House of Commons Communities and Local Government Committee
Financing of new housing supply
Eleventh Report of Session 2010–12
Volume I: Report, together with formal minutes, oral and written evidence
Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/clgcom
Ordered by the House of Commons to be printed 23 April 2012
HC 1652 Published on 7 May 2012 by authority of the House of Commons London: The Stationery Office Limited £24.50
The Communities and Local Government Committee
The Communities and Local Government Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Communities and Local Government.
Current membership Mr Clive Betts MP (Labour, Sheffield South-East) (Chair) Heidi Alexander MP (Labour, Lewisham East) Bob Blackman MP (Conservative, Harrow East) Simon Danczuk MP Rochdale (Labour, Rochdale) Bill Esterson MP (Labour, Sefton Central) Stephen Gilbert MP (Liberal Democrat, St Austell and Newquay) Mr David Heyes MP (Labour, Ashton under Lyne) George Hollingbery MP (Conservative, Meon Valley) James Morris MP (Conservative, Halesowen and Rowley Regis) Mark Pawsey MP (Conservative, Rugby) Heather Wheeler MP (Conservative, South Derbyshire)
Steve Rotheram MP (Labour, Liverpool Walton) was also a member of the Committee during this inquiry.
Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk.
Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/clg. A list of Reports of the Committee in the present Parliament is at the back of this volume.
The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume.
Additional written evidence may be published on the internet only.
Committee staff The current staff of the Committee are Glenn McKee (Clerk), Edward White (Second Clerk), Kevin Maddison (Committee Specialist), Emily Gregory (Senior Committee Assistant), Mandy Sullivan (Committee Assistant), Stewart McIlvenna (Committee Support Assistant) and Hannah Pearce (Media Officer).
Contacts All correspondence should be addressed to the Clerk of the Communities and Local Government Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 1234; the Committee’s email address is [email protected]
Financing of new housing supply 1
Contents
Report Page
Summary 3
1 Introduction 5 The challenge 5 Barriers to housing supply 8 The Government’s strategy: Laying the Foundations 9 Focus of report 10 Our inquiry 10
2 Private investment 12 Investment from pension funds and large financial institutions 12 Private rented sector 12 Institutional investment and housing associations 15 Investment vehicles 17 Real Estate Investment Trusts 17 Self invested personal pensions 20 Housing Investment Fund / Housing Investment Bank 20
3 The private rented sector 23 Smaller landlords 23 Issues in the private rented sector 23 The private rented sector: conclusion 25
4 Affordable housing delivery 26 Affordable Rent 26 Letting housing benefit take the strain? 28 Affordable Rent: the longer term 29 Affordable Rent: conclusion 31 Affordable housing delivery: possible risks 31 Section 106 agreements 31 Welfare reform 33
5 The future financing of housing associations 36 Bond finance 36 Historic grant 37 Writing off the historic grant 37 Historic grant and equity 38 Historic grant: the Government’s view 41 The Dutch experience 41 Future financing of housing associations: conclusion 42
6 The role of local authorities 44 Reform of the Housing Revenue Account 44 HRA reform: maximising the benefits 45
2 Financing of new housing supply
Sources of finance 50 Local authority land 51 The Right to Buy 52 The Right to Buy: concerns 53 Extension of the Right to Buy to housing associations 56 Conclusion: the role of local authorities 57
7 Financing new build for owner occupation 58 NewBuy Guarantee scheme 58 ‘Intermediate’ products 60 Government land 61 Other models 62 Self/custom build housing 63
8 Conclusion 67
Conclusions and recommendations 68
Formal Minutes 75
Witnesses 76
List of printed written evidence 77
List of additional written evidence 77
List of Reports from the Committee during the current Parliament 79
Financing of new housing supply 3
Summary
A basket of measures, covering all tenures of housing, is needed if enough finance is to be made available to tackle the country’s housing crisis. There is no one ‘silver bullet’ with which the housing deficit can be removed. Many of the measures in the Government’s housing strategy will provide a welcome boost in the short to medium term. However, further action and a longer term approach will be needed if we are to see a sustainable change in housing supply. The country has not come close to delivering the number of homes it needs for many years, and this has been exacerbated by the recent financial crisis.
Institutions and structures that have traditionally ignored housing should be encouraged to invest. Increased investment from large financial institutions and pension funds may not be a panacea, but could make a significant contribution to the building of new homes in both the private and social rented sectors. Public sector bodies and housing associations should take steps to encourage institutional investment. Vehicles such as Real Estate Investment Trusts should be revamped to encourage investment in housing. The Government should also consider whether the remit of the Green Investment Bank can be expanded to cover housing and, potentially, wider infrastructure projects.
While institutional investment could play a greater role, the private rented sector will continue to be dominated by smaller landlords. The Government should bring forward proposals to simplify tax and regulatory structures to encourage private landlords to expand their portfolios and invest in new build housing.
The Affordable Rent model is the Government’s flagship policy for affordable housing. We have concerns: how it will play out in different parts of the country; whether it is a decision to ‘let housing benefit take the strain’; and whether it is sustainable over the longer term. The Government should address these issues in bringing forward proposals for the future delivery of affordable housing. There are also wider questions about the future financing of housing associations, as lending from traditional sources becomes less readily available. In particular, the Government should consult on the future role and status of the historic grant that sits on housing association balance sheets and is potentially an untapped resource.
