Housing 21 Downgrade

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Posted 19 June 2020

Housing 21, a leading housing association for older people of modest means, has been downgraded from a G1 to a G2 rating by the Regulator of Social Housing. The Governance downgrade is due to issues involving rent setting processes and controls. 

As a not for profit, leading housing association for older people, Housing 21 has always sought to do the right thing for its residents, whilst remaining ambitious in its plans to continue to develop more high quality Extra Care and Retirement Housing.

The introduction of the Welfare Reform and Work Act in 2016 required housing providers to reduce affordable rent charges by 1% each year. Housing 21 reduced the net rent it charged to residents by 1% annually as required by the Act, but maintained variable service charges that reflected the true cost of the services provided.   As a consequence the variable service charges applied by Housing 21 over three years were in total £2.8 million higher than was permitted if these were also required to be reduced by 1% per annum. To address this, the Board of Housing 21 has pledged to credit this sum back to the service charge accounts of the 80 Extra Care schemes affected.   

Housing 21’s considered position had been that setting a net rent and applying a variable service charge provided better value for money and greater accountability than applying a fixed combined rent and service charge. Housing 21 had not sought to charge the maximum affordable rent it is permitted to and in many cases the net rent set by Housing 21 for affordable rent properties was lower than the social or formula rent that would have maintained a variable service charge.  

Housing 21 recognises that its approach and application of variable service charges to affordable rent properties was not consistent with the Welfare Reform and Work Act 2016 and is committed to working with the Regulator to agree the basis for future rent setting. 

As a separate issue the rents for 17 of Housing 21’s older Extra Care schemes, that had been agreed and set by the Housing Corporation, were found to be above the current permitted formula rent levels.  

The rents for these schemes (including five Extra Care schemes provided under a 30 year Public Private Partnership contract) had initially been set above the then ‘target’ rent when they were commissioned to reflect the higher costs of developing Extra Care and limited grant funding applied.  The rents on these properties have all been annually adjusted by the permitted percentage, including 1% rent reductions in accordance with the Welfare Reform and Work Act 2016. 

These Extra Care schemes are providing a valued service that offers a more desirable alternative to residential care (which is especially valued in the times of Covid-19) and several of them are rated as outstanding by the Care Quality Commission.  If the higher rents had not initially been agreed for these schemes it is unlikely they would have been developed. 

Housing 21 has agreed to reduce the rents on all these properties to the formula rent levels notwithstanding that this does have implications for the financial assumptions on which the developments were undertaken. 

None of the issues raised and steps Housing 21 has agreed to take as a consequence with the Regulator affect Housing 21’s V1 financial status.

Bruce Moore, Chief Executive commented; “Whilst we are naturally disappointed with the downgrade, we are engaging fully with the Regulator and taking decisive action to resolve the situation to ensure that future rents and charges are set and adjusted in a manner that demonstrates full compliance.    We remain committed to doing the right thing for our residents and providing them with a quality service with rents and service charges that represent value for money.   Our focus is now working collaboratively with the Regulator and to restoring our G1 status as soon as possible.

Despite the downgrade, Housing 21 is confident and committed to continuing to fulfil its mission of providing more and better high quality Extra Care and Retirement Housing for older people of modest means and playing a vital role in keeping more than 20,000 older people safe during the continuing challenge of the Covid-19 crisis”.

Notes on Housing 21’s approach to Affordable Rents and Service Charges

Housing 21 has 3,200 Extra Care properties that are let on affordable rents.

Affordable rents are set at up to 80% of the gross market rent (i.e. rent and service charge combined).     

Since the introduction of affordable rents under the Affordable Homes Programme in 2011 Housing 21 has been clear that its approach was to set a net rent and apply a separate variable service charge, whilst still ensuring that the combined rent and service charge was less than 80% of the gross market rent.   

Housing 21 has always been open and transparent about the robust methodology it was adopting and had disclosed this approach to the Regulator of Social Housing and Homes England and their predecessor bodies.

Extra Care properties have more communal areas and additional services than typical general family properties and so the service charge represents a more significant proportion of the total cost.   

Housing 21 considers that maintaining variable service charges for Extra Care properties is more accountable, and provides better value for money as residents are only charged for the actual cost of the services they receive and they are able to determine and exercise choice and control over the level and specification of services.   

Housing 21 involves residents in setting service charges and 85% of its Extra Care residents say their service charges represent good value for money.

By only reducing rents by 1% each year following the introduction of the Welfare Reform and Work Act in 2016 and maintaining a variable service charges this was consistent with the policies and approach previously adopted by Housing 21 to draw a distinction between rents and variable service charges.    This was also consistent with the approach adopted for Housing 21’s other non-affordable rent Extra Care and Retirement Housing properties.  

Housing 21’s considered position was that setting a net rent and applying a variable service charge provided better value for money and greater accountability than applying a fixed charge for services as part of the rent.  

If a service charge is fixed it cannot be challenged and providers could potentially adjust or reduce the level of service provided whilst maintaining fixed income streams and result in residents paying more than required to meet the costs of the services they receive.

Housing 21 has not charged the maximum affordable rent it is permitted to and a recent valuation review by property consultants JLL indicated that the combined rents and service charges applied by Housing 21 to affordable rent Extra Care properties were on average some £40 per property per week lower than 80% of the gross market rents.   On this basis rents and service charges have been calculated to be £5.9 million per annum lower than was permitted.

To address the Regulator’s concerns regarding rent setting processes, Housing 21 has confirmed that it will aggregate rents and service charges when applying permitted increases or decreases in the charges for all existing affordable rent tenancies.   Housing 21 has also confirmed that rents for new tenancies will either be set as social/formula rents with a variable service charge or set on a fixed gross rent basis (inclusive of a fixed service) linked to a discount below 80% of the market rent position.

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