Housing revenue account business plan

Background

The Housing Revenue Account is a ring-fenced account within the council which is used for all transactions relating to Cheltenham’s council homes. All of the income generated from these council homes has to be kept in the Housing Revenue Account and used for the purpose of maintaining and investing in existing homes, building new homes and delivering services to tenants and leaseholders.

The aims and priorities over the next five years, set out in this business plan, are modeled over a 30-year term to understand the financial impact of the investment aspirations within this plan and to ensure that the HRA remains financially viable. The assumptions within the model are updated annually as part of the budget setting process. This financial model is also used to stress test the HRA to understand the key financial risks which need to be managed in both the medium and long term to ensure the HRA remains viable.

Current Context

The UK is faced with the most significant cost-of-living crisis in a generation. Inflation in 2022 has increased to 11.1%, the Bank of England base rate has increased from 0.1% to 3.5% with further increases expected in 2023 and energy costs have soared for both consumers and businesses.

Excess cost inflation, increased interest payable, energy costs and additional compliance expenditure have added £1.8m to the HRA cost base in 2023/24 compared to the 2022/23 budget prior to other year on year changes of £0.7m resulting in an overall expenditure increase of £2.5m. Whilst rental income will be increasing it has been capped at 7% for 2023/24 resulting in the estimated net operating surplus in the HRA falling from over £1m to £70,800 in 2023/24.

The long-term impact of this high inflation and capped rent is substantial on the 30-year outlook with capacity in the HRA reducing by an estimated £92m.

This reduced capacity in the HRA means the scale and pace of investment in existing and new homes needs to be carefully managed to ensure that vital services to customers and communities are protected. To deliver growth and maintain long term financial viability, additional sources of revenue need to be secured including building or acquiring new homes for rent, additional revenue and capital grant funding and through CBH exploring new opportunities for commercial income such as private rented homes (as noted in the aims above).

Investing for the next 5 years

The priorities for the next five years demonstrate the council’s commitment to Cheltenham residents and communities during this volatile and challenging period through its continued investment over the medium term in improving existing homes, supplying new homes and investing to make Cheltenham net zero carbon whilst providing immediate support during the cost-of-living crisis.

Over the five years of this business plan the council is proposing to invest £225m in these priorities as set out below.

• Increase delivery of affordable homes including new net zero homes - £97m
• Improve existing homes including investment to make homes net zero - £64m
• Provide homes that are safe and well maintained - £30m
• Provide efficient and accessible housing services - £21m
• Support strong and socially sustainable communities - £21m

Funding and Financial Viability

Whilst the impact of inflation, the rent cap, interest rates and compliance changes have had a substantial impact on the capacity of the HRA over the medium to long term, it is still important to invest in existing and new homes and the customer focused services which are essential for the support of our communities in this most challenging of times.

The significant level of capital investment proposed within this plan will be financed by a combination of borrowing, grant funding, shared ownership sales and capital receipts. To deliver this substantial investment, the level of debt within the HRA will be higher at its peak and need to be serviced and repaid over a longer period than previously projected. This brings its own risks which need to be carefully managed over the short to medium term to ensure viability over the long term.

The following parameters are used as measures to determine viability of the 30-year plan for modelling purposes:

1. Revenue reserves is on or above the approved minimum
   • The minimum revenue reserve balance of £1.5m is the level approved by council and equates to approximately £330 per property
2. The capital programme for existing homes is affordable
   • Being able to afford the capital programme and therefore ensuring the existing homes are maintained for the long term is a key principle for all Local Authority’s with housing stock.
3. Interest cover
   • The interest cover percentage is used to determine how easily the HRA can pay the interest expense on outstanding debt.
4. Debt at the end of the 30-year plan as a percentage of peak debt during the plan
   • Since the abolition of the HRA debt cap in October 2018 the council has been able to set its own prudential limits on HRA borrowing, rather than rely on the cap specified by Government. The HRA’s ability to repay borrowing over a reasonable period is a key factor when deciding whether a proposal to borrow for HRA purposes is a prudent decision

Throughout the 30-year plan period the HRA revenue reserve is maintained at or above the £1.5m minimum level and the capital programme for existing homes remains affordable.

As can be seen below, interest cover falls below 125% in the short term due to increased costs from high inflation and then starts to rise as new homes and consequently rental income are added to the HRA.

Debt is estimated to peak at £234m in the medium term, mainly due to the investment in new homes, and then starts to fall as additional rental income and careful cost management increases the net operating margin and allows for repayment of this debt.

These current projections show that the parameter relating to the repayment of debt does not meet the target of 50% of peak debt at the end of the plan period. This is due to the current financial pressures on the HRA including high inflation and the rent cap for 2023/24. This is considered necessary to allow for the continued investment in essential services and new homes as set out in this business plan. Careful monitoring will be undertaken to ensure that the scale and pace of delivery does not risk long term viability.

Key Assumptions

The budget for 2023/24 and projections for the following four years are underpinned by a number of key assumptions which are set to estimate future income, expenditure and capital investment. These assumptions take account of the current operating environment and state of the UK economy. Due to the current volatility in the UK and international economies these assumptions will be updated each year and sooner if there are significant, unprojected changes. The key assumptions are set out below.

