States of Jersey Housing Transformation Programme: Full Business Case.

STATES OF JERSEY

STATES OF JERSEY HOUSING TRANSFORMATION PROGRAMME: FULL BUSINESS CASE

Presented to the States on 4th March 2013 by the Minister for Housing

STATES GREFFE

2013   Price code: F  R.15

States of Jersey

Housing Transformation Programme

Full Business Case

Contents

1  Executive summary ........................................................................................ 1

1. Introduction ....................................................................................................................................... 1
2. Strategic case .................................................................................................................................... 1
3. Economic case ................................................................................................................................... 2
4. Commercial case .............................................................................................................................. 3
5. Financial case .................................................................................................................................... 4
6. Management case ............................................................................................................................ 5
7. Next steps for the programme .................................................................................................... 6

2  Strategic Case ............................................................................................... 7

1. Introduction ....................................................................................................................................... 7
2. Strategic Context ............................................................................................................................. 8

3  Economic case ............................................................................................. 17

1. Introduction ..................................................................................................................................... 17
2. Matters considered at the Outline Business Case stage (August 2011) ................... 17
3. Developments since the Outline Business Case ................................................................. 19
4. Summary of updated business modelling assumptions .................................................. 24
5. Update on assessment and conclusions of each Critical Success Factor .................. 29
6. Update risk and legal aspects ................................................................................................... 45
7. Sensitivity analysis ........................................................................................................................ 46
8. Summary and conclusions .......................................................................................................... 47

4  Commercial case .......................................................................................... 49

1. Introduction ..................................................................................................................................... 49
2. Transfer Agreement ...................................................................................................................... 50
3. Procurement, Legislative and Organisational Arrangements ......................................... 52
4. Asset Management Arrangements ........................................................................................... 55
5. Commercial Risk Allocation ........................................................................................................ 56
6. Human Resource Implications ................................................................................................... 57
7. External Funding Sources ........................................................................................................... 58
8. Financial reporting and financial protocols ........................................................................... 59
9. Contractual Miles tones ................................................................................................................. 61

5  Financial case .............................................................................................. 63

1. Introduction ..................................................................................................................................... 63
2. Proposed Rents Policy and its implications........................................................................... 63
3. Contribution from the wholly owned Housing Company ................................................. 67
4. Summary financial case .............................................................................................................. 67
5. Risks.................................................................................................................................................... 71
6. Risk assessment criteria .............................................................................................................. 71
7. Sensitivity analysis ........................................................................................................................ 72
8. Summary financial risk assessment ........................................................................................ 83
9. Conclusion ........................................................................................................................................ 85

6  Management case ........................................................................................ 87

1. Introduction ..................................................................................................................................... 87
2. Project Management ..................................................................................................................... 87
3. Business Change Management ................................................................................................. 88
4. Benefits Realisation Arrangements ......................................................................................... 94
5. Risk Management ........................................................................................................................... 96
6. Contract Management .................................................................................................................. 99
7. Post Project Evaluation .............................................................................................................. 100

Appendices....................................................................................................... 101 Appendix A  Risk analysis ............................................................................................................... 101 Appendix B  Refurbishment and new build projects ............................................................. 104 Appendix C  Description of delivery options ............................................................................ 105 Appendix D  External factors that might influence income stream ................................. 112 Appendix E Commercial risk allocation matrix ........................................................................... 116 Appendix F Staff structure ................................................................................................................. 118

1 Executive summary

1. Introduction

This Full Business Case seeks approval for the establishment of a suitable delivery vehicle and funding mechanism for the management of States of Jersey social housing in Jersey.

Sector Treasury Services Limited were appointed as financial advisers to the Housing Transformation Programme and to assist in the development and assurance of a business case to consider the options for change. Sector Treasury Services recommended the use of the UK HM Treasury 5 Case Model for Public Sector Business Cases to evaluate the options for change and this was adopted by the Housing Transformation Programme which is the format of this report.

The preferred solution is for the establishment of a new, not-for-profit, wholly States owned  social  Housing  Company  (the  "Housing  Company")  and  implementation  of  its business plan (set out in the financial case in section 5).

The Housing Company will be a self-sustaining Social Housing service provider which is flexible and able to adapt to change with fully separate regulatory, policy and service functions.

The States of Jersey will transfer the current Social Housing stock, which has no debt burden, to the Housing Company for nil proceeds and the Housing Company will continue to deliver a significant annual return to the States of Jersey.

The proposed rent policy of 90% of market rents on new tenancies protects tenants in receipt of the housing component of Income Support and for tenants not in receipt of the housing component of Income Support it provides a balance between:

• Requiring those who can afford to pay more to do so
• Recognising that tenants have entered in to tenancy agreements and planned their finances on the basis of the prevailing rent levels

Decent Homes will be achieved within 10 years and maintained thereafter, funded by a combination of an investment from the Currency Fund and the rent increases achieved from the proposed rent policy. Furthermore, the stock will be improved to better meet the needs of Jersey's changing population funded from additional income generated.

2. Strategic case

The current provision for States of Jersey social housing in Jersey involves a single tier of government with responsibility for housing strategy, governance, regulation, policy making and delivery. This results in inherent conflicts of interest for the Minister for Housing who is simultaneously required to be policy maker, regulator and the largest landlord in the Island.

It is also a fact that over a number of years rents in the social sector have fallen a long way behind the market and therefore provides a hidden and unintended subsidy to all Tenants in the sector, whether or not their personal circumstances mean that they need that assistance.

In July 2010 the former Minister for Housing issued a policy statement establishing a Housing Transformation Programme to address the outcomes of a review carried out by the Cambridge Centre for Housing and Planning Research and set out in a report by Professor Christine Whitehead OBE. The Minister's statement indicated his commitment to:

• The establishment of an independent Regulator of social housing applicable to all residential providers in Jersey

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• The  formulation  of  a  new  rents  policy  to  establish  a  sustainable  relationship between social housing rents and the overall rental market

 The change in status of the present Housing Department

Also of key importance here is the alignment of the proposed transformation with the States' Strategic Plan 2012 (P28/2012) and the corporate priority "House our Community".

The proposed business case enables resolution of the following key actions with the House our Community" priority:

• Continue work on existing homes to meet the Decent Homes Standard
• Address the funding of the maintenance and reinvestment of the States owned social housing stock.
• Complete  the  Housing  Transformation  Programme  to  allow  more  flexibility  in tackling housing issues

The proposed rent policy (90% of equivalent market rents for new tenancies) would also enable the following actions to be met:

• Put in place schemes to generate affordable housing for social rental and purchase
• Bring forward schemes to support first time buyers

3. Economic case

The review carried out by the Cambridge Centre for Housing and Planning Research identified 7 possible delivery options for the provision of landlord services, which are noted in the table below (and detailed in section 3.4.3). Each option has been appraised in order

to identify the most economically advantageous option, which best meets the service needs and optimises value for money.