Local authorities have a vital contribution to make to the delivery of new housing supply, by working in partnership with developers and housing associations, and by making land and finance available for new development. The recent reforms to the Housing Revenue Account are welcome and could potentially increase the finance available for new housing supply, if they allowed local authorities, within prudential limits, to safely increase their capital borrowing. We are concerned about the impact of the Government’s proposals to revive the Right to Buy upon the social housing stock. In the longer term, in line with the spirit of localism and moves to self-financing, we recommend that the Government give councils greater freedom to decide on the best housing solutions for their communities.
The Government can also support the building of new homes for owner occupation: it should ensure the NewBuy Guarantee scheme is achieving its aims and maximise the opportunities for the involvement of smaller builders and lenders; it should take steps to
4 Financing of new housing supply
encourage investment in shared ownership and shared equity mortgage products and make them understandable; and it should continue to make public land available for development, whilst ensuring that the best deal is secured for the taxpayer. There is particular merit in public bodies contributing their land to a joint venture model.
If the gap between housing supply and demand is to be met, other models of housing delivery should also be promoted. Self and custom build schemes in particular have significant potential to deliver a major contribution to housing supply from a new source, but we should not underestimate the institutional change necessary to achieve this. The Government, local authorities and lenders should take action to overcome the barriers to self and custom build development, and there should be a commitment to getting pilot schemes underway very quickly.
Financing of new housing supply 5
1 Introduction
1. Ensuring that there are enough homes available to meet the nation’s needs should be a key priority for any government, but for many years house building levels in England have been far too low. The Minister for Housing and Local Government, Rt Hon Grant Shapps MP, himself told us that he did “not think we have been building enough homes in this country for a very long time”.1 It is clear that we need to see a step-change in housing supply, but the new homes the country needs will not be delivered unless there is sufficient money available to pay for them. This report considers the steps that can, and should be, taken to make more finance available for the building of new homes.
The challenge 2. Mr Shapps stressed that predictions of housing need were “hellishly difficult to make”, pointing by way of example to the impact that the Government’s immigration policy could have on the number of homes required in England. He said that, according to the “last study” he had seen, 232,000 new homes per year were needed.2 This is the average annual figure for the projected growth in the number of households in England between 2008 and 2033.3 Levels of household formation are determined by a range of social and economic factors. The Chartered Institute of Housing (CIH) told us that this household growth figure had to be considered on top of the “assessed backlog at any one time”.4 The CIH referred to a study that estimated households in housing need commissioned by the previous Government and published in November 2010.5 This study set out projections that showed “backlog need peaking in 2009 at around 1.99 million households—equivalent to 8.8 per cent of all households, before falling back gradually until 2021”. The forecast was based “on continuation of relevant existing policies and on judgements about the likely path of the wider economy going forward”.6 The CIH referred to a reconsideration of assumptions and suggested that “the forecast of an easing backlog is now much less likely to apply, because of the likelihood that the market will not recover rapidly and that the rented sector will grow little in gross terms”.7
3. Table 1 below shows provisional house building completion figures in England for 2011. Such figures would suggest that England is currently building less than half the number of homes it needs to meet levels of household growth. Mr Shapps, however, pointed to the provisional New Homes Bonus figures for England for the more recent period, October 2010 to October 2011,8 which showed that the Bonus was paid in respect of 159,000
1 Q 320 2 Q 322 3 Department for Communities and Local Government, Household Projections, 2008 to 2033, England, November 2010, p 1 4 Ev 110 5 As above 6 Glen Bramley, Hal Pawson, Michael White, David Watkins and Nicholas Pleace, Estimating Housing Need, research commissioned by the Department for Communities and Local Government, November 2010, p 10. 7 Ev 110 8 Q 321
6 Financing of new housing supply
properties.9 This figure includes 22,000 long-term empty properties brought back into beneficial use.10 In a Written Answer to Rt Hon Nick Raynsford MP in February 2012, Mr Shapps said that the remaining 137,000 included new build and conversions. The source data did not distinguish housing converted from existing stock from the newly-built housing that is the focus of this inquiry.11 Moreover, while these New Homes Bonus figures may paint a somewhat more positive picture of the total number of homes being delivered, they would still suggest that there is a deficit of over 70,000 homes when compared with levels of household formation. If the backlog is also taken into account, the deficit becomes even greater.
Table 1: Permanent dwellings completed, England, by tenure, 201112
Private Enterprise 82,170
Housing Associations 24,530
Local Authorities 2,320
TOTAL 109,020
Figures are provisional and subject to revision.
4. Table 2 below shows house building completion figures in England for the last two decades. It shows that completions, in particular those by private enterprise, have fallen dramatically since the ‘boom’ years of the mid 2000s. The data also suggest, however, that even during those years, when it can be argued that there was plentiful finance available, the figures never came close to delivering the levels of housing the country now needs. Moreover, they show that in the last twenty years, the private sector has never delivered more than 150,000 homes per year. This suggests that potentially radical changes of policy and alternative sources of finance will be needed if housing supply is ever to reach levels of demand. Indeed, as owner occupation has been falling as a percentage of total tenure since 2003, some of these new approaches will need to be targeted at rented housing.13 Increasing housing supply would also provide an important economic stimulus.14
9 HC Deb, 1 February 2012, col 66WS 10 As above 11 HC Deb, 27 February 2012, col 36W 12 Department for Communities and Local Government, Live tables on house building: Table 244: Permanent dwellings completed, by tenure, www.communities.gov.uk 13 Department for Communities and Local Government, English Housing Survey: Headline Report 2010–11, February 2012, p 47 14 See, for example, Ev w32 [Riverside], Ev 154 [National Housing Federation].
