Mirror, signal, manoeuvre: our drive to provide more social housing February 2011
Family Mosaic: an introduction
We’re one of the largest housing associations in London and Essex. We provide affordable homes to rent, and buy, as well as services to people who may need extra support.
We have over 23,000 homes for rent. We serve over 45,000 residents. And we support over 4,000 people with additional services to help them live independently.
2 The impact on rents
3 The impact on our tenants
4 The impact on the public purse
5 The risks for Family Mosaic
6 How do we go forward?
We’re driven by our customers. We want to offer them more control and choice. We can do this because we are financially strong, and because it’s part of the way we work. This means we can reinvest our surplus into our existing housing stock. It means we can finance the construction of new homes. It means we can help people get the most out of their local community.
1 Why Family Mosaic believes this 4 research is important
It means making them feel valued in everything we do for them. www.familymosaic.co.uk
summary Mirror, signal, manoeuvre In October 2010, the Government announced a new approach to the development of social housing: housing associations are to be encouraged to charge all new tenants an Affordable Rent. This was defined as being linked to a percentage of market rents up to a maximum of 80%.
As one of the leading developers in London and Essex, Family Mosaic wanted to understand how this new model would impact on our existing client groups, as well as on our development programme. Family Mosaic knows it needs to continue building desperately needed new homes and make them available to those in greatest need. As we move into a new way of working, we see this report as part of a “Mirror, Signal, Manoeuvre” exercise. The report examines what this new model will mean to our residents. Its conclusions signal a possible new direction of travel for us, enabling us to move forward with our social purpose and providing good quality, new homes for those in greatest need. This research is based on an evaluation of how an increase in rent to 80% and 60% of market rent would impact on 50 new tenants. The research sample included a range of our properties, including different types, sizes, location and tenant circumstance. The research was carried out by Mark Lupton, a leading independent policy analyst, in December 2010.
The research demonstrates that: • setting rents at 80% of market rent would increase our clients’ requirement for housing benefit by 151%; • even at 60% of market rent, there would be significant increases in rent levels, leaving a large proportion of tenants unable to retain enough income to pay their rent and live according to government standards of affordability; • the impact on our tenants will vary by location, with those living in inner London the hardest hit: for most of those in Essex, social rents are already at 60-80% market rates; • for those tenants receiving benefits, the proposed new affordable housing model creates, or worsens, the poverty trap, acting as an additional disincentive to gain employment. We know there is no new money available. We are convinced that the future new supply of affordable housing at reasonable rent levels will depend on housing associations and local authorities working even more closely together, maximising our efforts for the good of local communities.
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1 Why Family Mosaic believe this research is important When the Government announced in October 2010 that capital grants were going to be cut, it came as no surprise. The cuts were deeper than many anticipated, but we had been expecting fundamental change. The question, for us, is whether the new model is purely a development solution, or one that helps us achieve our social objectives.
After all, that is the core of our work: the provision of affordable housing for those in greatest need. We’re proud of being a social landlord. We welcome the new model, as it provides us with the freedom to determine our own rents. This new model might also result in a greater diversification within those who make up the social housing sector, which could be a good thing for housing. Our way isn’t the only way. Our primary concern with the new model, however, was with the 80% figure: instinctively, it felt that this would be too high for the people we want to house in London. We believed that we might be able to make the new model work at 60% of market rent. Over the past five years, we’ve developed over 4,000 new homes. We now serve over 45,000 residents, and support over 4,000 with additional services to help them live independently. Our surpluses are growing because of efficiencies we’re making and we want to invest these in our homes and communities. Our intention was to develop over 1,000 new homes, while continuing to provide all our customers more involvement and
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greater choice. And we know that our land buying, procurement and partnership skills will have to adjust to the new model and create even greater value. The new model announced by the Government, however, challenges these plans. Would we continue to be able to provide social housing to those in most need? Or would we be forced to let homes to a new client group? Would the new model, as some suggested, spell the death of social housing? Whatever, the need for 90% private finance limits our capacity and our new programme will be much smaller. While others within the sector debated the potential impact of the changes, we commissioned Mark Lupton, a leading independent housing specialist, to conduct research. His findings, which form the basis of this report, are based on a sample set of people who became Family Mosaic tenants in November and December 2010. This enables us to determine the real impact of the new model, and to propose strategies to enable us to continue developing affordable housing for those in greatest need. The research methodology is set out in appendix one.
