Derby Homes Newbuild Consultancy Phase One - Report

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30 September 2005

ECOTEC

 Priestley House 12-26 Albert Street Birmingham B4 7UD United Kingdom

T +44 (0)121 616 3600 F +44 (0)121 616 3699 www.ecotec.com

ECOTEC Derby Homes Newbuild Consultancy Page 2 of 50

Contents PAGE

1.0 Introduction ...... 1

2.0 Brief ...... 3

3.0 Context ...... 4

4.0 National Review ...... 6

5.0 Housing Corporation Finance ...... 8

6.0 ALMO Homes Proposal ...... 15

7.0 Other Development Opportunities ...... 24

8.0 Conclusions ...... 31

9.0 Recommendations ………………………………………………………... 35

Appendix 1 Interviews Undertaken ………………………………………….. 38

Appendix 2 Summary of options …………………………………………….. 40

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1.0 Introduction

In July 2005 Derby Homes appointed ECOTEC Research & Consulting to assist it in working with Derby City Council to develop new proposals for affordable housing in Derby through which the ALMO would have a stake through ownership and management. This report sets out work done in Phase 1 of the commission, setting out the options, reflecting the work undertaken to date and making recommendations. Following receipt of this report there is a contractually agreed break point for Derby Homes to review the project before confirming its intentions with regard to Phase 2.

As a Round 1 ALMO, Derby Homes is nearing the completion of its major catch up repair and improvement programme which will bring the Council's existing stock to the Decent Homes Standard by the end of this year. It is understood that in early 2006 the contract between the Council and the ALMO, which runs to 31 March 2007, will be reviewed with a view to a 5-year extension.

Identifying ways in which Derby Homes might get involved in new build development is therefore timely. The stock which it manages is diminishing due to right to buy sales, decommissioning and demolition. These stock losses could be partly off set by involvement in the development of new homes and encourage active asset management to build more sustainable communities on estates in the city where housing quality is poor and demand is low. This new role could be reflected in the revised agreement between the ALMO and the Council and reflected in its Business Plan.

Derby Homes is well placed to undertake such a role. It has a track record of successfully implementing major housing spending programmes and providing excellent services. There is scope for the provision of new housing through the decommissioning and clearance of some existing areas of Council housing and the creation of mixed tenure, sustainable communities. In these areas Derby Homes is able to facilitate such development and to subsequently manage any new social housing stock created within them. Due to the services Derby Homes provides to the Council, its close working relationship and its nature as a controlled company (the Council being the sole member) it [the Council] has an intrinsic interest in the ALMO’s development. As Derby Homes acquires development expertise it would be able to offer to participate in development on other sites, such as those in private ownership that are subject to Section 106 agreements.

It should be noted that at the present time a national review is taking place which is considering changes to financial and legal arrangements for high performing ALMOs. These could result in the cancellation of historic debts, separation of ALMOs from the

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housing subsidy system and thereby give them access to their future rental income streams against which to borrow in order to build. This would place them on a similar financial footing to Registered Social Landlords (RSLs). The timescales for such changes are, however, uncertain and in the interim Derby Homes will wish to pursue opportunities that can be taken now so as not to loose significant development opportunities. Moreover it must be appreciated that the national review covers the future of the existing stock managed by ALMOs whereas alternative arrangements can be established for the ownership and management of new stock which are not dependent on the national review.

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2.0 Brief

The brief for Phase 1 of this assignment is to

1 Assess the options for Derby Homes to be involved in the development of new homes in order to meet housing need; 2 Consult with key stakeholders listed in the brief on the most preferable and practicable ways to achieve this; and 3 Identify a short list of options which should be considered, including reference to potential sites.

This interim report sets out the work undertaken to date and makes recommendations. It enables Derby Homes to consider the results of Phase 1 of the assignment. At this time a break point has been agreed for Derby Homes to review its intentions with regard to Phase

At inception of this project Phase 2 was envisaged as being to

1 Facilitate discussion with key stakeholders identified with Derby Homes to outline the main options; 2 Develop an Action Plan to progress preferred option(s) including estimation of the timescales and resources required; and 3 Develop an Exit Strategy setting out ways in which Derby Homes can pursue the preferred options following completion of the ECOTEC assignment.

In accordance with the wishes of Derby Homes, a flexible approach was taken during assignment including direct involvement by ECOTEC in discussions with interested parties in submitting bids, with the support of Derby Homes and Derby City Council, for Housing Corporation funding through its National Affordable Housing Programme (NAHP). The bid deadline has been extended from 7 October 2005 to 21 October 2005. In respect of this option the work undertaken to date has therefore covered some of the elements identified at inception as falling in Phase 2.

A list of interviews undertaken is attached.

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3.0 Context

Before considering the options available to Derby Homes it may be helpful to provide an overview of the production of new affordable housing in England. This illustrates the impact of financial and legal arrangements on the ability of different types of organisations to build and sets the context for the choices now available in Derby.

Since 1988 new social housing has been built by housing associations (most of which are RSLs). This has been financed from a mix of sources including capital grants from the Housing Corporation and local authorities, reserves and borrowings against future income rental streams. As their borrowings is counted as private sector, rather than public sector, it is limited only by the ability to repay from future rental income, whereas the ability of Councils to do so has been subject to national policy and borrowing rules. Since 1988 very little new housing has been built by Councils, who have instead provided financial assistance to RSLs, primarily because the latter are able to raise these additional resources – whereas Council housing departments are not able to raise similar sums. By providing capital grants, transferring land and recycling receipts from the sale of housing assets towards them (for example as a result of stock transfer) local authorities have further enhanced the ability of RSLs to develop new affordable housing. This ‘enabling route’ has been the main method of developing new social housing.

Currently in order to build new housing that would be owned by local authorities the main options are:

1 Finance of building from an authority's Capital Programme using capital receipts and support towards the cost of borrowing – undertaking 'prudential borrowing' related to its financial position principally its ability to repay such borrowings; 2 Acquisition of new Council properties from a developer through the use of a planning (or "Section 106") agreement – this is exceptional since normally such housing is sold to RSLs on a discounted basis; 3 Use of the Private Finance initiative (PFI) which involves the long term leasing of stock to a private provider which manages and maintains housing in return for a performance based fee; 4 Development of Special Purpose Vehicles (SPV) in which the Council may have a minority stake and which acquires, repairs and manages stock on behalf of the authority.

The ability of an RSL to raise private finance has meant that they can produce more social housing for a given amount of money than could a local authority whose borrowing is

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constrained by public sector rules. There are no legal reasons why ALMOs cannot build and own homes and undertake borrowing to do so. Since ALMOs are, however, local authority controlled companies they are subject to the same borrowing rules as local authorities themselves. This means that Derby Homes can only borrow, or the Council borrow on its behalf, if it considers that it could be so prudentially. Critically utilising the ALMO to develop new social housing under current rules does not add to the resources available for this purpose, unless through a bid to the Housing Corporation, it can benefit from recent changes which enable bodies which are not RSLs to bid. This option is discussed below.

Interviews for this assignment indicate that Council officers perceive that there is some scope for limited prudential borrowing to part fund the development of housing by Derby Homes. Legal advice is that these can be built outside of Housing Revenue Account and hence they are by definition not covered by the subsidy system. This carries a degree of risk for the Council since the future changes in borrowing costs would fall to the Council without recourse to any support from the subsidy system. The Council is therefore taking a cautious view of the amounts that could be borrowed prudentially.

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4.0 National Review

A national review of the future of ALMOs has been taking place which may provide freedoms and flexibilities for high performing ALMOs such as Derby Homes. Derby City Council and Derby Homes have been contributing to the review through the Local Government Association (LGA) and the National Federation of ALMOs (NFA) respectively. ALMOs – a new future for council housing [April 2005], published by CIH, NFA and Housemark, has outlined 4 models some of which would involve the removal of ALMOs from the housing subsidy system. More recently the Audit Commission report Council Housing Finance [June 2005] has recommended that financial freedom and flexibility for high performing ALMOs be given consideration.

All of the options put forward by NFA and the Chartered Institute of Housing (CIH) involve breaking the link between the HRA and the housing subsidy system in order to enable ALMO finances to become more dependable. This would provide a basis on which ALMOs could incur borrowing to fund new housing development and, at least in the first instance, shift risk to the ALMO rather than the Council. The national review was originally due to be completed by December 2004 and until recently has been referred to as being likely to be reflected in an ODPM Consultation Paper to be published in September 2005. In interviews for this project civil servants did not give an indication that this is likely to be the case and have indicated that any proposals are likely to be subsumed into a broader review by the Sustainable Communities Minister, David Milliband, the timescales for which are uncertain.

