housing revenue account (hra) business plan - corby revenue account (hra... · housing revenue...

Open Decision Item

122 1

One Corby Policy Committee 16th December 2014

Housing Revenue Account (HRA) Business Plan

SYNOPSIS BOX For Members to agree the financial update on the HRA business plan for 2014. This plan has been updated from the original 2013 financial plan and provides a 30 year projection of the capital investment required in our housing stock.

1. Relevant Background Details The Housing Revenue Account (HRA) financial business plan is a 30 year asset management projection, originally agreed in April, 2013. The attached updated plan for October, 2014, outlines the current financial position highlighting any changes and opportunities from the previously agreed plan.

In developing this year’s updated plan two member’s seminars were held in the Council Chamber on Thursday, 18th September, 2014, where the consultants from the Chartered Institute of Housing presented the latest Asset Management information. The plan provides a 30 year infrastructure outlook and builds upon the Medium Term Financial Strategy presented to members in November.

2. Report The plan details the impact of the recently completed stock condition survey and shows that we will need to invest approximately £150m over the next 30 years. If the investment is profiled on a combination of age and condition criteria then the overall cost is slightly reduced and some expenditure can be deferred to later rather than earlier years.

Even after allowing for this, there may well be a requirement to borrow to support the investment at some point in the future, unless revenue account savings can be found or rents are increased over and above the 2.5% currently assumed.

3. Options to be considered (if any) The plan identifies 3 options for meeting the stock capital investment requirements as follows:

1. Age – replacement of items when their predicted lifecycle expires. The cost would be £153.3m, representing £32.9k per unit.

2. Condition – replacement of items in the year the surveyor assesses their condition will warrant it. The cost would be £155.6million, representing £33.4k per unit

3. Age & Condition – replacement of items only when BOTH the condition and age criteria are met. This cost would be £148million, representing £31.8k per unit.

As the third option represents the cheapest approach and allows more expenditure to be deferred to later years thereby allowing greater financial flexibility, this is the preferred option of officers.

In order to fund future year’s investment without the need to borrow, rents could be increased over the 2.5% currently assumed. Alternatively members may want to consider introducing re-let new tenancies on to formula rent rather than the outgoing rent.

2

4. Issues to be taken into account:- Policy Priorities Housing and investment in stock is a key priority for the Council. The plan demonstrates that with careful management the stock can be maintained over the next 30 years.

Legal There is a statutory requirement to maintain homes to a decent standard.

Financial These are largely covered within the report. So long as rents are increased, the future programme is affordable.

Risks The main risks to the long term viability of the plan are Welfare Reform, Rental income levels, Right to Buys and Void levels. These will be monitored on an annual basis through updating the Medium term Financial Strategy and through separate reports as and when required.

Best Value, Community Safety, Human Rights, Equalities, Sustainability There are no issues in relation to these arising directly from this report.

5. Conclusion The HRA business plan demonstrates that approximately £150m of investment is required over the next 30 years. This is achievable so long as rents continue to be increased. If they are not then either offsetting savings will need to be found with the HRA or the investment in the stock will need to be reduced.

6. Recommendations i) Note the financial information contained within the business plan; ii) Agree to develop the housing asset management plan on an age and condition basis

over the 30 year plan; and iii) Agree that a capital plan is developed for the coming 2015/16 year and in future

years in line with the business plan.

Background Papers 2013 HRA Business Plan

External Consultations Chartered Institute of Housing

List of Appendices Appendix 1 - HRA Business Plan Financial Projections Report October

Wards All wards

Officer to Contact Adrian Sibley, Director of Corporate Services, Ext. 4125

Appendix 1

CIH Consultancy www.consultcih.co.uk Octavia House, EMail [email protected] Westwood Way, Telephone 0844 561 178 Coventry, CV4 8JP Registered in England and Wales: 01754648

Corby Borough Council

HRA Business Plan Financial Projections

October 2014 Review 1. Introduction 1.1 CIH consultancy have been commissioned to update the Council’s HRA

Business Plan and report on the latest projections arising and how the position has changed from the last review of the model.

