The government is consulting on reintroducing rent convergence. Here Helen Routledge, a director at Campbell Tickell, reviews what convergence is, the consultation and how it can be implemented.
For those that have been in housing as long as I have, you may remember rent convergence first time around in 2002. A target rent, now called formula rent, was set and was formula based, so that similar houses in the same area were charged the same rent. Registered Providers (RPs) had to have a plan to reach target rent, over 10 years, by restructuring rents. Effectively changing the rents annually by a maximum increase of RPI+0.5% +/-£2. The convergence factor of +£2 was removed in 2015 although not all properties had yet reached ‘formula rent’.
To get a sense of what this meant in practice, in 2023 when the annual rent increase was capped at 7%, CPI+1% (the previous formula for calculating the maximum annual rent increase) was 11.1%. So actual rents once again fell behind formula rent.
The government is now proposing on bringing back in rent convergence, to help give RPs the stability to invest in new and existing homes. They are proposing to allow RPs to increase rents by an additional £1 or £2 a week until they converge with formula rent.
Rent consultation outline
The consultation is asking:
1. At what level should social rent convergence be permitted – £1 a week or £2 a week?
2. How would the benefits for the supply and quality of social housing differ depending on whether £1 or £2 was permitted?
3. How would the impacts on households differ?
4. Should the starting date be implemented from 1 April 2026 or a later date, and what would be the impact of deferring this?
5. How long should the convergence regime be in place, and what would be the implication of different durations of convergence?
Financial modelling
To answer these questions, you will need to carry out some financial modelling and understand the impact on both your business plan and your tenants. The following factors will need to be considered.
a) Convergence can only be used to increase the rents up to formula rent: it cannot provide formula rent plus flexibility. This is not being consulted on, but is explicit in the government’s draft policy statement accompanying the consultation. If your RP applies the flexibility, you will not be increasing all rents to the same level – the increase to formula rent plus flexibility will still only be made on reletting a property.
b) What happens to landlords with monthly rents, or a 48-week rent year? One assumes the +£1 or +£2 will be applied pro-rata as the Draft Rent Policy Statement refers to a weekly rent.
c) What are the organisation’s priorities for using this additional income? What will be the impact of introducing these plans on your business plan and loan covenant compliance? Will you now be able to bring forward plans for new homes or investing in existing stock?
d) What is the potential impact on tenants. For some tenants – especially self-payers – convergence could affect affordability. It may also lead to an increase in rent arrears. Consider whether this is going to cause financial difficulties and whether you need to consider increasing your tenant hardship fund provision.
Prepare for rent increase
Organisations will also need to start thinking about the next year’s rent increase by:
1. Updating and testing rent increase systems and processes;
2. Revising rent policies and procedures;
3. Planning communication for how your organisation is going to consult with tenants on this change.
The convergence consultation closes on 27 August. This is earlier than the government’s other two current consultations, on Decent Homes 2 and on energy efficiency (both of which close on 10 September). This is a tight turnaround over the summer period so RPs will need to move quickly to submit their responses on time.
Enquiries
If you would like to discuss this or any issues raised, please contact Helen Routledge: helen.routledge@campbelltickell.com.
Find out more about our housing finance consultancy services.