2 The impact on rents At 80% of market rent, all properties had significant increases of rent. In seven inner London properties, these increases were over £200 a week. Outside London, however, these increases were less than £50 per week. At 60% of market rent, all properties in London would have increases in rent. For five of these in inner London, these increases would be over £150 per week.
Open market rents
The rise in rents at 80%
The first task was to consider the difference moving from the current rent to a rent of 60% of market rent (60% MR) and 80% of market rent (80% MR). To achieve this we determined a market rent for each property using the methodology outlined in appendix one.
At 80% MR the breakdown of properties by rent increase is: • £1–50 increase per week 16 properties: 13 in Essex, two in outer London, one in Inner London;
As might be expected the higher open market rents were mainly for houses. They were also, however, determined by location: • the highest open market rents were for a three bed house in Islington (£576 per week) and a four bed house in Lambeth (£532 per week); • of the twelve properties with weekly rents above £300 per week, just two were flats: one located in the City of Westminster (£458 per week), the other in Islington (£310 per week); • all five properties with open market rents of less than £120 per week were flats in either Braintree, Basildon or Colchester.
• £51–100 increase per week 15 properties: 11 of which are flats in less expensive parts of London, as well as houses in Waltham Forest, Lewisham and Haringey; • £101–150 increase per week 10 properties, including five houses and five flats, in Islington, Barnet, Lambeth, Southwark, Lewisham and Hackney; • £151–200 increase per week one house in Islington; • over £200 a week increase seven properties: six houses in London and one flat in the City of Westminster. See graph 1 on page 6 for full details
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The rise in rents at 80% £300 £250 £200 £150 £100 £50
Graph 1 Rise in weekly rent at 80% market rent
The rise, and fall, in rents at 60% Moving to 60% MR produced a significant change for the properties outside London (see graph 2 below). The rents on the properties in Braintree, Basildon and Colchester would reduce – although the reductions are minimal.
For properties in London there would still be significant increases at 60% MR: £1–50 increase per week: 17 properties £51–100 increase per week: 10 properties £101–150 increase per week: 3 properties Over £150 increase per week: 5 properties
£300 £250 £200 £150 £100 £50
Graph 2 Rise in weekly rent at 60% market rent
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Rent changes by location When we look at the average weekly rent by location, we can see how tenants living in inner London, in particular, will be affected by increases to both 60% and 80% of market rent. For those in outer London, the impact of a shift to 80% in market rent is marked, while for those in Essex, many will have a slightly lower rent if set at 60% of market rent.
Graph 3 Average weekly rent at current rate, 60%MR and 80%MR in Essex, Outer London and Inner London
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case study 1
Three single people, the real costs Mark lives in a one-bed flat in Basildon, Essex. He is employed, taking home a weekly wage of £230.76 per week. His current social rent is £89.36.
A 60% MR would result in a rent of £69, a fall of £20.36 or 23% less than his current rent.
A 80% MR would result in a rent of £92, a rise of just £2.64, or 3% more than his current rent.
Diane lives in a one-bed flat in East Ham, London Borough of Newham. She is employed and takes home £191.42 a week. Her current social rent is £79.06.
A 60% MR would result in a rent of £101, a rise of £21.94, or 28% more than her current rent.
A 80% MR would result in a rent of £135, a rise of £55.94, or 70% more than her current rent.
Florence lives in a one-bed flat near Clissold Park, London Borough of Hackney. She is employed, taking home £346.27 a week. Her current social rent is £103.27 a week.
A 60% MR would result in a rent of £138, a rise of £34.73, or 34% more than her current rent. A 80% MR would result in a rent of £184, a rise of £80.73, or 78% more than her current rent.
