Balancing surplus and rent affordability: a complex challenge for housing providers

Peabody’s rent strategy is simple: charge tenants a fair and affordable rent suitable to the tenure. In 2018/19 Peabody rents were not only around £400m lower than the market, but also £17m lower than the target regulated social rent level.

This means, for example, that the average rent on a three-bed Peabody social home in London is £130 a week, while the target rent is £141. The group’s average affordable rent also remains lower than the London Affordable Rent benchmark set by the mayor of London.

“We know that rents set at 80 per cent or even 65 per cent of the market in London are not going to work for people on the lowest incomes”

In a move often referred to as Peabody’s “self-imposed rent cut”, we froze those existing affordable rent properties that are above the London Affordable Rent benchmark in 2018, and the group continues to convert pepper-potted market rent properties to social rent on re-let. These decisions meant that our social housing operating margin last year was four per cent lower than if we charged permitted regulated rent levels.

Peabody is also prioritising social rent in its development programme despite low grant levels and high building costs in London. I am pleased that 41 per cent of our programme last year was for social rent, which is more than anyone else developing over 1,000 homes a year.

We know that there are limits to the cross-subsidy model, but sales to fund social rent are holding up on price. Peabody is committed to delivering as much social rent as possible within a mixed-tenure development programme.

Low rents are ingrained in the culture of the organisation, and are informed by insight into the level of need. In assessing rent levels as part of the long-term financial plan, we considered the circumstances of people living in our homes and how genuinely affordable our rents were. We know from our existing research that a number of residents are struggling financially.

The latest Peabody Index (September 2019) revealed that over the past year, Peabody residents’ confidence to pay bills has consistently declined. Incomes are squeezed because of rising utility costs and the continued impact of government policies, such as the freeze on working-age benefits. More than half of residents report that they are only just able to afford the essentials each month.

We know that rents set at 80 per cent or even 65 per cent of the market in London are not going to work for people on the lowest incomes, and while some people can afford to pay more, there also needs to be much lower rents if we are to support the most vulnerable and reduce homelessness.

Low rents, particularly within development programmes, cannot be achieved without government support and public investment. That’s why I’m pleased to see the recent pledge that money won’t be cut from the next Affordable Homes Programme. I remain hopeful that there will be a clear focus on properly funding new social rented homes as part of that pot.

Alongside this, the certainty that a 10-year rent settlement would bring, and government using its fiscal credibility to reduce the cost of borrowing, would help us deliver more.

This year’s new affordable guarantees programme also has great potential and needs to be as flexible as possible to ensure it works within developing associations’ funding structures. There should also be some discussion about what could be done to share sales risk more widely to help fund more affordable homes.

Maintaining the sector’s strong investment proposition should help with this. This will be hugely important in future, and I should think the sector’s ability to lever in well-priced capital flows to make an impact will be of great interest to ministers as well as to lenders and institutional investors.

The UK social housing sector has a tremendous story to tell. Our social purpose is profound, and our impact significant. We enhance GDP and economic prosperity.

To government I say listen to our ideas to help deliver on our shared goals, and to investors wanting to make a social and sustainable impact in the UK, look no further than social housing.

Susan Hickey, former chief financial officer (2010-20), Peabody, and executive and non-executive director in responsible real estate finance