1.2 This review, specifically for officers and members makes reference to any

significant changes to the previous version of the business plan model (March 2013).

1.3 This review of this model incorporates the original budgets for this financial

year, which will differ from last review where budgets used where based on the Council’s medium term financial plan as it was then. The plan starts from 2014.15 with actual opening balances for 2014.15 for the HRA and Major Repairs Reserve and the ‘1-4-1’ right to buy re-investment reserve. The changes are noted below:

March 2013

HRA BP Projected Balances

Actual Opening Balances 2014

Variance Notes

HRA £1.375m £2.206m £0.831m 1 MRR £0.0m £0.0m £0.0m 1-4-1 Reserve £0.0m £0.714m £0.714m 2 Debt Repay Reserve £0.500m £0.400m -£0.100m 3

1.4 Note 1: There was is a variance from what was projected when compared

to the actual out-turns in terms of net expenditure within the HRA. This reflects that the level of investment planned for 2012.13 and 2013.14 did not quite materialise thus reducing revenue contributions plus under spends on HRA budgets over these two years.

1.5 Note 2: The ‘1-4-1’ reserve is the net balance from right to but sales which

is required to be re-invested in providing additional affordable housing –

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Appendix 1


2.3 As part of the business planning process we have accurately forecast

forward each individual property’s rent to estimate future increases and assess the impact of the £2 cap above RPI plus 0.5% in the past. However the recently produced social rent policy from April 2015 now replaces RPI with CPI and the real increase of 0.5% is replaced by 1%. Furthermore the final guidance confirmed the withdrawal of rent convergence, therefore suggesting that the rent levels set in April 2014 will form the basis for future inflationary increases of CPI plus 1%.

2.4 For the April 2014 rent increase we had a projected a 5.3% rent increase as

part of the convergence policy (with an RPI of 2.5%). The actual RPI materialised at 2.7% would have resulted in a higher rent increase. Members decided upon a 3% rent increase, based on concerns over affordability. This resulted in an average rent of £75.66 and an average formula (or target) rent of £79.16. The March 2013 model assumed a rent of £77.24 which represents a lower starting position for the latest version of this plan.

2.5 The actual CPI was published earlier this month at 1.2% and RPI of

2.3%and this is included in our modelling as a basis for 2015.16. In September we presented this update to the business plan to member with an assumed CPI of 1.5% based on the August results. Therefore there is a marginally worse position for these outputs based on an assumed lower increase.

2.6 Void levels are estimated to remain at 1% throughout the plan as a prudent

assumption based on a relatively high demand for the stock and quick turnaround times.

Welfare Reform

2.7 The total impact of welfare reform to the plan and how to profile it into future

projections will be progressed with officers but for the time being we have kept the provisions for bad debts as before, which remain at 1%. This could present a risk to the plan if arrears rise as a result of welfare reform.

Treasury Management 2.8 The loan portfolio remains unchanged and consists of 4 individual which are

scheduled to be repaid by year 28 of the plan. 2.9 The interest on these loans (which vary from 2.4% to 3.5% depending on

duration) will be charged directly to the HRA, and being fixed rates the forecast interest projections will be accurate.

2.10 The graph below shows the financing position of the HRA:


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Appendix 1


New Build 3.7 There are four main schemes included with the plan’s projections with the

additional of some tail end costs for other sites:

• Canada Square 18 units at £1.809m • Finland Way 26 units at £1.426m • Existing Garage Sites 35 units at £3.959m • HCA Bid 50 units at £6.5m (estimated)

3.8 The HCA bid scheme has been approved with a total grant of £1.5million

(£30k per unit) however we have had to split this scheme for reason explained below that mean, according to our assumptions, that only 15 properties can be funded using the HCA grant at a reduced total of £0.445million.

