Review of residential rents and service charge

Report: 15
Date: 21 February 2002
By: Commissioner

Summary

This report seeks to determine the level of rent increase for resident officers for 2002/03. It was to have been considered at the Estates Sub-Committee meeting of 31 January 2002. (Subsequently cancelled). The MPS Resource Allocation Committee and Management Board have also reviewed the paper and both have endorsed Option 6 for the residential quarters and option one for section houses.

A. Recommendations

Members views are sought on the appropriate increase to be applied for 2002/03:

1. for the rent on residential quarters (RQs); and,
2. for the service charge payable on section house bedspaces (SHs).

B. Supporting information

Introduction

1. Accommodation charges were introduced in September 1994 for post-Sheehy officers living in MPA residential accommodation. Rents are charged for residential quarters and a service charge for section house rooms.

2. The residential charges are reviewed annually against changes in other rent levels and any changes are introduced after giving residents a minimum notice of one month (effective on the 1st of any month). Annual increases have previously been aligned with movements in average housing association rent levels across relevant parts of London based on information produced on behalf of the Housing Corporation 18 months after the relevant year. As such rent levels are very competitive in comparison to private rent levels.

Residential quarters

3. At November 2001, the MPA held 775 properties for use as quarters and had granted 196 tenancies subject to the payment of a rent. The average rent paid is £307 per month.

4. The vacancy level for quarters at 30 November 2001 was 6.98% (compared with 15.97% 12 months earlier). The fall in the vacancy level is due to the resumption of selling surplus quarters and an increase in demand arising from the recruitment campaign.

5. The rent structure is linked with a property's Council tax band. Our standard accommodation comprises two or three bedroom flats in Council tax band D. A standard rent for quarters is determined by reference to the average housing association rent for comparable accommodation in those London Boroughs where the MPA has quarters. Rents for houses in Council tax band D are 20% higher than for similar sized accommodation in blocks of flats. This comparison produces a series of base rents for all types of quarters in Council Tax Band D.

6. The MPA base rents are applied to quarters in other Council tax bands in the same statutory ratio that defines all Council tax bands.

7. The creation of secure tenancies, and with it a 'right to buy', may result in the loss of up to 120 properties. This, together with the increase in recruits, will increase pressure on the remaining available properties.

Options

8. The current standard rents for 2 and 3 bedroom flats are £306.94 and £346.31 per month respectively. (A copy of the complete 2001 rent schedule is attached at Appendix 1, see Supporting material.)

Option one – no increase

9. Rents charged by the MPA are linked with housing association rents. Although a rent differential has arisen with private rented property, at present it is not so significant as to raise a concern that MPA rents are subsidised and therefore avoids the risk of a taxable benefit in kind arising. If, however, the value of MPA rents is not maintained the matter of subsidy might become a real issue.

Option two – increase rents in line with MPS budget provision for rental income: (average 6% increase)

10. When the 2002/03 budget for rents was prepared in July 2001 comparable data for the 2002 review was not available. The budget made provision for an average increase in MPA base rents of 6%, which equated to the forecast increase in Housing Association rents. Appendix 2 (see Supporting material) shows the full details of the associated complete rent schedule.

Option three – increase rents in line with latest information on housing association annual rent increases: (average 2.4% depending upon size of accommodation)

11. If the annual review were to be determined on the same basis as in previous years the standard rents for two, three and four bedroom flats would rise by 2.27%, 2.02% and 2.91% respectively. Appendix 3 (see Supporting material) shows the full details of the complete rent schedule.)

Option four – re-base MPS rents to actual housing association rents and update by (all items) Retail Price Index (RPI)

12. As the data on which the MPA's rents are based is 18 months old at he time of each annual review, actual rents include an element of forecast for 'future' changes in the comparable housing association rents. The forecast element is the average change between the previous two years. The time lag has produced a rent differential over a passage of time, with the result that the average housing association rent on 31 March 2000 (last date that data is available) was £76.74 per week whereas the MPA's rent was £75.11 per week.

13. The weekly average rent of £76.74 should rise to £78.63 using the RPI between April 2000 and October 2001, which gives an increase of 2.47%. This approach and timetable to the annual review will not eradicate a rent differential arising in the future, but it might be minimised as the forecast element is projected over a longer period (i.e. 18 months rather than 12 months).

Option five – re-base MPS rents to actual housing association rent and update by (All Items) RPI+(x)%

14. All former public sector utilities (e.g. electricity) are regulated and prices influenced by a formula known as RPI+(x)%. If the MPA were to adopt this principle the increase above RPI could be linked with factors such as salary increases for police residents or maintenance budget increases. The latter could be complemented by 'ring-fencing' that income element for exclusively maintaining the residential estate. This would assist the Service with responding to an increasing ground-swell of criticism from tenants about the limited maintenance resulting from successive budget cuts.

15. To illustrate the effect of this approach; if the increase above RPI is set at 7.5%, the revised rent would rise to £84.53. There would be a 'ring-fenced' element of £60k in a full year to support the maintenance of the 196 properties occupied by tenants who pay a rent. This will enable appropriate management to continue in order to minimise vacancies when funding may otherwise be unavailable.