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3 The impact on our tenants Only three tenants – all living in Essex – would be able to afford to pay rents at 80% MR, and still have 70% of their income to live on. At 80% MR, 57% of tenants would be on full housing benefit. The remaining 43% would have to meet the increased rent at least in part from their own resources. At either 60% or 80% MR, tenants would become more dependant on housing benefit, reducing incentives to work.
The affordability issue
Tenants and affordability
To determine the affordability of these rents for the same tenants we first looked at how many of them would have to use more than 30% of their income to pay the new rent level.
So what happens when we increase weekly rent to 80% MR? Of the 49 tenants in the sample, just three – all of whom lived in Basildon and were in work – could afford the higher rent, and still have 70% or more of their income to live on.
This figure was chosen because it is typically used as an ‘affordable’ proportion of income to be paid as rent when assessing housing need. While Communities and Local Government guidance suggests 25%,1 the last definition of social housing need based on income in the London Plan states: Rent and service charges together should not exceed 30% of net household income for a household with an income of less than £18,100.2
Of the other seven tenants whose income was above £18,100 per annum (as set out in the London Plan), none would be able to afford the higher rent, and still have 70% or more of their income to live on. The two graphs on the following page show the affordability gap – the amount of extra income a tenant would need to pay the rent – at 80% MR and 60% MR.
With most of the properties in this study situated in London, this confirmed our use of the 30% figure. 1 Strategic Housing Market Assessments Practice Guidance (CLG 2007)
We also used an adapted Department for Work and Pensions Tax Benefit model calculator to estimate how much each tenant would have left to live on in different income and rent scenarios. 3
2 London Plan annual monitoring report, 05/02/09 3 http://research.dwp.gov.uk/asd/index.php?page=tbmt: These scenarios were based on information supplied by Family Mosaic from financial assessments conducted at the point of letting. Where necessary, estimates have been used to supplement this information.
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£400 £300 £200 £100
Essex Graph 5 The affordability gap: the amount of extra income tenants would have to find to pay weekly rent at 80% MR.
At 80% MR, eight tenants would need to find over £200 in order to pay the new rent. Over 50% of the tenants in this sample would need to find an extra £100 or more per week to pay the rent. One of these tenants lives in Essex: the others live in London.
£400 £300 £200 £100
Essex Graph 6 The affordability gap: the amount of extra income tenants would have to find to pay weekly rent at 60% MR.
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At 60% MR, five tenants would be able to pay the increase in rent, and still have 70% or more of their income to live on (the affordability test). Just under a third of the tenants in this sample would still have to find an extra £100 or more a week to pay the rent. All of these tenants live in London.
Increased dependency The result of the rise in rent to 80% MR would lead to over 50% of the tenants in this sample being on full housing benefit. The remaining 21 would have to meet the increased rent at least in part from their own resources. Consequently, at 80% MR those tenants whose rent is not fully covered by HB are paying significantly more rent than they would on social rents. These 21 tenants would be left with the following amount of income to live on:
£s per week
Number of tenants
5 single, 1 couple
1 single, 1 couple, 6 households with children
6 households with children
Notably, at 60% MR only six of these 21 tenants would have significantly more money to live on every week than if their rent was set at 80% MR. These six are on higher incomes and medium rents. For the other 15 tenants there is no change on what they have to live on despite the decrease in rent. If you have low income or high rent you are, in effect, stuck.
The inevitable result of an increase in rent to these levels would be an increase in applications for, and payments of, housing benefit. The next section of this report explains how the increases to 60% and 80% would increase housing benefit payments to these tenants. One result would be that increased dependency on housing benefit would have a negative effect on work incentives. It is outside the scope of this analysis to quantify this but work conducted by the Department for Work and Pensions shows how much extra a particular family would need to earn to increase their ‘take home’ income by much more than its current level. As an example, for gross pay of £300 per week, their ‘left to live on’ amount would be £311.01, but for gross pay of £400 per week their ‘left to live on’ amount would be just £315.51. Earning £100 more per week, then, results in just £4.50 more to live on. Moreover, on £300 gross per week, the rent they pay needs to be below £65 a week for it to make any difference to their left to live on amount, as any rent higher than this is covered by housing benefit. On the other hand, a rent of £200 per week extends their ‘poverty trap’ up to a gross income of some £700 plus a week. Our concern is that raising rents to 80% MR – and thereby increasing the affordability gap – will result in greater dependency on housing benefits, and impact negatively on work incentives. We know welfare reform will change this position. This is discussed later in the report.