A 30 year business model has been developed for each option. It is recognised that external finance is required in order to deliver stock development plans (noted in section 1.5 below) and so the ability of each option to obtain sufficient borrowing is considered in the option appraisal process.

The key assumptions for each business model are as follows:

• Decent Homes Standard achieved in 10 years and maintained
• Return to Treasury maintained in real terms from 1 January 2016 after delivering the returns set out in the Medium Term Financial Plan including Comprehensive Spending Review savings in 2013 (option 6 only (for other options surpluses are returned))
• Refurbishment and new build plans noted in Appendix B with a net gain of 434 units
• Sales of 300 properties (15 per annum for years 1-20 of the business model)
• £40m internal borrowing facility (for options 2 to 7)
• External borrowing facility to fund stock development and any remaining cash flow shortages (for options 4 to 7). External borrowing assumptions are noted in section 3.3.4
• Proposed rent policy and implementation thereof noted in section 3.4.1 (except for option 1 which incorporates the existing rent policy)
• States  of  Jersey  Statistics  Unit  central  scenario  RPI  projections  and  average earnings inflation of 0.75% in excess of RPI (which represents half of the long term expectation)

 Market rent inflation at RPI plus average earnings inflation

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The following financial critical success factors were developed in order to appraise the delivery options:

• The  resulting  delivery  organisation  must  be  a  self-sustaining  social  housing services provider
• The resulting delivery organisation must be a flexible delivery organisation able to adapt to change
• The resulting delivery organisation must provide a continued significant income stream to States of Jersey
• The resulting organisational framework must fully separate Regulatory, Policy and Service functions

The results of the options appraisal are noted in the table below.

Option 5  Hybrid trading company  2  Low to Medium

Option 7  Freehold sale to a new social landlord  4  Low to Medium

Option 6 ranks highly against all critical success factors and offers the lowest risk. Stock development plans can be delivered as can the expected return to the States of Jersey. A separate  landlord  function  and  the  availability  of  finance  provide  the  required independence and autonomy. Option 6 is, therefore, the preferred option which is taken forward to the Commercial, Financial and Management cases.

4. Commercial case

The Commercial case covers the following areas for the establishment of the proposed Housing Company:

• Transfer agreement between the States of Jersey and the Housing Company
• Procurement, legislative and organisational arrangements
• Asset management arrangements
• Commercial risk allocation
• Human resource implications
• External funding sources
• Financial reporting and financial protocols
• Contractual milestones

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5. Financial case

The key financial objectives of the Housing Company are as follows:

Objective

To achieve Decent Homes Standard within 10 years and maintain the standard thereafter

To develop the current social housing stock to better meet the needs of Jersey's changing population by:

• Making more homes more lifelong compatible by refurbishing existing stock and building on new sites
• To realign the current social housing stock and provide affordable housing solutions to those in a position to buy. This will be achieved through the sales of current social housing stock

To provide the agreed annual return to States of Jersey

The Housing Company will manage the social housing service including maintaining the 90% of market rent policy on new tenancies described in section 3.4.1 and summarised in section 5.2.1. The key elements from the Financial case are noted below.

1. Stock development

The Housing Company plans to invest £201.4m (in real terms) in stock development and obtain proceeds from sales of £96.1m (in real terms) as follows:

• Build on new sites with a net gain of 434 units (20 of which will be sold for lifetime enjoyment as affordable homes for proceeds of £4.4m) at a projected cost of £147.1m
• Refurbish 578 units at a projected cost of £54.3m

 Sell 300 units (projected at 15 per annum for 20 years with proceeds of £366k per

property, with a 25% bond provided on half of sales

Additionally, the Housing Company plans to invest £300.0m (in real terms) in maintenance to bring all properties up to Decent Homes Standard and maintain it thereafter (this is £19.0m more than that allowed for in the Medium Term Financial Plan).

The stock movements are summarised in the table below.

*The sale of 330 properties includes 30 sales prior to the commencement of the new Housing Company on 1 July 2014

The proposed sales in years 1 to 20 and those that will take place prior to 2014 will all be classified as Affordable' in perpetuity and this will mean that the stock of affordable homes is actually increased by 414 units albeit that 330 homes will be targeted at affordable home ownership. Overall the Islands' stock of Affordable Housing will be augmented further by the addition of 203 units to the Housing Trusts.

Sales are proposed for years 1 to 20 of the business plan because the proceeds are used to fund the stock development and loan repayments which will be completed by year 20.

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2. Borrowing

The States of Jersey has indicated that the following borrowing facilities could be made available:

• Internal  borrowing:  A  facility  of  £40m  as  set  out  in  R132/2011  States Investment Strategies with a fixed interest rate of 4% to be repaid by year 20 of the business model
• External borrowing: The Treasury Department has indicated that borrowing of up to £200m over a 20 year period is proposed to be made available to the Housing Company at a fixed interest rate of 5%. A financial advisor has been appointed initially to recommend the best finance options

These borrowing facilities have been incorporated in to the Housing Company's business model and are considered to be sufficient for the Housing Company to meet the above noted objectives.

3. Return to Treasury

The Housing Company will continue to return a significant agreed amount to the States of Jersey each year (as described in section 3.4.2).

4. Sensitivity analysis

Sensitivity analysis has been performed to assess the robustness of the business model against identified risks. It is concluded that, on the assumption that the matters noted in section 1.7 below are resolved as planned, the Housing Company is considered to be viable.

5. States' sector income support costs

Additional Income Support costs resulting from the proposed rent policy will be met by the Treasury through an additional budget allocation to the Social Security Department. Given the nature of the implementation of the proposed rents policy, these increased costs will build slowly over many years and peak at approximately £2 million per annum in real terms for Company properties after 30 years.

Section 5.2 of the financial case documents the income support implications resulting from this programme.

6. Management case

The Management case covers the following areas for the management of the proposed Housing Company:

• Project management
• Business change management
• Benefits realisation arrangements
• Risk management
• Contract management
• Post project evaluation

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7. Next steps for the programme

The next steps for the programme are as follows:

• The  States  to  consider  the  business  case  as  part  of  the  wider  proposed transformation programme
• If the incorporation of States Housing Report and Proposition proposing enabling establishment of the Housing Company is approved, a shadow board would be recruited to lead development of the new organisation

 This would require:

• Confirmation of proposed funding
• Confirmation of risk allocation
• Confirmation of the transfer agreement

 The above will be formalised through Regulations brought to the States in 2014

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2 Strategic Case

1. Introduction

In July 2010 the Minister for Housing issued a policy statement establishing a Housing Transformation Programme  to address  the  outcomes  of a  review  carried  out  by  the Cambridge Centre for Housing and Planning Research and set out in a report by Professor Christine Whitehead. The Minister's statement indicated his commitment to:

• The establishment of an independent Regulator of social housing applicable to all residential providers in Jersey.
• The  formulation  of  a  new  rents  policy  to  establish  a  sustainable  relationship between social housing rents and the overall rental market.
• The change in status of the present Housing Department

This initial announcement was followed up by a further statement by the Minister within the 2011 Housing Department Business Plan highlighting the scope of the Programme. The statement is set out below.

