Small print on debt puts transfers in jeopardy

The new rules state that while debt will be met by a one-off grant, penalty charges for redeeming debt early, and the transfer set up costs, must not exceed the value of the stock.

This rule has dealt a "real blow" to Birmingham's scheme to switch its 92,000 homes, according to those working on the scheme. On current assumptions the penalty could run into hundreds of million of pounds but the value of the stock is only marginally positive.

Housing director Graham Farrant was more upbeat about the transfer's future. He said: "I am not that devastated by the blow, because there are so many factors involved."

But he added: "We will need to work through the implications of the decision not to pay off the early debt penalties. We are looking to negotiate with the government."

The council may have to change its assumptions about the planned degree of demolition and future re let rents in order to increase the stock's value. But such changes could make the deal less attractive to tenants.

Transfer experts warned that the new rules will prevent transfer in many other councils.

Chapman Hendy Associates director Peter Chapman said: "The government is going to have to resolve this issue if it wants transfers to continue on the scale that local authorities are now demanding."

He claimed that many of the big metropolitan authorities are likely to be effected by this problem.

HACAS director Jeff Zitron agreed: "The overhanging debt proposal rules don't deliver as much as promise as we would have hoped. We have to remember that many authorities have a negative value stock to start with. The prohibition on breakage costs and set up costs is going to knock out a lot of inner city authorities."

He also warned authorities against increasing rent assumptions in order to manipulate stock value. He said: "The track record on jacking up rents to increase the valuation is not good in terms of ballot results. Councils would be ill advised to go down that route."