Reliance on the possible outcome, following the national review, of a new regime that can facilitate new housing development by Derby Homes would result in opportunities that are available over the next few years being lost. Stock retaining authorities that have not set up ALMOs are arguing that they too should have access to freedoms and flexibilities. It is likely that in order not to concede to this "4th option" lobby Government would operate a managed programmed for high performing ALMOs (such as the ALMO programme itself) for which bids would be required. Requirements would be likely to include submission of viable business plans, continuance of governance arrangements in which Councillors are in a minority on ALMO Boards and inspection and performance requirements. It has been estimated that a managed programme of this kind if developed would result in freedoms and flexibilities from 2007/08 at the earliest. Derby may therefore wish to consider options for new building which are not directly dependent on the outcome of the national review.

Derby Homes is party to the national review through the National Federation of ALMOs and Derby City Council through the Local Government Association. Both parties will

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therefore have direct access to further information on the progress of the national ALMO review.

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5.0 Housing Corporation Finance

Historically the Housing Corporation has provided grants towards the cost of new social housing to RSLs only. Following changes made in Section 27A of the Housing Act 2004, however, unregistered bodies are now – for the first time, able to bid for these resources. The Corporation’s main funding programme – the National Affordable Housing Programme (NAHP), formerly the Approved Development Programme, has consequently been opened to private sector developers. The programme will be £3.9 billion in 2006 -08 which it is estimated will produce 70,000 new homes, of which £166m will support the production of 3,000 new homes in the East Midlands region. 80% of the national budget will be allocated through the 'Partnering' route to which private developers who have ‘Pre Qualified’ can bid either individually or as members of consortia. Whereas RSLs invariably wish to mange any new stock which they develop, or acquire from a private developer through section 106 agreements, the opening up of Corporation funding has provided opportunities for Derby Homes to work with an unregistered developer in order to assist in building new affordable homes in sustainable, mixed tenure communities which it will own and manage.

The complete list of all short listed organisations for NAHP funding is as follows:

Individual Bidders: Non-RSLs David Wilson Homes Ltd Lovell Partnerships Limited Persimmon Homes Limited Westbury Homes (Holdings) Limited Miller Homes Limited Fairclough Homes Group Limited Bellway plc George Wimpey UK Ltd Keepmoat Plc Fairview New Homes Limited Gleeson Regeneration Limited The Berkeley Group Holdings plc Mansell Barratt Developments plc

Individual Bidders: RSLs Hanover HA Community Housing Association Affinity Homes Group

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Croudace Homes Limited Sunderland Housing Group Home Group Ltd Raglan HA Limited Waterloo Housing Association Metropolitan Housing Partnership Nomad Housing Group A2 Housing Group Moat Housing Group Ujima Housing Association Town and Country Housing Group Swan Housing Association Family Housing Group London and Quadrant Housing Trust Lookahead Housing & Care Ltd Hightown Praetorian & Churches Housing Association Presentation Hyde Housing Association Ltd Southern Housing Group Thames Valley Housing Association Housing 21

Consortia: Non-RSLs First Base Limited Taylor Woodrow Developments

Consortia: RSL Enterprise 5 Housing Association Ltd Somer Community Housing Trust Encompass (Flagship Housing Group) Servite Houses Paradigm Housing Group Islington & Shoreditch HA Devon & Cornwall HA Aldwyck HA Toynbee HA Eastern Shires HA Sarsen HA Octavia Housing and Care

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Yorkshire Community Housing Ltd Arena HA Ltd Genesis Housing Group Ltd Riverside HA Knightstone Housing Association Accent Group Ltd Plus Housing Group Sanctuary HA The Beth Johnson HA Limited Jephson Homes HA Ltd The Places for People Group Limited Signpost Housing Group Tees Valley Housing Group Sappling Housing Partnership Amicas Group Ltd Chevin Housing Group Longhurst Group Catalyst Housing Group Focus Housing Association Wandle Housing Association Hexagon HA Mosaic Housing Association East Midlands Housing Association Limited Orbit Housing Group Ltd Sovereign Housing Consortium Western Challenge HA Newlon Housing Trust Adactus Housing Association Ltd Circle Anglia Limited Guiness Trust Group Gallions Housing Association Bromford Carinthia Housing Association The Swaythling Housing Society Ltd East Thames Group West Mercia Housing Group Accord Housing Association Bedfordshire Pilgrims HA Asra Greater London HA Dominion Housing Group

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Consortia: Mixed The Compendium Group Ltd Manchester Methodist HA Orwell HA Ltd The Rokbuild Ltd Notting Hill Housing Trust Galliford Try Plc

Special Purpose Vehicles Gentect Homes Ltd

These organisations have passed the Pre-Qualifying stage and have now invited to submit detailed bids. Bidding organisations will need to demonstrate that their proposed schemes meet the local priorities laid out in Regional Housing Strategies, as well as compliance with the Corporation's Scheme Development Standards, which include a move to an EcoHomes 'Very Good' rating as a minimum requirement. The Corporation intends to use a number of tools to evaluate bids. It has described these as forming part of “a 'balanced scorecard' approach, creating a level playing field between commercial and not-for-profit organisations”. These evaluation tools include:

Housing Quality Indicators covering a range of indicators allowing evaluation of a scheme on the basis of quality rather than cost alone, using three categories of key features - location, design and performance.

Capacity Model providing a common set of data to discuss a programme grant level in the context of an organisation's long-term viability and development capacity

Standardisation of Specifications with greater use of standardised development plans have the potential to unlock efficiency gains through reduced design fees and development department overheads.

Grant Index which will be used to assess the relative value for money of bids from both Housing Associations and private developers, involving adjustments to take account of differences between the two organisation types (this assessment may be particularly relevant to the schemes being considered by Derby Homes and Derby City Council as discussed below).

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When Housing Corporation development funding was confined to RSLs it was invariably the case that any new development would be managed by the RSLs concerned and this would not have provided scope for any significant management by ALMOs. The terms of the Prospectus and Guidance issued to NAHP bidders enable unregistered bodies in receipt of social housing grant to appoint two or three star ALMOs to manage any stock created using that funding. This has provided an opportunity for Derby Homes and Derby City Council to negotiate with bidders who are unregistered bodies in order to secure a tripartite arrangement in which land is made available to the developer on which affordable housing to be managed by Derby Homes can be built.

If Council land is utilised it would be theoretically possible to develop without Housing Corporation subsidy by cross subsidisation of the proceeds of market housing to produce new affordable housing at nil cost to the ALMO. This could, however, only be achieved if land values are sufficiently high in relation to building costs in addition to the land required were sold by the local authority at a discounted value, for example £1. Where cross subsidisation will not generate sufficient resources, even with the provision of free land, it will be necessary to rely on Housing Corporation funding. The assessment of competitive bids for funding will take into account the market value of the land when determining if a particular scheme offers value for money.

The Corporation’s Grant Index will be used as the key value for money measure of each scheme. The table below shows how this is to be calculated.

Calculation of the NAPH Grant Index

Grant Amount £X

(a) Recycled Grant Add, as if other public subsidy for housing

(b) Other public subsidy Add, according to Capital Funding Guide

(d) Time beyond 1 April 2008 Add, 6% per annum

(e) Housing Quality Index Add/subtract, HQI Factor

The Invitation to Bid states that "all things being equal a lower GI will represent better value for money" [ITB p. 27]. If a significant proportion of market housing is incorporated

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into any scheme then it will be possible to propose viable schemes at anticipated average grant rates for the region. The addition of land value within the Grant Index would, however, generate a Grant Index figure that is substantially higher – perhaps twice as high. For example, a scheme of 40 affordable units on land with a market value of £1.5m would generate a Grant Index figure of £37,500 per unit – before adding any construction costs. This suggests that, for the City Council and Derby Homes to successfully pursue a scheme reliant on NAHP funding, it will to desirable to engage in detailed discussion with the Corporation, ODPM and GOEM prior to the bid deadline. These discussions should involve both regional investment staff and national policy staff in order to ensure that what will be an innovative approach is given serious consideration, its regeneration benefits are understood, perhaps the case argued for any such bids to be considered as pilots and the necessary fit shown with regional policy as set out below.

