Social housing values could fall up to 70% in worst-case scenario as decarbonisation costs bite

Applied to the Existing Use Value for Social Housing (EUV-SH) valuations approach, the worst-case scenario combines a host of factors, most prominent among them the impact of applying net-zero costs of £25,000 per property.

 

This scenario – which also factors in the seven per cent rent cap, a 50 basis points (bps) discount rate, and an increase in management costs and maintenance spend of 10 and 18 per cent respectively – could lead to values dropping by 69.5 per cent in the North East, modelling suggests.

 

The percentage change relates to projected values at April 2023, compared with values at April 2022.

 

The next-largest decrease would be  67.5 per cent, in the North West, followed by 66.6 per cent in Yorkshire and the Humber and 50.3 per cent in the Midlands.

 

Speaking at the Social Housing Annual Conference on 1 December, Richard Petty, head of UK living at JLL, emphasised the modelling was indicative only and not a forecast, and that valuations will vary in practice.

 

Seven per cent rent cap

 

Talking through the approach, Mr Petty said his modelling suggested that a seven per cent rent cap on its own next April would lead to a rise in values.

 

JLL looked at eight actual loan security portfolios that it valued in April or March of this year and will be valued again next April.

 

Mr Petty’s modelling showed that, on the basis of EUV-SH, values could increase by 1.6 per cent on average.  

 

Under EUV-SH, it is assumed that properties will remain in the sector. The value is calculated by adding up rental income over a 30-year period and taking away the costs. The net figure is then discounted to allow for inflation.

 

The modelling took into account the seven per cent rent cap, a 10 per cent rise in management costs and 18 per cent increase in maintenance costs.

 

The figures it gave were: a 3.4 per cent increase in prime London, 3.3 per cent in Greater London, 2.1 per cent in the South East and 0.3 per cent in the South West.

 

Mr Petty’s modelling showed a 0.4 per cent rise in the Midlands, one per cent for both Yorkshire and the Humber, and the North West and 0.9 per cent for the North East.

 

However, he said that a “whole host of things”, including working through a COVID backlog of repairs and maintenance, fire safety and retrofitting costs and introducing new tenant satisfaction measures, mean much higher operating costs for providers.

 

Mr Petty said that all of these add up and suggest “rather more risk” going forward in his valuations, which brings difficult issues and the problem of having to deal with discount rates.

 

The indicative modelling showed that (on top of the assumed rise in management and maintenance costs), if discount rates increase by 50 bps alongside next year’s seven per cent rent cap, values would fall by about eight to 11 per cent next April, depending on the region.

 

At the lower end, Yorkshire and the Humber could experience a 7.7 per cent fall, and the South West and South East 11.4 per cent.

 

If net-zero costs of £25,000 per property were added to the rent cap, values could fall by a range of 19.6 per cent (in Greater London), up to 60.8 per cent (in the North East).

 

The modelling also considered that, altogether, if both discount rates rise by 50 bps and net-zero costs are factored in, indicative values could drop by 28.6 per cent at the lower end (in Greater London), and up to 69.5 per cent at the higher end (in the North East).

 

In this worst-case scenario, values could fall by 67.5 per cent in the North West, 66.6 per cent in Yorkshire and the Humber and 50.3 per cent in the Midlands.

 

Values could fall by 48.2 per cent in the South West, 37.3 in the South East, 31.6 per cent in prime London and 28.6 in Greater London.