Managing the impact of rising capital expenditure costs on social housing valuations

Increase in costs

Our analysis of regulatory returns and statements by Registered Providers since 2020 shows their average annual maintenance and repairs costs per home have increased from £1,000-£1,500 to £1,500-£2,000 in most regions. This is a rise of between 30% and just over 50%, depending on region (see charts 1 and 2, below).

London and the South East have seen even greater increases, largely due to their higher labour costs. These regions’ annual maintenance and repairs costs now average around £2,400 per property, which equates to an almost 70% rise in the South East.

However, while costs have rocketed, the rents housing associations and local authorities can charge are of course regulated and restricted to ensure they remain affordable. Therefore, landlords’ income is struggling to keep pace and Existing Use Value – Social Housing (EUV-SH) cashflows are being hit with a deficit. Based on the Regulator of Social Housing’s Rent Standard, the maximum rent increases from 2020-2024 were 29.8%, meaning the rate of rise in costs since 2020 outweighs the rise in rents over the same period.

As a result of this disparity, it is expected that the Net Present Value (NPV) – a measure which determines value over time – of many social homes will be limited in growth. This situation puts the key valuation metric, EUV-SH, under pressure. This can, in turn, restrict housing providers’ financial capacity as they may need to increase the number of homes they provide as loan security for lenders.

Rental analysis

Although these challenges are significant, when undertaking loan security valuations, there are steps which can be taken to help address these issues while providing a level of reassurance to lenders.

A ‘maximum affordable rent’ for socially rented properties can be adopted in EUV-SH valuations for loan security purposes. This sees valuers carefully analyse and model a higher potential rent level for each property based on a number of inputs. These include location, property type, market rents, the Statistical Data Return provided by all housing providers to the regulator, and importantly, estimated local household incomes. In application this assumes that current rents will increase gradually over a period of time to the maximum affordable level as properties are relet. Thereafter, they continue at Consumer Price Index (CPI) plus 1%. Adopting this approach results in higher EUV-SH values where appropriate.

It is important to note that actual rents set by Registered Providers would not increase each year by more than allowed by the Rent Standard – CPI growth over 12 months plus up to 1%. This is only theoretically allowed in a loan default scenario and therefore is only applicable to loan security valuations. The assumption is that, in the event of a competitive sale of such homes, the purchaser would still let the homes at an affordable, sub-market rent. However, they are no longer bound by the rent standard and they could plausibly set a new, ‘maximum affordable rent’.

We believe that such a purchaser is likely to set rents for new tenants at a level they consider to be the maximum affordable for local people in low-paid employment and increase existing rents to a sustainable and affordable level over a reasonable period. It is still very much a sub-market rent product.

Affordable rents remain key

This measure mitigates the cost increases in many cashflows, but each valuation should be considered on a case-by-case basis. It is vitally important to the sector that rents do still remain affordable and therefore, even with valuers adopting this measure, in some instances this will not always fully bridge the deficit in these loan valuations, albeit to some degree it will.

Of course, in these ongoing financially challenging times, it is vital that landlords seek to carefully manage their costs and income to maximise their balance sheet capacity. Our valuation approach demonstrates how valuers can work with the housing sector and lenders to help it deliver on business plans and ensure the provision of much-needed, quality, affordable homes for those most in need.

Further information

Contact James Crawford