How will the new rent cap impact your organisation?

‘Relief’

As Jonathan Cox, partner and housing sector lead at Anthony Collins Solicitors, says: “The results clearly reflect the sense of relief in the sector that the rent cap could have been much worse for landlords. But with more than half of all landlords expecting to cut new homes development, this brings home the reality of the tough choices every housing association is facing.”

A number of large landlords had already announced that they were downscaling their development plans well before the government announced it was reviewing the rent cap. Most notably, G15 giant L&Q said two years ago it was cutting its annual housebuilding target by 70 per cent to cope with rising fire safety costs. Clearly, with the new rent cap in place, the government’s much-vaunted aim to be building 300,000 new homes a year by the mid-2020s looks under even more threat.

Multiple options were allowed on this question, which also saw half replying that investing in decarbonising homes would also be reviewed. This is seen as an area of spend that can be delayed for now. But with all social homes expected to be an Energy Performance Certificate Band C by 2030, there is a huge amount of work for the sector to do in this area.

Third-highest on the list of areas of potential review was repairs and maintenance. Bearing in mind the scandals around the condition of some social housing, which have been widely highlighted in the media, and the current focus on damp and mould issues following the tragic Awaab Ishak case, this will raise concerns.

Of course, landlords are only one side of this equation. For those tenants that pay for their rent partly or entirely, a seven per cent increase is significant, especially during the cost of living crisis. Landlords are clearly aware of this. Of the relationships that they feel are going to be “most challenged” in 2023, two-thirds ticked the box indicating it will be with their residents. This relationship will not be helped by the fact that a significant majority of landlords will not be capping service charge increases. Seventy-four per cent of respondents to our survey said they would not put a cap on these increases.

The next highest option on the “most challenged” relationship question was with contractors, with 56 per cent of respondents ticking this box, reflecting the ongoing cost pressures around development and repairs and maintenance. Half stated ‘developers’, while 29 per cent agreed that their relationship with their funders would be among those most strained.

Meanwhile, the question of how landlords with shared ownership homes will deal with the rent cap issue has been pondered, as the same rules do not apply. However, the majority appear to be following the lead on social housing, with 77 per cent saying they would introduce a rent cap of seven per cent on their shared ownership properties.

The long-term financial implications of the new rent cap may not yet have crystallised. But it appears landlords are aware there could be issues. A question asking whether the new cap would put pressure on funding covenants saw 56 per cent say “yes”. Of these, nearly a fifth – 17 per cent – said it would cause significant pressure.

‘Lower margins’

Waqar Ahmed, group finance director at L&Q, says: “Lower margins caused by cost pressure inflation, combined with higher interest rates, will mean a direct impact to EBITDA interest cover ratios.”

Meanwhile, Sarah Cole, executive director of business and finance at Cardiff-based Taff Housing, points to the long-term impact. “A less-than-inflation rent rise won’t have a one-year hit,” she says. “This is because the rate of rise for following years will be on a lower amount brought forward – the effect is cumulative and grows as a quantum figure.

“The margin between our rental income and our costs has been hit forever unless we get a greater-than-inflation rise in the future, [which] seems unlikely.”

Ms Cole says lenders are aware of this and the challenges the sector is currently facing in trying to deliver new homes and decarbonise, as well as dealing with issues such as fire safety and damp and mould.

Mr Cox adds: “As core income is only going up by seven per cent and expenditure increasing by 10 to 15 per cent, there will inevitably be pressure on business plans and some of the funding arrangements that underpin them.”

Another commenter makes a more general point, saying: “If the government does not increase public sector wages to match inflation, a lot more people will fall behind in their rent and other bills, which puts more pressure on everyone’s lives.”

Returning to the long-term situation, it appears it is development programmes that will take the hit. In a question asking the likely impacts in five years’ time, 73 per cent said reduced development.

Interestingly, the cap could also accelerate a recent trend in the sector. More than half – 54 per cent – ticked the box saying there would be fewer housing associations, while just under half said there would be more mergers. We have already seen a number of high-profile mergers in the past year or two. And with the squeezed finances of the sector, it is perhaps inevitable that this trend will continue as smaller associations seek shelter with bigger organisations, or larger groups that are financially challenged find a suitable partner. Just over a fifth said it was likely to lead to more collaborations and joint ventures – another trend that has been gathering pace.

Elsewhere, in terms of the long-term impact, 46 per cent said it would mean a reduced maintenance spend, while 40 per cent ticked the box saying it would lead to “reduced service offerings”, spelling further bad news for tenants. And returning to the financial implications for landlords, 40 per cent said it could lead to higher costs of funding or reduce funding availability.

So while the sector breathed a collective sigh of relief initially following the rent cap announcement, it has done little to allay the fears around the financial challenges facing landlords in the coming years. The question also remains over the future stance that this government or future governments will take on social housing rent. More future twists and turns are inevitable.