direct payment of rent may still be made to the landlord; however, there is no protection from Spare Room Subsidy (“Bedroom Tax”)
- May have rents, including service charges, restricted to Local Housing Allowance levels by local authorities, unless the properties are owned or leased by a Registered Provider.
- Limits the ability of local authorities to recover enhanced Housing Benefit payments via their annual subsidy claims.
Exempt Accommodation does not have these shortcomings so it’s important to ensure that your services are correctly identified as Exempt Accommodation.
If you are not sure, or you have been classifying your services as Specified Accommodation categories 2, 3 or 4 then please contact us as you, your tenants and your LA are probably losing revenue to which all are entitled and which will be lost for good if not established soon.
However, Exempt Accommodation will effectively cease to exist at the point, we would suggest around 2020 as per the DWP/DCLG’s apparent thinking, when the UK Government devolves the enhanced Housing Benefit expenditure to English local authorities and to national governments outside England.
It is important for providers, and for local authorities, to ensure that reasonable, well-founded enhanced Housing Benefit claims are made and paid in order to ensure that what gets devolved is sufficient as local legacy funding for preventative services of the type that enhanced Housing Benefit funds and as a contribution to a pooled Community-Based Prevention Fund.
We are in the midst of fundamental policy change and as with any policy approach, it’s the implementation that matters. The UK Government has the opportunity to make a success of what it deems to be a necessity.
At the beginning of this briefing we wrote about privatisation and the 1% rent reduction and towards the end we talked about a unified commissioning system and a Community-Based Prevention Fund. These things are intricately connected. The UK Government’s approach to funding isn’t hard to fathom. They don’t want the public purse to fund capital projects where private finance will and to the extent that public revenue is paid, it will be on the basis of cost-benefit and outcomes.
There remain significant revenue opportunities in enhanced Housing Benefit (look at the rent structure diagram) and also private capital for providers.
The DWP/DCLG review of supported housing should not be an exercise in cost control, although it should save money. It should be an exercise in assessing the cost-benefit of preventative services (that happen to be funded by Housing Benefit at the moment), basing future public revenue expenditure decisions on positive financial, personal and social outcomes.
Unified commissioning, which we are finally beginning to see in some areas, has to be the norm for us to be able to focus on value before cost.
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