Stock Transfer, is it still an option for Councils?

This article, which builds upon the insights shared in my previous piece on The History of Housing Finance post-2012, is designed to inform housing colleagues (Councils) why a stock transfer, for most, is no longer an option.

How is Council Stock Valued

Understanding the intricacies of stock valuation in a transfer is paramount. If a transfer is feasible, the receiving landlord does not pay the market value for the housing stock. Instead, they pay the properties' Tenanted Market Value (TMV). This calculation is based on the projected rental income from the housing stock over 30 years minus the expected costs of managing, maintaining, and investing in the properties over the same period. A percentage then discounts this figure to determine the value of those cashflows at the date of transfer. The discount rate is based on the typical borrowing rate that would be required, plus a risk margin. This calculation results in a significantly lower value than a market value due to the limited use of social housing, which is assumed to be social housing in perpetuity with all funds reinvested in the housing and not sold for commercial purposes.

The impact of the self-financing settlement

As my previous article on housing finance history highlighted, the loan calculations for local authorities to ‘buy’ their stock included provisions for a long-term rent settlement that didn’t materialise. This unforeseen circumstance has resulted in actual debt levels for local authorities, especially those who have expanded their housing units, being higher than anticipated. This unanticipated financial burden presents significant challenges that require immediate attention.

Furthermore, some Councils have prioritised the development of stock and social value over a positive Net Present Value (NPV).? While this decision reflects their noble intent, it has led to additional borrowing requirements as the rent did not cover the ongoing maintenance and investment costs. This situation serves as a cautionary tale, highlighting the potential financial implications of such a strategy and the importance of a balanced approach.

?Previous Reasons for Stock Transfer

Pre-Self Financing (up to 2012)

??HRA subsidy payments may have been onerous, and LSVT gave a better option (every Council had to do an options appraisal to decide whether to retain stock, set up an ALMO, or transfer stock).

The stock condition was well below Decent Homes, and transfer could deliver Decent Homes and beyond, where the HRA could not at the time within restrictions of Major Repairs Allowance (part of HRA subsidy) and borrowing restrictions (HCFR).

HRA’s hardly ever did development.

Some Councils were in debt, so that LSVT may have given a capital receipt.

Overhanging debt was available. This was the Government policy of paying off the difference in the Council's debt and the stock's purchase price, together with the premia on early repayment of debt.

?Gap funding for negative valuations was available. The value of the stock not only did not cover the debt but required the Government to give the new Landlord a grant contribution to afford the stock.

?Set-up costs for the Council and the new Landlord could be funded out of the purchase price.

?VAT shelter allowed the reclaim of some VAT on the costs of bringing the stock to Decent Homes. The Council and the new Landlord could share the VAT value reclaimed.

Post-2012?

Up to 2018, the HRA debt cap imposed in 2012 limited debt, so if the stock needed more investment, which required borrowing, the HRA could not do it.? Via an LSVT, the new landlord could borrow, invest, and develop. 2018, the debt cap was lifted, and the main reason for Stock transfer was lost. As long as debt is affordable, there is no borrowing restriction for capital purposes.

?Self-financing 'recalibrated' debt in 2012 using the same calculation as a Tenanted Market Value to calculate the amount of debt a Council could afford. The new Landlord used the Tenanted Market Value calculation to determine how much it could afford to pay for the properties. This removed the likelihood of a capital receipt as all Councils now had debt. The Self-Financing calculations did not include VAT costs (as Councils can reclaim). Therefore, the valuation and, thus, debt taken on were higher than the Tenanted Market Value would be. Consequently, it was unlikely to have any valuation that didn’t require Government support for overhanging debt.

? The self-financing valuation was based on rents increasing RPI + 0.5% + ￡2 and convergence to 2015, convergence to target stopped, and CPI + 1% introduced.? In ?2016 -1% on rent for four years was introduced.? In ?2020, CPI + 1% was reintroduced but was limited to 5 years up to March 2025. However, in 2023/24, the limit on rent increases was 7% compared to inflation of 11.1%. Welfare reform and the introduction of Universal Credit affected tenants’ ability to pay, which led to increased voids and bad debts. ?These are all a hit on the assumptions used to calculate debt taken on but not compensated for post-2012.

?The calculation of expected costs in 2012 did not include the measures introduced since, e.g., net carbon zero, fire safety, the cost of increased regulation, ?Consumer Standards, ?and responses in line with Awaab’s Law. These add cost and would if known then, have reduced the debt that could be afforded.

?There was no ?Government ?Budget for overhanging debt after 2015. ?The final LSVT happened in 2015 (Gloucester, Salford and Durham). The business case provided social benefits above what the HRA could deliver, resulting in the agreement of the last overhanging debt payment from the Government. ?The social benefits included development, ?less homelessness, local jobs, better housing, and improved thermal quality.? Fewer costs for tenants on fuel lead to more money to pay rent, and the health benefits of better-insulated homes lead to lower NHS costs.

?Debt premia costs are usually high as they are affected by global economic factors, not UK-based rates. If the debt is not paid down on the stock transfer, it would need to be serviced (but the Council would not have income from the stock), and interest in the cash receipt received would not cover the interest on the debt. Debt repaid early incurs a premia payment.

?Receipts (if any) from the stock sale would be capital, not revenue.

?TUPE would apply to housing staff, but the Council would be left with the share of corporate and democratic costs currently recharged to the HRA and the cost of any other staff /services that did not transfer.

?The answer is, for the majority, no.

For most councils, stock transfer is not the answer to a business plan heading toward S114 territory.

?Given the challenges outlined, it is clear that a review of the 2012 calculations or the introduction of alternative funding solutions is necessary. While I don't have the answer, the next Government might provide some solutions.

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Deborah Fenton

Director of Housing

BMSDC

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Thank you to Angie Marshall-Smith from Abovo-Consult for providing this information.? Angie is our retained Business Plan Consultant, providing dynamic business planning for our HRA Business Plans.

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