"The Review of Social Housing undertaken by Professor Christine Whitehead from the Centre for Housing and Planning Research at the University of Cambridge was an independent, in depth study of social housing provision in the Island. In her report,  published  in  2009  and  consulted  upon  during  the  first  half  of  2010, Professor Whitehead identifies that the existing method of delivering social housing is unsustainable. It is she says the States system of housing provision which is not fit for purpose, rather than the Housing Department itself which operates with significantly fewer resources than would be normal elsewhere.

Professor Whitehead has suggested that if a modern 21st Century social housing sector is what we desire then change and very significant change at that, is required.

Of the options presented by Professor Whitehead it is clear that we can maximise the impact of our social housing provision by moving to a situation where the States is very much the facilitator and regulator of all social housing provision. This would necessitate placing the present Housing Department, with all of its inherent experience and highly skilled staff, at arms length from the States where it can concentrate more fully on providing the housing service to those who most need that assistance. This arms length body will have the ability to access private finance as a means of developing new affordable homes to meet existing and any future demand for homes.

The  role  of  regulation  is  something  which  should  stay  with  the  States  and developing a suitable framework is fundamental to having a successful social housing sector.

The unsustainable nature of the Housing Department's financing whereby it is under funded by £7.5 million per annum whilst having a commitment to make a return of £23 million per annum to the Treasury must be addressed and work is already in hand with Treasury to find a solution. Of course one significant way of bridging this gap will be through the development of new homes which, once private  development  funding  has  been  repaid,  will  be  unencumbered  income generating assets. This  growth  in the States  owned  social  housing  stock  will certainly allow the much needed realignment of the housing stock to take place whilst also providing for some growth in the sector which will help to address the needs of those who presently do not meet the rather stringent allocations criteria."

In order to implement the Housing Transformation Programme a governance structure has been established by the Minister for Housing. The structure includes a Political Steering Group, comprising the Chief Minister and Ministers for Treasury and Resources and Social

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Security together with a Programme Board of senior civil servants, and a Programme Management Team established within the Housing Department.

The role of this FBC is to provide a financial business case for the establishment of a suitable delivery vehicle and funding mechanism for the management of social housing in Jersey.

2. Strategic Context

1. Organisational Overview

The States of Jersey Housing Department is the predominant provider of social housing in Jersey with approximately three quarters of the total social housing stock. Other providers include 4 Housing Trusts who have and continue to be in receipt of support from the States and a number of other providers including some Charities and a number of Parishes who have developed small housing stocks without significant States support. A table setting out the provision of social housing by landlord is shown below.

Landlord  Dwellings

States of Jersey Housing Department  4,539 Jersey Homes Trust  741 Les Vaux Housing Trust  346 Christians Together in Jersey Housing Trust  123 FB Cottages Housing Trust  48

In January 2012 the Minister for Housing launched the Affordable Housing Gateway. The aim of the Gateway was to bring together the waiting lists held by the 4 States supported Housing  Trusts  and  the  Housing  Department  into  one  consolidated  waiting  list  with common eligibility criteria, improving equity and streamlining access for applicants.

There is a finite amount of social housing and the social housing sector has seen little growth since 2008, other than a small number of Parish developments and a small number of homes developed by the Housing Department on existing States owned land. Some new supply is now in development; however, this has only been possible with the advance of stimulus funding by the States.

To ensure that the limited amount of social housing available is occupied by those who need it most eligibility criteria have been developed. The current eligibility criteria for acceptance onto the Gateway list require that applicants must fulfil the following criteria:

• be residentially qualified households; and
• either have young children living with them or be over fifty years of age, or otherwise have medical, physical or mental disabilities; and

 have income less than defined maximum limits, which roughly equate to the

bottom two quintiles of income distribution in Jersey.  

2. The Housing Department

Jersey  currently operates  a single  tier  of  government with responsibility for  housing strategy, governance, regulation, policy making and delivery. The States itself is landlord for 65% of all social housing. This is quite different from other European countries. In the UK over 50% of social housing is provided by independent social landlords. Social housing provided by local authorities is funded from a ring-fenced account where expenditure and income on housing landlord activities is separated from the cash flows of the other activities provided by local authorities so that local taxes aren't used to subsidise social housing and housing rents aren't used to subsidise services funded by local taxes.

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Jersey's system of government and the way in which Social Housing has been organised means that there are inherent conflicts of interest for the Minister for Housing who is simultaneously required to be policy maker, regulator and the largest landlord on the Island.

The Housing Department 2013 MTFP allows for a total of 47.6 Full Time Equivalents ("FTEs") staff. Additionally, 2.6 Full Time Equivalent Customer Service staff transferred to the Housing Department during 2012 (as the customer service function moved from Cyril Le Marquand House to the Housing Department). Total staff at 2013 is as follows:

No. of FTEs

Chief Officer and Personal Assistant  2 Strategic Development Directorate  13 Operations Directorate  24.6 Finance Directorate  10.6 Total Housing Department Staff  50.2

Sector Treasury Services compared this to local authority housing organisations in the UK with broadly equivalent stock numbers and concluded that this represents a very lean establishment. For example in the UK for services provided by best practice organisations you would expect to find a ratio of staff to dwellings of approximately 1:67 (depending on density levels, housing and social conditions). In Jersey the ratio in accordance with the 2013 MTFP is 1:95. The preferred delivery organisation forecasts a ratio of 1:81 at inception.

3. The Housing Trusts

In contrast to the States, the Housing Trusts operate as not-for-profit organisations and unlike the Housing Department are able to retain all of their rental income and to reinvest it into housing related expenditure, to make repayments of borrowing entered into to acquire their respective property portfolios or to accumulate surpluses.

In the majority of cases borrowing by the Housing Trusts has only been possible with support from the States.

The various Trusts are managed by Boards of Trustees and whilst they employ no direct staff of their own, managing agents are employed to coordinate day to day administrative and landlord activities.

4. Council of Ministers

High level decisions on social housing policy and the role of the Housing Department are formally made by the States, but responsibility for developing policy rests with the Council of Ministers which set out its approach to Housing issues in its 2009 – 2014 Strategic Plan.

The Council of Ministers concluded that:

• All Island residents should be housed adequately.
• Older people need to be housed in accommodation which support the principles of lifetime homes' and which can adapt over time to allow independence to be maintained.
• Changing  demographics  and  migration  may  put  pressure  on  certain  types  of accommodation.
• If we want to meet the aspirations of Islanders to own their own homes, then homes must be made more affordable.
• The affordable housing should be targeted at only those who need the support.