Economic considerations will contribute to a 50% weighting against an internal Value for Grant Comparator (VfGC) with the remaining weightings being 30% for quality and 20% for timeliness.

In addition to offering value for money and being deliverable (for example with planning consents secured) schemes bids are assessed for their relationship to regional and local priorities. The Housing Corporation states that its role is to "ensure that regional priorities are addressed whilst at the same time we deliver on the national targets and policy objectives" [Prospectus p. 8]. The proportion of the NAHP to be spent in the East Midlands Region has been agreed by Ministers as being £74m (3.9%) in 2006/07 and £92m (4.5%) in 2007/08.

The Regional Housing Board is recommending that £50.5m for New Affordable Housing be allocated in 2006-08 to the 'Three Cities Sub-Region' which it estimates would produce 1,341 homes in Derby, Leicester and Nottingham combined. If spilt evenly this would produce 447 new homes in Derby. The Three Cities sub-regional priorities are

1 those areas with the greatest affordability issues such as Blaby, Rushcliffe, Gedling and Broxtowe 2 provision in those areas which represent natural migratory locations 3 projects which incorporate mixed use economic growth as part of a wider overall scheme; and 4 projects which reflect housing market patterns rather than administrative boundaries.

An estate based housing regeneration scheme would not appear to relate to these sub- regional priorities.

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There are two specific areas of Derby mentioned in the RHB investment recommendations. These are Derby Cityscape, which is stated to be a priority for funding in 2006-08 with £2m set aside to schemes in that area, and the former Derby County FC Baseball Ground' in the Peartree area where plans are described reaching an advanced stage for likely delivery in 2006-08. In addition to provision under the heading of New Affordable Housing, the RHB, has made provision for £18.5m in 2006-08 for ‘Low Demand and Housing Market Renewal’. This will be allocated to areas in Bolsover, Mansfield and Derby. The RHB states that "in Derby investment will be targeted at localised market renewal activity where intervention is sought to raise standards of stock by targeted renewal and replacement, as well as tenure and income diversification through a widening of house type and tenure" [p.22]. This could provide an opportunity to bid for schemes in Derby which could be characterised as revitalising failing localised housing markets.

In addition to needing to relate to policy priorities, bids for new affordable housing will need to show they offer value for money. The sub-regional funding allocated for new affordable housing is equivalent to an average SHG rate of £37,658 per dwelling. The Invitation to Bid states that "the general presumption is that development should be for the additional supply of new homes or conversion to residential use rather than on purchase and refurbishment of existing stock". Schemes that involve demolition, clearance and rebuilding of existing estates are both relatively expensive and offer a relatively smaller number of net additional units since, even with higher densities; much of the new housing is replacing previous stock - albeit with a better type, mix and quality of housing. To enhance its chance of success an SHG bid would need to stress its regeneration benefits and its role in creating a sustainable communities and balanced local housing markets.

Finally in considering the prospects of Housing Corporation funding it is worth noting that the standard NAHP financial conditions include "Additionality – for each Scheme, the Grant applied for must be necessary in order for the affordable housing in the Scheme to be delivered". Bids for the development of new stock on Council land would therefore be expected to be supported by a mix of free land, sale proceeds and prudential borrowing with Housing Corporation grant only being required to fund any shortfall required in order to produce an affordable housing element of the type considered necessary by the Council in accordance with its housing strategy.

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6.0 ALMO Homes Proposal

A proposal to develop new social housing has been outlined to Ministers and they have asked London Borough of Hounslow and Hounslow Homes to work this up in more detail. The proposal would involve

• Transfer of land on which the homes are to be constructed from the Council to the ALMO for £1 • The dwellings concerned not being built under the Housing Act so that by definition that are not HRA dwellings to which the subsidy system and the Right to Buy would apply • Tenancies in the new dwellings being assured or assured shorthold rather than secure tenancies • The ALMO being able, at least in theory, free to set rents which are different to those determined through the Government formula for setting social housing rents.

It is understood that the initial proposal concerns a scheme on three sites which are in close proximity to each other. These consist of two disused car parks and a large detached dwelling. The scheme has planning consent and proposes to result in the provision of 49 units made up of

4 x 2 bedroom flats (for shared ownership) 4 x 4 bedroom houses (for rent) 11 x 3 bedroom houses (for rent) 30 market dwellings for sale.

It is understood that the scheme is not dependent on Housing Corporation or other subsidy, other than the discounted land value, nor does it require borrowing. The intention would be generate sufficient value from cross subsidisation to enable future rental income to be reinvested in further ALMO development. These aspects of the scheme may well reflect in characteristics of the London property market. Ministers are considering this proposal as a pilot. It is understood that the scheme would require Secretary of State’s consent to disposal for less than best consideration since the general consent enabling local authorities to do so specifies the bodies to whom such disposals can be made and that, whilst it includes RSLs, it does not include ALMOs.

A second scheme has been identified by Hounslow but not yet put forward to ODPM as a pilot. This consists of four blocks of flats consisting of 72 units and associated garages. The scheme would create 130 flats for sale which would cross subsidise the production of

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72 affordable houses ranging from one to four bedrooms in size. This scheme has not yet been put forward as a pilot since Hounslow’s preference is to get consents in place and then follow up with its second proposal which it believes is more complex due to:

• the presence of leaseholders and the potential need to use Compulsory Purchase Orders • the need to phase the decanting of existing tenants • the need to seek possession from tenants under Ground 10a with the Secretary of State’s approval (required where the authority is not itself undertaking the development) which in turn necessitate a firm programme to be in place • the need to secure vacant possession before the site can be sold.

The second redevelopment proposal also gives rise to issues about the rights of existing tenants who would need transfers to secure tenancies or the contractual preservation of these rights in alternative homes. Moreover, given recent policy commitments to home ownership, Ministers might have concerns about the replacement of homes to which the Right To Buy applies with homes to which neither the Right To Buy, the Right to Acquire nor the new Social Homebuy Scheme are applicable. As a minimum in this situation it would be necessary to create a term of contract between the local authority and the ALMO which would oblige it to offer contractual tenancies to any former Derby City Council tenants of the estate. That is in order to enable those former Council tenants wishing to do so to return to the estate following redevelopment contractual tenancies would need to be created with equivalent rights to buy, succeed, exchange, etc.

LB Hounslow has decided to seek Counsel’s Opinion primarily with regard to the process used to determine that land would be sold to the ALMO. It is understand this relates to Member concern following judicial review of an unrelated recent land disposal. Hounslow have indicated to ODPM that they would actively consider inclusion of Social Homebuy within the scheme. This proposal involves existing tenants being able to purchase part of the equity in their home and ultimately benefit from the sale of that sale when leaving the property. This scheme is distinct from New Build Homebuy. The details of the scheme are subject to consultation and it is unclear what resources might be required in the event that departing tenants have an option to secure payment in relation to the equity they have purchased. At this stage Hounslow envisage that the capital gains and losses arising from Social Homebuy would be shared between the Council and the ALMO. It is also proposed that there be a clause in the contract between the Council and the ALMO providing that for agreement on the use of surplus rent – if rents are set above levels in accordance with Government policy.

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In an interview for this project the Head of the ALMO Branch at the ODPM indicated that they would be keen to consider as a separate ALMO house pilot scheme proposal from Derby which involved estate redevelopment. In order to co-ordinate approaches prior liaison with Hounslow Homes and London Borough of Hounslow would be desirable. It is understood that following Counsel’s Opinion, a further approach will be made to ODPM and then again to the Council’s Executive.

An outline proposal (which follows) adopts a similar approach. This was drafted as part of this assignment and has been adapted by Derby City Council and Derby Homes for submission to the Housing Corporation and ODPM. Calculations of potential scheme costs and composition were made as part of this assignment based upon the mix required by the City Council and the costs and profit margins of the preferred bidder – these currently remain subject to negotiation.

Unlike the Hounslow proposal land values for the Derby Homes schemes are not sufficient to make development incorporating a significant affordable element viable without Housing Corporation grant. A non-grant approach would require predominantly market housing schemes, possibly also with rent levels for the affordable housing element set higher than rent targets in line with the Government's formula, for example set at the maximum levels at which Housing Benefit would be payable.

