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Capital Funding Guide

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Homes and Communities Agency
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8. Affordable Rent

This chapter sets out the procedures which must be followed and the conditions under which providers must progress affordable rent schemes.

1. Overview

1.1 Purpose

1.1.1 This chapter sets out the procedures which must be followed and the conditions under which providers must progress Affordable Rent schemes.

1.2 Context

1.2.1 Affordable Rent is a form of low cost rental social housing, as defined by section 69 of the Housing and Regeneration Act 2008, and is the principal rental product available through the Agency’s Shared Ownership and Affordable Homes Programme (SOAHP).

1.2.2. Social rent provision will only be supported in very limited circumstances. For example, social rent could be considered where decanting existing social tenants in to new homes is necessary. In all cases providers, supported by the relevant local authorities, will have to make a strong case to demonstrate why Affordable Rent would not be a viable alternative. All such cases will be considered on their individual merit.

The following scheme types are included under the Affordable Rent heading:

  • New Build including Acquisition & Works, Off the Shelf and Works Only schemes
  • Rehabilitation including Acquisition & Works, Existing Satisfactory, Purchase and Repair and Works Only schemes
  • Re-improvement of provider-owned stock but not Major Repairs. Note that Major Repairs are covered by the Repair chapter of this Guide

For further information on scheme types please refer to Procurement and Scheme Issues section 3.

1.3 Main features

1.3.1 Affordable Rent property is to be made available for rent up to a maximum of 80% of gross market rent (inclusive of service charges). For further information see section 2.

1.3.2 Section 31(2) of the Housing and Regeneration Act 2008 requires that when Affordable Rent properties, funded by the Agency, are made available, the landlord must be a Registered Provider and are therefore subject to the Regulator’s Standards and regulation regime.

1.3.3 Allocations and nominations processes for Affordable Rent homes are expected to comply with the requirements of the Tenancy Standard; and Registered Providers will be under the same statutory and regulatory obligations as they are when allocating properties for social rent.

1.3.4 The Regulator’s tenancy standard requires Registered Providers to grant general needs tenants a periodic secure, periodic assured or assured shorthold (excluding periodic assured shorthold) tenancy. The tenancy must be for a minimum fixed term of five years, or exceptionally, a tenancy for a minimum fixed term of no less than two years, in addition to any probationary tenancy period. Any exceptional circumstances in which Registered Providers intend to grant fixed term tenancies for a term of less than five years must be clearly set out in their tenancy policies. For further information see section 3.

1.3.5 Affordable Rent schemes are subject to the Regulator’s Rent and Tenancy Standard, but are not subject to the formula in the government’s guidance on rents for social housing 2014.

1.4. Scheme administration

1.4.1. The Agency’s scheme administration requirements are set out in section 3 of the Programme Management Affordable Homes Programme chapter.

1.5 Right to Acquire

1.5.1 The Right to Acquire provisions of the Housing and Regeneration Act 2008 apply to all dwellings built or acquired for the social rented sector with public funding since 1 April 1997, unless exempted. It is a condition of grant funding that providers comply with this legislation. Further details of the Right to Acquire product including property and applicant eligibility, and the legislation can be found in the Right to Acquire chapter.

1.5.2. Section 181(2) of the Housing and Regeneration Act 2008 requires the Agency to notify grant recipients before giving grant whether schemes are to be regarded as having been publicly funded for Right to Acquire purposes. The Agency will meet this obligation by means of an IMS notification confirming to providers of Affordable Rent that schemes are treated as publicly funded for the purposes of the Right to Acquire. This notification will be available for providers to print each time a scheme is approved in IMS.

2. General

2.1 General

2.1.1 This section describes the Agency’s requirements in relation to the rents to be charged on grant funded Affordable Rent schemes.

2.2 Rent setting and valuations

2.2.1 The maximum rental level for Affordable Rent should be no more than 80% of gross market rent (inclusive of service charges). In assessing whether the rent is no more than 80% the individual characteristics of the property must be taken in to account, such as its location and size.

2.2.2 Providers will be expected to maximise their financial capacity, by charging rents at or as close as possible to 80% of market rents, to add to new supply.

2.2.3 For both new supply and conversions providers will be required to assess the market rent (using the definition of the International Valuations Standard Committee as adopted by the Royal Institute of Chartered Surveyors) that the individual property would achieve and set the initial rent at up to 80% of that level (inclusive of service charges).

Please follow the link for further guidance

The Regulator has issued an explanatory note on Royal Institute of Chartered Surveyors (RICS) approved valuation methods which is contained in Appendix 3 of the Rent Standard Guidance.

Please note that this document contains information produced by the Royal Institute of Chartered Surveyors, which could be subject to change.

In particular it is worth noting that for valuation purposes the appropriate lease terms will normally reflect current practice (e.g. twelve month fixed term assured shorthold tenancy) in the market in which the property is situated, not the individual terms of the tenancy in question.

2.2.4 Supported housing and housing for vulnerable and older people, and extra care housing often includes a range of services to support the particular needs of the client group. For this type of property the market rent comparables (including service charges) should be based on similar levels and types of service provision available in that area. Where there are insufficient or no comparables for similar types of provision in the local area, valuers should be requested to identify comparables from other areas, or give their best view of the market rent (inclusive of service charges) that would be applicable in the location in which the property is situated or use an alternative valuation method, setting out their justification. Registered Providers should then set the initial rent at up to 80% of that level.