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A new Strategic Plan was approved by the States in 2012. Once again Housing related issues are given a high degree of priority and the Council of Ministers committed to:

• put in place schemes to generate affordable housing for social rental and purchase
• bring forward schemes to support first time buyers
• continue work on existing homes to meet the Decent Homes Standard'
• establish a Strategic Housing Unit to co-ordinate a long term housing strategy  address the funding of the maintenance and reinvestment of the States owned
• social housing stock
• complete  the  Housing  Transformation  Programme  to  allow  more  flexibility  in tackling housing issues

In response to the Council of Ministers strategy the Housing Department has set out its key objectives in its 2013 Business Plan. They are identified as:

• Effective management of the States owned social rental stock
• Introduce the proposed changes in the provision of social housing
• Greater emphasis given to the delivery of social landlord services
• Staff  and  resources  managed  to  improve  performance  and  provide  value  for money.

Also of key importance here is the alignment of the proposed transformation with the States' Strategic Plan 2012 (P28/2012) and the corporate priority "House our Community".

The proposed business case enables resolution of the following key actions with the House our Community" priority:

 Continue work on existing homes to meet the Decent Homes Standard

• Address the funding of the maintenance and reinvestment of the States owned social housing stock.
• Complete  the  Housing  Transformation  Programme  to  allow  more  flexibility  in tackling housing issues

The additional rental income generated from the proposed rent policy level (of 90% of equivalent market rates on new tenancies) would provide funds to enable the following actions to be met:

• Put in place schemes to generate affordable housing for social rental and purchase
• Bring forward schemes to support first time buyers

5. Existing Financial Performance

The States' Housing Department has historically been funded from States' revenue funding streams. As a result the Housing Department is debt free and consequently the Housing Business Plan is able to project a surplus of £26.8m for 2013 (excluding depreciation) which is returned to Treasury. In recent years this has translated into a transfer of £21.5m in 2009, £18.7m in 2010, £21.5 in 2011 and £24.5m in 2012.

Investment decisions therefore involve balancing the requirement to return funds to the Treasury to be used for other purposes and increasing expenditure on social housing.

It is recognised that the current levels of contributions from the Housing Department are not sustainable, particularly if the service is to invest sufficient resources in maintenance and improvement works to bring the housing up to the decent homes standard by the target date within the Property Plan (P6/2007) of 2016 and maintain it at that standard. A stock condition survey prepared for the States of Jersey by Ridge and Partners shows a projected  expenditure requirement of  £328m  over  the  next  30 years  to  deliver  and maintain the decent homes standard (this is without further investment in refurbishing or

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increasing the housing stock). This equates to £73k per dwelling, which Ridge and Partners indicated is at the top end of the benchmark range for survey projections in the UK - a reflection of higher house prices in Jersey.

6. Rent and Income Support

When valuations were obtained in 2010, the average weekly rent in States sector housing was £154 exclusive of service charges. This is approximately 69% of the market rent that would be charged for equivalent dwellings in the private sector. Valuations have been obtained at December 2012 and the relationship has continued at the same rate.

Rent increases for States' housing have been constrained in recent years because of an adverse relationship between States sector rent increases and the resulting cost to the States of Income Support payable to tenants of States housing, Trusts' housing and private rented housing.

A review of options to address this issue has been undertaken and it is proposed to change the link between States' housing rents and income support payable to private tenants. In future, it is proposed that private sector income support levels will be linked to the average of the market rents in the States' sector. The impact of this change in policy has been allowed for in the Medium Term Financial Plan and the Minister of Social Security will bring forward detailed proposals to be debated at the same time as the rent policy.

7. Demographic Change and Housing Costs

The residential qualification system that operates in Jersey has a major impact on total population  and  how  housing  is  allocated  in  Jersey.   The  current  policy  includes  the following:

• Maintain the level of the working age population on the island
• Ensure the total population does not exceed 100,000
• Ensure population levels do not increase continuously in the longer term

A census was carried out on 27 March 2011. On that day the total population of Jersey was recorded as being 97,857. This represented an increase of 10% since 2001. 82% of the population were residentially qualified (categories A to H) and 2% in categories J and K, whilst 13% were unqualified.

Average house prices in Jersey rose by 56% between 2002 and 2011. The most rapid increases were observed in three bed and houses (as opposed to flats) purchased by first time buyers. Flat prices rose by less than half the average rate. The main pressure in Jersey is for family homes and homes for life' for older people rather than flats although evidence set out in the Whitehead review indicates that buying a family home is generally only possible for qualifying residents with earnings in the two highest quintiles.

Younger households, single people, and those on lower incomes cannot afford to become owner occupiers, and must rent their accommodation, either from private landlords or in the social housing sector, unless they have access to significant savings or loans from parents or others. It is worth noting that in 2011, the average price of the 13 flats sold under the First Time Buyer scheme was £272,000, and the average price of the 22 first time buyer houses sold was £420,000. These prices are unaffordable for residents earning below the top two income quintiles without additional assistance.

8. Conclusions from Professor Christine Whitehead's Review of Social Housing in Jersey

This Green Paper (published in 2010) suggested that certain changes were necessary. These were:

• The conflict for the Minister for Housing being responsible for housing policy and regulation whilst also being the largest landlord needs to be resolved;
• There is a requirement for a long term cross tenure housing strategy;

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• There has been a long period of under investment resulting in a considerable backlog -in the funding of maintenance and reinvestment of States owned social housing;
• A new regulatory framework applicable to all social housing providers needs to be created;
• Social housing needs to become more accessible for those in long-term housing need;
• Eligibility criteria need to be made clear and consistent across all providers;
• A long-term rental policy needs to be introduced;
• The  Housing  Department  needs  to  be  restructured  to  be  more  financially sustainable in order to adequately maintain States owned social housing in the long term.
• It is also a fact that over a number of years rents in the social sector have fallen a long way behind  the  market and therefore provide a  hidden and unintended subsidy to all Tenants in the sector, whether or not their personal circumstances mean that they need that assistance.

9. Business Case Scope

Since the publication of the Whitehead review, the Political Steering Group for the Housing Transformation  Programme  have  considered  the  structure  and  status  of  the  current Housing Department and have concluded that there are seven alternative options available including the Status Quo. These span four financing mechanisms, as follows:

Detailed descriptions of the delivery options are set out in Appendix C and an economic appraisal of each of the delivery vehicle options are set out in the Economic Case in section 3.

In developing the new organisation, the Housing Transformation Programme is charged with endeavouring to provide increased "housing for life". The scope for this Full Business Case therefore also includes a review of the capacity of each delivery vehicle to invest in new affordable housing to meet the demand for additional social housing in Jersey.

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10. Strategic Benefits / Investment Objectives

The main benefits associated with the Housing Transformation Programme were set out within the Programme Brief approved by the Programme Board at its meeting in November 2010 and validated by the Political Steering Group in April 2011. In the table below they are referenced to Government Strategic Priorities and the Social Policy Framework.

