Great expectations?
As the September rent-setting calculation point approaches, all eyes are on inflation projections.
RPI (the measure used to calculate annual social housing rent increases) was -1.6% in June, with CPI at +1.8% (dropping below the Bank of England target) and underlying RPIX (which excludes mortgage interest payments) at +1.0%. All measures have been trending steadily downwards in recent months, encouraged partly by the government's autumn cut in VAT from 17.5% to 15% (a move that will be reversed in January).
At the start of the year many economists predicted RPI of around -3.0% or worse for this autumn; this dire prediction looks unlikely to be realised but with three months to go a rate of -2.0% is still within reach. This is (coincidentally?) the 'floor' reportedly proposed by the Department for Communities & Local Government for RSL rent-setting.
Given RPIX is still in positive territory, the key factor determining the rate at which RPI settles is mortgage costs. Many of the last two- and three-year fixed and tracker rate deals signed by the banks before the credit crunch hit home are now coming to an end, and borrowers are being moved onto higher rates. Meanwhile the Bank of England is expected to begin to raise the base rate over the next year, with some economists predicting it will reach 2.5% by late 2010. All this is expected to help drive RPI back into positive territory in the coming months. But it's not likely to happen in time to save RSLs' bacon.
How can we quantify the impact this could have on RSL businesses? A friendly FD informs us that a rent change of -2.0% for 2009/10 would shave around £4 million off the reciepts of some of the largest groups in the sector, which at net present value is worth some £50 million.
In relation to the sector's financial heft, the impact of this level of change appears marginal. But for some organisations already under pressure from falling sales receipts, cash calls, higher borrowing costs and tightening financial ratios, it could be the straw that breaks the camel's back - or at least, that breaks the loan covenants.
Monday 27th of July 2009 02:42 PM · Derek Joseph says:
Housing Associations need to be realistic about rents. For 2008 the rent increase was well above price inflation and the 2009 'correction' will still leave rents ahead. There is a danger of being short term. The key will be whether total borrowing costs achieve the historic relationships of reducing to reflect lower inflation. HA's should be more worried about how detatched the two have become with higher margins eroding the lower inflation benefit. If this relationship does not go back into balance then the cost basis will need to be shrunk. Something HA's have singularly failed to do in the past!