OUTLINE PROPOSAL FOR THE DEVELOPMENT OF ALMO HOMES Derby City Council has developed a proposal in conjunction with Derby Homes and a private developer for the redevelopment of two small estates of flatted blocks. These consist of 137 flats in the Derbyshire Blocks in Spondon (86 flats) and the Isle of Wight Blocks in Alvaston (51 flats). The Council approved, in April and June 2005 respectively, work to bring forward redevelopment proposals and has commenced the decanting of tenants.

It is proposed to redevelop these flats which have become unpopular and difficult to let, offer a poor quality estate environment, offer poor thermal comfort due to their (non- traditional) construction and would result in high costs if brought to the Decent Homes Standard. For these reasons work to bring them up to the standard have not been carried out by Derby Homes.

Public consultation in both areas has favoured the sites being cleared for redevelopment. Derby Homes has recommended to the Council that the flats be demolished. The Council resolved to support this recommendation and to seek high quality, mixed property and

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mixed tenure developments. The Council's stated preferred option to deliver such schemes was to work in partnership with Derby Homes and a private developer qualified to seek Housing Corporation grants. Bids for funding in 2006-08 must be submitted by 21 October 2005 and, to go forward, would require City Council support. The bid will be more attractive if the Council makes prudential borrowing available to Derby Homes in order to part fund the affordable homes.

The model that has been developed in line with the Council's preferred option would be for ownership of the sites to pass from the City Council to Derby Homes for nominal consideration (i.e. £1) in order to enable an agreed scheme to be developed. Terms of the contract would include nomination rights and a local lettings plan to achieve sustainability, affordable rent levels, the preserved rights for existing tenants wishing to return to the estate through contractual tenancies, agreement on the distribution of receipts and payments relating to purchases through preserved RTB rights or Homebuy, agreement on maintenance of unadopted access roads, arrangements for the repayment of any borrowings to the City Council and upon dissolution of Derby Homes.

Derby Homes would decant the tenants and grant the developer a licence to occupy and control site, designing and building both affordable and market homes. The developer would draw upon Housing Corporation grant, secure proceeds from the sale of homes on the market and require a balance to be paid by Derby Homes which would be supported from prudential borrowing. Upon completion the affordable housing would remain in the ownership of the ALMO whilst the land on which the market housing is built would be sold to the developer who would in turn sell on the completed homes. The open market housing and low cost home ownership would help generate the funds required to provide the rented and shared ownership housing. In the case of these sites, particularly due to demolition costs, additional financial assistance would also required to secure an appropriate, sustainable mix within the scheme.

This method of delivering the scheme would attract external finance, draw upon the expertise of a developer able to lead the demolition and redevelopment process and ultimately create new homes which would become assets of Derby Homes. These properties would not be built by the Council under its powers within the Housing Act which would exempt them from the right to buy, although, through grant conditions, the right to acquire would apply to any homes built with Housing Corporation funding. Legal advice given to Derby Homes and the London Borough of Hounslow is that properties built by the ALMO, and on land owned by it, would not be deemed to be housing provided by the authority under Part II of the Housing Act 1985 (to which the Housing Revenue Account, and hence the subsidy system, is applicable). In discussions the ODPM has indicated this

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is a legal matter and suggested that advice could, for the avoidance of doubt, be exchanged. It has further indicated that it has no plans by bring any such ALMO housing within the HRA. This matter is not directly linked to the current national review of the future of ALMOs and is not dependent on its outcome.

Whilst not within the HRA, the Council would, however, retain ultimate control of any new homes by virtue of its position as the sole and controlling member of the Derby Homes Ltd. An appraisal of alternative models has been undertaken by ECOTEC and supplied to Derby Homes and Derby City Council. A summary of their advantages and disadvantages is appended to this report. It is possible that by using Housing Corporation, prudential borrowing and discounted land, schemes could be produced which would be offer a broadly comparable level of affordable housing to those which could be produced by a housing association. There would be additional benefits to the Council of developing through Derby Homes by virtue of its nature as an ALMO in securing close co-operation, helping to sustain the viability of the ALMO, providing nomination rights and ultimate control of its assets, which would transfer to the Council upon dissolution. Development through a housing association or the Private Finance Initiative both contain requirements that preclude any assets from being vested directly in the ALMO.

In order to maximise the likely success of a Housing Corporation bid it would be desirable for the City Council to enter into prudential borrowing or support the ALMO to enter into borrowing. If the cost of any such borrowing, together with management and maintenance costs, is, as anticipated, less than rental income then these properties will enable other developments to be funded in the future, for example on smaller sites where there are no or more limited opportunities for cross subsidisation. This approach would endow assets in the ALMO and assist it to help meet housing need in the city by developing homes in addition to its management and repairing role. Completion of the decent homes programmes by the end of this year would make new development in 2006-08 particularly timely.

In the case of the Derbyshire Blocks, the preferred option reported to the [Council] Cabinet, in April 2005, was to develop a proposal with conjunction with Lovell, a private developer which is under contract to the Council to deliver the decent homes programme. The initial intention was to bid under a pilot programme, known as New Partnerships in Affordable Housing. In the event the bid was held over with a view to inclusion in the scheme being put forward by Lovell for inclusion in the National Affordable Housing Programme 2006-08. Cabinet agreed to receive a further report with a recommended option for decision.

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A layout, scheme mix and budget are the subject of negotiation with Lovell. The current proposal would result in the replacement of the 86 Derbyshire flats with a mixed development of 57 properties, including 39 houses. The proposal to seek Housing Corporation grant funding resulting in the development of rented homes and shared ownership properties managed by Derby Homes together with open market homes and low cost homes on the site. Derby Homes would own the rented homes, 20% of the equity in the low cost homes (in perpetuity) and the unsold part of the equity (initially normally 50%) in the New Build Homebuy properties (the name being used by the Housing Corporation for the relevant shared ownership product).

In order to develop similar proposals for the Isle of Wight blocks the City Council invited proposals from a number of developers who are qualified to bid for Housing Corporation funding. The proposal, from Lovell, who were the preferred partner amongst those that submitted proposals, is to redevelop the estate demolishing 51 flats and replacing them with 53 units, including 23 houses and bungalows. Again these properties would be accompanied by open market and low cost homes, with Derby Homes having an equity stake in the latter.

The nature of the tenure mix on both sites requires further consideration in order to produce a bid level for Social Housing Grant that is liable to be successful. The property mix can be adjusted to include the type and number of open market and shared ownership dwellings that are necessary to produce a realistic bid. Should the bid fail an option available to Derby would be to further revise this mix to secure a viable scheme, but necessarily with a smaller element of affordable housing than could be achieved with grant.

Based on discussions with Lovell, Derby City Council and Derby Homes the following schemes are now being prepared for an NAHP bid. Since that date the parties have further been discussing the preferred mix to form the basis of an NAHP bid and using the spreadsheet provided. These versions are set out here to facilitate illustration of the principles involved whilst acknowledging that they are subject to refinement.

The illustrated schemes below would provide 30 rented units on the Isle of Wight site and 29 units on the Derbyshire blocks site at Social Housing Grant which it is anticipated would be close to the anticipated regional average level. The grant rate could be reduced further if the mix were adjusted to include more market units and fewer rented units and if property type were to be used as a further variable. Given that these proposals would relate to Government, Housing Corporation and Regional Housing Board strategies and

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policies there is a reasonable prospect, provided the case is properly made, that these bids could succeed.

Summary of Potential Schemes undertaken with Derby Homes Isle of Wight Blocks Derbyshire Blocks Costs Units £ Units £ OM 11 £798,769 14 £1,093,747 LCHO 3 £217,846 6 £468,749 SO 9 £653,538 8 £624,998 Rented 30 £2,178,460 29 £2,265,619 All 53 £3,846,613 57 £4,453,114

Sales OM 11 £1,308,780 14 £1,725,000 LCHO 3 £272,976 6 £576,000 SO 9 £528,660 8 £510,000 Rented 30 £0 29 £0 All 53 £2,110,416 57 £2,811,000

Gap £1,738,197 £1,642,114

Grant SHG SO 9 £181,721 8 £159,044 Per Unit £20,191.26 £19,880.51 SHG Rent 30 £1,211.47 29 £1,153,070 Per Unit £40,382.51 £39,761.02 All 39 £1,393,197 37 £1,312,114 All AH Units £35,722.99 £35,462.53

Borrowing SO 9 £45,000 8 £40,000 Per Unit £5,000 £5,000 Rented 30 £300,000 29 £290,000 Per Unit £10,000 £10,000 All 39 £345,000 £330,000

Funding £1,738,197 £1,642,114

Balance £0 £0

In order for these bids to go forward Lovell are, it is understood, seeking confirm of the payment that Derby Homes would make available from borrowings and anticipated revenue from shared ownership and low cost home ownership sales. The balance of funding required would be from Social Housing Grant. Whilst Lovell, as the applicant, will determine that figure an open book approach, which is understood to be the intention of the parties, would mean that Derby Homes is aware of the costs and profits relating to all units so that the degree of cross subsidisation is explicit and the sharing of risk could be

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negotiated on a partnering basis. Mechanisms will need to be created to manage potential risks such as payments from Derby Homes to the developer falling due in relation to progress of the construction works but in advance of sales revenue being generated and, in particular, the consequences of market conditions deteriorating prior to completion.

