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Philanthropy Begins at Home: #sayyestoreclassify

25/7/2013

2 Comments

 
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Peter Hall (@PHHSl) writes passionately about the bedroom tax, asking Why aren't more landlords reclassifying homes to ease the real pain being caused?

There’s been a lot of press this week on 100 days of the bedroom tax and its impact. The NHF highlighting the impact in the North West citing £21m lost income. Aragon taking the time, effort and presumably significant resource to produce a glossy brochure on the impact on its business (a £7,000 increase in arrears while 5 staff have been recruited to help people affected ‘budget’ better!) And then I see that a man slashed his throat in a job centre after complaining about the impact of the bedroom tax.

All this time, effort and negative impact on businesses, and most importantly, individuals, when all the time landlords have it in their power in one fell swoop to take away all misery and suffering it’s causing – as I’ve written in detail about elsewhere - by reclassifying properties. Simple. Change it from a 3 Bed to a 2 Bed for rent purposes and charge a lower rent. Or a 2 bed to a 1 bed. Some have done so. Why aren’t others following suit?

The housing sector is rightly very proud of its origins in the philanthropic Peabodys and Rowntrees, among others. Surely it makes business and philanthropic sense to simply reclassify homes and reduce the rent charge (even temporarily) in the circumstances?

What rational business would sit back and see £000’s being lost on rental income merely because the property is ‘hard to let’ because of the bedroom tax,  or even consider demolition rather than just reduce the rent by a few £’s a week?

Does it make sense to employ 5 people to help with budgeting when those badly affected have no budget to speak of or hope of a move or work in the near future? Does it make business sense to spend £’s chasing arrears which you’ll never recover?

And what genuinely philanthropic business would see the physical and emotional human hardship and turmoil being caused by the bedroom tax, and choose not to act in the most simple manner to end that simply because ( as I’ve seen commented elsewhere)  ‘we can’t allow rent policy to be dictated by government welfare policy’ or some notional fear of lenders not liking what they see. Especially with HA surpluses rising yet again for the last financial year. L&Q up to £100m. Home Group doubling to £64m. Hyde £25m. Riverside £22m. The reductions in rents by reclassifying properties and saying they have less bedrooms are a drop in the ocean compared to those levels.

Come on #ukhousing. Do that maths. Get creative. Don't do what you're told to do. Do what you know is right. Ask all of your tenants rather than your FD or your board what they would rather you do and give them some genuine options on where savings could be made elsewhere to keep services going , still maintain and improve existing stock , and deliver much needed smaller new homes for those affected to move into. I’m betting most would happily agree to their fellow tenants being given some reprieve on a ‘there but for the grace of god go I’ basis! And it needn't be permanent. Just give those affected some relief  for a limited period at least while other options are worked through - lodgers, downsizing etc.

If I’m barking up the wrong tree, let me know. But if you’re a fellow housing professional, tenant or interested observer who feels the same, tweet away at #sayyestoreclassify!

2 Comments
Peter Hall
28/7/2013 03:29:42 am

Ive had some interesting comments back on this via Linked in and Twitter posts. Ranging from the impact on business plans, the perversity of the policy, and from Paul Wilding, Revenues and benefits manager at Oxford as below via Linked In
"Its just not as simple as the article would have you believe. Firstly most Housing Associations have significant borrowing. Their credit worthiness is based on their rent book and the rent they collect. Reducing their rents reduces their credit rating and they could find loans being called in. Secondly, which properties do they reduce the rent on? Just those affected by the bedroom tax, just those where the tenants are on HB? Either way, they are likely to end up with families in exactly the same properties paying different rents which is hardly equitable. And then what if someone affected by the Bedroom Tax no longer requires benefits? Does their rent get put back up??"

My Response as below;
It really can be relatively simple.

HA's and LA's credit worthiness is not just based on their rent book. It’s based on income & expenditure, the integrity of their business plans and confidence in the organisations ability to deliver what they say they will do.

Credit ratings are notoriously discretionary but from an accountancy and regulatory perspective the key measures are ability to service debt, largely based on their operating margin, SBIT, EBITDA, adjusted net leverage and debt per home etc.
The operating margin is in simple terms the difference between income & expenditure – expressed as a %. It’s that which largely determines ability to borrow additional money and a credit rating.

So in terms of business plans and operating margins, reducing income by reclassifying rents would need to be offset by savings elsewhere to produce the same operating margin – as I’ve outlined. Doing one without doing the other would indeed lead to problems. But it should be safe to assume those running effective businesses would know that. Those who have reclassified will have.

As I’ve outlined elsewhere, the sector as a whole spends in the region of £1bn a year on noncore housing activity. ‘Housing Plus’, Resident Involvement etc. The capacity within the sector to reduce spend elsewhere is certainly there.

On the matter of which properties to reduce rents on, there are already a myriad of tenures and different rents across the sector which most manage effectively. Fair rents, secure, assured, assured shorthold, affordable, introductory tenancies, fixed term tenancies, market rent, keyworker, shared ownership. The list goes on. All with differential rents and periods etc. The reality is that neighbours in the same properties already pay different rents across the country, and have done for some time. ‘Pay to Stay’ proposals for market rents for those on incomes >£60k will enshrine this.

Some say reclassifying will trigger a revaluation of stock, which would lead to their debt per home levels increasing, and impact on operating margins etc. I don’t agree – especially if the reclassification is for a temporary period for existing tenants only. Revaluations aren’t required when a property switches from fair to assured, or secure to assured shorthold on a temporary basis. Most loan covenants only require revaluation for a permanent change of use on a large scale. Landlords could and should check the small print of their loan.

And if someone affected by the bedroom tax no longer relies on benefits or gets a lodger to cover the shortfall etc, yes, put their rent back up. What’s different between that and ‘pay to stay’ or conversion to secure or assured after an introductory or fixed term tenancy? Philanthropy should only go where it's needed.

In simple terms, social landlords really do have the means to end all this misery. It comes down to whether there’s the will to do it. Where there’s a will, there’ll be a way.

Follow the debates at http://www.linkedin.com/groups/Welfare-Reform-Housing-4266794?home=&gid=4266794&trk=anet_ug_hm

Reply
Peter Hall
29/7/2013 03:47:12 am

Responding to a question posed about why landlords will need to reduce rents if they reclassify.

Its the Homes and Communities Agency (HCA's) Regulatory Standards which dictate rent levels in social housing - not HB regulations.

Specifically it is the rent standard, which states:

"Registered providers shall charge rents in accordance with the objectives and framework set out in the Government’s direction to the regulator of November 2011"

The key requirements of that framework and direction are that social rents are set in line with rent convergence formulas which are based on property size ( ie bedrooms), value and local incomes. Convergence was set in place by the previous government with the aim that all council & HA rents would be the same in a geographic area based on those three criteria. It was meant to harmonise rents by at least 2015.

That's the principle which Lord Freud alluded to when he mooted reclassification as an option in 2012, and the basis that Leeds City Council will be taken to task over for reclassifying without reducing rents.

Reclassifying to smaller bedrooms means in Freud's and the regulator's view that the rent charged has to be lower too in line with rent convergence direction.

If a property is reclassified to a smaller 'size, the relevant convergence formula rent for its size or equivalent within a landlords stock if they haven't yet converged should be applied.

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