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					                  The City of Edinburgh Council

                  Housing Stock Options Study:
                      Executive Summary

                                    May 2001




Planning, Economic & Development Consultants
Ref: 99/69793-4
       Housing Stock Options Report - Executive Summary                                                     1


     EXECUTIVE SUMMARY


      STUDY OBJECTIVES


1.   The overall aim of the Stock Options Study was to take an objective and thorough
     appraisal of the alternative courses of action available to the Council for the long-term
     financing, investment and management of its housing stock.


2.   Particular emphasis was placed on the need to assess the options within the context of:
     continuing investment in the housing stock, affordable rents, the existing City-wide
     resident focus, maximising the receipt to the Council.


3.   The study was informed by a number of integral elements including:

              the stock condition survey and valuation

              analysis of the Council’s current and projected financial position

              tenant and wider stakeholder consultation

              analysis of the Council’s key housing and corporate objectives.


      STOCK CONDITION, VALUATIONS & FINANCIAL ANALYSIS1


     Stock Condition Survey

4.   In general, the stock condition survey reported that the Council’s housing stock has
     acceptable standards of basic services and amenities. However many of the components
     (e.g. kitchens, bathrooms) are nearing the end of their useful life. The total like-for-like
     investment, which includes limited improvements, for the housing stock over a thirty-
     year period is estimated at £493m. The study also developed what is termed the
     ‘Edinburgh Standard’ focusing on a set of physical improvements to the housing to be
     undertaken over a fifteen year period. The estimated cost of implementing the Standard
     is an additional £227m2.



      1
        The base year utilised for the valuations and financial analysis was 2000/01 therefore it does not take
      account of this year’s financial position (i.e. 2001/02).
      2
        The Edinburgh Standard is still under development, and will be subject to further work within the
      Council and consultation with tenants before it can be finalised. A provisional Edinburgh Standard was
      adopted for use in this study, to estimate the likely scale of investment that will be required and the
      potential impact that improving the standard of the housing stock would have on the options assessed.
      It is stressed that the investment costs associated with the Standard will be subject to change over the
      coming months.
       Housing Stock Options Report - Executive Summary                                                       2


     Valuations

5.   The investment costs associated with the stock condition survey and the costs
     associated with the provision of the housing service have been incorporated within the
     valuations of the housing stock. Tenanted Market and Retention Valuations have been
     produced at various levels including:

               the total Council housing stock (consolidated3)

               each of the six management areas4

               consolidated excluding the six NHP target areas5

               each area excluding the six NHP target areas

               consolidated including the costs associated with the implementation of the
                Edinburgh Standard.


6.   A summary of the main valuations of the housing stock on a consolidated basis and for
     the Central/West and South and East areas6 is provided in the table below:


                                                   Table A1
                       CEC Housing Stock – Summary Of Valuations (Retention & TMV7)
                                          Retention                           TMV
         Area                   Total (£)         Per Unit (£)     Total (£)      Per Unit (£)
         City (consolidated)    285.7m               9,724         200.3m            6,831
         Central/West            74.6m              14,730          63.3m           12,491
         South & East            66.0m               7,561          40.8m            4,674

7.   The positive valuations indicate that the stock could be managed and maintained on a
     like-for-like basis by either the Council or an alternative landlord given the projected
     income.


8.   When the Edinburgh Standard costs are included, the retention valuation declines to
     £88.5m (£3,012 per unit) and the TMVdeclines to -£24.8m (-£845 per unit). That is, the
     TMV with the standard is negative. This means that cost reflective rent increases (over

      3
        The consolidated figure is the value for the total stock. It differs slightly from the summed area totals
      because of roundings within the modelling.
      4
        These are West Edinburgh, Central/West, North, Leith & City, East and South.
      5
        These are Dumbiedykes, Niddrie Marischal, Craigmillar Castle, Hyvots, Moredun and
      Southhouse/Gracemount
      6
        These two areas were chosen as the partial transfer options to be examined through the option
      appraisal.
      7
        The Retention Valuation and Tenanted Market Valuation (TMV) are based on the net income
      generated from the stock, assuming continued use as social rented housing, not the open market value
      of the properties. The difference in valuations for retention and TMV arise from the different cost bases
      that would be experienced by the council and by an alternative registered social landlord - in terms of
      VAT and management costs (a 20% uplift in management costs is assumed under transfer).
        Housing Stock Options Report - Executive Summary                                    3


      and above annual rent increases) and/or a dowry would be required in the event of a full
      stock transfer to ensure financial viability.