• Consumer Price Index (CPI) assumed to fall to 5.2% in 2023/24 and then return to the Government’s target rate of 2% in 2024/25
• Retail Prices Index (RPI) assumed to remain 1% above CPI throughout the plan period
• Following the rent cap of 7% in 2023/24, rent increases to return to CPI + 1% for 2024/25 and then reduce to CPI + 0.5% and then CPI thereafter (next review of Government rent policy due April 2025)
• Rent estimates assume a 1% void rate and 20 RTB sales annually and also reflect additional income from newly built homes and acquired homes
• Cost increases to return to CPI from 2024/25 onwards apart from building costs which track RPI until returning to CPI in the medium term
• Borrowing rates to average 3.65% in 2023/24 before falling to 3% per annum over the long term
• A refreshed assessment of the 30-year capital programme on major works and component replacement each year
• Minimum HRA revenue reserve balance to remain at £1.5m over the long term
• New fixed or temporary borrowing to be available as required throughout the life of the plan
• This is considered necessary to allow for the continued investment in essential services and new homes as set out in this business plan. Careful monitoring will be undertaken to ensure that the scale and pace of delivery does not risk long term viability

Additional funding sources

Sourcing and bidding for income generation features throughout the strategic aims and intentions of this business plan. CBH will need to consider the availability and access to relevant government funding to support HRA finances throughout the five-year period and be responsive to opportunities, including government funding, as they arise. CBH will lobby when needed to raise attention and focus to funding and income opportunities to support the delivery of this business plan, and ultimately for the benefit of customers and residents of Cheltenham.

Value for money

Demonstrating excellent customer services at the right cost is crucial and ensures the council and CBH are delivering value for money (VFM); it is about understanding the need to spend and managing that effectively to maintain strong core services and continue to achieve positive change and outcomes for our customers. This ensures the rent paid into the Housing Revenue Account (HRA) delivers high quality services whilst maintaining and improving existing homes and building more affordable homes.

Performance, satisfaction and costs are benchmarked against other housing providers in the sector with a target of first and second quartile performance and satisfaction whilst targeting costs at a median sector level.

CBH continues to look for ways of making services cost efficient and opportunities for additional income to increase the capacity of the HRA for investment and maintain long term financial viability.

Sensitivity analysis

The financial projections noted above summarise expenditure, investment, capital financing and borrowing in respect of council housing over a 30 year period, starting in 2022/23. This baseline position reflects the council’s best available data and assumptions and allows for inflationary pressures impact on budgets and programmes. It also assumes a continuation of existing rent policy on the part of the Government (CPI + 1%), after applying the 7% cap to the maximum rent increase for existing tenants in 2023/24. Alongside this baseline CBH have also modelled the effects of the following sensitivities:

• Inflation is higher than baseline in 2024/25 by 2% and 2025/26 by 1% also resulting in higher rent increases
• The government decides to impose a further cap on rent increases in 2024/25 of CPI –1%
• Interest rates are higher than baseline over the medium term
• The combined effects of the above sensitivities

These sensitivities reflect the effects of changes in economic factors and government policy that are outside of the council’s control, as a way of assessing some of the underlying risks associated with the projections.

Under all sensitivities the HRA is able to maintain the minimum reserve balance of £1.5m throughout the projections. All sensitivities cause peak debt to occur in 2032/33 and permit the council to be reducing debt year on year by the end of the 30 year period. The Inflation sensitivity increases both costs and income (primarily rents) over the medium term. Since income is greater than expenditure, this enables the council to maintain lower levels of debt. The rent cap sensitivity reduces the income generated from the baseline rent increase for 2024/25, causing the council to borrow more to deliver its capital programme and take longer to repay the debt. Similarly, the interest rate sensitivity requires the authority to pay more for its debt, reducing the ability of the HRA to repay debt early.

The combined sensitivity has more complex effects. Inflation is greater for both income and expenditure but allowing for an additional rent cap in 2024/25 means that the rise in costs is greater than the additional income generated, causing debt to rise to the highest level among the sensitivities tested.

Table showing???

Scenario/Sensitivity	HRA CFR 2022.23	HRA CFR 2031.32	HRA CFR 2041.42	HRA CFR 2051.52	Peak debt year	Peak debt amount	Terminal debt year	Terminal debt amount
Baseline	£78,980	£222,369	£206,790	£166,256	2032.33	£234,805	2051.52	£166,256
Baseline + Inflation Sensitivity	£78,980	£222,233	£198,050	£144,097	2032.33	£234,391	2051.52	£144,097
Baseline + Rent Cap Sensitivity	£78,980	£223,926	£210,602	£172,779	2032.33	£236,575	2051.52	£172,779
Baseline + Interest Rate Sensitivity	£78,980	£223,211	£207,928	£167,791	2032.33	£235,673	2051.52	£167,791
Baseline + Combined Sensitivities	£78,980	£228,000	£214,123	£171,166	2032.33	£242,129	2051.52	£171,166

Interest cover performance is weaker if costs rise without a compensating rise in income, or if income reduces. This is demonstrated clearly by the rent cap sensitivity, which shows the effects of income rising at a slower rate than costs in 2024/25. On the other hand, performance improves under the inflation sensitivity (which increases both costs and income) and the combined sensitivity (which allows for higher underlying inflation, so permits a larger rent increase in 2024/25 than under the rent cap sensitivity).

None of the sensitivities impact significantly on the ability of the HRA to maintain a minimum balance. The additional income generated (assuming no further rent cap) under the inflation sensitivity allows the authority to reduce HRA debt by £22m after 30 years and is beneficial. All of the remaining sensitivities require the authority to hold higher levels of debt, with the rent cap sensitivity having the greatest negative impact.