Financing of new housing supply 7
Table 2: Permanent dwellings completed, England, by tenure and financial year15
Year Private Housing Local TOTAL Enterprise Associations Authorities
1990–91 132,500 14,580 12,960 160,030
1991–92 132,050 15,970 7,110 155,130
1992–93 115,910 23,970 2,580 142,460
1993–94 116,050 30,210 1,450 147,710
1994–95 125,740 31,380 850 157,970
1995–96 123,620 30,230 760 154,600
1996–97 121,170 24,630 450 146,250
1997–98 127,840 21,400 320 149,560
1998–99 121,190 18,890 180 140,260
1999–00 124,470 17,270 60 141,800
2000–01 116,640 16,430 180 133,260
2001–02 115,700 14,100 60 129,870
2002–03 124,460 13,080 200 137,740
2003–04 130,100 13,670 190 143,960
2004–05 139,130 16,660 100 155,890
2005–06 144,940 18,160 300 163,400
2006–07 145,680 21,750 250 167,680
2007–08 145,450 23,110 220 168,770
2008–09 108,010 25,510 490 134,020
2009–10 89,540 25,180 370 115,080
2010–11 81,980 22,760 1,310 106,050
Mean 122,960 20,902 1,447 145,309
15 Department for Communities and Local Government, Live tables on house building: Table 209: Permanent dwellings completed, by tenure and country, www.communities.gov.uk
8 Financing of new housing supply
Barriers to housing supply
Finance 5. Our evidence indicated that the availability of finance was one of the biggest current barriers to increasing housing supply. In particular, witnesses were concerned about limitations on mortgage finance. Regenda Group, a housing association, argued:
Increasing the availability of mortgage finance is critically linked to the issue of housing supply as building rates will only increase if there is confidence that sales will take place post completion.16
Peter Williams, Director of the Cambridge Centre for Housing and Planning Research, said that there was “clearly a capacity constraint in the mortgage sector now and going forward for at least five years, and possibly longer, which really has a big implication for the shape of UK housing provision”.17 The Council of Mortgage Lenders anticipated “only a gradual progressive improvement in affordability pressures and credit availability, and therefore much slower recovery in property transactions” than had been projected by the Office for Budget Responsibility.18 Some witnesses also pointed to issues raised by the availability of development finance. The Home Builders Federation (HBF), for instance, said that “funding is very restricted for many SMEs [small and medium enterprises] in the sector who often rely on project-based bank funding”. It added that “if funding remains restricted, this could restrict the industry’s ability to meet expanding demand”.19 Given that the financing challenges are likely to continue,20 new sources of finance will be important both for making up the housing shortfall and providing longer term solutions. Our report will consider whether there are alternatives to traditional sources of debt finance that can help to fund the building of new homes.
6. We also heard from witnesses that there were various constraints preventing them from accessing the finance that was available. Representatives from various sectors—local authorities, housing associations, private landlords and investors—all pointed to particular regulatory, legislative or governmental issues that made it harder for them to finance house building.21 We will consider in more detail some of the key constraints and how they might be eased or removed.
Availability of land 7. Some of our evidence considered the availability of land to be a barrier to housing supply. G15, a group of London housing associations, for example, said: “The supply of
16 Ev w46 17 Q 2 18 Ev 123 19 Ev 89 20 See, for example, Bank of England, Financial Stability Report, Issue No. 30, December 2011 and Financial Services Authority, Retail Conduct Risk Outlook, March 2012. 21 See, for instance: Ev 95 [Local Government Association on the cap on local authority borrowing]; Evs 144, 145 [Residential Landlords Association on taxation in the private rented sector]; Ev w46 [Regenda Group on how the treatment of historic social housing grant constrains housing association borrowing]; Ev 107-108 [British Property Federation on barriers to the establishment of Real Estate Investment Trusts].
Financing of new housing supply 9
genuinely developable land is low and action is needed to increase the supply”.22 In particular, the evidence emphasised the importance of public bodies—central government departments and agencies and local authorities—making their land available for development.23 In this report we will consider as a recurring theme the ways in which the public sector can support the financing of housing development through the provision of land; in doing so, we will be mindful of the assertion made by Shelter that:
new approaches to both land and finance will be required. Increasing the supply of either land or finance in isolation will not work: additional land supplied without finance will not be developed, and additional finance without land will simply inflate prices.24
Planning 8. It is important to consider finance and land availability in harness. These issues may also link in with planning. We heard from some witnesses that the planning system was a constraint upon housing development. John Stewart, Director of Economic Affairs at the HBF, said that planning was “a major obstacle”, pointing to the findings of Kate Barker’s review of housing supply and his experience of talking to house builders.25 Other witnesses took a different view about planning, with Cllr Clyde Loakes, Vice Chair of the Local Government Association’s Environment and Housing Board, saying that it was “certainly not” a key barrier to increasing housing supply.26 We have already examined the planning system in this Parliament, in particular through our inquiries into the Abolition of Regional Spatial Strategies27 and The National Planning Policy Framework.28 In this report, we do not propose to look in detail at planning issues, except where they have an impact on the financing of new homes.
