Review of residential rents and service charge

Report: 14
Date: 19 February 2004
By: Commissioner

Summary

The Committee is asked to consider the introduction of a standardised minimum rent and to determine the level of rent increase for resident officers for 2004/05.

The Police Federation has been consulted in the process of preparing this report.

The Resource Allocation Committee considered the matter on 27 January 2004 and endorsed Option 3 in respect of the rent on residential quarters (Section B, paragraph 15) and Option 3 in respect of the service charge for Section House bedspaces (Section B paragraph 3).

A. Recommendation

Members’ are asked to:

1. consider the introduction of a standardised minimum rent on residential quarters which would harmonise the lower quartile of MPA rents with those prevalent in the social housing sector.
2. endorse the decision by the MPS Resource Allocation Committee that option 3 in each case be the appropriate increase to be applied in 2004/05 for:
   1. the rent on residential quarters (RQs); and,
   2. the service charge payable on section house bedspaces (SHs).

B. Supporting information

Introduction

1. Attached at Appendix 1 is a copy of the current (April 2003) rent and service charge schedule.

2. When the current rent structure was established in 1994 the rents on MPA houses and flats were related to median housing association rent levels across London and then applied in relation to each property’s Council Tax banding.

Residential Quarters

3. At November 2003, the MPA held 686 properties for use as quarters. A total of 285 tenancies have been granted that are subject to the payment of a rent. The remaining tenancies are to officers who have a right under Police Regulations to free accommodation, having joined the MPS prior to 1994. The median rent that is paid is £333.49 per month for a 2 bedroom flat. The MPA standard rent is £376.26 per month, which equates to a 3 bedroom flat.

Effect of Right to Buy

4. Most of the impact from the Right to Buy disposals have worked through the system. Although some tenants have not yet completed, the overall impact on the rent roll in 2004/05 will be minimal. When budgets were prepared they reflected the current situation.

Rents on properties at or below Council Tax Band C

5. Anomalies have come to light in that some rents are clearly too low even when measured against social housing rent levels. A typical example would be the rent on a two bedroom flat in Victoria that is in Council Tax Band C.

6. The average social rent for 2 bedroom flats in Westminster during 2001/02 (latest year for which data is available) was £70.72 net of service charge. This compares with a MPA weekly rent of £62.49 for the same year. If rent on the same MPA property were based on a Band D level, the weekly rent would have been £70.83.

7. A examination of the quality of accommodation compares well as the MPA properties are double-glazed and have central heating, both of which reflect current standards for social housing.

8. Social housing rents do not maintain a link with Council Tax Bands. The MPA’s rent structure in 1994 was based on average social rents, which were applied according to each property’s Council Tax Band. Clearly, some of the MPA’s rents have fallen out of step with the comparable social rents charged on properties in the lower Council Tax Bands.

9. Consequently, a review has been made of the anomalies (at 2001/02 levels) and it is proposed to introduce a standard minimum rent on MPA properties. This will mean re-basing certain MPA rents to reflect the amount charged by housing associations on identical sized properties in London. In most cases this means charging MPA rents in Council Tax Bands A-C at a level equivalent to Band D, which is the MPA average.

10. There are 15 quarters in Bands A and B, of which 10 are currently occupied by rent-paying tenants. In view of the rent differential arising from this proposal the change could be implemented in phases.

11. Current rent levels for these 3 bedroom quarters range from £261 to £293 per month. These rents are considerably below average social rents in the same locations. Based on a sample of 75% of published social rents the range is from £355 to £433 per month. The Housing Corporation’s minimum target rent is £380 per month.

12. All the rent review options in this report are based on the premise of a standardised minimum rent. The appendices that illustrate each option reflect the impact of the review and the introduction of a standardised minimum rent.

Options

13. Option one: Increase rents in line with the budget provision (average 2.0%) - when the 2004/05 budget for rents was prepared in July 2003 comparable data for the 2004 review was not available. The budget made provision for a forecast increase in average housing association rents of 2%. This increase was used to produce a budget provision for 2004/05 of £1.2m. The current median rent would rise to £340.16 per month. Appendix 2 shows the detailed effect on the MPA rent schedule.

14. Option two: Increase rents in line with the Retail Price Index (average 2.5%) - if rents were increased to reflect subsequent changes up to, say, November 2003, the current monthly median rent would rise to £341.83. Appendix 3 shows the detailed effect on the MPA rent schedule.

15. Option three: Increase rents in line with latest information on housing association annual rent increases: (average 3.5% - depending upon size of accommodation) - the standard rents for two, three and four bedroom units would rise by an average of 3.12%, 3.87% & 3.53% respectively. The monthly median rent would rise to £343.89. Appendix 4 shows the detailed effect on the MPA rent schedule.

16. Option four: Increase rents to reflect a rate of return on the opportunity cost of the capital invested in the residential estate (average 10.6% - depending upon size of accommodation) - the capital value of the houses and flats that are used as residential quarters is £191m. If a 2% return on capital were to be realised the standard rents for two, three and four bedrooms units would rise by an average of 11.2%, 11.9% & 8.9% respectively. The monthly median rent would be £371.13. Appendix 5 shows the detailed effect on the MPA rent schedule.

