Northampton Borough Council Housing Stock Options Financial - - PowerPoint PPT Presentation

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Northampton Borough Council Housing Stock Options

Financial analysis

KEY DOC 22

Recap on financial position presented previously

Agenda

Stock condition survey – development of Northampton standard HRA business plan – key elements and different options Government guidance on stock transfer Stock transfer business plan – key elements and different options

2

Options discussion – break out session

Recap on financial position

• Landlord income and costs ring fenced

within Housing Revenue Account (HRA)

• Expenditure on housing management

and maintenance

• Income from rents, service charges,

garages, shops etc

• Analysis of day to day expenditure
• Northampton spends more on housing

services compared to other similar landlords

• Government assessment of need

considers it reasonable that Northampton spends at this level

• Ongoing day to day expenditure is

lower than it first appears – so the service is underfunded

• Performance and satisfaction is poor,

and getting worse

• Some increase in funding is

reasonable to deliver the performance improvement required

3

Stock condition survey – Decent Homes

• Decent Homes
• Total £693m over 30 years
• £96.9 m in the first 5 years to

upgrade council homes to basic standard

• This represents a lower

standard of investment than the Council is aiming for in its current housing business plan.

• Key features
• A minimum basic Government standard introduced in

2001

• Current target for meeting this for NBC is 2015
• A property is Decent under this standard if:

– It meets the current legal minimum standard for housing – It is in a reasonable state of repair – It has reasonably modern facilities – It is reasonably well insulated

• Does not allow for non essential improvements or any

work to the general environment

4

Resident consultation – Northampton standard

• Developed in consultation

with residents and informed by the stock condition survey findings

• Includes all expenditure in

Decent Homes standard and more

• £851m over 30 years
• £249m in the first 5 years
• Costs assume improvements

are delivered as part of the scheduled replacement timetable rather than a one

• ff improvement beforehand
• Key features include:
• Bathroom improvements such as heating, adjustable

height shower heads, choice of bath or shower (with both in larger homes), mixer taps

• Kitchen improvements such as layout changes to

increase space for appliances, improve flooring and cupboard space, quality materials with choice of finish, and more electrical points

• A budget for environmental improvements to estate

roads and paths, improved parking provision, secure bin storage.

• A budget for security lighting and window locks and

for improvements to heating and insulation to reduce heating costs in hard to heat homes.

5

Comparison of stock condition spend

• £57K per unit Decent Homes versus

£70K per unit for Northampton standard and £65K in current HRA business plan

• The Northampton Standard is not

excessive but contains high costs in the early years

• Key difference between the

Northampton standard and the current business plan is an additional £80m (approx) for environmental improvements, kitchen and bathroom alterations and solid wall insulation

• Still need to consider the case for

investment in each property as part of asset management strategy

• The importance of environmental

works to create sustainable neighbourhoods

Source: Savills survey 6

£0 £50,000,000 £100,000,000 £150,000,000 £200,000,000 £250,000,000 £300,000,000 Years 1 to 5 Years 6 to 10 Years 11 to 15 Years 16 to 20 Years 21 to 25 Years 26 to 30

Investment standard comparison

Northampton standard Decent Homes NBC HRA BP

HRA business plan – key elements

• In addition to major investment expenditure, the HRA business plan must include all

the income and expenditure the Council needs to spend as a landlord

• Income
• Rents
• Service charges
• Other income (e.g. Garages, shops)
• Leaseholder charges
• Expenditure
• Day to day management and repairs
• Major works to an agreed standard
• Any regeneration/new build to be held in HRA
• Servicing HRA debt
• Assumptions largely informed by current business plan
• Future costs
• Assume current one off management costs are continued long term to fund

service improvements

• Assume management of major repairs programme is funded by capital not day to

day maintenance

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HRA business plan – key factors to consider

• Rent assumptions must reflect agreed rent policy
• The plan must manage risks of changes e.g. to

inflation or interest rates, or future cost increases.

• Starting debt reflects the cost of HRA self

financing

• Where expenditure is greater than income in the

early years, the Council can consider whether it is affordable to borrow money to repay in the longer term

• Under government rules HRA debt cannot be

more than £209.1m.

• This means that even if it is affordable, there may

be limits in the amount that can be borrowed

8

Current (approved) NBC HRA business plan

• Capital programme is above the decent

homes level identified in the survey but less than the “Northampton standard”, particularly in the first five years

• Significant proportion of capital expenditure

met from revenue (so not spent on service)

• Includes 40 new build homes per year from

2014

• Plan “designed” with an objective to repay

borrowing over 30 years

• Key issues
• Expenditure is lower than the

Northampton standard

• Assumes existing rent policy
• Council can choose what to do with

surpluses e.g. New build v increased investment

Debt curve (red line) is a standard illustration of business plan affordability - to show the potential to repay debt within 30 years

9

50,000 100,000 150,000 200,000 250,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 £000 Years

NBC approved HRA BP Net Indebtedness Debt Cap

Testing different scenarios

• Five different versions of the business plan have been

modelled, with the aims of testing the maximum debt required and how quickly it can be repaid

• Three scenarios (2, 4 & 5) include new build at 40

homes per year from 2014 with an average cost of provision of £135,000 (current prices) and rents of £100 per week (current prices)

• The key income and expenditure assumptions, which

are common to all scenarios are as shown in Appendix

• ne
• These broadly reflect the assumptions in the current

HRA business plan but also take into account government proposals for changes in social housing rent policy which restrict future rent increases

• All scenarios include major investment costs based on

the Northampton standard though the timing of some investments (as explained) forms part of the scenario testing.

