1. Valuing the Right to Buy 16 April 2014 Pete Redman Managing Director, Policy and Research

2. TradeRisks  We are financial advisors, and arrange finance in the capital markets for housing associations, local authorities, utilities, and property companies  In the last five years we have helped raise £4bn for housing – nearly half of all own name bond issues  We have introduced new investors into the sector – improving competition on rates and terms

3. Introduction  The Scottish parliament is voting on abandoning the Right to Buy; The Westminster Coalition government is planning to increase the maximum discount and to provide marketing, advice and help with mortgages; Wales and Northern Ireland operate different discount rates and maximum amounts  What is the “fair” price for selling a public asset to the sitting tenant?  This study compares the costs and benefits for the tenant and for the public sector

4. Methodology  Using previous work by Holmans (DoE 1980), Forrest, Jones, Murie, Moody, King, Wilcox, Sefton and CLG (impact assessment), and data from CLG live tables, combined with models used in the Housing Revenue Account settlement 2012, valuation techniques have been applied to the Right to Buy question for Council stock in England  Sensitivity tests and regional evaluations are available from the new model – national averages are presented here  Policy and resource implications are explored  Minimise the number of assumptions – Ockham’s Razor

5. Assumptions  The “average” Council tenant exercising the Right to Buy has five years tenure and another fifteen to go  Some receive Housing Benefit (15% full equivalent) and more will receive support with housing costs (30%) when they retire  Future outgoings or receipts are brought to present value using a Social Time Preference Rate of 3.5% plus a medium term inflation forecast of 3%

6. Proportion of Council stock sold through RTB Recent effective discount RHS

7. Social RentPRSOwn Occ LAHA Values OMV VP £110,000130,000165,000225,000 Market rent £pw119135167- Social rent £pw7485-- Value 30yr VIU £18,00043,000106,000- Stock age yrs57518067 OMV VP = Open market value with vacant possession VIU = Value in use England 2013

8. A marriage valuation  A sitting tenant delivers an investment return to the landlord, and when they move the landlord has vacant possession. The combination of these is the Value In Use – Service Potential  A tenant moving now delivers today’s vacant possession value  It is a statutory requirement in Leasehold Enfranchisement that the difference is shared between the parties

9. Marriage value comparator Current OMV VP 110,029 Value in use 10,301 Future OMV VP 60,637 VIU-service potential 70,938 Marriage value 90,484 = Discount of 19,54618% Current discount £ 49,51345% "Excess" discount 29,968

10. Public sector net position Sales receipt 60,51655% Less administration(1,815) Net receipt58,701 VIU-service potential70,938 Surplus (deficit)(12,238) HB 15% on full equivalent 6,490 Future pensioners 5,926 Public sector net position179

11. Results  The “excess” discount on today’s run rate of 6,500 additional RTB sales (3,500 already accounted for in HRA Settlement) could amount to £200m pa transferred to tenants, if sales rates were maintained  The cost benefit analysis and the “fair” discount rate are all highly dependent on the property value and the terms of the tenancy  So for example a fixed term tenancy:

12. 5 year marriage value Current OMV VP 110,029 Value in use 3,798 Future OMVP 92,806 VIU-service potential 96,603 Marriage value 103,316 = Discount of 6,7136%

13. Implications of a “fair” discount policy  Longer security of tenure and lower rents require a higher fair discount, and vice versa  No initial entitlement period (it could happen the day after letting), no increasing discount for time in social housing (in fact there is an argument it should reduce over time)  Affordable Rent and Shared Ownership tenants would get a (small) discount on buy out; Pay to Stay tenants (if it happens) would get a smaller discount  Downsizing sums could be substantially more, say up to £20,000 in London

14. Conclusion  The model can be used to evaluate the relative benefits of capital (eg grant) subsidy and revenue subsidy (HB), forms of portable subsidy for example for decanting in regeneration schemes can be calculated  Workable methods of “multiple” shared ownership, including occupiers and financial institutions, can be developed  Simple administrative discount percentages and maxima are no longer appropriate for sales to sitting tenants whether or not through the Right to Buy

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