      Financial analysis of the Council’s Housing Revenue Account (HRA)

9.    The Council’s HRA amounted to £63.1m in 2000/01 after debt servicing. The
      Council’s current housing debt for all the stock is approximately £270m. HRA
      surpluses are extremely limited, and the Council is likely to increasingly draw on rental
      income over the next few years to make the required capital investment in its housing
      stock.


10.   The HRA analysis shows that the Council has sufficient resources to fund the basic
      repairs, replacements and undertake limited improvements. A surplus of £164m is
      projected to accumulate over the thirty-year planning period based on a rent profile of
      RPI-only increases for each year.


11.   When the costs of the improvements within the Edinburgh Standard are included in the
      analysis, the picture changes. A shortfall, equivalent to £88m over the thirty years,
      emerges between the available HRA resources and the total investment requirements.
      Therefore the financial analysis concludes that the Council would be unable to
      implement the Edinburgh Standard in full, given the provisional specification and
      anticipated resources available.


       THE OPTION APPRAISAL


12.   The option appraisal framework comprised a set of options, evaluation criteria and a
      scoring and weighting system. The framework was developed in consultation with the
      Project Steering Group (including tenant representatives). The options for assessment
      were:

              retention of the housing stock by the Council with variations including the
               implementation of the Edinburgh Standard (retention plus) and the exclusion
               of the six NHP target areas

              full transfer of the housing stock to an alternative social landlord/s and the
               exclusion of the six NHP target areas. The impact of implementing the
               Edinburgh Standard investment was also considered, but not scored.

              partial transfer of some of the housing stock to an alternative social landlord/s
               on a geographic basis – the two examples examined were the Central/West
               housing management area and the amalgamation of the South and East areas
               to illustrate the key differences between relatively low and high investment
               need areas.
        Housing Stock Options Report - Executive Summary                                    4


13.   The appraisal criteria fell within the broad categories of:

              impact on tenants and other users of housing services

              impact on Council policies and the quality of services

              financial appraisal

              impact on staff and employment

              impact on other key stakeholders.


14.   The main issues to arise from the analysis of each option are outlined below.


      The Retention Option

15.   Impact on Customers - The retention option's key advantages were that it already
      actively facilitates tenant involvement at both a strategic and operational level; that
      tenants would continue as secure tenants of the Council and could expect the Council to
      continue to pursue service improvements through Best Value. However rent guarantees
      are unlikely to be available and it is anticipated that there would continue to be a high
      number of applicants on the waiting list.


16.   Impact on Council policies and the quality of services – The Council’s enabling
      activities to increase the supply of social housing may be limited and this was viewed
      as a disadvantage. The main advantages included the continuation of corporate working
      with other services to meet social inclusion and Best Value objectives, the ability to
      fund the repairs and maintenance of the stock on a like-for-like basis and ability to meet
      homelessness objectives more easily.


17.   Financial Appraisal – The Council has sufficient resources to meet the repairs and
      maintenance investment on a like-for-like basis over the next thirty years and service
      the housing debt.


18.   Impact on Staff/Employment – There would be no real impacts on staffing levels or
      other employment considerations under this option. This was considered an advantage.


19.   Impact on Other Key Stakeholders – It was not anticipated there would be any great
      impacts on other stakeholders.
        Housing Stock Options Report - Executive Summary                                 5


20.   Under the retention plus option, the introduction of the Edinburgh Standard could have
      positive impacts on a number of the criteria. However the Standard could not be fully
      implemented on the base case financial assumptions. The conclusion was that seeking
      to implement the Edinburgh Standard within retention could result in deterioration in
      general housing services, increased rents and only a partially implemented Standard.


21.   There was no significant differences identified between the basic retention option and
      retention excluding the six NHP target areas.