14  Adequately House the  Support the Development of Social Housing

Population

The funding proposals within this Outline Business Case provide a funding framework which would give the optimum scope for the provision of new social housing to meet the profile of housing types needed in Jersey

Continue to upgrade and improve older States rental homes to meet the adopted Jersey Decent Homes Standard'

This Full Business Case establishes the business planning implications of funding the cost projections associated with delivering the required dwelling standard. In addition, it enables comparison of delivery options to identify the approach which best addresses the investment needs for States' housing

3  Reform Public Service  Determine those services that must be provided by

Provision to Improve  Government

Efficiency

The economic appraisal of funding options within this Full Business Case will enable assessment and comparison of funding options based on continued ownership of the housing stock but with varying degrees of States managerial control against the option of a sale of the freehold to a new social housing provider

Promote/review private sector involvement and more commercial approaches to service provision

The economic appraisal of funding options within this Full Business Case will compare the existing revenue funded approach to meeting the investment needs of social housing with debt funding including borrowing by the Government and options for borrowing by the housing organisation

10  Develop funding  Development of a Financial Business Model mechanisms to address the  Development of a financial model with the flexibility to

backlog of deferred  compare the ability of different funding mechanisms to maintenance of social  deliver the investment priorities of social housing in

rented housing  Jersey, including addressing the backlog of maintenance works.

Social Policy Framework

Criteria 6  Households can access  The proposed Policy and Regulatory changes proposed as suitable accommodation for  a result of the Programme would address the assessment

their needs  of demand for different types of social housing and the delivery of an Affordable Housing Gateway to social

housing spanning States housing and Trust housing.

This Full Business Case addresses the scope for providing new housing to meet the needs of residents requiring

social housing

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The brief for this FBC has been to further develop the work undertaken in the Outline Business Case to set out the role that the proposed new Wholly States owned Housing Organisation will play in the provision of States of Jersey social housing. The following four key financial Critical Success Factors have been identified for evaluating the 7 delivery options:

• For the new Housing Organisation to become a self-sustaining social housing services provider
• For  the  new  Housing  Organisation  to  become  a  flexible  and  agile  delivery organisation able to adapt to change
• For the new Housing Organisation to continue to make a significant annual return to the States of Jersey
• For  the  Regulatory,  Policy  and  Service  functions  of  the  existing  Housing Department to be fully separated

11. Strategic Risks

The main business and service risks associated with the potential scope for this project are shown below, together with their countermeasures.

• Experienced Delivery Team and Advisers
• Clear programme planning, implementation and

Delay in delivering programme outcomes  monitoring process

• Clear consultation and effective inter- Departmental working

• Regular reporting to the Political Steering Group, and the Council of Ministers

Lack of public or political support for the   Active engagement with the Health, Social Programme objectives and proposals  Security and Housing Scrutiny Sub-Panel

• Pro-active and meaningful briefing of States Members

Failure to adequately resolve the   Joint, inter-Departmental review of housing potentially adverse financial relationship  elements of Income Support by experienced between changes in States rent and  independent Advisers

income support costs   Social impact assessment of proposals

Identification of a funding delivery mechanism Lack of acceptance for the proposed  that addresses the investment needs of the

csoonluttriiobnu ttioown afrrodms Stthaetepsr ocopsotsse d housing  housing stock whilst providing an agreed

contribution to States expenditure

• Validated stock condition survey and stock valuations

Financial modelling doesn't adequately   Review of capital investment programme that address future investment needs and /  optimises value for money delivery;

or management and financing costs   Experienced financial advisor to validate

modelling and validate assumptions in business model

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Borrowing costs are higher than   Early reporting on implications of any changes in projected in Outline Business Case  projected funding costs

Failure to gain the support of Tenants to  Delivery of an effective communications strategy proposals   Active engagement with tenant representatives

and frontline staff

• Ministerial consultation with Chairs of Housing

Failure to gain the support of Housing  Trusts

Trusts to proposals   Effective information sharing

• A proportionate and fair approach to policy changes affecting Housing Trusts
• Delivery of an effective communications strategy Clear and transparent communication of benefits

Fparoilpuoresatlos gain the support of staff to  and implications for staff

• Seek advice on appropriate communication material

• Experienced Delivery Team and Advisers
• Clear delivery outcomes, benefits and risk

Service disruption to Tenants during  management and programme of change change process  management

• Clear consultation and effective inter- Departmental working

12. Assumptions and Dependencies

The Full Business Case is subject to the following assumptions and dependencies that will be  carefully  monitored  and  managed  throughout  the  lifespan  of  the  Housing Transformation Programme.

• That the proposal to separate the existing link between States of Jersey housing rents and private sector income support will be agreed and that an alternative approach to setting the housing element of private sector income support will be accepted;
• That a return to previous fair rent levels set at 90% of equivalent market levels for new tenancies is approved which provides sufficient resources for the delivery and maintenance of the decent homes standard and the provision of new social housing
• That a sustainable agreed level of annual contribution from the proposed Housing Organisation  to  the  States  of  Jersey  is  agreed  and  fully  funded  within  the Company's business plan
• That  the  Ridge  stock  condition  survey,  Jones  Lang  LaSalle  valuations,  and assumptions regarding business modelling provided by the Treasury and Resources Department remain valid
• That the proposed regulatory function is delivered independent of the strategic policy and service delivery functions
• That the strategic housing function remains within the States of Jersey, with effective internal and external stakeholder relationships, to enable delivery of the States' strategic housing priorities

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• Agreement regarding the scope of housing functions and assets which are to be transferred to the new organisation and the financial arrangements between it and States of Jersey.

That the future arrangements for service delivery of social housing to current States of Jersey tenants delivers a modern, customer-focussed service which meets the proposed regulatory expectations for enhanced governance, financial viability and service delivery. Resources will need to be employed appropriately to enable the day-to-day service to continue whichever option is chosen while managing change, potential disengagement and implementation of new systems

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3 Economic case

1. Introduction

This  section of the Full  Business Case documents  the  options appraisal process and provides evidence to show that the most economically advantageous option, which best meets the service needs and optimises value for money has been selected. This Economic Case updates analysis provided in the Outline Business Case.

2. Matters considered atthe Outline Business Case stage (August 2011)

1. Key Critical Success factors) considered in Outline Business Case

The critical success factors evaluated within the Outline Business Case, and the associated assessment questions, were as follows:

Critical success factor  Assessment questions

What scope is there to improve housing standards for residents?

The resulting delivery  How accessible is the finance needed to pay for investment and organisation must be a self- delivery plans?

sustaining social housing  What freedom is there to re-invest efficiency gains and services provider  additional income streams?

How viable is the business model?

What capacity is there to deliver new housing – e.g. housing for The resulting delivery  life' (strategic priority no. 14)?

organisation must be a flexible  How accessible is the finance needed to pay for investment and delivery organisation able to  delivery plans?

adapt to change  What autonomy is there to make independent decisions on

procurement and service delivery?

What is the level of income stream available to States of Jersey? The resulting delivery

How does the income stream compare with States of Jersey organisation must be provide a

estimates?

continued significant income

stream to States of Jersey  What are the external factors that might influence this income

stream?