The Government’s strategy: Laying the Foundations 9. On 21 November 2011, the day we held our first oral evidence session, the Government published Laying the Foundations: a Housing Strategy for England. Giving evidence to us on 30 January 2012, Mr Shapps told us that the strategy set out “over 100 different ways in which we intend to fix the gap”.29 He identified from the strategy four particular measures: the Right to Buy; plans to build 100,000 homes on government land; the new build
22 Ev w34 23 See, for example, Ev 155 [National Housing Federation], Ev w55 [Place Shapers], Ev w39 [Waterloo Housing Group], Q 66 [John Stewart]. 24 Ev 83 25 Q 45 26 Q 44 27 Communities and Local Government Committee, Second Report of Session 2010–12, Abolition of Regional Spatial Strategies: A Planning Vacuum?, HC 517; Department for Communities and Local Government, Government Response to the Communities and Local Government Committee’s Report Abolition of Regional Spatial Strategies: a planning vacuum, Cm 8103, June 2011 28 Communities and Local Government Committee, Eighth Report of Session 2010–12, The National Planning Policy Framework, HC 1526; Department for Communities and Local Government, Government response to the Communities and Local Government Select Committee Report: National Planning Policy Framework, Cm 8322, March 2012 29 Q 320
10 Financing of new housing supply
mortgage indemnity scheme (later branded as the NewBuy guarantee); and planning reform.30 A further measure in Laying the Foundations related to the establishment of a “Get Britain Building Fund” to “support building firms in need of development finance”.31 The 2012 Budget announced that this £420 million fund would be increased by a further £150 million.32 John Stewart said that the fund was “not a panacea [...] but where development finance is the primary constraint this should help”.33
Focus of report 10. We will examine some of the key measures put forward in Laying the Foundations, but will also take a longer-term view and consider the potential for broader changes of policy. As Peter Williams told us:
We all struggle to understand why housing supply does not respond more effectively than it does. There is clearly a package of issues around that, but it is extraordinary how the private sector output has remained remarkably constant, all through the cycles, without responding to what normal markets would respond to.34
There is clearly no ‘silver bullet’ with which the housing deficit can be removed; nor can we rely solely on private enterprise, which, in recent times—even during the ‘boom’ years of the mid 2000s—has not built more than 150,000 homes per annum in England. A range of solutions is needed, across all tenures of housing.
11. Our report will focus on identifying additional sources of finance to support house building. It will consider whether there are constraints on housing finance that can be removed, whether there are ‘traditional’ approaches to financing that can be given greater support, and whether there are new and innovative ways in which new housing can be funded. It will look at the contributions to be made by the public and private sectors, as well as not-for-profit housing associations. It will also consider the ways the various sectors can work together to make the most effective use of the finance available.
Our inquiry 12. We received over 60 written submissions, from housing associations, local authorities, academics, think tanks, charities and representative bodies, amongst others. We explored the themes emerging from our written evidence in four oral evidence sessions between November 2011 and January 2012. In the course of the inquiry we visited Birmingham and Dudley, to see at first hand the steps being taken to address the challenges of housing supply, and the Netherlands, to consider whether there were lessons from the Dutch approach that could usefully be applied within England. We are grateful to those who supplied us with written and oral evidence, and to those people we met on our visits.
30 Q 320 31 Department for Communities and Local Government, Laying the Foundations: A Housing Strategy for England [referred to hereafter as Laying the Foundations], November 2011, p 9 32 HM Treasury, Budget 2012, March 2012, para 1.221 33 Q 47 34 Q 3
Financing of new housing supply 11
Particular thanks are due to Birmingham City Council, Dudley Metropolitan Borough Council and the British Embassy in the Hague for arranging the visits, to the Royal Institution of Chartered Surveyors who held a briefing session for us at the start of the inquiry, and to our specialist advisers, Professor Christine Whitehead OBE of the London School of Economics and Political Science,35 and Philip Jenks of Phil Jenks Consultancy Ltd.36
35 Professor Christine Whitehead declared the following interests: Advisor to the Board of the Housing Finance Corporation; independent research for Shelter, RICS, JRF, the Housing Futures Network; Project for the European Investment Bank on housing finance for affordable housing; fellow of the Society of Property Researchers; Member, RICS. 36 Philip Jenks declared the following interests: NED, Chartercourt Financial Services—New non bank lender and mortgage servicer; Phil Jenks Consultancy Ltd—current clients with housing links: Mill Group, UKAR; recent previous clients: CLG, HCA, Lloyds Banking Group, Metro Bank, Pocket and NPS, plus unpaid support to both FSA and BSA; Board Member, Leeds Building Society.
12 Financing of new housing supply
2 Private investment
13. Given current limitations on both debt finance and public funding, there is inevitably a need to look to other sources if we are to raise sufficient finance to meet the country’s housing needs. This chapter will consider the potential for investment by large financial institutions, both in the private rented and housing association sectors. It will then examine possible vehicles that could be used to channel investment into rented housing.