      The Full Transfer Option

22.   Impact on Customers – The transfer option may offer opportunities for increasing
      tenant involvement and control, particularly through tenant representation on the
      governing body of the landlord. Transfer would also bring the likelihood of improved
      service delivery and rent guarantees for tenants. However it may have a negative
      impact on other service users, allocations may become more complex and the future
      role of ETF is unclear.


23.   Impact on Council policies and the quality of services – Advantages include the
      Council gaining control of the strategic housing budget, which would enhance its
      strategic capabilities. The disadvantages include loss of influence over social housing
      management, increased complexity in administering homelessness services and the
      uncertainty and potential loss of income for other Council services such as Edinburgh
      Building Services (EBS).


24.   Financial Appraisal – The transfer valuation (£200.3m) is lower than the outstanding
      housing debt by £69.7m. The residual debt would be serviced by the Scottish Executive
      and positive cashflows would be achieved throughout the thirty year period.


25.   Impact on Staff/Employment – It is anticipated that all housing staff would transfer
      under TUPE arrangements thus minimising some of the implications. However other
      Council services may be adversely affected by the transfer particularly those involved
      in central services and employed by EBS.


26.   Impact on Other Key Stakeholders – There may be increased competition for
      development funds among housing associations and a markedly different profile of
      social housing in the city. The Council would gain control of the strategic housing
      budget and would need to strengthen partnership working through the local housing
      strategy. Consideration would have to be given to voluntary organisations funded
      through the HRA.
        Housing Stock Options Report - Executive Summary                                    6


27.   The introduction of the Edinburgh Standard could have positive impacts on a number of
      the criteria including meeting tenant priorities and facilitating improvements to the
      housing stock. The TMV including the Edinburgh Standard is negative, which means
      that in overall terms on a discounted basis expenditure on the housing stock exceeds the
      income generated by it. Work would need to be undertaken to resolve this and options
      include negotiation of the transfer price, persuading the Scottish Executive to provide a
      dowry that would fund the investment gap, agreement on cost reflective rent increases
      or an adjustment to the investment programme. It is worth noting that the Scottish
      Executive may not be sympathetic to a case for a dowry payment, so the burden of the
      funding gap may rest with price negotiations, rent increases or a reduction in the
      investment programme.


28.   There were no significant differences between the basic full transfer option and transfer
      excluding the six NHP target areas.


      The Partial Transfer Option

29.   Impact on Customers – Tenant involvement could be realised for the transferring
      tenants, while the majority of tenants remaining with the Council would continue to
      benefit from its relatively well-developed structures for involvement. Under the South
      and East partial transfer option there may be a negative impact on the remaining tenants
      as the residual debt burden would have to be serviced by the Council five years post-
      transfer. On the other hand the net capital receipt obtained through the Central/West
      transfer may enhance the Council’s enabling capabilities, although there is no guarantee
      that the Council will be permitted to use the monies for this purpose.


30.   Impact on Council policies and the quality of services – There may not be any
      additional supply of social housing realised through the partial transfer option although
      the investment needs of the stock in the transferred area would be met. The delivery of
      the Council’s broader aims may become more complex necessitating effective
      partnership arrangements. There would be an impact on other Council services
      although this would not be as great as the full transfer option. The transfer of the South
      and East area while perhaps contributing to wider regeneration objectives may make it
      more difficult for the Council to meet homeless needs given the larger stock numbers
      and turnover in this area.


31.   Financial Appraisal – The Central / West area has strong cashflows which are
      sufficient to cover the cost of the management and maintenance of the housing stock, to
      cover the apportioned outstanding housing debt and provide the Council with a capital
      receipt (circa £17m). The South and East areas have much weaker cashflows, with
      residual debt of approximately £39m. After the initial five year debt servicing period
      has expired, the cost of the balance of residual debt would be passed onto the remaining
      council tenants.
        Housing Stock Options Report - Executive Summary                                                  7


32.   Impact on Staff/Employment – Those staff who are employed on housing work in the
      partial transfer areas would be transferred to the alternative landlord and have their
      terms and conditions protected through TUPE. Some Council services may see a
      downturn in workload and hence resources.


33.   Impact on Other Key Stakeholders – Partial transfer would present opportunities to
      existing RSLs where the Council did not intend to set up a new organisation. However,
      there may be increased competition for development resources were a new organisation
      set up.