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Scenario 1: Northampton standard, no new build

• An increase in expenditure to deliver the

Northampton standard would mean the Council would need to increase borrowing to just over £262m

• This level of borrowing is potentially

affordable but not allowed under current government HRA rules

• To deliver the Northampton standard the

Council would need to borrow £53m more than allowed

• Key questions

? How to manage within the debt cap ? Could expenditure be reduced, or delayed

11

0.00 50.00 100.00 150.00 200.00 250.00 300.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Scenario 1: HRA debt with Northampton standard investment

Debt cap Debt

Scenario 2: Northampton standard, with new build

• An increase in expenditure to deliver the

Northampton standard and new build from 2014 would mean the Council would need to increase borrowing to over £286m

• This level of borrowing is potentially (just)

affordable but not allowed under current government HRA rules

• To deliver the Northampton standard the

Council would need to borrow £77m more than allowed

• Key questions

? How to manage within the debt cap ? Could expenditure be reduced or delayed ? Could new build be developed in another way – not affected by HRA limits on borrowing

12

0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00 1 2 3 4 5 6 7 8 9 10 11121314 15 16171819 20 21222324 25 26272829 30

Scenario 2: HRA debt with Northampton standard investment and new build

Debt cap Debt

Scenario 3: Northampton standard, no new build and early re-profiling of spending

• In order for Scenario 1 to remain within

the debt cap, the Council would need to consider options to adjust:

• the level of expenditure and/or
• the timing of investment.
• there will be a range of options to be

explored in consultation with residents

• Scenario 3 is developed from Scenario 1.

It maintains the Northampton standard but assumes that £44 million of expenditure is delayed from years 1 to 5 to years 6 to 10.

• This is equivalent, for example, to

extending the programme of environmental and property improvements over the first ten years rather than the first five.

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0.00 50.00 100.00 150.00 200.00 250.00 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930

Scenario 3: HRA debt with Northampton standard investment, no new build ‐ improvements in years 1 to 10

Debt cap Debt

Scenario 4: Northampton standard, with new build and early re-profiling of spending

• What happens if we defer expenditure (as

in scenario 3), and include new build (as in scenario 2)?

• Again this scenario is potentially

affordable, but not allowed. The Council would need to borrow a maximum of £245m which is £36m more than currently allowed

• But borrowing does not need to go above

the cap immediately so there is time to consider options

• The Council would need to consider
• ptions to adjust further:
• the level of expenditure and/or
• the timing of investment
• there will be a range of options to be

explored in consultation with residents

14

0.00 50.00 100.00 150.00 200.00 250.00 300.00 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930

Scenario 4: HRA debt with Northampton standard investment, with new build ‐ improvements in years 1 to 10

Debt cap Debt

Scenario 5: Northampton standard, with new build and further, more extensive, early re-profiling of spending

• How could the Council still do new build and

deliver the Northampton standard and keep council HRA borrowing within the current government rules?

• The Council would need to delay £60m of

expenditure from years 1 – 5 to years 6 – 15

• This could be achieved, for example, by delaying

three quarters of the programmes of improvement and environmental improvement works and extending them over a 10 year period from years 6 – 15 instead of years 1 – 5.

• This extended period of improvement allows

capacity for the 40 new homes per year from 2014

• This shows that there will need to be choices

between improvements in existing homes and new build if this is to be contained within the HRA debt cap

• However many Councils are exploring alternatives

to deliver new build outside of the HRA debt cap

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0.00 50.00 100.00 150.00 200.00 250.00 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930

Scenario 5: HRA debt with Northampton standard investment, with new build ‐ expenditure delayed to years 6 to 15

Debt cap Debt

Retention options for new build and regeneration

• Within the HRA (debt cap)
• Reduce or delay expenditure on

existing homes

• Delay new build and regeneration until

beyond year 10

• Consider alternative forms of finance

such as sale and leaseback

• Outside the HRA (no debt cap – but still

needs to be affordable)

• Council owned company (e.g.

subsidiary of ALMO or Council)

• Partnership with housing

associations/developers

• Joint venture
• Grant funding for new housing and

regeneration is likely to be very limited. Many landlords are assuming no grant availability

• This means looking for opportunities for

cross subsidy from mixed tenure development, HRA surpluses, Right to Buy receipts, affordable rents