Investment from pension funds and large financial institutions
Private rented sector 14. Some of our evidence suggested that large financial institutions and pension funds could make a significant contribution to new housing in the private rented sector. Ian Fletcher, Director of Policy (Real Estate) at the British Property Federation considered that the conditions were “all there for large-scale institutional investment in the sector”, adding that it was “now or never”.37 The Resolution Foundation, an independent research and policy organisation, discussed the potential for a “new approach to build-to-let development using institutional investment”, arguing that such an approach could help to meet “the housing needs of individuals and families on low-to-middle incomes who are unable to buy a home in the medium to long term”.38
15. Not all witnesses were so enthusiastic about the prospect of “build-to-let” investment. Paragon Group, which provides mortgages to investors in the private rented sector, warned that investment from institutions might not produce the right type of housing:
The kind of properties that institutional investors are likely to invest in through “build-to-let” schemes, such as two-bedroom flats, in large purpose-built developments are unattractive to tenants and there is already an over-supply of this type of property caused by pre-credit crunch property developer and investment club activity.39
The housing charity, Shelter, said that institutional investment “would clearly be welcome, if it can provide additional sources of financing for high quality homes, but we should not expect a revolution in housing finance to come from this source”. It added: “Even in countries with much larger private rented sectors and significant institutional investment in housing, it remains the case that the bulk of landlords are small scale investors, and particularly individuals, much as in the UK”.40
16. In Laying the Foundations, the Government announced that it would be “putting in place an independent review of barriers to investment in private homes for rent”.41
37 Q 56 38 Ev w88 39 Ev 151 40 Ev 87 41 Laying the Foundations, p 33
Financing of new housing supply 13
Subsequently, Mr Shapps, the Minister, announced that this review would be led by Sir Adrian Montague, non-executive chairman of the private equity firm 3i.42 On 21 February 2012, Sir Adrian issued a call for evidence. He set out two “fundamental questions” upon which he wished to focus: “Will the changes that the Government has introduced go far enough to generate significant new flows of investment? And, if not, what can be done to accelerate things?”43
17. Professors Tony Crook of Sheffield University and Peter Kemp of Oxford University, discussed attempts over the last 30 years to bring in institutional investment. They considered that successive governments had sought to adapt “existing schemes designed for other purposes” rather than bringing forward initiatives “with the specific needs of private renting in mind”; moreover, governments had not addressed “the fundamental barriers preventing the emergence of larger companies and institutional investment”.44 In the view of Nick Jopling, Executive Director of Property at Grainger plc,45 the three main barriers were “scale, suitability of stock and yield”.46 He explained:
An institution wants to invest in scale; it is not interested in buying buy-to-let property. There is no stock for it to go and buy. There are no portfolios of rental stock for it. There may be some distressed portfolio, but they are not interested in that, because there is often a reason those properties are distressed in the first place. Suitability of stock: we address that through building purpose-built stock for rent. That is the multi-family housing US model. And then the yield. Yield has always been a challenge, because the cost of entry, against the rent and the net rent that comes off the bottom, has always been too high. In particular in London, the net yield is so small, so one has to deal with the cost of entry, and that is the cost of construction and the land.47
Alan Benson, Head of Housing and Planning at the Greater London Authority, expressed a similar view, saying that, for him, “the yield question” was “the absolute crux [...] of why institutional investment has not got off the ground in the UK”.48
18. Grainger plc’s submission gave details of institutional investment schemes in which the company had been involved. The G:res fund, which it said was the “UK’s largest private rented sector residential investment fund”, and in which it held a 22% stake, had approximately £400 million of residential assets in the UK.49 Grainger’s submission also described a partnership it had established with the construction company Bouygues Development Ltd, “with the aim of creating and co-investing in a new Build-To-Let
42 “Review to examine institutional investment in private rented homes”, DCLG press release, 23 December 2011, www.communities.gov.uk 43 “Sir Adrian Montague calls for evidence on barriers to institutional investment in private rented homes”, DCLG press release, 21 February 2012, www.communities.gov.uk 44 Ev w51 45 Grainger plc is a property company involved in a number of institutional investment build-to-let schemes. 46 Q 130 47 As above 48 Q137 49 Ev 120
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Fund”.50 It was anticipated that this fund would “provide institutional investors with the opportunity to invest in scale into the Private Rented Sector [...] which to date has been relatively inaccessible”. The fund had “a dedicated portfolio of purpose built PRS development sites in London and [the] South East of England”.51 Nick Jopling said that to address “cost of entry” issues, all four of the sites put forward were “on public land”.52
19. Building on public sector land is a useful way of overcoming the key barriers to institutional investment: the release of large sites can enable the development of purpose- built stock at a viable scale. If public bodies are prepared to defer payment or enter into a partnership, this can reduce the costs of entry for the investor. Richard Hill, Deputy Chief Executive at the Homes and Communities Agency (HCA), told us about its work to make land available. He said that the HCA had a role in using “public sector land where possible for a variety of developments”; the agency would “be prepared to defer the return for a longer period, take some of the rental during that period, and look for capital return further down the line”.53
20. We heard from the Association of Greater Manchester Authorities (AGMA) about a pilot scheme being developed by Manchester City Council with the Greater Manchester (GM) Pension Fund:
Discussions with the GM Pension Fund have been taking place to develop a Housing Investment Model in Manchester that will deliver both low and high rise mixed tenure options, capable of being applied across GM. The basic premise is very simple; there are two investment partners, the council with land to invest and the pension fund with cash to invest. Together the investors procure a house-builder, sales and marketing function and a housing managing agent with which it enters into a minimum 10 year lease. Through the lease, both investors are able to take a guaranteed revenue return on their investment and both share in any capital return on the sales properties. The new build housing is targeted at economically active households.54
AGMA identified a number of barriers and challenges, not least the need “to demonstrate to all partners that the model works”.55 While it is too soon for us to make a judgement on the scheme, it does raise some interesting issues, including the possibility of public sector pension funds investing in housing. Andy Hull, Senior Fellow at the Institute for Public Policy Research (IPPR), considered that local government pension funds could be an important source of finance “because they have in excess of £150 billion worth of funds, because they can be quite patient to see the return over time and because they have councillors on their management boards who should understand [...] what a crisis we are facing in terms of housing need”.56
50 Ev 119 51 As above 52 Q 133 53 Q 316 54 Ev 131, 132 55 Ev 132 56 Q 4
Financing of new housing supply 15
21. Another way in which local authorities could support institutional investment was to take a flexible approach to affordable housing requirements in section 106 agreements.57 Grainger plc suggested that “reducing or altogether removing affordable housing requirements on [private rented sector] developments would greatly increase the viability of the scheme and improve yields”.58 John Stewart, Director of Economic Affairs at the Home Builders Federation (HBF), however, referred to “glib comments about, for example, making private rented sector schemes work by waiving affordable housing”, adding: “I am always rather concerned when there is talk about reducing the regulatory burden for one source of capital or one particular provider within one tenure. I am much more a believer in a level playing field”.59 Responding to these comments, Ian Fletcher said that HBF “members are investing capital for the best part of a year at most, sometimes; my [British Property Federation] members are investing in capital for 20 years; there is a greater cost to their doing that and they should be treated more favourably”.60 We consider that there may be merit in a flexible approach, but this would need to be balanced against the impact upon affordable housing provision across a local area. The onus should be on the individual council to assess how best to strike the balance.