2.2.5 Exceptionally rents may exceed 80% of market levels in areas where the Affordable Rent would otherwise be lower than the target rent for the property. The target rent therefore constitutes a ‘floor’ for the rent to be charged. However providers will be required to document such decisions together with supporting evidence for audit purposes.

2.3 Setting rents at less than 80% market value

2.3.1 In order to maximise their financial capacity the Agency expects providers to set rents at or as close as possible to 80% gross market rent. Where in specific circumstances providers can demonstrate it is appropriate to set rents at less than 80% of gross local market rents whilst still meeting local needs and delivering value for money they will be required to discuss such cases with their Agency lead investor team. Examples where it might be appropriate could include:

  • Where a rent at 80% of market rent would exceed the relevant local housing allowance cap or place the rent close to the cap or
  • If the local rented market was considered to be particularly weak or fragile

2.4 Rent reviews

2.4.1 Homes let on Affordable Rent terms will not be subject to the formula in the government’s guidance on rents for social housing 2014 as set out in the Regulator’s Rent Standard and Guidance. For further information, please see the Rent Standard Guidance.

2.4.2 In order to provide protection and certainty for tenants, providers and funders, the maximum annual Affordable Rent increase will be the Consumer Price Index plus 1%. The Consumer Price Index will be taken as at September of the previous year.

2.5 Subsequent tenancy renewals and re-lets

2.5.1. Registered Providers will be required to rebase the rent on each occasion that a new Affordable Rent tenancy is issued (or renewed) for a particular property; and ensure that the rent remains at no more than 80% of gross market rent (inclusive of service charges) as of the date the property is re-let – even if this means the new rent is lower than the rent previously charged.

2.5.2. Registered Providers that wish to participate in the High Income Social Tenants scheme should refer to the Recovery book section 3.4.1.9 for further details.

3. Tenancy Agreements

3.1 General

3.1.1 This section describes the flexible tenancy arrangements that Registered Providers are able to operate when providing Affordable Rent, and reflects the requirements of the Regulator’s Tenancy Standard.

3.2 Requirements

3.2.1 The type of tenancy which Registered Providers should use when homes are let on Affordable Rent terms is not prescribed. Therefore, Registered Providers are able to offer Affordable Rent on flexible tenancies; retaining the option to offer assured or secure tenancies if they wish to.

3.2.2 Affordable Rent tenancies may be either long term periodic assured or secure tenancies, or they may be for a fixed term. If fixed term they must be for a period of no less than five years (or two years in exceptional circumstances – see 1.3.4), but Registered Providers have the flexibility to offer longer tenancies, including assured or secure tenancies.

3.2.3 Registered Providers will be required to have regard to Local Housing Authorities’ strategic tenancy policies.

Please see below for further guidance.

Section 150 of the Localism Act requires all Local Housing Authorities to produce a tenancy strategy. These strategies should set out the broad objectives to be taken in to consideration by individual social landlords in the area regarding their own policies on the grant and reissue of tenancies.

The requirement to have regard to local authority tenancy strategies only applies in relation to a Registered Provider’s policies on tenancy type and not to other aspects of a Registered Provider’s business (such as rent setting or conversions).

3.3 Ending a tenancy

3.3.1 Where, at the end of a fixed term tenancy, Registered Providers decide not to issue a further Affordable Rent tenancy, they will be required to offer timely and reasonable advice and assistance to the existing tenants to help them find suitable alternative accommodation.

Please see below for further guidance.

Registered Providers may wish to consider a range of ‘end of tenancy’ options depending on the needs of the household.

The Regulator’s tenancy standard says that where Registered Providers choose to offer Affordable Rent they should offer reasonable advice and assistance to those tenants where that tenancy ends and landlords determine that a further tenancy will not be issued to them.

Where it would be affordable and sustainable for the tenant, one option might be to sell the Affordable Rent property to the tenant(s) on shared ownership terms to assist them in to Affordable Home Ownership. Whilst such a sale would be a voluntary sale on shared ownership terms, Registered Providers are encouraged to refer to the shared ownership chapter for further details of how the Agency’s shared ownership product works. In such cases the sales receipt, including the appropriate proportion of Agency funding (please see section 4 of the Grant Recovery chapter), will be expected to be reinvested in further new supply of Affordable Rent properties.

3.3.2 When disposing of Affordable Rent property Registered Providers are reminded that they will be subject to the Regulator’s Consent to dispose regime.

3.4 Grant recovery

3.4.1. Disposal of Affordable Rent property on the open market, or voluntarily to a tenant on shared ownership terms is a ‘relevant event’ for grant recovery purposes. Registered Providers should credit the appropriate grant amount to their Recycled Capital Grant Fund in the normal way, and ring fence these amounts to be spent on further supply of Affordable Rent properties.

For further information on grant recovery including relevant events, calculating the grant to be recovered, and Recycled Capital Grant Fund administration refer to the Grant Recovery chapter.

4. Reporting and audit requirements

4.1 General

4.1.1 Providers must maintain accurate and complete records both for reporting and audit purposes and this section sets out the Agency’s requirements.

4.1.2 For general requirements see Programme Management AHP 2015 to 18.

4.1.3. All Affordable Rent lettings must be recorded on a Continuous Recording (CORE) lettings log. Further information can be found here.

4.2 Supporting Documentation

4.2.1 For details of the required supporting documentation please see Programme Management AHP 2015 to 2018.