Cost Rental Scheme - Fitting the Bill?

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On Wednesday, 20th January 2021, the Minister’s office published the General Scheme of the Affordable Housing Bill 2020. Here we consider the cost rental provision of this draft legislation and whether or not it fits the bill.

Cost Rental is, ostensibly, a rental system whereby the landlord charges a rent equal to the cost of the property (finance, maintenance, any service charges and so on) over a set period, for example 30 years. The cost rent is not linked to the rental market and should therefore be cheaper than market rents and more affordable for tenants. The General Scheme of the Affordable Housing Bill 2020 seeks to put cost rental tenancies on a statutory footing, by amending the Housing Acts and defining cost rental as a tenancy:

1. where the rent is set by the landlord or provider at a cost-covering level, as may be prescribed in regulations, but in any case so as to include:
   
   1. delivery/capital development costs;
   2. financing costs, including debt finance costs, interest charges and equity returns;
   3. management costs of the properties; and
   4. maintenance costs, including cyclical maintenance, life-cycling and sinking fund costs;
2. that meets any additional requirements as may be prescribed in regulations, and
3. is designated by the Minister by order under this section as a Cost Rental tenancy.

This definition appears aimed at institutional providers, such as developers, Approved Housing Bodies (AHBs) or Real Estate Investment Trusts (REITs). AHBs, with a not for profit social and/or public housing remit, would be the most likely provider, particularly in the context of the exclusion of certain provisions of the Residential Tenancies Acts which means a landlord could not terminate a tenancy on the basis that they or a family member wish to use the property; refurbishment or change of use. Such exclusions would ordinarily be considered an encroachment on property rights.

Costing Cost Rental

The feasibility of this scheme will largely depend on the ability of providers to offer suitable accommodation for an affordable rent. To facilitate AHBs to do this, the Government launched a ‘Call for Proposals’ for a Cost Rental Equity Loan Scheme allocating €35 million to cover up to 30 per cent of the development or acquisition costs of new cost rental homes. This €35 million was allocated to secure the delivery of approximately 350 homes – with an average loan of €100,000 each. It is expected that the remaining costs will be funded through low cost loans available through the Housing Finance Agency, which reportedly confirmed it would make €100 million available in 2021.

If €100,000 equates to 30 per cent, the total development or acquisition cost per until would average in excess of €333,000. That’s €925 per month over 30 years, excluding the actual cost of financing, management costs, maintenance or any other ancillary costs associated with the upkeep of the property.

Rent Reviews and Eligibility

The proposed legislation provides for annual rent reviews linked to the Consumer Price Index or similar “or as otherwfise prescribed by the Minister in regulations”. Linking to inflation to track any increase or decrease in costs seems proportionate. One might wonder on what basis the Minister may impose other criteria for rent increases.

However the eligibility criteria is where questions really arise. While the proposed legislation provides for the establishment of income adequacy criteria (96E(1)), it clearly distinguishes cost rental tenancies from social housing tenancies (96F(1)), going so far as specifically exclude tenants who would need to avail of the Housing Assistance Payment (HAP) to help pay the rent[1]. This creates both another tier of housing provision, stigmatising social housing and social housing tenants even further, while continuing the reliance on the market to provide social housing at private rent rates.

Scaling the Issue

The launch of the Cost Rental Equity Loan Scheme was a welcome step in the provision of additional funding supports to AHBs, however Social Justice Ireland is concerned with the lack of ambition in the projected scale of supports, with c.350 homes to be delivered with this support in 2021.

Data available from the Eurostat database[2] indicates that, in 2019, 17.8 per cent of tenants in the private rented sector were paying over 40 per cent of disposable household income in rent, one in ten were paying over half their household disposable income and more than one in 20 were paying over 75 per cent.

At the end of Q3 2020 there were 297,683 Private Rented tenancies registered with the Residential Tenancies Board[3]. If we apply the housing cost overburden data to these tenancies, the scale of the need for affordable rental accommodation is evident (Chart 1).

Chart 1: Housing Cost Overburden, Rent at Market Price and No. of Tenancies

Source: Author’s calculations of Eurostat data (2019) and RTB Registrations Data (Q3 2020)

Doors left open to private providers?

The proposed legislation is worded in such a way as to allow for private developers to enter into the cost rental market, provided it was worth their while. It is arguable that many private developers would be interested in a scheme designed not to make a profit, however were tax breaks available (as has been the case before for student accommodation and nursing homes), this may become more attractive.

Social Justice Ireland tentatively welcomes the proposed legislation, and will monitor its progress carefully, however we have the following concerns:

• affordability for tenants
• the lack of sufficient scale to provide cost rental properties to the thousands of renters who are struggling to afford their rent
• the creation of another ‘tier’ in the housing system
• the possibility of further rent increases permitted by Ministerial order

These are issues that must be addressed and clarified through thorough public debate and legislative scrutiny.

[1] Cost rental tenants who experience a change in circumstances after 6 months and needs to avail of HAP at that point will not be excluded.

[2] ILC_LVH028

[3] RTB_Tenancy_Registration_Statistics_Summary_2020_Q1toQ3.pdf