22. We heard about a number of steps that public sector organisations can take to encourage institutional investment in the private rented sector, addressing the key barriers of scale, suitability of stock and yield. We recommend that all public bodies, both local and national, consider the potential for contributing their land alongside institutional finance to support build-to-let initiatives. We urge local authority pension funds to be alert to the benefits of investment in residential property, whilst ensuring transparency and security for their investors. We would hope that their doing so would pave the way for private funds also to invest in residential property. Finally, we encourage local authorities to consider taking a flexible approach to affordable housing requirements in planning obligations on a case-by-case basis, where this will help to stimulate build-to-let investment and will not be to the detriment of the wider housing needs of the area.
Institutional investment and housing associations 23. An alternative way of overcoming some of the barriers to institutional investment would be for investors to work in partnership with housing associations. Considering the prospects for institutional investment, the Cambridge Centre for Housing and Planning Research said that it was difficult to obtain “a portfolio which is simultaneously sufficiently diversified but also spatially concentrated (for economies of scale in management) […] within the short time frame required by investors”. It suggested that housing associations could offer a solution to this problem:
57 Section 106 agreements, or planning obligations, involve a local planning authority entering into an agreement with a developer in association with the granting of planning permission. They have been frequently used to secure a contribution from a developer to the provision of affordable housing. 58 Ev 118 59 Q 60 60 As above
16 Financing of new housing supply
In this regard it can be argued that the most practicable means of creating large scale, long term, institutional landlords in the private rented sector may be to encourage housing associations to expand into market renting, since they already exist, are of a viable scale, and have the necessary expertise. The key issue here would be to develop regulation to ensure that any cross-subsidisation is from private to public rather than the other way around.61
David Orr, Chief Executive of the National Housing Federation, said:
I think that there is a realistic possibility of housing associations bringing institutional investment into very significant institutions to provide a market rent product, and to help stimulate new supply of market rent, so that we are talking about housing associations expanding the range of things that they do—not replacing the things that they do, but adding to the range of things that they do, in an attempt to respond to the housing market failures at present.62
24. The housing association London and Quadrant Group (L&Q Group) set out some of the potential advantages of partnerships between investors and housing associations:
Housing associations are in a good position to attract private investment. They have a wealth of experience managing rented accommodation and through this have the capacity to continuously develop a range of housing products. There is potential in the future to invest in partnerships with others, including becoming key delivery vehicles for upstream institutional funders of market rent which would help to achieve scale. Housing associations also have the ability to act as guarantor of quality and a degree of security to the benefit of both consumers and investors.63
L&Q Group also discussed the possibility of attracting private finance by developing “a new form of market rented housing with a differential offer such as longer tenancy options”.64
25. Another possibility put to us involved institutions investing directly in social housing. Newark and Sherwood Homes Ltd considered that the social rented sector had “a more stable long term return potential being less volatile than the majority of market driven investments”. It gave the example of the insurance company Aviva investing in social and affordable properties with the Derwent Living housing association.65 The British Property Federation also commented on this example, stating that while Aviva’s investment did not contribute “to new stock per se”, it released capital allowing the housing association “to invest in new build elsewhere”.66 Discussing new ways of providing funding for affordable housing, the Housing Forum, a membership body for organisations involved in the construction and repair of housing, said that institutional models might work “on a longer time span than current financial models (typically 30–50 years)” and called for them “to be
61 Ev 77 62 Q 257 63 Ev 171 64 Ev 170 65 Ev w4-5 66 Ev 105
Financing of new housing supply 17
explored and encouraged”. It added: “This will be a significant catalyst to reshape the housing association sector”.67
26. We took evidence from Peter Mahoney, Chief Executive Officer at R55 Group, about a model his organisation had developed to bring institutional investment into social housing. He explained that his model was “a funding solution and also a modular housing solution”:
The funding solution is very much a lease-backed funding solution where it is directly targeting housing associations and local authorities who are providing modular housing that is responding to local housing needs, but it also comes fully funded. Effectively, the housing association or local authority would provide us with land. We would work with them, understanding their housing needs and the needs of the Housing Department, and together a solution is developed.68
He added: “it is not debt funded, it is not reliant upon social housing grant; it is purely funded by pension funds and life insurance funds that are looking for long-term, stable, low-risk solutions”.69 The Northern Housing Consortium and North West Housing Forum also referred to an emerging model of “lease backed funds” under which “ownership of the scheme transfers to the investor and is leased back to the provider until the loan is made”. It warned that there were “concerns around this model, particularly its ability to manage risk given turbulent performance of pension markets in recent [years].”70 Housing associations should play a role in attracting institutional equity investment, either by expanding into market renting and providing the economies of scale required by investors or by using finance from institutions to bring investment into social rented housing. We encourage housing associations to explore such opportunities and to establish a dialogue with potential investors. Later in the report, we consider the possibility of institutional investment being used to support “intermediate” products.