Right to Buy Receipts

3.9 With the reinvigoration of the right to buy policy Corby has seen sales in

2012.13 to 2014.15 exceed those witnessed over the prior three years (and those assumed within the self-financing settlement).

3.10 The result of the increased volume of sales affects the Plan not only with

loss of income but also introduces the ability to retain the balance of the receipts (after some initial deductions).

3.11 After all eligible deductions the Council currently has £1.169million of net

receipts termed as “1-4-1” for the direct contribution for new build as at 30 June 2014. This will increase if sales continue at their current level and we estimate that this balance could reach £2.045million even with reducing the level of sales in 2015.16 and 2016.17. Regulations state that this can be used for up to 30% of new build within 36 months of the receipt arising. These receipts can be reclaimed by DCLG if they are not utilised within 36 months with compounded interest.

3.12 We have therefore allocated these receipts to schemes where there is no

HCA grant funding in the first instance. The reason for this is that the Government see it has double subsidy if both ‘1-4-1’ receipts and HCA grant are used for the same property. Hence this is the reason why we have assumed to split the original 50 units bid to the HCA in order to maximise the use of these projected receipts. We urge Corby to monitor sales over quarters 2 and 3 of 2014.15 to project forward the receipts if this is the correct course of action. The reason we have prioritised ‘1-4-1’ receipts is that the level of subsidy is £39,000 against the £30,000 from the HCA, compounded interest is payable on unused receipts and finally there are no stipulations in terms of rents and other conditions.


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Appendix 1


8. Sensitivities 8.1 It is normal practice to run some sensitivities on the plan to test various

scenarios that could have a detrimental effect on the forecasts. They are as follows:

Sensitivity HRA Bal

30 yrs £m HRA Debt 30 yrs £m

Impact £m

Capital Shortfall £m

BASE (Age & Condition) 6.5 43.2 Re-lets (3% to Formula) 10.1 27.5 19.3 Bad Debts +1% 4.5 55.1 11.9 Interest +1% (new borrowing) 5.2 46.5 4.6 Right to Buys (45-5Yrs +145) 1.5 78.3 38.1 CPI differential to RPI -1% (-0.6%) 1.5 81.4 43.2 26.8

8.2 This table shows that the plan is incredibly sensitive in terms of changes in assumptions. The key risks from above centre around the impact from high levels of right to buy sales but more importantly if the gap between inflation indices on rents and operational costs remain at 1% rather than the 0.6% there are real viability issues in terms of maintaining the stock – even on the age and condition scenario basis.

9. Summary 9.1 This review of the HRA Business Plan demonstrates that it remains viable

over the 30 years though not with the ability to repay debt under two investment scenarios.

9.2 It is important to note that it is only due to the data cleansing of the

database that the plan has become viable against the backdrop of recent lower than assumed rent increases and the introduction of the new social rent policy.

9.3 There are still some inherent risk factors which are shown in the sensitivity

table and the Council could take the opportunity to offset these. We have taken the opportunity to suggest to the Council options which are available to them.

9.4 The first easiest to implement would be to re-let new tenancies on to

formula rent rather than the outgoing rent. This would not apply to mutual exchanges. The Council rents will be lower than registered providers’ rents that operate in the area and will therefore have a negligible effect on re-let take ups.

9.5 The Council could consider with the backdrop of a low CPI that perhaps

rents could be increased above the 2.2% factored into this plan which would have a beneficial effect to all future years within the plan.

9.6 A review of which investment scenario should be used in modelling the

investment programme over the next 5 years to take advantage of the resources available. It should consider the clear need for investment which requires early attention where the condition scenario dictates.

Appendix 1


9.7 If the Council wishes to continue a new build programme of affordable

homes it could consider alternative models outside of the HRA which could bring revenue benefits to the Council’s HRA.

Simon Smith October 2014

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