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case study 2
Granny, daughter and two grandchildren in inner London Nadine lives in a four bed house in Lambeth, with her daughter Win, and three grandchildren, Marcus, Malcolm and Kai. Nadine lives on an occupational pension and is not currently in receipt of housing benefit.
Current rent is 23% of income
Her income is £580.95 a week, of which £133.31 is currently spent on rent (23% of income). This leaves her with £447.64 a week. At 60% MR, rent is 55% of income
If her rent was increased to 60% of market rate, it would rise by £185.84 to £319 per week. At this level, she would be left with £261.95 a week to live off. If her rent was increased to 80% of market rate, it would rise by £292.69 to £426 per week. At this level, she would be left with just £154.95 a week to live off.
At 80% MR, rent is 73% of income
At 80% MR, she would have to apply for housing benefit. This would be paid at a rate of £301 per week. After other housing costs, she would be left with £394 per week to live off.
At 60% MR, she would also have to apply for housing benefit. This would be paid at a rate of £193.81 a week. After other housing costs, she would still be left with £394 per week to live off.
Rent at 60%MR
Rent at 80%MR
Her current annual housing benefit bill is nil. At 60% MR, the annual cost to the taxpayer of housing benefit payments would be £10,271.93. 0
At 80% MR, the annual cost to the taxpayer of housing benefit payments would be £15,652.
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Annual housing benefit cost
4 The impact on the public purse Based on this research, at 80% MR the weekly housing benefit bill for these tenants would rise from £3,155 to £7,911, an increase of 151%. Based on this research, at 60% MR the weekly housing benefit bill for these tenants would rise from £3,155 to £5,286, an increase of 68%. Based on this research, at 80% MR, the yearly housing benefit bill – just from these 50 properties – would increase from £164,060 to £411,372.
Graph 7 As the rent on these properties increases, so the proportion paid by housing benefit rises: at current social rents, housing benefit covers 61% of total rents; at 60% MR, this increases to 71%; at 80% MR, housing benefit covers 80% of rent.
Graph 8 Accordingly, the annual cost to the taxpayer of housing benefit from these properties also increases.
Rents at 80% market rate
Rents at 60% market rate
Rents at 60% Rents at 80% market rate market rate
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case study 3
Mother and her three children Gemma and her three children – Maya, Bobby and Alfie – live in a three-bed house in Holloway, London Borough of Islington. She is currently out of work, living on a combination of Income Support, Child Tax Credit, Child Benefit and Housing Benefit. The first three amount to £162.56 a week, while the latter – £120.29 – covers the cost of her rent. If her rent was increased to 60% MR, it would almost triple, to £346 per week. As a consequence, her housing benefit bill would also increase: we estimate to £346 per week or £17,992 a year.
£6,255 Annual housing benefit bill at current rent
To cover the cost of her annual rent at 60% MR – £17,992 – and have at least £200 a week for her family to live on, she would need to find a job that paid £28,392 a year. This is above the median annual pay for full–time employees in the UK (£23,348). If her new rent represented 30% of her income – the affordability income – she would need to find a job that paid just below £60,000 a year (net). Even if her rent represented 50% of her income, she would still need to find a job paying £35,984 a year (net).
Annual housing benefit bill at 60% MR
If her rent was increased to 80% MR, it would rise by almost 400% to £461 per week. As a consequence, her housing benefit bill would also increase: we estimate to £23,972 per year. To cover the cost of their annual rent at 80% – £23,972 – and have at least £200 a week for her family to live on, she would need to find a job that paid £34,392 a year. If her new rent represented 30% of her income – the affordability income – she would need to find a job that paid her just under £80,000 a year (net). Even if her rent represented 50% of her income, she would still need to find a job paying £47,944 a year.