The resulting organisational

framework must fully separate  How separate are the service, regulatory and policy functions? Regulatory, Policy and Service  How independent is governance of the delivery organisation? functions

The  above  critical  success  factors  and  associated  assessment  questions,  which  were developed  by  Sector  Treasury  Services  at  Outline  Business  Case  stage,  have  been reviewed and it is concluded that they continue to be an appropriate basis for the Full Business Case assessment.

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2. Refurbishment and new build plans considered in Outline Business Case

In assessing the capacity to deliver new housing at the Outline Business Case stage, 2 scenarios were modelled to build 552 or secondly 1,104 net new properties. At the Outline Business Case Stage these were not based on real, current schemes but broadly reflected maximum stock anticipated in the Island Plan. The scenarios were designed to test the ability of the business model under each option to finance the costs of borrowing implied by these levels of additional investment, should the Strategic Housing Unit wish the proposed Housing Organisation to invest to this level.

Following the developments since the Outline Business Case noted in section 3.3 below, schemes identified for development have been included in the updated business modelling. Updated plans are described in section 3.3.3 and Appendix B.

3. Rent  policy  and  income  support  options  considered  in Outline Business Case

This Full Business Case proposes a 90% of market rents policy for new tenancies (as described in section 3.4.1.1).

Several rent policies and methods of implementation were considered prior to taking the decision to propose this rent policy. Considerations at Outline Business Case stage are noted below, and considerations subsequent to that are noted in section 3.3.

The rent policy options evaluated at the Outline Business Case stage were:

• Scenario 1: Rents set at 80% of equivalent market rent. Annual rent increases for existing tenants limited to a maximum of £3 per week above the level of the annual uplift* in rental values.
• Scenario 2: Rents set at 80% of equivalent market rent. Annual rent increases for existing tenants limited to a maximum of £5 per week above the level of the annual uplift* in rental values.
• Scenario 3: Rents set at 90% of equivalent market rent. Annual rent increases for existing tenants limited to a maximum of £3 per week above the level of the annual uplift* in rental values.
• Scenario 4: Rents set at 90% of equivalent market rent. Annual rent increases for existing tenants limited to a maximum of £5 per week above the level of the annual uplift* in rental values.

*Annual uplift is equivalent to Retail Price Index ("RPI") plus 0.75%. 0.75% represents half of the average annual increase in earnings in excess of RPI

For all scenarios above, increases in Income Support costs would be returned to the States of Jersey and funded by the rental income raised by the new housing organisation.

At Outline Business Case stage, 80% of equivalent market rents was determined not to enable  viability  for  the  social  housing  sector  in  general  and  the  proposed  Housing Organisation in particular. Updated business modelling performed for this Full Business Case indicates that the 80% of market rents policy is not viable due to the required level of borrowing. Furthermore, an 80% of market rents business model is not robust when sensitivity analysis is performed in, for example, a weak property and rental market (resulting in lower proceeds from property sales than expected). In order to make the business model viable with an 80% of market rents policy, the return to the States of Jersey would need to be reduced significantly.

Following the developments since the Outline Business Case noted in section 3.3, the implementation of the rent policy has been revised. The updated proposed rent policy is described in section 3.4.1.

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4. Delivery options considered in Outline Business Case

The delivery options evaluated within the Outline Business Case, along with the overall ranking and risk assessment at that stage, were as follows:

Option 5  Hybrid trading company  3  Low to Medium

Option 7  Freehold sale to a new social landlord  2  Medium

The delivery options have been reviewed, and are not materially different to those in the Outline Business Case. The revised options are described in more detail in section 3.4.3.

5. Preferred option at Outline Business Case stage

The preferred option at the Outline Business Case stage was:

• Setting up a wholly owned Housing Company and adopting the rent policy based on 90% of equivalent market rents with increases towards these rents limited to increases in average market rents (RPI + 0.75%) plus £5 (the 0.75% represents half of the average annual increase in earnings in excess of RPI)

 To maintain fair rent levels at 90% of equivalent market rent

3. Developments since the Outline Business Case

1. Political steering group conclusions

Outcome of presentation of the Outline Business Case to the Political Steering Group on 9 August 2011

Option 6 was agreed as the basis for further work, which needed to include:

• Further work on the business case in order to ensure a robust case for change
• How P6/2007 had contributed to Housing Department's finances and the future extent of sales and disposals would need to be set out within proposals
• Whilst there was general support for the proposal to use States of Jersey funding to smooth the funding profile within the business case, sensitivities looking at faster convergence to the proposed 90% near market rent level to attempt to preserve the annual return to Treasury should be undertaken

The Political Steering Group also recognised the importance of the social impact of the rent policy change and asked the delivery team to consider options for its implementation.

The proposed Outline Business Case position presented to the Political Steering Group at briefings held between 13 December 2011 and 9 January 2012

The proposed assumptions, based on updated financial modelling, presented to the Political Steering Group at briefings held between 13 December 2011 and 9 January 2012 were:

• Decent Homes Standard achieved in 10 years and maintained
• Refurbishment and improvements to existing stock to adapt into Life Long Homes
• Re-develop selected low density estates

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The modelling of the proposed position allowed for:

• Sales of 450 properties (15 per year amounting to £4.6m per year at today's prices)
• Demolish 224 and re-build 592 units on States-owned sites
• Social housing stock would be approximately 4,444 units at the end of the 30 year plan
• Phased increase to 90% rent policy with an increase of £5 per week above the level of the annual uplift in rental values
• £40  million  internal  (States  of  Jersey)  borrowing  and  £108  million  external (privately funded) borrowing
• Return  to Treasury  maintained  in  real  terms from  2014 after Comprehensive Spending Review savings are delivered in 2013 (as set out in the Medium Term Financial Plan)
• Additional income support costs resulting from the initial implementation of the proposed rent policy added to the return to Treasury

Sensitivity analysis was performed with respect to:

• Rent convergence with weekly increase caps of £0, £5, £10, £15 and £20
• 15 and 20 sales of properties per annum, and calculation of the number of sales required if no external borrowing was taken out

 Interest rates of 4% for internal borrowing and 4.7% or 6% for external borrowing

• Different stock investment options:
• Option A: Decent Homes Standard only
• Option B: Option A + intensification on existing sites*

 Option C: Option A + Option B + 318 new build on acquired sites**

*Decent Homes Standard plus completion of refurbishment and intensification of La Collette low rise, Le Squez phases 4 to 8 and Victoria Cottage Homes phases 1 to 4

**Decent Homes Standard plus completion of refurbishment and new build projects listed in Appendix B

The outcome of the sensitivity analysis was presented to the Political Steering Group at briefings held between 13 December 2011 and 9 January 2012.