       SCORING


34.   A summary of the scoring outcomes for the main options is provided below:

                                                  Table A2
                                  Stock Option Appraisal: Summary of Scores
                                      Retention    Retention      Full             Partial        Partial
       Criterion                                     plus       transfer          Transfer       Transfer
                                                                                   (S&E)          (CW)
       Impact on customers               5.67           3.67          5.33          5.33           5.67

       Impact on Council policies        6.12           5.25          5.83          4.96           5.83
       & service
       Financial appraisal               4.50          -1.50          4.50          2.25           5.25

       Impact on staff/employment        2.25           1.5           2.25          2.25           2.25

       Impact on stakeholders            1.50           0.75          0.37*         1.12           1.12

       Total Scores                     20.04           9.67         18.28*        15.91          20.12



       Note - were the transfer be to a number of organisations, the score for impact on other stakeholders
       would be 0.94, bringing the total score to 18.85.
        Housing Stock Options Report - Executive Summary                                     8


       CONCLUSIONS


      Partial transfer

35.   While the partial transfer of the Central/West area is the highest scoring option, there is
      no clear rationale for this course of action within the Edinburgh context. There are also
      uncertainties over the potential use of the net capital receipt generated. The option has
      been scored on the assumption that the Council would be able to determine how these
      funds are used, although this may not be the case. The other issue is that, while the
      financial implications of the Edinburgh Standard has not been broken down by
      management area, building the cost of these improvements into the valuation would
      most likely result in a residual debt situation as opposed to realising a net capital
      receipt. Tenants may have to pay for these improvements through cost-reflective rent
      increases above the annual RPI+1% increases. This would have repercussions in terms
      of rent divergence, affordability and inequitable housing standards when compared to
      the tenants that remain with the Council.


      NHP Areas

36.   The study found that there was no material difference whether these areas were
      included or excluded in the retention or full transfer options. This suggests that neither
      of these options would be compromised if the NHP areas were to transfer separately.


      Retention and Full Stock Transfer

37.   The retention option performs best at the like-for-like level. The financial analysis
      shows that the cash flow is sufficient to resource the expenditure identified by the Stock
      Condition Survey to repair and maintain the housing stock, and to continue to fund
      housing services to current levels. In addition, the retention option would be able to
      pursue wider housing and council objectives, and to support external agencies. It is,
      however, noted that an early rent freeze makes the retention option considerably more
      fragile with significantly reduced HRA surpluses.
        Housing Stock Options Report - Executive Summary                                      9


38.   The main disadvantage is that the retention option cannot resource the full
      implementation of the Standard as it is currently defined. Attempting to achieve the
      Standard would demand re-prioritisation of resources within the housing service, which
      would compromise achievement of wider housing and corporate objectives. The
      necessary rent increases would further erode affordability of Edinburgh council rents. It
      is appreciated that the Standard is still at an early stage of development and the cost of
      the final standard may be manageable within the retention plus option. However, it is
      noted that the interim Standard used in the study was not considered particularly
      aspirational, tending to formalise current practice and programme its extension to the
      whole stock. Furthermore, the situation with regard to HRA surpluses is less favourable
      towards the implementation of the Standard given the current rent freeze.


39.   The transfer option performs well at the like-for-like level but not to the same degree in
      overall comparative terms as the retention option. It was considered less well-placed to
      support tenant involvement, particularly in the short-term, or to contribute to some
      housing and corporate policy objectives. On the other hand, the advantages identified
      included rent commitments, the potential to develop new social housing, and additional
      resources would be made available for housing management. Where the transfer was to
      a number (around four or five) organisations, benefits for the RSL sector in terms of
      savings from economies of scale and increased influence of the sector in strategic
      housing policy were identified.


40.   The transfer valuation would not fully fund the Edinburgh Standard. Given that the
      Council's rents are already very high, it is likely that the Scottish Executive would be
      sympathetic to arguments that, at least some of, the cost of the Standard should be built
      into the valuation. Including the full cost of the Standard in the valuation would result
      in a negative valuation, requiring a dowry payment to facilitate the transfer. It is unclear
      whether a dowry would be acceptable to the Scottish Executive, so tenants may be
      required to pay some cost reflective rent increases.

				
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