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Annual housing benefit bill at 80% MR
5 The risks for Family Mosaic At 80% of market rent, Family Mosaic would collect an additional £4,780 in rent every week just from these properties. At 60% market rent, the additional income would be £2,295 per week. Increasing rents to 60% or 80% MR will increase our dependency on housing benefit.
Additional weekly rental income Income generated from these 50 properties for Family Mosaic: The current rental income:
Additional income generated by moving to 60% of MR:
Additional income generated by moving to 80% of MR:
The move to the new rent would therefore generate 92% extra rental income for the association at 80% MR and 44% at 60% MR.
£9,939 £7,454 £5,159
While the organisation would clearly benefit, the two losers would be those new tenants and the taxpayer. Housing benefit would be needed to cover the majority of this increase if let to our current client groups (see last section). Graph 9 Weekly rental income at current, 60% MR and 80% MR
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The risks of housing benefit If rents are raised to 80% MR, Family Mosaic will become increasingly financially dependent on housing benefit. Simultaneously, a number of the changes to the benefit system that are being introduced will make it more challenging for Family Mosaic to collect rents from its current profile of tenants. This raises identifiable risks and numerous uncertainties to our business and all those we serve. There are four changes the Government is proposing to housing benefit rules that may make it difficult for some tenants to continue to recoup the extra rent costs, and therefore pay their rent to us. The overall benefit cap The move to limiting total benefits is clearly a potential difficulty for some tenants given the high rents in London. The proposed benefit caps are: • £250 for a one-bed property; • £290 for a two-bed property; • £340 for a three-bed property • £400 for four-bed and larger properties. Using an early version of a spreadsheet the Chartered Institute of Housing is developing, we calculate that an increase to 80% MR would result in eight of the cases in this research being affected by the benefits cap. All are located in inner London. If rents were raised to 60% MR, then only two of the tenants in the sample would be affected. The 10% reduction in JSA Family Mosaic has attempted to quantify the potential consequences to tenants when this is introduced both in terms of rent loss and the need
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to give support and advice. The proposed change will affect those who have been in receipt of Job Seekers Allowance (JSA) for over a year. Family Mosaic visited a proportion of its tenants on full housing benefit to identify those who were also receiving JSA. This suggested that about 15% of people on full housing benefit are also of working age and on JSA. Six of the tenants in this survey were claiming JSA. The increase in non-dependent deductions Family Mosaic estimates that 542 of its tenants may be affected by this measure. They estimate that this could lead to a potential rent loss of £478,000 per year, with a high risk of about £306,000 bad debt. Two tenants in this study had non dependants. Limiting housing benefit to property size Another proposed change is that housing benefit is to be limited for working age claimants so that it only covers the property size deemed needed for the household. The tenants in this study were all new lettings where the size of property is more likely to meet household requirements at time of letting. This may, however, change in the future. We do not therefore have sufficient information from the sample to take an informed view on this. Family Mosaic has, however, estimated that over 1,000 of its tenants may be effected by this provision with a potential rent loss of over £1m.
6 How do we go forward? To mitigate this risk we could change the profile of our tenant group, and not let new properties to those most in need: this, however, goes against our core principles. Our preferred option is to work even more closely with local authorities to ensure a continued supply of housing for those in greatest need.