Conclusions  of  the  Political  Steering  Group  at  briefings  held  between  13 December 2011 and 9 January 2012

The Political Steering Group agreed that the proposed Outline Business Case solution should be further investigated and presented in the FBC and this should incorporate a 90% of market rents policy. The implementation of the 90% of market rents policy which was discussed with the Political Steering Group, which is not the policy proposed in this FBC, was as follows:

• Tenants in receipt of any amount of the housing component of Income Support:
  • These tenants would be charged 90% of market rent from April 2014. Their Income Support payments would increase by the same amount as their rent increase. Therefore, tenants in receipt of the housing component of Income Support would be fully protected
• Tenants not in receipt of Income Support

 These tenants would be charged rent at 90% of market rent from 1 April

2014. At the same time they would receive a subsidy for the same amount as their rent increase

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• Between April 2014 and April 2015, tenants would be given the opportunity to apply for means testing in order that their subsidy is not immediately withdrawn. The criteria for the means test would be designed to ensure that  tenants  do  not  encounter  financial  hardship  and  would  include consideration of their expenditure
• For means-tested tenants, the subsidy would be phased out from 1 April 2015,  dependent  upon  the  circumstances  of  the  tenant,  within  the following parameters
  • Minimum of £5 per week reduction in the subsidy per year (or the total or remaining subsidy where this is less than £5 per week)
  • Maximum of 10 years

• Cottage Homes tenants
  • Residents of Cottage Homes properties are governed by a constitution. The constitution contains terms and conditions which are different to those included in the standard tenancy agreement used for tenancies in general stock. Amongst other things, the constitution stipulates that a contribution is paid rather than a rental
  • A Report and Proposition to repeal the constitution would be proposed which, if successful, would result in future Cottage Homes tenants moving to the standard tenancy agreement
  • Cottage Homes residents with tenancies at 1 April 2014 would be fully protected (including after the property is refurbished and if a decanting period is required) unless and until such time that they wish to move to an alternative property

Additional Income Support costs arising from the implementation of the rent policy would be paid for by the Housing Organisation through an increase in the annual return made by the Housing Organisation to the States of Jersey.

Final approval for the proposed rent policy is subject to an acceptable option for the housing component of income support being identified. This is addressed in the Financial Case in section 5.2.

Updated proposed rent policy

In December 2012, the Housing Minister met and consulted with States Members and the Health and Social Security Scrutiny Panel in relation to his proposals for the future of Social Housing in Jersey. Recurring concerns expressed to the Minister were:

• The return to the 90% of market rent policy
• The size of the annual return to Treasury
• The  social  impact  of  the  rent  policy  on  tenants  given  current  economic circumstances

80% rents policy consideration

In December 2012, the Housing Minister asked for modelling to be undertaken to establish the  financial  implications  of  an  80%  of  market  rent  policy  whilst  still  performing redevelopment plans and achieving Decent Homes Standard objectives.

3 additional scenarios were modelled, using the assumptions noted in section 3.4 and rent policy implementation noted above. The scenarios were as follows:

1. 80% of market rents policy
2. 80% of market rent policy with a one off reduction to the return to Treasury in 2016 of £4,750k (which represents £4,204k in real terms)

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3. 80% of market rent policy with a one off reduction to the return to Treasury in 2016 of £1,800k (which represents £1,593k in real terms)

An 80% of market rent policy with no reduction to the return to the States of Jersey (scenario 1), would result in a loan period of 26 years and generate significantly lower cash surpluses at year 30.

If the return to the States of Jersey was reduced by £4,750k (scenario 2), the outputs for the Housing Organisation would be similar to the business model with a 90% rents policy (with no reduction in the return).

Reducing  the  return  by  £1,800k  (scenario  3)  would  result  in  increased  borrowing requirements and lower cash surpluses at year 30.

It was considered that scenario 2 could represent a suitable compromise. Therefore, the robustness of this model was assessed through the performance of sensitivity analysis.

The results of the sensitivity analysis revealed that the Housing Organisation did not have a viable business model in a weak rental and/or property market. Therefore, there was a high risk that additional support would be required from the States of Jersey.

The outcome of the review concluded that the 80% of market rents policy, with a reduction in the annual return to the States of Jersey of £1,800k in 2016, did not represent a viable solution because there was a high risk that the Housing Organisation would not be self- sustainable.

90% of market rent on new tenancies

In January 2013, the Minister for Housing, taking in to account the outcome of business modelling  in  the  round  and  stakeholder  views,  including  concerns  raised  by  States Members and the Health and Social Security Scrutiny Panel noted above, agreed to the development a Full Business Case incorporating the following assumptions:

• An annual return to Treasury that is maintained in real terms from 1 January 2016 (after commitments contained within the Medium Term Financial Plan have been delivered)
• A rent policy of 90% of market rent on new tenancies. This is described in section
  1. and summarised below
     • Existing tenancies would remain on the same rental charges with annual inflation linked increases (capped at 90% of market rents if applicable)
     • Rents on new tenancies would be charged at 90% of market rent with annual inflation linked increases (capped at 90% of market rents if the inflation linked increase was greater than the increase in the market rent)
     • Tenants in receipt of any amount of the housing component of Income Support would not be financially impacted by this rent policy in their current tenancies or if they transfer to another property within the Housing Organisation's stock
     • Tenants not in receipt of the housing component of Income Support would not be financially effected by this rent policy whilst they remain in their current properties. Should they move to another property they would be required to pay 90% of market rent for the new property. Section 5.2 of the Financial Case includes analysis that shows the affordability of the proposed rent policy for tenants in these circumstances

The Minister for Housing requested that a financial business model was developed to assess the viability of this option. The results of the business model revealed that the Housing Organisation would have a self-sustaining viable business model including in times of economic downturn (including a weak rental and/or property market).

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It was agreed to prepare the Full Business Case on this basis, which incorporates the updated business modelling assumptions noted in section 3.4.

The remainder of the Economic Case assesses the 7 delivery options. The Financial Case summarises the business case of the preferred option and tests the robustness of the business case by performing sensitivity analysis.

A further change in the assumptions per the business modelling performed for the Political Steering Group in December 2011 to the financial business modelling contained in this Full Business Case is a reduction in the number of property sales. In the assumptions in this Full Business Case, properties sales are 300, not 450 which were incorporated in the Outline Business Case. This change represents 15 sales per annum for 20 years rather than for 30 years. Proceeds from property sales are used to fund the new build projects. This funding will only be required until external borrowing is repaid, which is forecast to be within 20 years.

2. Other progress

The proposed solution and a near market rent policy was incorporated in the "Achieving Decent Homes, An Affordable Housing Framework for the Future" White Paper which was issued on 12 April 2012 after being approved by the Council of Ministers on 15 March 2012.

The Council of Ministers agreed to provide £27.1m to the Housing Department in 2012 to advance 6 refurbishment and new build projects. Report and Proposition P40/2012 was lodged on 12 April 2012 and has been approved. The cash advanced will be repaid on inception of the new delivery organisation.