Investment vehicles
Real Estate Investment Trusts 27. Our evidence discussed the role particular vehicles could play in the channelling of investment into both social housing and the private rented sector. A common suggestion was that Real Estate Investment Trusts (REITs), which have thus far only existed in the commercial property sector, could be used to bring investment into housing. Professors Crook and Kemp discussed the background to residential REITs:
The [...] Real Estate Investment Trust (REIT) initiative (from 2007 onwards) created the possibility of fully tax transparent residential REITs, notionally able to attract pension and life funds to invest without a tax loss for them. However, to date this has not resulted in even one residential REIT being established, although the great majority of commercial property companies have now converted to REIT status.
67 Ev w11 68 Q 276 69 As above 70 Ev w28
18 Financing of new housing supply
This is partly because, despite the initial impetus to forming REITs being based on the desire to get institutional funds into the private rented sector, the initiative became transformed into one addressing investment in all property not just in private residential property.71
The British Property Federation suggested that residential REITs could also provide a way of attracting individuals’ investment into housing:
Little of individuals’ money (so-called retail funds) currently goes into collective investment schemes that are investing in property. Part of the problem is that small investors like to be able to buy and sell when they wish. That is difficult in a collective scheme, where most cash will be tied up in buildings that cannot be instantly bought and sold. The way around that is to invest in companies or Real Estate Investment Trusts [...] that invest in housing.72
28. Between April and June 2011, HM Treasury undertook an informal consultation on a range of measures announced in the 2011 Budget “to support the development and growth of the UK Real Estate Investment Trust market”.73 Following this consultation, the draft legislation for the Finance Bill 2012 included a measure to address certain identified barriers to entry and investment.74 The 2012 Budget confirmed that the Government would legislate “to support entry to and investment in REITs”.75 The Budget also announced that in 2012 the Government would consult on the REITs regime, including on “the role REITs can play in supporting the social housing sector”.76 This consultation was launched on 4 April 2012.77
29. The Chartered Institute of Housing said that potential changes to REITs “could see housing associations becoming interested in exploring the potential of the model to increase the supply of affordable homes, as it creates easier access to equity capital markets and an opportunity for balance sheets to work harder”.78 The housing association, Places for People, described a proposal it had developed to create a residential REIT:
Our initial modelling of the REIT proposal works on the basis that around 5,000 existing rented properties are purchased by the REIT, including social rented properties that have been converted into Affordable Rent when they fall vacant. The funds generated by the sale of properties into the REIT would be used to finance additional development of new homes in affordable rented and market rented tenures, and once occupied these new homes would then be sold onto the REIT. This
71 Ev w51 72 Ev 106 73 “Informal consultation on REITs measures announced Budget 2011”, HM Treasury webpage, www.hm- treasury.gov.uk. 74 HM Revenue and Customs and HM Treasury, Overview of Legislation in Draft, December 2011, p A89 75 HM Treasury, Budget 2012, March 2012, para 2.178 76 HM Treasury, Budget 2012, March 2012, para 2.177 77 HM Treasury and Department for Communities and Local Government, Consultation on reforms to the real estate investment trust (REIT) regime, A) to explore the potential role REITs could play to support the social housing sector, and B) to explore the tax treatment of REITs investing in REITs, April 2012 78 Ev 114
Financing of new housing supply 19
process or cycle could be repeated a few more times until the REIT needs to be reseeded or restocked with existing residential properties.79
Writing to us after giving oral evidence, Steve Binks, Finance Director at Places for People said that Places for People anticipated “that the Finance Bill will contain the amendments to legislation which will facilitate a Social Housing REIT”.80 Places for People estimated that, if the amendments were made, the REIT could “deliver yields of around 7% to investors which a number of them have confirmed is acceptable”.81
30. Ian Fletcher, of the British Property Federation, wrote to the Committee following the publication of the draft legislation. He stated that “the current proposed reforms mark significant progress in reforming the REIT regime to support residential investment” but argued that there were “other reforms that we believe are essential if we are ever to see a significant number of residential REITs”. He proposed two particular additional reforms. One related “to the way the traditional tax distinction between ‘trading’ and ‘investment’ activities applies in the REIT context”. He explained that a property portfolio could “only fall within the tax-exempt ring-fence of the REIT rules if it [...] amounts to an ‘investment’ business in tax terms”. There was, however, “a structural tendency in the UK residential context to rely to a greater extent on regular asset sales” than in commercial property; this meant that residential property businesses were “generally quite sensitive to the operation of the trading/investment test”.82 This issue was raised by a number of other witnesses, including Grainger plc, which had asked the Government to look at the trading versus investment distinction “specifically in the context of and for the purposes of residential REITs”.83
31. The second additional reform suggested by Ian Fletcher concerned “the scope for using the REIT structure without the compliance burden of a listing”.84 He said:
In other countries with REITs a further evolution of their regimes has been the creation of private REITs that are unlisted. The rationale for only allowing listed REITs in the UK is understandable, which is that listing provides a degree of protection for investors, which unlisted REITs would not. However, because most residential REITs would be started from scratch and therefore be smaller than existing commercial property REITs there is an argument that allowing unlisted REITs would particularly be beneficial to the residential sector.85
32. In our view, REITs could be a useful means of bringing investment into the residential property sector. It is significant that no residential REIT has ever been established in the UK; it suggests that there are significant barriers to entry and investment. We commend the Government’s efforts to identify these barriers and put in place measures by which they
79 Ev 167 80 Q 264, footnote 81 Ev 167 82 Ev 107–08 83 Ev 121; See also Ev w53 [Professors Crook and Kemp]. 84 Ev 107 85 Ev 108
20 Financing of new housing supply
can be overcome. We also welcome Places for People’s innovation in developing proposals for a REIT. We agree, however, with the view that further action is needed if the contribution of REITs to the financing of new housing supply is to be maximised. We recommend that the Government put in place measures to address concerns about the distinction between trading and investment specifically in the context of residential REITs. We further recommend that the Government allow the creation of private, unlisted residential REITs.