Changing the tenant profile This exercise has focussed on continuing to house the same client group. The alternative is to move to a different tenant group who are less dependent on housing benefit to afford the rents. Whilst the Government has said it is looking for housing associations to house the same sort of client group as at present, there have been suggestions of a degree of flexibility in relation to this. In London, the high housing costs mean that in most boroughs it is hard for people on salaries of less than £40,000 to find a property they can afford. This leaves a wider gap of income ranges unable to gain affordable housing. There is also an issue about what proportion of income households can afford to spend on housing costs. In this research we have used 30% of income. There is, however, the view that it is not the percentage which is important but the amount the tenant has left to live on. That people are spending a higher percentage of their incomes on housing costs can be seen from research conducted by Savills. This considers the
percentage of households in London against the income bands for particular tenures. The research indicates that many households, particularly those in the £15,000–£40,000 income bands, are paying significantly more income to live in private rented or owned property. 4 So whilst the poorest are unlikely to be able to pay more than 30% of their income on rent, higher income groups may be able to pay more. Letting to these slightly higher income groups might lead to less risk of them being affected by the housing benefit changes. However the effect of other benefit changes on these groups – in particular low-income workers – may also hamper affordability. These can be seen in the Resolution Foundation finding that “major changes to tax credits that by 2012 will hit working families hard” and the concerns expressed in their recent report Squeezed Britain. 5
4 - research prepared by Savills Residential Research 5 – http://www.resolutionfoundation.org/us/current-work/squeezedbritain-low-middle-earners-audit/
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Better advice and support
One consequence of higher rents and greater financial risk is that associations will have to think about how they can be more active in helping reduce poverty amongst their tenants at a time of rising rents and reduced benefit payments.
So is the new affordability model proposed by the Government an opportunity or a threat? We want to continue to develop desperately needed new homes.
Family Mosaic is already changing how it targets its advice and support services more effectively, regardless of what the final impact of benefit changes may be particularly in relation to: • welfare rights advice to help tenants cope with rent payments; • employment advice and support to help them to come off benefits. Given the need to maintain sustainable tenancies in this changed environment associations might need to be more pro-active in helping tenants keep their costs down. This might include, for example, spending increased rent income on retrofitting to help lower tenants’ fuel bills and thus reduce financial pressures. Or it could mean supplying micro-loans to tenants to help them reduce dependence on doorstep lenders.
Family Mosaic CEO Brendan Sarsfield says, “We are determined to deliver more homes, but this look in the mirror tells us that the new model creates problems for our residents. Market rents per se are not the problem – we have used them in temporary housing for many years. The challenge now is can we make higher rents work as a long-term solution during welfare reform and public spending constraints. This report does not provide all the answers: that, after all, was not our objective. Looking at the impact of the new model through the eyes of our residents, however, will inform how we manoeuvre towards providing affordable social housing in the future.”
The new world presents many challenges for those on low incomes and housing associations trying to meet those needs.
“The challenge now is can we make higher rents work as a long-term solution during welfare reform and public spending constraints”
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appendix one Research methodology This research was based on an analysis of the impact of how the rent paid by 50 new Family Mosaic tenants would change as a result of setting the rents at 80% and 60% of market rates. The sample of tenancies was based on a cross section of our properties with different types and location of properties, as well as of tenant circumstance.
Setting market rates was a key element of the research methodology. Indeed, if landlords are to adopt a pricing policy based on a percentage of market rent then they will need to consider how they gain information. Some associations have considered setting the percentage against average market values. Yet if associations are to manage their assets effectively they should be setting rents for each property on the basis of its open market rental value for that particular type of property in that location. It is important that associations do not just look at regional or local authority figures but consider localised housing submarkets. Associations need to be able to ensure they know their local markets and can conduct robust analysis on a localised basis. Getting robust information on market rents is not easy. This is principally because most private landlords are small scale and localised. Housing associations as major landlords working across a range of markets and sub-markets need more detailed information.
It is possible to get local authority wide information. This does not, however, reflect the markets which operate within and across local authority boundaries. The Housing Minister has announced that the calculation of market rent will need to be based on a residential lettings estimate compatible with RICS recognised methods of valuation. Methods to do this are currently being developed. For this report we have used the Find a Property website, which gives localised private sector asking rents, using a geography of rental submarkets. It is based on extensive data, and uses a sophisticated methodology devised by Calnea Analytics. 6 Asking prices are not necessarily realised, however, and rent levels may be affected by variations in the quality of properties coming on to the market. Markets are also dynamic and therefore subject to change. Rental prices using an RICS approved methodology may be different to these free market asking rents. 6 â€“ http://www.findaproperty.com/rental-index.aspx
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For further information contact Joanna Coyle: T 020 7089 1046 M 07960 821 007 E Joanna.Coyle@familymosaic.co.uk
Credits Original research by Mark Lupton and Bob Line Edited by Matthew Grenier Designed by Andrew Kingham