Option six – re-base MPS rent to actual housing association rents and update by only the (Housing Rent element) RPI

16. There is no historical evidence that links a general rise in prices with movements in the market for residential rents. Therefore it would be more realistic if the principle in Option Four were to be applied by using only the residential rent element in the RPI instead of the full (all items) index.

17. On this basis, the housing association base rent £76.74, would rise to £80.00, an increase of 4.25%.

18. The MPS Resource Allocation Committee and Management Board, at their January 2002 meetings, endorsed this Option.

Option seven – re-base MPS rents to actual housing association rent and update by only the (Housing Rent element) RPI+(x)%

19. This option reworks the principles described in paragraphs 14 to 16.

20. On this basis the housing association base rent of £76.74 would rise to £86.18, although the 'ring-fenced' element remains unchanged at £60k.

Option eight - bring rents up to the level of those private sector rents that are referred to the Rent Officer for Housing Benefit.

21. The private rented sector is diverse and its rents reflect a range of factors that influence the market and the rental values that can be achieved. Within this broad category there are ordinary residential properties that are occupied by households not dissimilar to those occupying MPA quarters or housing association properties. Many of these tenants pay a private rent which has been referred to the local Rent Officer for determination for Housing Benefit purposes. This data could form the basis for the MPA's rent schedule. The latest availability date is 31 March 2000

22. If it were to be adopted and implemented in a single year this approach would necessitate a substantial increase just to bring it up to a new base rent. This increase alone would be, on average, 110%. The new base rent would still have to be updated by means of a forecast element in accordance with one of the principles set out in earlier options.

23. Alternatively the objective could be achieved over successive years with the gap being closed in, say, 5 stages. On this basis the new base rent for a typical 3 bedroom flat would be £168, a rise of £88. If only 20% of the total increase is implemented at this year's review the new average MPS rent would rise to £98.

Section houses

24. There were 720 bedspaces at 31 December 2001 of which 575 were occupied by post-Sheehy officers paying the service charge. The current service charge is £309.16 per month (Appendix 1, see Supporting material).

25. At present all Section Houses have toilet and shower facilities share on each floor. Modern hostel facilities available from Peabody Unite are currently charged at a weekly rent of £85 per room, albeit their location is largely restricted to cheaper parts of east London.

26. The vacancy level in section houses was 4.4% in November 2001. This will fall to zero very soon as demand continues to rise due to the enhanced recruitment campaign.

27. Traditionally the section house increase has been linked to the rise agreed for residential quarters. This may not be appropriate any longer, if the residential quarters are to reflect more closely private costs, unless this is accompanied by improved facilities (e.g. en-suite accommodation or similar).

28. The budget provision for section house service charge in 2002/03 shows a total receipt of £2.3m based on an annual increase of 6% (in line with budgeted rents) and a monthly average of 585 residents paying the service charge.

Options

Option one

28. To make no increase in the service charge.

Option two

29. To increase the service charge by the budget provision of 6% which will raise the monthly charge to £327.73 (see Appendix B)

Option three

30. To increase the service charge in line with Option 6 for Residential Quarters. This would raise the monthly charge to £310.14. (Appendix 4, see Supporting material)

31. The MPS Resource Allocation Committee and Management Board, at their January 2002 meetings, endorsed this Option.

Option four

32. To increase the service charge by an amount comparable with any other option chosen for Residential Quarters. Appendix 4 (see Supporting material) shows the resultant range of service charges.

Timing

33. All residents are entitled to one month's notice of any increase. If the review is to be implemented on 1 April 2002, the latest date for serving notice is 1 March 2002.

Consultation

34. The Federation has been consulted and their views will be made known at the meeting.

C. Financial implications

Residential quarters

1. Appendix 4 (see Supporting material) is a schedule of all noted options. It shows the revised new MPA standard rents together with the budgetary implications for a full year.

2. The proposed budget for 2002/03 makes provision for a rent increase of 6%. This would raise rental income by £43,000 per annum. There will be a corresponding increase or reduction depending upon any other option approved.

3. In addition demand for quarters is forecast to rise which could raise up to a further £120,000 in a full year, but abated by the loss of up to 120 properties under the 'right to buy' legislation, with a net loss of income of £40.5k per annum.

Section houses

4. Appendix 4 (see Supporting material) is a schedule of all noted options. It shows the revised MPA standard service charge together with the budgetary implications for a full year.

5. The proposed budget 2002/03 makes provision for an increase of 6%. It would raise income by £118k per annum and produce a monthly service charge of £327.73

6. In addition, demand for bedspaces is forecast to rise which could raise up to a further £432k.

D. Background papers

Research 45 - Source Guide to Local Rents – parts I & II cross tenure rents and social landlord rents; published by The Housing Corporation.

E. Contact details

Report author: Trevor Lawrence, Director of Property Services, MPS.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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