The City Council has decided to support the submission of NAHP bids with Lovell for these sites. This commitment will be subject of a further report to Cabinet. In coming to this decision the Council will have considered the relative merits of undertaking development on these sites through RSLs and Derby Homes. The following table illustrates that in addition to securing ALMO assets this route would generate resources sufficient initially to fund 10 additional properties elsewhere in the city and that, if financial freedoms became available, initially over 40 additional properties. This latter scenario is referred to in the column headed ‘post review or via SPV’, with an SPV also being likely to attract additional resources. In practice the numbers would be significantly in excess of this level as a business plan for a portfolio of schemes would by dynamic and lead to further growth and any new schemes support further development.

Estimation of Future Benefits Arising From Schemes Undertaken with ALMO Isle of Wight Blocks Derbyshire Blocks Units Now Post Review Units Now Post Review or via SPV or via SPV Capital Value £ £ £ £ LCHO 3 £68,244 6 £144,000 SO 9 £528,660 8 £510,000 Rented 30 £3,225,120 29 £3,465,000 Total £3,852,024 £4,119,000

Rental Income Rented Units (av p.w.) 30 £61.17 29 £62.76 Less M&M £35.00 £35.00 Net £26.17 £27.76 Shared Ownership 9 £33.65 8 £36.52 Less M&M £0 £0 Net £33.65 £36.52

Net Inc p.a. per unit £1,256 £1,332 All rented units £37,680 £38,640 Over Business Plan £1,130,400 £1,159,200

Net Inc p.a. per unit £1,615.35 £1,753.13 All SO units (Year 1) £14,538.15 £14,025.00

Borrowing – now Rented £300,000 £1,120,000 £290,000 £1,160,000 SO £45,000 £326,769 £40,000 £255,000 All £345,000 £1,526,769 £330,000 £1,415,000

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The assumptions used in the above calculations have been as follows.

ALMO Benefits – Assumptions Rental Income IOW and Derbyshire IOW Rental assumptions - rented units Rental assumption - on SO units 1bf £55.00 Unsold equity £528,660 2bf £60.00 2.75% £14,538 2bh £65.00 Number 9 3bh £70.00 Av per unit p.a. £1,615 2bb £65.00 Per Rent Wk £33.65 4bh £75.00 Rent Weeks 48 Derbyshire Rental assumption - on SO units Unsold equity £510,000 2.75% £14,025 Number 8 Av per unit p.a. £1,753 Per Rent Wk £36.52

Borrowing Capacity Now Post Review or via SPV Rented Units £10,000 £40,000 Shared Ownership £5,000 25% of OMV

Construction Costs of future units on other sites at current values £70,000

A summary of the advantages and disadvantages of different models for development of these sites is appended to this report.

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7.0 Other Development Opportunities

There are a number of other development opportunities which could utilise housing stock and land which is in the Council's ownership and other residential development opportunities arising from planning policy and Cityscape, the Urban Regeneration Company. These opportunities include the following.

'Disposal Sites' – These are areas identified by strategic housing and planning officers at the City Council as suitable for residential development. These are extracted from the Council's list of vacant and surplus land which it maintains as part of its Asset Management Plan. The disposal sites currently identified and their estimated residential potential are as follows

Location Estimated Planning Potential Purpose Held For Bramfield Road – adj. no. 70 2 houses or 4 flats Estates Peel Street – site adj. no. 32 5/6 flats Policy Elton Road/Crowshaw St 4 houses or 6/8 flats Policy Belgrave St – site adj.no. 50-58 2 houses or 4 flats Policy Slack Lane – site off no.182-188 3 houses or 6 flats Policy Caxton St/Coleridge – small site 1 house or 2 flats HRA Caxton St/Coleridge – large site 3 houses or 6 flats HRA Enfield Rd – adj. no. 9 1 house or 2 flats HRA Muswell Rd 2 houses or 4 flats HRA Oaktree Ave – site adj. no. 9 -11 2 houses or 4 flats HRA

These sites do not have planning consent for residential development. All of sites have actual or potential planning issues, in many cases being used as informal open space. Planning Guidance requires that the views of residents be sought on the potential loss of open space and the gain of affordable housing.

In the near future the Elton Road and Peel Street sites are to be offered to RSLs and the City Council have asked if Derby Homes wishes register an interest in these. The Peel Street site is used for informal parking the loss of which may be weighed in the planning process against the gain of affordable housing.

There are other Council owned sites that are not considerable suitable for development or are deemed further away from being developed than the sites referred to above. Some of these other Council assets will have significant residential development potential and may be surplus to current or future operational needs.

'Management Sites' – There are areas of land that are considered by Area Managers to be surplus. These can give rise to litter, nuisance and anti-social behaviour. A detailed list,

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drawn up by Derby Homes for the North Area, has identified land considered to have development potential in the following locations: • Monyash Close • Alison Close • Tansley Rise • Maryland Road garages • Meath Avenue garages • Corner of Hillcrest and Wiltshire Road • Larger rear gardens in various locations • Green at the back of Chaddesden Park Local Housing Office

These areas may prove suitable for small numbers of dwellings where there will not be opportunities for cross subsidisation on that site.

Cowsley Road - The City Council has identified the now vacant site of the former Cowsley Road maisonettes as an area that could be developed (currently an RSL has been invited to submit an NAHP bid in respect of this land). If Derby Homes were to develop on larger site, as proposed at the Isle of Wight and Derbyshire blocks, and then had an asset base against which it could further develop, then smaller schemes could be undertaken on such sites, including non-grant schemes.

Priority Estates – the Council undertook, in 2003 - 04, housing futures studies in three areas which have been treated as priority estates having had successive regeneration initiatives. These studies covered Derwent, Osmaston/Allenton and Old and New Sinfin. These studies contain recommendations which include tenure diversification and changes in property mix including both larger properties, smaller properties (1 or 2 beds) and low cost home ownership. These recommendations would constitute remodelling and go beyond the scope of past regeneration initiatives. In the case of Derwent discussions have taken place with the Housing Development Team Leader on an indicative scheme to demolish 100 homes managed by Derby Homes and construct a mix of rented and privately owned homes in an area that is currently unpopular and has significant future investment needs. It is understood that further development of these plans is in abeyance pending development of an overall masterplan. Derby Homes could similarly work with a private developer and other partners to undertake comprehensive regeneration schemes. These could be undertaken through partnering arrangements, similar to those proposed on the Derbyshire and Isle of Wight blocks, or by constituting a Special Purpose Vehicle in which there would be an interest held by Derby Homes and/or the City Council. If this were constituted with the Council and the ALMO having a minority interest and no overall control

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then such an SPV could act as a means to secure private finance whilst contracting management of the new stock to Derby Homes. Selection of a developer with expertise in regeneration could add value to such a partnership in which it could hold equity and/or act as a contractor. Where land values are low it may be preferable to develop a long term strategy to comprehensively remodel these estates, including new services and schools, with housing redevelopment following at a later stage when additional value has been 'liberated' through changing demand. The 15-year strategic framework for North Solihull provides an example of this approach being delivered through a regeneration partnership levering private finance and bringing expertise to development of a portfolio of sites.