3. Changes to stock development plans and external borrowing

New build plans and external debt at Outline Business Case stage noted in section 3.3.1 resulted in net additional units of 368 and external debt of £108m identified within the "Achieving Decent Homes" White Paper. Further sites have now been identified for new build  development  by  the  Minister  for  Planning  and  Environment  and  have  been incorporated  in  the  updated  business  modelling  to  demonstrate  their  capacity  and flexibility to deliver new homes (see Appendix B for a full list of proposals). This results in the following changes to new builds, major refurbishments and external borrowing since the proposed Outline Business Case solution was agreed by the Political Steering Group at briefings between 13 December 2011 and 9 January 2012. Refurbishment projects are also noted below for further information.

*the peak shown in the above table are for option 6 – Wholly owned Housing Company

4. External borrowing

It is recognised that the new Housing Organisation requires external finance in order to meet its objectives. The States of Jersey may, for major investments such as social housing, which have long term benefits, decide to borrow in order to finance the project and spread an element of the cost to future tax payers who will also benefit from the new facility. The States of Jersey are presently exploring a range of options.

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A financial advisor has been appointed initially to recommend options for the best financing options. Once a workable solution is identified, a proposition will be taken to the States to seek their approval for the proposed funding strategy, in compliance with Article 21 of the Public Finances (Jersey) Law 2005.

The Treasury Department have estimated that borrowing of up to £200m over a 20 year period is proposed to be made available to the Housing Organisation at a fixed interest rate of 5% per annum. This facility is considered when appraising the options in this section, and performing sensitivity analysis for the preferred solution in section 5.7.

4. Summary of updated business modelling assumptions

The results of business modelling for the 7 delivery options (which are described in section 3.4.3  and  Appendix  C)  incorporated  in  this  report  are  based  on  the  following  key assumptions:

• Decent Homes Standard achieved in 10 years and maintained
• Return to Treasury maintained in real terms from 1 January 2016 after delivering the returns set out in the Medium Term Financial Plan including Comprehensive Spending Review savings in 2013 (option 6 only (for other options surpluses are returned))
• Refurbishment and new build plans noted in Appendix B with a net gain of 434 units

 Sales of 300 properties (15 per annum up to year 20 of the business model)

• £40m internal borrowing facility at a repayment interest rate of 4% per annum (for options 2 to 7)
• External borrowing facility to fund stock development and any remaining cash flow shortages (for options 4 to 7). External borrowing assumptions are noted in section 3.3.4
• Proposed rent policy and implementation thereof noted in section 3.4.1 (except for option 1 which incorporates the existing rent policy)
• The use of the States of Jersey Statistics Unit central scenario RPI projections and average earnings inflation of 0.75% in excess of RPI (which represents half of the long term expectation)
• Market rent inflation at RPI plus average earnings inflation of 0.75%

The detailed business models for each option are available on request.

1. Updated  assessment  of proposed  rent  policy  and  income support

It was noted in the Outline Business Case that social housing rent levels have fallen below fair rent levels.

On average, States of Jersey social housing rent levels are approximately 70% of market rents (based on a valuation of social housing rents performed and validated by professional valuation experts). The rents range from under 50% of market rents to (in a small number of cases) over 100% of market rents.

Rents at these levels are not appropriate because:

• Aggregate rents at these levels are insufficient to maintain States housing at Decent Homes Standard and make the annual return to States of Jersey

 Rent levels set below fair rent provide a subsidy to the tenant. This subsidy is

unintended, hidden and not means tested

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It is recognised that tenants will have entered in to tenancy agreements and will have planned their finances on the basis of the prevailing rent levels. It is proposed to allow current tenants to continue on their current rent levels (with annual increments explained below) for the duration of their tenancy.

1. The proposed rent policy

The proposed rent policy modelled in this FBC sees a return of social housing rents to fair rent levels for any tenancy that commences on or after 1 April 2014. Fair rent levels are set at 90% of market rents to track but not inflate market rents in the private sector.

New tenancies (and existing tenancies that are at 90% of market rents) will be adjusted annually  by  RPI  plus  average  earnings  inflation  of  0.75%  in  excess  of  RPI  (which represents half of the long term expectation). However, where this would take the rent above 90% of market rent, the rent will only be increased to 90% of market rent.

For existing tenancies that are above 90% of market rent (approximately 450 properties), rent will be frozen until it matches 90% of market rent. Thereafter, it will be adjusted annually as noted above.

The annual return to Treasury will be maintained in real terms (i.e. adjusted annually by RPI). Therefore, increases in rental income above RPI will be retained by the Housing Organisation. Where increases in rental income are below RPI, i.e. in a weak rental market,  the  Housing  Organisation  will  absorb  this  into  its  operations,  therefore,  not requiring additional support from the States of Jersey.

This  could  be  achieved  by  changing  stock  development  plans  (including  re-profiling maintenance costs), overhead cost reductions, alternative income sources from widened activities, further property sales in some years, delaying repayment of the internal loan and obtaining further external financing. The Housing Organisation would be required to keep its operating practices under continuous review, with a view to minimising costs and maximising flexibility within its business model.

The amount of additional rent forecast to be generated by the proposed rent policy is noted in the table in section 3.4.1.3.

2. Implication for tenants

Tenants in receipt of the housing component of Income Support

Rents charged for properties held by the Housing Organisation will continue to be at a level that would be covered by the housing component of Income Support. Therefore:

• Tenants entitled to the full housing component of Income Support will continue to have the full amount of their rent paid whilst they are a tenant of the Housing Organisation

 Tenants entitled to any lower amount of the housing component of Income Support

will  continue  to  receive  the  level  of  Income  Support  appropriate  to  their circumstances

In other words, tenants in receipt of any amount of the housing component of Income Support will not be financially impacted by the proposed rent policy in their current tenancies or if they transfer to another property within the Housing Organisation's stock.

Tenants not in receipt of the housing component of Income Support

Existing tenants not in receipt of the housing component of Income Support will not be required to pay additional rent as a result of the proposed rent policy (other than annual increases explained in section 3.4.1.1) whilst they remain in their current properties.

Should those tenants transfer to another property within the Housing Organisation's stock (thus creating a new tenancy), rent will be charged at 90% of market rent for the new property.

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Section 5.2 of the Financial Case includes analysis that shows the affordability of the proposed rent policy, in terms of the ability of tenants to pay additional rent for those not currently in receipt of Income Support.

3. Implication for the States of Jersey

The return to Treasury is maintained in real terms from 1 January 2016 after delivering the returns set out in the Medium Term Financial Plan including Comprehensive Spending Review savings in 2013 (option 6 only (for other options surpluses are returned)).

This section explains the forecast housing component of Income Support resulting from the proposed rent policy.

The table below includes forecasts for:

• The additional rental income received by the Housing Organisation as a result of the proposed rent policy being implemented (compared to the existing rent policy)
• The  amount  of  the  additional  rent  that  will  be  paid  by  the  Social  Security Department. This is modelled as 67% of the additional rent because approximately 67% of the tenants of the Housing Department are entitled to an element of the housing component of Income Support