Cost Rental – one year on
There is a clear need for Cost Rental housing in Ireland but the funding model must change if AHBs are to continue delivering these affordable homes
STRATEGY
Clúid delivered Ireland’s first Cost Rental homes in Balbriggan, County Dublin, in July 2021
Kate Innes
Chief Finance Officer, Clúid
Cost Rental, a new housing tenure in Ireland, was announced by the Irish Government just over a year ago. It is intended as part of the solution to the difficulties middle-income earners have been facing in sourcing affordable rental homes (see box: What is Cost Rental?).
For many years Clúid, alongside others in the Approved Housing Body (AHB) sector, had called for the introduction of Cost Rental and highlighted it as a potential long-term game changer for the Irish housing system.
Clúid proudly delivered Ireland’s first Cost Rental homes in Balbriggan, County Dublin, in July 2021. Since then, the AHB sector has delivered more than 400 pilot scheme homes. The intention is to deliver up to 2,000 homes per year. AHBs are seizing the opportunity to truly create mixed-tenure communities, where affordable, social, and private homes are planned and built together.
Pilot lessons
So, what have we learned in the last year from this pilot?
There is significant interest among local authorities (LAs) across Ireland in bringing Cost Rental to their communities. We are currently in discussion with more than 15 LAs, which share our view that mixed-tenure is the way forward.
Demand itself is significant and higher than expected, resulting in oversubscription for the available homes. Clúid’s schemes have received up to 40 times more applications than available units, validating strongly that these homes are much-needed.
The legislated allocation process is fair. We have received no complaints to date regarding the lottery and interview process. Perhaps most importantly, we have found that the tenants living in these homes have a sense of relief and are happier.
What is Cost Rental?
- Cost Rental is a new form of tenure in Ireland where residents pay rents that are solely based on the cost to build, manage and maintain the homes. Affordability of the rent charged for the tenant is a key consideration. In 2022, the Irish Government allocated €70m to develop 700 Cost Rental homes, to be delivered by AHBs through the Cost Rental Equity Loan (CREL) mechanism.
- CREL covers up to 30% of the capital costs of a development and is administered by the Housing Agency, on behalf of the Department of Housing, Local Government and Heritage. The Housing Finance Agency (HFA) has also made financing available to support the remaining capital costs for delivery of Cost Rental homes.
- Eligibility for Cost Rental is targeted to address the needs of middle-income earners (below €53,000 net household income).
Source: Irish Government
Challenges remain
That said, bringing Cost Rental homes into management is challenging. Financial viability is very difficult to achieve with the current model and in the current economic environment. Any housing product with a 25% rent income reduction, with limited balancing cost support, would be hard to make work financially. These homes are all 100% debt-funded, and government support is received only on the 30% CREL mechanism, with a fixed lower interest rate of 1%. The remaining 70% debt now receives no support, unlike the pilot schemes where we had a discounted rate.
At present, the sums on Cost Rental simply don’t add up. AHBs do not have a 25% surplus in their financial business models, after loan repayments and long-term maintenance, to absorb this income reduction. Additional costs for provision of white goods and furnishings, a regulatory requirement, and anticipated higher natural churn in tenancies make the cost base for Cost Rental units higher than social housing.
The level of government support falls significantly short of compensating the affordable rental income reduction required. In its current form, the model is very imbalanced: the AHB sector takes a disproportionate level of financial and demand risk on all these schemes.
Fundamental rethink
AHBs absolutely want to deliver these affordable homes. However, for Cost Rental to work there needs to be a fundamental rethink of the funding model and implementation of sufficient direct government financial support to create a balanced model.
AHBs simply cannot carry the burden of the funding and cost risk of this delivery alone. Importantly, we cannot subsidise loss-making Cost Rental homes with income from social housing. This would be wrong both in moral terms and in legal terms.
The concept of affordability for the tenant on future Cost Rental schemes is not stacking up either and is under pressure. On a pure cost rent basis, where rents are set at breakeven, the current cost of land and construction, means that cost rents are unaffordable now and into the future for the tenant. A year ago, we could make Cost Rental schemes work in higher rental areas. Today, even those areas are not working.
“AHBs simply cannot carry the burden of the funding and cost risk of this delivery alone. Importantly, we cannot subsidise loss-making Cost Rental homes with income from social housing.”
Call for action
In the short term, before the maturation process of Cost Rental takes place, the right type and level of subsidy is required. This is especially important while more fundamental land and construction cost reform occurs.
We must not lose the opportunity to deliver this important change into the Irish housing sector. But it cannot be delivered, either, at the cost of financial stability for AHBs, or by redefining affordability for the tenant upwards to achieve numbers.
Our call to the government is to re-examine the funding of the Cost Rental model, to open up Cost Rental grants to the AHB sector and to allow this to be delivered at the required scale.
