A new era for rents
What constitutes a ‘fair’ rent?
This is a dilemma being faced by most social landlords in the UK right now. But the challenge is especially acute for not-for-profit housing provider Dolphin Living, the charitable white knight purchaser of the notorious New Era Estate in Hackney, east London.
After dramatically rescuing the estate’s tenants from mass eviction and homelessness in December, the pressure is now on for the housing charity to table a rent policy that is ‘demonstrably fair’ to existing tenants, future tenants and the landlord. This is a tricky balance at the best of times, especially in this corner of Hackney. Failure to do so could have serious consequences; the New Era tenants have already demonstrated that they are not to be trifled with.
Pitted against Britain’s richest MP Lord Richard Benyon (or his family’s property management company, the Benyon Estate*) and US private equity giant Westbrook Partners, the tenants of the New Era estate fought plans to hike their long-standing low rents to full market rates.
They formed a powerful, but unlikely, protest movement led by comedian Russell Brand and later backed by Hackney Council, the Unite union, a host of high-profile MPs and even London mayor Boris Johnson. What started as a group of private tenants flyering in Hackney’s Hoxton Market escalated to hundreds of protestors marching to the doorstep of prime minister David Cameron at Number 10 Downing Street, waving a petition with more than 350,000 signatures.
In the face of massive political pressure, first the Benyon Estate, and then Westbrook, backed down. A fast-track deal brokered by the Greater London Authority sold the estate to Dolphin Living, which pledged no evictions and a year-long rent freeze. The move marked a fantastic victory for the residents and saw a previously obscure housing provider crowned the charitable saviour of the New Era estate.
The national press was captivated by the story – not just because it was able to create a cast of pantomime villains and heroes – but because it served a much bigger purpose: it reframed the public’s perception of the housing crisis from a struggle to buy a house, to a struggle to even rent one. But for many housing professionals, this was of limited relevance given it was about private renters and Dolphin is not a social landlord.
“The chance to experiment is a really unique one.”
Mark Kent, managing director, Dolphin Living
The next chapter of the New Era story is likely to prove far more interesting to them. The UK’s highest-profile tenants are set to become guinea pigs for a radical new discounted rent model – one which Dolphin hopes will form the foundation of a new generation of housing associations. As Dolphin Living chief executive Jon Gooding puts it: ‘We want to become another Peabody or Guinness.’
Its plan for doing so is simple: it intends to charge rents that are genuinely affordable to low-income households without any state subsidy. And, at the New Era estate, this could see Dolphin become the first landlord to introduce a personalised means-tested rent model based on income.
Ironically, Dolphin is only able to do this because it is not a regulated social landlord, and because the New Era residents are private tenants.
‘We see New Era as being quite a unique opportunity to experiment with the possibility of having personalised rents,’ Mr Gooding explains. ‘Because they [the tenants] are assured short-hold tenancies, they don’t have protection and they [the homes] are not owned in a registered provider, we don’t have any Homes and Communities Agency [HCA] grant, we don’t have any nominations agreements with Hackney, we don’t have bankers, so we have the freedom – subject to my board of governors – to do what we want.’
‘The opportunity that Dolphin Living has here is that it is almost a blank canvas,’ adds Mark Kent, newly-appointed managing director of Dolphin Living. ‘The chance to experiment is a really unique one.’
To be clear, Dolphin Living is the housing delivery arm of the Dolphin Square Foundation – an organisation set up in 2005 based on a charitable endowment of £140m from the Dolphin Square Trust. Its social purpose is to provide affordable homes for private tenants who need to either work or live in Westminster. It has built 150 homes to date, with plans for a further 350 – these are mostly privately let at ‘intermediate’ rents, which are linked to income rather than market rents. It hopes to pilot means-tested rents in New Era, then if the system works, roll it out more widely.
As an aside, the trust was set up using the proceeds of a deal between Westminster Council and, believe it or not, Westbrook Partners (Mr Gooding insists the fact Westbrook eventually sold New Era to Dolphin was pure coincidence).
“In central London, there is now a complete disconnect between market costs and people’s ability to pay.”
Jon Gooding, chief executive, Dolphin Living
The organisation’s commercial aspirations are informed by its board, which include senior social housing figures from Westminster Council, CityWest Homes, Peabody and Sanctuary. It has registered a housing association arm with the HCA which will be chaired by outgoing Guinness chief executive Simon Dow and will be used to raise £160m of cheap debt. This will in turn provide a £300m development budget with which it intends to build 1,000 affordable homes by 2020. To continue to build 100 homes a year after this, Dolphin needs a 4% net yield from all its investments – including the New Era estate, which also requires future regeneration work.
These homes that Dolphin builds are mostly let at intermediate rents linked to bands of household income rather than the local market rates. The affordability criteria it applies – in which the cost should not exceed 40% of household income – is already making a mockery of the terminology around affordability. For example, one of its schemes in Soho charges lower income tenants an intermediate rent set at 33% of local market rates – yet elsewhere in Westminster, social landlords can charge up to 80% using the government’s affordable rent model.