• Key questions

? Viability ? Funding ? Delivery options ? Capacity

16

Stock transfer – key financial features

• Transfer of ownership (sale) of tenanted properties to independent registered provider
• Stock transfers at tenanted market value based on value of ongoing cashflows
• So the more expenditure is in the business plan, the lower the value of the cashflows,

and the lower the price paid to the Council for the stock

• This ensures that the new landlord can afford to fund promises which are costed in the

valuation

• The Council needs to ensure HRA debt (£193m) can be repaid from the proceeds of

transfer or written off by government

• Stock transfer brings additional costs (set up, funding, VAT)
• External funding market challenging

17

Stock transfer– government policy

• Secretary of State must consent to

transfer

• New guidance has been issued in July

2013 for consultation – final version September

• Relates to stock transfers that will

complete by March 2015 only. The government’s position beyond then is not clear yet

• Government’s starting point for consent is

that cash flows reflect assumptions in HRA self financing – or justify departure through additional outputs, in return for debt write off

• This makes it difficult to promise

existing tenants additional investment as a result of transfer

• To get consent the Council must

demonstrate the following cases for transfer alongside resident and political support

• strategic
• economic
• commercial
• financial
• management
• If debt write off is needed – transfer must

be completed by March 2015

• The Council and the new landlord would

need to fund their own set up costs

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Stock transfer– government policy (2)

• Key difference between old rules and the

new

• No gap funding
• Limited debt write off
• Limited ability to promise additional

investment in existing homes as a result of stock transfer

• Much greater emphasis on benefits to

central government

• No ability to meet set up costs
• Very challenging timetable
• To achieve stock transfer in Northampton

the timetable would need to be

• Council decision on options (Dec 13)
• Application to transfer (Mar 14)
• HCA/CLG decision on application (Jun

14)

• Offer document and ballot (Sep 14)
• Subject to ballot result, set up new

landlord and complete the transfer (Mar 15)

• Need to consider whether this allows

adequate consultation with residents to develop the offer and put plans in place

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Scenario 6: Stock transfer business plan – Northampton standard (without adjustment) without new build

• Scenario 6 is an indicative housing stock transfer

equivalent of Scenario 1 – e.g. Bringing all homes up to the Northampton standard of investment

• The debt cap does not apply – so borrowing is

limited to what can be afforded and there is no need to delay expenditure

• Higher funding costs mean debt is repaid later

than under Scenario 1

• Transfer receipt is estimated at £83 million

maximum and is not sufficient to repay Council’s HRA debt - over £100m debt write off needed

• This would need to be justified by additional

income or reduced expenditure to government e.g.

• VAT receipts
• Reduced housing benefit bill
• Wider economic and social benefits – e.g.

apprenticeships, savings in public health

• Potential benefit to tenants would be that

improvement work is delivered in first five years rather than over longer period

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0.00 50.00 100.00 150.00 200.00 250.00 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930

Scenario 6: LSVT debt with Northampton standard investment and no new build

Debt

Scenario 7: Stock transfer business plan – Northampton standard (without adjustment) with new build

• Scenario 7 is an indicative housing stock transfer

equivalent of Scenario 2 e.g. Bringing all properties up to the Northampton standard and building 40 new homes a year

• The debt cap does not apply – so borrowing is

limited to what can be afforded and there is no need to delay expenditure

• Lower initial debt and higher funding costs mean

debt is repaid within 30 years

• Transfer receipt is lower due to the cost of new
• build. It is estimated at £30 million maximum.

This means the Council needs even more from government to write off existing debt - over £150m

• This would mean the Council would need to show

more wider economic and social benefits and more savings to government as a result of transfer

21

0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 180.00 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930

Scenario 7: LSVT debt with Northampton standard investment and new build

Debt

Summary and questions

• The Council has developed a local

standard of investment in consultation with residents

• Retention offers the opportunity to deliver

this standard although choices would have to be made about timing of improvements, regeneration and new build due to the debt cap

• Retention

? Choices between level of investment and how quickly improvements could be done ? New build and regeneration are constrained by the debt cap. Options are available, but would require significant delivery capacity at the Council

• Stock transfer offers the opportunity to

deliver improvements sooner, but only with government financial support which is only available before March 2015 and must be justified by benefits to government

• Transfer

? What level of investment could be afforded in the new landlord’s business plan ? How could a case for debt write off be built up to deliver new homes and regeneration ? What could be offered to existing tenants

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Break out session –

• ptions
• Balance between level of investment

and timing

• Balance of investment in new and

existing homes

• What would the offer to tenants be?

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Appendix One: NBC base business plan assumptions

• Income (common assumptions to all scenarios)
• Average starting rent £78.59
• Rents move towards target in 2014/15 with increases limited to maximum of RPI + 0.5% +

£2 to 2014/15

• Rents increase by CPI + 1% from 2015/16 (assumed to be 3%) in light with Government

proposals

• Other income £3.8m from garages, shops, leaseholders, service charges etc
• Voids 1.4%
• Bad debts 1.53% in the short term to reflect initial impact of welfare reform, returning to

0.92% long term

• Decent Homes backlog funding £44.8m
• Expenditure (common assumptions to all scenarios)
• Management costs £6.4m
• General fund recharge £4.8m
• Maintenance £11.2m
• Service costs and other costs £4.1m
• Major works costs assumed to reflect the Northampton standard

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