Change to discount rate throws stock

The Treasury last week launched a new version of Appraisal and Evaluation in Central Government – the public sector bible on value for money, also known as the "Green Book". It confirmed a 3.5% basic discount rate for calculating the current value of long-term transactions.

The discount rate is crucial in deciding transfer prices. A lower rate produces higher selling prices but can make the transfer unfundable if lenders are not convinced the price can be covered by future income.

The new 3.5% basic rate is far lower than the 6-8% currently used for transfers. However, factors such as risk of low demand can be added to bring the total back up to around the same level.

Changing the rate will also affect councils' option studies as they must decide a future for their stock based on the relative attractions of the different options. Peter Williams, deputy director general of the Council of Mortgage Lenders, said: "The whole business of discount rates is a judicious balance of getting the price right with regard to market expectations. Lenders' expectations are based on the practical reality of whether the transfer will form a sustainable business."

The National Housing Federation has called for government talks to clarify the Treasury's intentions. A spokesman said: "The guidance may be seen as the arbiter for assessing councils' pricing policies in disposing of their assets when it was primarily designed for a different purpose.

"If this is not the intention, it would be helpful for the Treasury to make a statement to that effect."

The NHF said any new rate should not apply to transfers in the pipeline before April, when the Green Book comes into effect.

York University professor of housing policy Steve Wilcox said the Office of the Deputy Prime Minister, Welsh Assembly and Scottish Executive would have to review their approach. He said: "There will be uncertainty until the issue is resolved, but there will not necessarily be any change."

But the ODPM said the Green Book would not affect its policies. A spokesman said: "The change to the government discount rate as set out in the new Green Book does not mean a similar change to discount rates on stock transfer. This is because the latter rate is based on RSLs' cost of borrowing, while the former is the government cost of borrowing. There is no reason why the rates should be the same."