‘In central London, there is now a complete disconnect between market costs and people’s ability to pay, so it doesn’t really matter whether it’s 80%, 60% or 50% of market rent because it is probably not affordable at those levels,’ says Mr Gooding. ‘If it’s not affordable, it’s not affordable.’
This is certainly the case in Hackney. Based on a median household income of £31,000 a year and not spending more than 40% of net income on rent, a tenant should be able to afford to pay a rent of £180 a week. Mr Gooding says that the New Era tenants are already paying ‘something like that’, which equates to around 50% of the market rate. But the gap between incomes in the borough means that the median will not be affordable to some of the tenants – hence the appeal of means testing.
‘Conceptually, personalised rent seems like an attractive option and passes that test of it being demonstrably fair. If we ask people to pay a rent that is based upon their ability to pay, then Karl Marx would approve. We have looked at the Joseph Rowntree minimum income standards and modified them to reflect London inner-city issues, and identified a minimum amount of cash our residents need in their pockets in the areas we operate in.’
The Rowntree standard is calculated based on what members of the public consider households need in order to reach a minimum acceptable standard of living, and is updated frequently to reflect changes in the economy and society.
Scepticism in sector
While, for the most part, sector figures welcome the experiment, there is some scepticism too. One London-based housing chief executive reels off a series of challenges: ‘What’s the incentive to better yourself? How would it work under universal credit? What happens if you go out of work? What happens if all your income is from low-income tenants? When does someone pay 100% of market rent? How do you scale it? What happens if a recession happens overnight?’
Mr Gooding has answers to some of these points (see box: Dolphin’s proposals for New Era) – but not all. Some, such as David Montague, chief executive of L&Q, are concerned about linking to income. He says L&Q started setting its rents at 35% of tenants’ household income based on post codes after affordable rent was introduced in 2010, but now has reservations about how sustainable this approach is.
‘As time has gone on and we have grown to understand welfare reform, we have started to wonder whether our approach will still be affordable in five years’ time.’
Overlooking the estate
Perhaps most immediately pertinent is the question of whether residents will consider the proposals – which would see some tenants paying significantly more than their neighbours – demonstrably fair. Is there a threat that in a year’s time, the New Era tenants might be calling in Russell Brand and marching on Downing Street again?
‘Clearly, as people start to do the maths, they may feel…some people are going to like this more than others,’ concedes Mr Dow. ‘But if it is part of a fair arrangement, then I think it goes a long way.’
Mr Gooding is more confident.
‘I have spoken to Russell and we are best mates…’ he says with a grin. ‘He is very supportive of what we are doing, which is a relief. I honestly can’t see a reason why our tenants would want to man the barricades at any stage over what we are doing here. We tend to work collaboratively. I think we will be able to present a set of proposals to the tenants that they will think represents a fair deal. In a way, the allocations policy is more difficult than the rents policy.’
Inside Housing tracked down Mr Brand to get his views on the rent plan. ‘I don’t really understand how it is going to work yet, mate – so I’d rather not be quoted,’ he replied – instead offering a hug. Similarly, the New Era tenants remain cautious. Despite being happy in principle to chat, they ended up not commenting. All 92 families are undertaking interviews about their personal circumstances that will inform the rent policy, so it is too soon to understand how many will be affected.
Regardless of what approach Dolphin decides, the experiment at New Era is a crucial one for the rest of the sector. Mr Dow warns the lack of coherence around rents will be ‘an Achilles’ heel’ for social landlords. ‘Unless we come up with some better ideas between us, we may find ourselves in a position where our customers don’t understand what we are doing, which is a dangerous place to be.
‘I think lots of other organisations will be very interested in what we do at Dolphin – and if we come up with something that is workable, then associations may want to use that as a discussion point with the regulator.’
This means the spotlight must, once again, return to the aptly named New Era estate as Dolphin attempts to redefine affordability – and also fairness.
*For full disclosure, the Benyon Estate is the author’s landlord.
Dolphin’s proposals for New Era
- Rents should be based upon a tenant’s ability to pay and should leave the tenant with sufficient disposable income to maintain a decent lifestyle.
- The calculation of a tenant’s ability to pay would include entitlement to benefits other than housing benefit.
- For the lowest paid, the rent should be capped at a level which ensures that they are left with no less disposable income than the Joseph Rowntree Foundation minimum income standards (adjusted).
- Rents would have a floor level of the existing rent payable.
- As a tenant’s income increases, they should pay a percentage of that as additional rent.
- For those tenants wishing to participate, rent payable would be calculated from detailed income information provided by tenants.
- Tenants would be given a three-year tenancy with no further means testing until renewal.
- Tenants who don’t want to participate would pay a higher rent.
- Hardship cases will be dealt with separately, not by adjusting rent policy.