Review of residential rents and service charge

Report: 10
Date: 17 February 2005
By: Commissioner

Summary

To determine the level of rent increase for 2005/06 that is to be paid by officers who live in MPA residential accommodation.

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

A. Recommendation

That

1. Members views are sought on the appropriate increase to be applied in 2004/05 for:
   • the rent on residential quarters (RQs);
     (Property Services recommends all rents on residential quarters should be increased by an average of 3% in line with the budget provision).
   • the service charge payable on section house bedspaces (SHs); and,
     (Property Services recommends the service charge on section house rooms should be increased by 3% in accordance with the review element in the budget).
   • to consider the principle of closing a section house to reduce the budget shortfall that has arisen with regards to the income from the section house estate.
     Property Services recommends that it is authorised to review all section houses and to report back with a recommendation to close a section house to ensure that (non-capital) expenditure is fully covered by the income generated from residents (Paragraph 17).

B. Supporting information

Introduction

1. Attached at Appendix 1 is a copy of the current (April 2004) 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 the review of residential rents in April 2004, structural alterations were made to the associated rent table to address anomalies that had emerged in respect of those rents that were being charged on residential quarters, which had low council tax bands.

4. Consequently, the lower quartile of the MPA’s rents were harmonised with those prevalent in the social housing sector through the introduction of a standardised minimum rent as part of implementing a broader rent increase.

5. This year’s review of residential rents builds upon the restructured basis that was established last year.

6. At November 2004, the MPA held 653 properties for use as quarters. A total of 279 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 £391.00 per month for a three bedroom unit.

7. During the late summer of 2004, the median rent and the standard rent converged. The latter is the base rent on which the rent table for all properties is structured. In previous years the lower median rent used to reflect the greater popularity of smaller two bedroom units, but the convergence reflects the lack of availability of these smaller units with new applicants having to take tenancies on larger accommodation than they would probably choose.

Options

8. Option One: Increase rents in line with the budget provision (average 3.0%) - When the 2005/06 budget for rents was reviewed in summer 2004 comparable data for the 2005 review was not available. The budget made provision for a forecast increase in average housing association rents of 3%. This increase was used to produce a budget provision for 2005/06 of £1.3m. The current median rent would rise to £403.00 per month. Appendix 2 shows the detailed effect on the MPA rent schedule.

9. Option Two: Increase rents in line with the Retail Price Index (average 2.8%) - If rents were increased to reflect subsequent changes up to, say, November 2004, the current monthly median rent would rise to £402.00. Appendix 3 shows the detailed effect on the MPA rent schedule.

10. Option Three: Increase rents in line with latest information on housing association annual rent increases: (average 2.56% - depending upon size of accommodation) - The standard rents for two, three and four bedroom units would rise by 3.02%, 2.41% & 2.25% respectively. The monthly median rent would rise to £400.50. Appendix 4 shows the detailed effect on the MPA rent schedule.

Section Houses

11. In November 2004 there were 547 permanent residents, of whom 508 paid the service charge, having joined the MPS since 1994. The current service charge is £348.00 per month (see Appendix 1).

12. 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.

13. The MPA section house estate is outmoded and it is believed that this is a contributory factor to the lower level of demand that has been experienced since the spring of 2004.

14. Modern hostel facilities are available from several providers including Keystart Housing Unit, Sutherland Housing and Thames Valley Housing. Their typical monthly charge ranges from £360 to £425. Although this range exceeds the current section house service charge, the charges reflect a higher standard of provision. Several of the hostels are located in inner London boroughs.

Internal Audit Report and recommendation

15. In 2003 MPA Internal Audit conducted an audit on MPS fees and charges. The associated report entitled “Resources Directorate Fees and 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.

16. A review of the MPA’s (non-capital) costs, such as maintenance, energy and dedicated staffing demonstrates that the recommended charge will cover the relevant costs, based on an occupancy level of 84% of the budgeted total number of rent-paying officers. However, the revised occupancy level is forecast to be 73% (i.e. 510 rent paying residents) the income stream will total £2.2m, which will be approximately £330k short of covering the non-capital costs.

Correction measures to cost deficit and budget shortfall

17. The actual forecast deficit between income and costs in 2005/06 could be addressed by reducing the MPA’s costs by closing one of the section houses. This action is estimated to deliver cost savings of approximately £340k in a full year and should ensure that costs are fully covered by the reduced income stream that has arisen from the forecast for lower demand.

18. In addition to the above deficit between income and costs, lower demand has also produced an actual 2005/06 budget shortfall of £466k. The above corrective measure will not address this shortfall. The service charge would have to be increased to £488.75 per month, a rise of 40%, to bring the income level back into line with the original budget.

19. The following table summarises the position.

20. Summary of Options:

Option One: To increase the service charge by the budget provision (overall 3%) - This would raise the monthly charge to £358.50 per room (see Appendix 2).

Option Two: To increase the service charge in line with Option 2 for residential quarters (overall 2.8%) - This would raise the monthly charge to £358.00 per room (see Appendix 3).

Option Three: To increase the service charge in line with Option 3 for residential quarters (overall 2.56%) - This would raise the monthly charge to £357.00 per room (see Appendix 4).

Option Four: To increase the service charge as a corrective measure to address the budget shortfall (overall 40%) -This would raise the monthly charge to £488 per room (see Appendix 5).

Timing

21. All residents are entitled to one month’s notice of any increase. If the review is to be implemented on 1 April 2005, the latest date for serving notice is 1 March 2005.

Consultation

22. The following have been consulted in respect of this review:

• MPS, Financial Services
• MPS, Human Resources Directorate
• The Metropolitan Police Federation

C. Equality and diversity implications

1. 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 2005/06 made provision for a rent increase of 3%. This would raise rental income by £54k to a total of £1.3m 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 2005/06 made provision for an increase of 3%. At the time it was forecasted that this would raise income to £2.9m per annum. However, the lower level of recruitment was exacerbated by an unexpected steeper deterioration in demand that became evident from late August onwards. Total annual rents from Section Houses are now forecast to be £2.1m for the year ending March 2005. The application of the original budget increase of 3% to a reduced occupation baseline will produce an income stream of £2.2m in 2005/06.

4. The closure of a section house is forecast to produce cost savings of approximately £340k. This will bring costs into balance with the forecast income of £2.2m. In view of the lower demand the service charge would have to be increased by 40% to produce an income of £2.9m which is the budget figure established 12 months ago.

5. A summary of all options is at Appendix 6 together with the budgetary implications for a full year based on current demand levels.

E. Legal implications

The MPA has a contractual right to review rents under its assured shorthold tenancies. There are no adverse legal implications associated with the proposed rent review.

F. Background papers

• “Research 66 - Source Guide to Local Rents: Parts I & II Cross Tenure Rents and Social Landlord Rents”; published by The Housing Corporation.
• MPA Internal Audit report (ref: 98/202/23/S), “Resources Directorate Fees and Charges”.

G. Contact details

Report author: Alan Croney, Director of Property Services

For more information contact:

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

Appendix 1: Metropolitan Police Service residential estate

Residential quarters rents: 1 April 2004

Section House service charge: 1 April 2004

Appendix 6: Metropolitan Police Service residential estate - summary of options to review rents and service charge

Section House rooms

Residential quarters

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