Section houses

17. In November 2003 there were 661 permanent residents of whom 620 paid the service charge, having joined the MPS since 1994. The current service charge is £335.93 per month (see Appendix 1).

18. Traditionally the increase for section house service charge has been linked to the rise implemented for residential quarters, which until 2001 had reflected changes in average housing association rents.

19. The MPA section house estate is outmoded. Modern hostel facilities are available from Keystart Housing, for example, which currently charges an average weekly rent of £86 per room. Although this is more than the current section house service charge, it reflects a higher standard of provision. Keystart hostels are located in several inner London boroughs.

20. At November 2003 the vacancy level in section houses was 4% (net of reservations for the following month). This has kept pace with the larger number of recruits leaving Peel Centre.

21. Despite concerns that demand for accommodation in the section house estate would exceed capacity in 2003, the number of vacations has exceeded expectations as residents have left before the end of their tenancies.

22. In addition a recruitment target in 2004/05, aimed at matching natural wastage rather than providing a real increase in the number of police officers, should also assist with managing demand for section house accommodation in the short-term.

23. During the past 12 months there has been a small increase in the number of bedrooms (11 in total) across the estate by re-utilising former bedrooms that had been used for other purposes (e.g. ironing rooms). This together with the churn factor has enabled all eligible applicants to be allocated a section house room during 2003. During the last quarter the surplus number of rooms has typically been in the region of 30.

24. This scenario is finely balanced and capacity/demand is constantly being monitored. The current level of churn is expected to remain constant into the beginning of 2004.

Internal Audit report and recommendation

25. In 2003 an internal audit was conducted into MPS fees and charges. The associated report entitled “Resources Directorate Fees & Charges” included a review of the original model that established the section house service charge in 1994. One of the report’s recommendations proposed that an annual review of costs should be undertaken to ensure the service charge covers all appropriate cost factors.

26. Half of all section houses share a site with an operational police station. Certain costs, such as the canteen, maintenance and energy, cannot be isolated from the total costs for the site. However, an exercise based on the free-standing section houses show that the day to day running costs in 2002/03 amounted to £1.38m. When projected across all section houses these costs would amount to £2.45m. The cost of dedicated staff in Property Services, amounting to £151k, must be added to achieve the package of costs that reflects the 1994 charging model. To recover all these costs a service charge of £290.68 would have to be set for each room.

27. The section house service charge in 2002/03 was £323.00 per month. This charge exceeded the running costs. It was subsequently increased by 4% in April 2003, when annual inflation was 3.1%, and it is expected that when the 2003/04 costs are known the “surplus” will have been maintained. No option therefore carries any specific preference over any others in terms of addressing the audit’s recommendation.

Summary of options

28. Option one: to increase the service charge by the budget provision (overall 2%) - this would raise the monthly charge to £342.64 per room (see Appendix 2).

29. Option two: to increase the service charge in line with Option 2 for residential quarters (overall 2.5%) - this would raise the monthly charge to £344.32 per room (see Appendix 3).

30. Option three: to increase the service charge in line with Option 3 for residential quarters (overall 3.5%) - this would raise the monthly charge to £347.71 per room (see Appendix 4).

31. Option four: to increase the service charge to recover running costs and the opportunity cost of capital (overall 11.9%) - on this basis the service charge would cover the following cost elements:

1. the annual day to day running costs at £2,605k; and,
2. a 2% rate of return (identical to Option 4 for residential quarters) on the £38.3m capital that is invested in the section house estate,

and this would raise the monthly charge to £376.20 per room (see Appendix 5).

Timing

32. All residents are entitled to one month’s notice of any increase. If the review is to be implemented on 1 April 2004, the latest date for serving notice is 1 March 2004.

Consultation

33. The following is a summary of the consultations that have been made in connection with the review.

• MPS, Financial Services
• MPS, HR Directorate
• The Metropolitan Police Federation

C. Equality and diversity implications

The MPS policies on equal opportunities and diversity will apply to the content of the review and are applied to current policies and practices used in managing the residential estate.

D. Financial implications

Residential quarters:

1. The budget for 2004/05 made provision for a rent increase of 2%. This would raise rental income by £143k to a total of £1.2m per annum. There will be a corresponding change to these figures depending upon any other option that is approved.

2. A summary of all options is at Appendix 6. It shows the range of revised new MPA standard rents together with the budgetary implications for a full year.

Section houses:

3. The budget for 2004/05 made provision for an increase of 2%. It would raise income by £49,000 to a total of £2.5m per annum. There will be a corresponding change to these figures depending upon any other option that is approved.

4. A summary of all options is at Appendix 6. It shows the range of revised MPA standard service charge together with the budgetary implications in a full year. When the budget was prepared it was based on a total provision of 736 bedrooms. As there has been a small increase in the number of bedrooms there will be a consequent improvement in the forecast income. In a full year this could amount to £44,000 at the current level of service charge. The improvement to the income stream will be incorporated into the next budget round.

E. Background papers

• Finance Committee 13 February 2003 (agenda item 16)

F. Contact details

Report author: Alan Croney, Director of Property Services, MPS.

For more information contact:

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

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