Derby Cityscape – there are significant residential development opportunities planned by Derby Cityscape which, if approved, will result in the redevelopment of large areas of the city centre with the building of 5,000 homes, including 1,500 affordable homes, up to 2020 with an estimated 10,000 new residents. These plans include the demolition of the 25 flats at Exeter House, which is managed by Derby Homes, and for the construction of a hotel on the site. The plan seeks a mix of housing for families, couples and single people and identifies areas for residential proposals as:

• Friar Gate Goods Yard – a mix of city centre apartments and family housing (around 800 homes);

• Castleward – a mixed-use residential area offering family housing (around 1,500 homes);

• Derbyshire Royal Infirmary – selective conversion of existing buildings combined with new apartment developments (around 1,350 homes);

• Riverside – high density development adjacent in this riverside area (around 430 homes) which includes Exeter House and is adjacent to Britannia Court managed by Derby Homes (the Council having resolved to decommission and sell Britannia Court);

• Sadler Gate/Iron Gate/St George's – small scale apartments in the heart of the city centre (around 120 homes); and

• Friar Gate 'Professional' Quarter – with potential for development of 'residential – based live work units'.

Local Plan and Development Framework – The City Council's Local Plan makes provision for residential development within the city and will give rise to the allocation of

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areas for new housing which will result in planning obligations requiring that affordable housing be provided on sites of 1.0 hectares or those providing 25 or more dwellings. Some of these schemes may attract Housing Corporation finance but many will need to be financed without reliance on grant. These provide opportunities for Derby Homes to develop new affordable housing.

The Structure Plan requires land to be provided for 15,500 dwellings in Derby over the 20 year period between 1991 and 2011. The position at the time of preparing the Revised Deposit of the Local Plan in April 2002 was that 8,800 dwellings had been completed in the period and that there were sufficient large sites identified, either with consent or allocated in the Local Plan, to accommodate about 2,800 dwellings. These consisted of large sites had consent for 280 dwellings and allowance was made for future 'windfall' development of 800 dwellings on large sites (10 or more dwellings) and 720 dwellings on small sites. Since this time the Derby Cityscape Masterplan has been produced and is expected to lead to changes in land use allocations in the city centre.

The target figure for affordable homes to be delivered through the planning system in 2002-2011 is 1,800 homes. Local Plan housing allocations in the revised deposit plan included the following areas with an affordable housing element and where construction has not yet taken place

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Policy Location Min. Expected Affordable Ref. No. Site Dwelling DwellingTarget Capacity Contribution 2002 - 2011 H1/CC8 Riverside 300 120 90 H1/CC26 Wellington Street 130 130 40 H1/R2 Friar Gate & Environs 500 300 150 H1/R3 South of Slack Lane 100 100 30 H1/R5 Baseball Ground 150 150 45 H1/R4 Kingsway Hospital 300 300 300 H2b Uttoxeter New Road/Great Northern Road 150 100 45 H2d Barlow Street 60 60 18 H2g Rykneld Tean Mills 100 100 30 H2h Dean Street Mills 25 25 7 H2i Station Road, Spondon 82 82 16 H2j Station Road, Spondon 20 20 7 H2k Agard Street 50 50 15 H2l Gower Street 35 35 10 H2o Brook Street 90 90 27 H2r Stenson Fields 35 35 10 Hx1a Glossop Street, Osmaston 40 40 12 Hx2 Ashbourne Road 35 35 9 H3 University Campus 400 400 120 H6 Highfields 120 120 35 H12 West of Rolls Royce Training Centre 108 108 30 H13 Rykneld Road 980 980 295 H14 West Chellaston 340 340 90

Housing PFI – The City Council is in the process of developing an Outline Business Case for non-HRA properties within Derby as part of the Housing PFI Round 3. The timetable would then be for bids to be made in Spring 2006 and a preferred bidder being selected by the end of 2006, for commencement in late 2007. The proposal is for 125 new build properties to be constructed on six sites, being a mix of those in Council ownership and those subject to s106 agreements. It is understood that three privately owned sites have been identified to date which would provide 125 units. The pursuit of redevelopment of the Isle of Wight and Derbyshire blocks through an alternative route will require the Council to identify sites other than these in order to sustain the business case for the PFI scheme. The essence of PFI is transferring risk to a private body which undertakes what is classified as private borrowing. Derby Homes is not in a position become a PFI bidder since it is a local authority controlled company whose borrowing would be classified as public sector borrowing. The scope for Derby Homes involvement would be a) to sell management services to the preferred bidder, and b) to form or join a bidding consortium in which it would have an equity share but no majority control. The ODPM has agreed to amend PFI guidance to enable ALMOs to be part of a PFI consortium for new build

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schemes in line with the changes to SHG that is now available to non-RSL bodies. This involvement would, however, necessarily be on a minority basis.

Local Improvement Finance Trust Initiative (LIFT) – a model which has been widely used in the education and health sectors is the formation of Joint Venture Companies to carry out agreed programmes of refurbishment or new development, with public sector shareholding limited to 20%. There are no current programmes to promote this approach in the housing sector and no specific housing-rented products available. There is however an established track record in other sectors and clear principles which could be applied to housing. Such schemes would be attractive if credits were made available to the Council and or the ALMO with which to fund payments. Derby Homes could both become a member of such a joint venture, secure an exclusive agreement to build on its behalf and then to subsequently manage the stock thereby created (subject to agreed audit and bench marking requirements). This type of scheme would be likely, however, to have significant transaction costs and it should be noted that a critical mass for use of the LIFT model is considered to be schemes in excess of £5m in value.

Derby City Homes Regeneration Ltd – a joint venture company was established in 1996 by Derby City Council and Bowmer and Kirkland Ltd which equity in the company being divided £200 City Council (20%) and £800 (80%) Bowmer and Kirkland Ltd. This structure was adopted in order to ensure that the company was not regulated and treated as part of the Council for capital finance purposes. The Company secured 10 'acquired' City Council properties on long leases. These are properties originally in private ownership which were acquired for rehabilitation but which subsequently required further upgrading. It was intended that after the costs of works carried out were met rental income would be used to fund further works or distributed as profit according to the 80:20 share capital ratio between the parties. This is a bespoke vehicle which could offer scope for extension should both parties wish to do so. The same principles could apply to the formation of a new venture, with minority ownership of shares by Derby Homes enabling a joint venture to undertake development activities the cost of which would not be deemed to be public borrowing.

The Assettrust Housing Ltd – this company presented a model for funding affordable housing without grant to Derby Cityscape, Derby City Council and Derby Homes in April 2005. This is a further example of a private partnership being used as a vehicle to develop affordable housing. The model uses section 106 agreements to build, raises private finance, accepts local authority nominations and contracts housing management to an RSL or ALMO. This model would offer a route to Derby Homes managing properties but would not vest ownership of them in the ALMO thus limiting its future potential to grow a

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developing asset base. It is understood that the Council wishes to review its approach to section 106 agreements in light of the revised Planning Policy Guidance 3 on Affordable Housing before giving consideration to the Assettrust Housing option.

Derby Homes Business Strategy – there have been discussions between the Council and the ALMO arising from the nature of its Memorandum and Articles and its Management Agreement which prevents work being carried out, or services being provided to third parties, other than Council tenants, without the council's prior written consent. Currently the Council has agreed to allow Derby Homes to provide management consultancy services up to a value of £20,000 in each case to any one organisation, has retained control of consent in respect of consultancy work in excess of this value and management of RSL properties, and has resolved to give further consideration, in late 2005, to the case for managing private sector properties. The involvement of Derby Homes in new build development would give rise to the need to further review its Business Strategy, Memorandum and Articles and Management Agreement in order to facilitate this work and enable a flexible approach to be taken to the vehicles that could be used for this purpose.

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8.0 Conclusions

This report has covered a wide range of opportunities for new build development some of which have potential for Derby Homes to be involved in the ownership and/or management of new homes. This activity would help the City Council to meet its strategic housing objectives and contribute to sustaining the ALMO. Before setting out recommendations this chapter offers some conclusions on the most fruitful options for going forward.

ALMO House

This option, which has been outlined in previous sections, is attractive since it enables the City Council, working with the ALMO and a development partner to create new social housing without reliance upon the uncertain, complex and contested processes that occur when attempting to secure affordable housing through the planning system. In contrast by using this route, particularly when developing on Council owned land, agreement can be reached with a high level of certainty that the units concerned will be delivered as required. The transfer of land for a nominal sum would generate some of the value required to make the development of ALMO homes viable. In order, however, to produce schemes with a significant social housing element which the Council considers necessary Derby would also need to attract Housing Corporation grant. This contrasts to the position of Hounslow Homes who envisage being able to develop new homes for rent on a 1:1 ratio with market housing due to the greater land values in their area. The submission of Housing Corporation bids, to supplement free Council land and borrowing, is an attractive option to secure new affordable housing, but is, by definition, problematic since the Corporation may take a view, both on policy and value for money grounds, that schemes of this nature do not merit support.

Special Purpose Vehicle

The chapter on development opportunities outlined a number of schemes that would involve the creation of a Special Purpose Vehicle to deliver affordable housing in conjunction with the City Council and Derby Homes. All of these are mechanisms to generate resources to do things which alone the Council and the ALMO would not able to do to the same extent. Although the ALMO could be considered to be a SPV it is a local authority controlled company and any borrowing by it, or by the authority on its behalf, counts as Council borrowing and is constrained by the prudential borrowing regime. In contrast an SPV in which the Council and/or the ALMO has a minority interest and no overall control can borrow on its own account without there being an impact upon Council finances. Making free or discounted housing land available to an SPV for agreed purposes

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could enable further private sector resources be generated and facilitate development without reliance on Housing Corporation finance. This approach should be given serious consideration should the forthcoming bids to the Corporation not succeed and as a mechanism to redevelop the Council’s pre-war housing estates.

Extra Freedoms and Flexibilities

The on-going national review of ALMO freedoms and flexibilities has the potential to provide future opportunities for at least three star ALMOs to be become involved in developing new social housing. There is a danger, however, that this review will cause delay and confusion in considering the ALMO homes proposals such as those being put forward by Derby and Hounslow - which are permissible under current rules subject to the necessary consents. Whilst permissible these homes would only support limited future development on other sites – because ALMO borrowing is constrained in a way in which SPV or RSL borrowing would not be. If the freedoms and flexibilities being sought by the National Federation of ALMOs and the Chartered Institute of Housing were granted, by removing all stock managed by ALMOs from the HRA and subsidy system, then there would be significant development opportunities. Freedoms could help to generate a larger portfolio of properties supported by future income streams and without prudential borrowing constraints. Whilst noting that a favourable outcome to the national review would offer significant additional opportunities, the development of new ALMO homes can be achieved under current rules, subject to the necessary constraints, and it is important that current opportunities are not lost on grounds that the national review is pending.

Pre-war estate stock renewal

The improvement of the pre-war stock to the Decent Homes Standard does not provide a satisfactory long term future for these estates. In areas where demand is weak more fundamental changes will be required for the future of these estates to be sustainable. The three housing futures studies of priority estates each identified the need for a wider mix of property types and tenures. To deliver more comprehensive redevelopment Derby Homes could work with relevant regeneration agencies, such as Derwent New Deal for Communities, developers with a regeneration record and skills, firms able to lever private finance and other interested parties. Opportunities could be widened if non-housing land was added to potential redevelopment, for example the surplus Rolls Royce premises adjacent to housing managed by Derby Homes. Rather than adopting a piecemeal estate by estate approach greater benefits would be secured by developing a long term strategy to be rolled out across all of these estates. A long term arrangement between the Council and Derby Homes working with developers could provide the resources and expertise

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required. A long term agreement, covering a 10-year period or longer, and including an exclusivity arrangement, would generate resources by enabling partners to invest resources at risk in the early years, particularly in the initial stages of building the vision, developing the strategy and devising the vehicles required to implement it.

Derby Homes staff resources

Derby Homes has a national reputation for high standards of service delivery and effective delivery of works to reach the Decent Homes Standard. The staffing structure of Derby Homes reflects these priorities and is similar in this respect to RSLs set up through Large Scale Voluntary Transfers. In the early years a focus on catch up repairs and improvements is necessary but this must be complemented, if the organisation is to be viable and grow, by business development. This can range from ‘soft’ regeneration activities which generate income, such as community services, to ‘hard’ activities such as demolition and rebuilding. The options to progress development by Derby Homes are

1. In-house Development Function - a small in-house business development team, working with other partners, could develop both types of approaches and generate new business. Ideally this should be a dedicated function which is not responsible for normal maintenance functions - in order that there is a clear and sustained focus on development activity. This function would have an explicit target to bring new homes into ownership and/or management.

2. Strategic housing team – reliance upon the strategic housing team at the City Council which is also the client for the landlord services provided by Derby Homes. Despite the effective collaboration achieved, with external support, during this project reliance solely on the strategic housing team would be less than satisfactory. This is because the re-modelling of Council estates and other opportunities for Derby Homes necessarily competes for time, land and financial resources against other schemes where the involvement of Derby Homes will be contingent upon value for money assessments.

3. Contracted development function - an alternative approach would be for a development team within an RSL to be contracted to provide a development service. If an SPV was created to which an RSL was a party there would be scope for these services to be provided at a discounted cost or on an at risk basis as part of the contribution that an RSL may be willing to make. An exclusivity deal, giving the partner first option on potential schemes, would assist in levering these resources.

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4. Consultancy support - Derby Homes could continue to work with the City Council and engage consultancy and support services. This report and associated work has been undertaken on a consultancy basis with potential developers undertaking work to prepare potential schemes at risk. Derby Homes could continue with this approach as it seeks to progress the Isle of Wight and Derbyshire block schemes, develop a strategic approach for pre-war estates and create appropriate delivery mechanisms. In particular if Derby seeks to create a partnership vehicle then consultancy would be important to select the partners, create the vision and develop the mechanisms required.

Drawing on these conclusions a set of recommendations follows.

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9.0 Recommendations

1. Derby Homes be enabled to develop new homes

i) The City Council satisfies itself that properties built by the ALMO would not constitute dwellings that would be contained within the Housing Revenue Account and the housing subsidy system.

ii) The Council and Derby Homes confirms the terms of the contract that would be required to transfer the land and making prudential borrowing available including provision covering tenants rights, rent levels and nominations.

iii) Derby Homes and its preferred developer confirm the terms of the contract between them for design and build of the scheme, retention of the affordable homes by Derby Homes and the transfer of the market housing land to the developer.

iv) The Council confirm the nature of the consents that may be required for it to dispose of land to Derby Homes for nominal consideration, to make borrowings available to it and to secure vacant possession of sites for development by Derby Homes.

v) That the necessary authority be sought from the City Council and the Derby Homes Board to give effect to these recommendations.

2. Housing Corporation funding be sought from the 2006 – 08 NAHP

i) The Council formally confirms that it will proceed with negotiations to redevelop the Isle of Wight and Derbyshire blocks by supporting a bid from its preferred partner, Lovell, which has pre-qualified to bid to the National Affordable Housing Programme, and is willing to proceed on the basis that affordable housing would be transferred to Derby Homes.

ii) Derby Homes and the City Council agree the terms of any bid to be submitted by the developer to the Housing Corporation, including the level of any financial contribution through prudential borrowing and the valuation of land to be transferred to the ALMO for nominal consideration.

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iii) Support for these bids continue to be sought from ODPM and GOEM in order to confirm that the necessary consents can be given and to secure their assistance in obtaining Housing Corporation funding.

iv) The Housing Corporation continue to be approached by the Council and Derby Homes to outline the nature and benefits of the schemes prior to formal submission of the grant application.

v) That should the bids fail further consideration be given to the merits of an alternative non-grant scheme (the submission of which is a required of the NAHP application process).

3. Derby Homes produce a long term strategic plan for estate redevelopment

i) Derby Homes should take a lead role in the development of proposals for housing regeneration within the city, in particular in relation to the City Council’s pre-war housing estates and non-traditional stock with an emphasis on the diversification of property types and tenure in order to meet housing need and secure sustainable communities.

ii) Derby Homes should seek to work with appropriate partners to deliver this redevelopment such as unregistered bodies able to secure Housing Corporation finance, regeneration agencies with specialist expertise to offer or BME housing associations able to mange part of any stock built with Housing Corporation funding.

iii) Derby Homes and Derby City Council should agree a framework and initiate a procurement process to select partner(s), who could be consortia, to work with Derby Homes to develop a long term strategic plan or set of plans that would develop a vision, produce masterplans and costed and funded programmes.

iv) These plans will need to be reflected in the Derby Homes Business Plan together with consequential changes to its contract with the City Council and its Memorandum and Articles.

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4. Further funding and management mechanisms be kept under review

v) The City Council and Derby Homes continue to monitor and influence the national ALMO review.

vi) Derby Homes seek to provide management services to other developers and providers of new affordable housing.

vii) Derby Homes consider joining a consortium that would bid to become the preferred partner to deliver Derby’s non-HRA Housing PFI scheme.

viii) Derby Homes consider seeking to manage or both manage and own new affordable housing on sites that become available for development through the planning system and land disposals by the City Council and other public bodies.

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Appendix One – Interviews undertaken

Paul Bayliss, Board Member, Derby Homes

Shaun Bennett, Director of Investment and Regeneration, Derby Homes

John Cadwallader, Chief Executive, DerbyCityscape

Phil Davies, Chief Executive, Derby Homes

David Enticott, Head of Technical Finance, Derby City Council

Howard Farrand, Chief Executive, Whitefriars Housing Ltd

Ian Fullaghar, Housing Strategy and Performance Manager

Jim Grundy, Housing Policy Manager, Government Office for the East Midlands

Mark Goddall, Housing Development Team Leader, Derwent Community Team (New Deal for Communities)

David Gough, Commercial Manager, Lovell

David Hall, Executive Director, Tribal HCH

Neil Isaac, Director of Resources, Hounslow Homes Ltd

Martin Laidler, Housing Development Manager, Derby City Council

Jyoti Madlani, Regeneration Manager, Lovell

Julie Pearce, Team Leader Housing PFI Team, ODPM

Barbara Perry, Head of Housing Strategy and Performance, London Borough of Hounslow

Stephen Pearson, Freeth Cartwright

Bob Osler, Vice Chair, Derby Homes

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Dennis Rees, Chair, Derby Homes

Mike Wilkinson, Head of ALMO Branch, ODPM

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Appendix Two – Summary of Options

Model A - Grant Scheme with Developer and RSL

DCC sells free land to an RSL which then contracts with a developer to acquire cross subsidised housing with is further supported by Housing Corporation Grant

Advantages Disadvantages Would produce a comparable number of rented and Reliance on Housing Corporation bid for deliver this shared ownership units to ALMO base options scheme mix although the number of rented and shared ownership units is only marginally greater than the equivalent non grant alternative (Model F)

Grant Index Per Unit is above average regional Attracts RSL investment through their ability to grant assumption borrow (which exceeds that of DCC/ALMO)

If a bid were successful the scheme would attract Need to commit at bid stage to a single HC bidder Housing Corporation finance Properties built with HC finance will have the right to acquire

The proportion of rented housing may not be seen as creating sufficient tenure diversification

The viability of open market housing may be compromised by the predominance of rented housing – RSL investment could be problematic

No AMLO homes created as a future asset base

No DCC tenancies managed by Derby Homes available in the new homes to those existing tenants who would want one

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Model B – Grant Scheme with ALMO and developer (using Prudential Borrowing)

DCC sells free land to ALMO and makes prudential borrowing available to it; it then contracts with a developer to acquire cross subsidised housing and attracts additional support from the Housing Corporation

Advantages Disadvantages Provides an arguably better mix between rented and Reliance on Housing Corporation bid New Build Homebuy (shared ownership) properties Creates ALMO homes providing a future asset base Although the Grant rate required is below the anticipated regional average a high Grant Index is generated by inclusion of discounted land value Secures growth potential enabling ALMO or DCC to borrow and develop more homes Need to commit at bid stage to a single HC bidder

Existing DCC tenants wishing to return after redevelopment can be offered a tenancy managed Properties built with HC finance will have the right to by Derby Homes with contractually preserved rights acquire (which they currently enjoy as secure tenants)

Requires Prudential Borrowing as well as Housing Corporation finance

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Model C – Grant Scheme with ALMO and developer (not using Prudential Borrowing)

DCC sells free land to ALMO; it then contracts with a developer to acquire cross subsidised housing and attracts additional support from the Housing Corporation

Advantages Disadvantages As Per Model B without the requirement for As Per Model B but with significantly higher Social Prudential Borrowing Housing Grant required per unit (close to the average assumed by the Regional Housing Board) and a very high Grant Index when discounted land value is taken into account

Possibly unlikely to succeed with the Housing Corporation if it takes the view that an ALMO or local authority redeveloping its own stock should be willing to use its capacity to borrow

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Model D – Non Grant with developer and ALMO (without Prudential Borrowing)

DCC sells free land to ALMO; it then contracts with a developer to acquire cross subsidised housing

Advantages Disadvantages Creates ALMO homes providing a future asset base Creates fewer affordable homes than with equivalent scheme using Prudential Borrowing (Model E) Secures growth potential enabling ALMO or DCC to borrow and develop more homes Does not attract any external finance

By not borrowing to fund these homes their full future income stream (after management and maintenance costs) would be available to support other developments, for example on small sites which would not support a mixed tenure cross subsidised scheme

Existing DCC tenants wishing to return after redevelopment can be offered a tenancy managed by Derby Homes with contractually preserved rights (which they currently enjoy as secure tenants)

No dependence on HC finance

No Right To Acquire

No dependence on agreement with RSL to contract managed to Derby Homes

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Model E – Non Grant Scheme with ALMO and developer (using Prudential Borrowing)

DCC sells free land to ALMO and makes prudential borrowing available to it; it then contracts with a developer to acquire cross subsidised housing

Creates ALMO homes providing a future asset base Creates fewer affordable homes compared to an equivalent scheme delivered through an RSL

Secures growth potential enabling ALMO or DCC to ALMO/DCC prudential borrowing capacity is lower borrow and develop more homes than RSL borrowing capacity (hence lower number of affordable units)

Existing DCC tenants wishing to return after redevelopment can be offered a tenancy managed by Derby Homes with contractually preserved rights (which they currently enjoy as secure tenants)

No dependence on HC finance

No Right To Acquire

No dependence on agreement with RSL to contract managed to Derby Homes

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Model F – Non Grant with RSL and developer

DCC sells free land to an RSL which then contracts with a developer to acquire cross subsidised housing

Advantages Disadvantages This is the non-grant model which generates the Creates fewer affordable units than if HC grant were highest level of affordable housing (due to the attracted greater ability of RSLs to borrow compared to ALMOs or local authorities) No AMLO homes created as a future asset base No Right to Acquire created in the new properties No DCC tenancies managed by Derby Homes No dependence on HC finance available in the new homes to those existing tenants who would want one

Scheme can be designed and terms agreed without pressure and inputs required specifically to meet HC deadlines and rules

Partner selection for these developments can be undertaken openly and transparently and without pressures related to the bid process

No Right To Acquire created

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Model G – Non Grant S106 Scheme at Open Market Value

DCC sells land on the open market with consent for housing subject to a requirement that there be an affordable housing element in accordance with the Local Plan

Advantages Disadvantages Generates capital receipt to the Council – potentially For the scheme to be viable based on the higher than in Model H due to the lack of rented assumptions used in this modelling then no rented housing housing would be produced

Capital receipt can be used as the Council sees fit to support its programmes and priorities Does not attract HC grant nor DCC/ALMO borrowing

Expenditure of receipts on housing or regeneration No AMLO homes created as a future asset base would be 100% usable and not subject to national pooling

No Right To Acquire funding requirement No DCC tenancies managed by Derby Homes available in the new homes to those existing tenants who would want one

Suitable sites with planning consent may not be made available for the use of capital receipts

Capital receipts can be spent on other programmes and might not result in new affordable housing

Generates only the minimum number of affordable homes consistent with the Local Plan requirement

Developer in strongest position to determine the nature of the affordable housing on the site

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Model H – S106 Scheme at OMV supported by DCC Grant

DCC sells land on the open market with consent for housing subject to a requirement that there be an affordable housing element in accordance with the Local Plan; it provides a Capital Grant to an RSL (making part use of the receipt from the land sale) which enables the RSL to acquire rented and shared ownership homes on the site

Advantages Disadvantages Creates more rented housing than in Model G Creates the smaller number of rented housing units than all other Models except Model G (which has none) Generates capital receipt to the Council Does not attract HC grant nor DCC/ALMO borrowing

Balance of the capital receipt after paying capital No AMLO homes created as a future Receipt partly grant is available to support other affordable housing off set by Council Capital grant needed to make schemes or other Capital programmes delivery of the affordable housing viable

No Right To Acquire funding requirement The scheme is dependent on a Capital Grant from the Council

Developer more easily able to determine the nature of the affordable housing on the site – although the Council subsidises it

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