Self invested personal pensions 33. The Residential Landlords Association (RLA) proposed that the Government “allow self invested pension funds to invest in residential units, up to a maximum purchase price of £250,000 per unit outside London (with a suitable adjustment for London prices)”.86 Mark Butterworth, Director of the RLA, wrote to us with further information about the potential for Self Invested Personal Pension (SIPP) investment:
There is £101.7 billion invested into just over 800,000 SIPPs currently. There are different types and characteristics but of the higher value more flexible type which would have funds and the ability to undertake the investments required there are 200,000 or 25% of the total number.87
He added that his estimate, given during oral evidence, “of 50,000 that would be interested or likely to take up such an offer would appear to be on the conservative side”.88
34. Self Invested Personal Pensions could provide another source of finance for rented housing. We recommend that the Government look in detail at the contribution SIPPs could make and the risks and benefits for those investing in SIPPs. If satisfied about these risks and benefits, it should bring forward proposals to facilitate their investment in residential property.
Housing Investment Fund / Housing Investment Bank 35. The National Housing Federation called on the Government to support the establishment of a Housing Investment Fund run by housing associations:
Government support and underpinning of a pilot housing investment fund run by housing associations would enable the development of mixed tenure sector schemes at scale and would attract investors and create confidence in the market hopefully acting as a prelude to it increasing in scale. Housing associations could reach an agreement with government about underpinning the risk and guarantee on investor return, but the clear backing and support of government would attract and reassure investors and government could play a role as broker.89
86 Ev 147 87 Ev 149 88 As above 89 Ev 156
Financing of new housing supply 21
36. The Confederation of Cooperative Housing (CCH) described its proposals to establish a fund through bond financing and institutional investment to finance the development of co-operative and mutual housing. Under these proposals it aimed to develop “between 1,500 and 2,500 homes through the development of between 30 and 50 new co-operative and mutual housing organisations”. The CCH said that it had begun to draw a number of local authorities and housing associations together as “potential partners” and was “seeking to work with Government to implement the programme”.90
37. Shelter proposed the creation of a National Housing Investment Bank:
A ‘National Housing Investment Bank’ could attract investment funds and provide loans for the construction of low-cost housing. In European countries such banks have proved effective at leveraging public funds to channel private finance into both house building and improvements to the existing stock, a model that RICS [the Royal Institution of Chartered Surveyors] have called on to be replicated in the UK. The government has partially adopted this approach through its Green Investment Bank: we would urge the committee to consider whether this model could usefully be expanded to include financing house building as well as green infrastructure.91
Roger Harding, Head of Policy, Research and Public Affairs at Shelter, responding to the suggestion that everybody would be competing for a limited pool of debt finance, said: “If there is a limited amount of debt, it is vitally important that we channel it towards new supply rather than inflating the market that we have got and feeding through into unsustainable loans”.92 IPPR also suggested the expansion of the Green Investment Bank into a national investment bank.93 Its Senior Fellow, Andy Hull, told us that he and his colleagues were “arguing for a national investment bank from a number of different perspectives, not just a housing one”.94
38. We saw for ourselves an example of a publicly-owned bank investing in housing during our visit to Netherlands, when we met a representative from the Bank Nederlandse Gemeenten (BNG; the Dutch Municipal Bank). We heard that this bank was 50% owned by the Ministry of Finance and 50% by the Dutch municipalities. The bank’s lending was restricted to public and semi-public organisations, with 52% of its lending going to housing associations. 98% of its loans to housing associations were guaranteed. The bank had a ‘triple A’ rating from two of the three ratings agencies, was the fourth largest and second most profitable bank in the Netherlands, and, according to Global Finance magazine, the third safest bank in the world.95
39. Mr Shapps said that he was “all in favour” of a housing association-run housing investment fund and that his officials “have [worked] and will work with organisations
90 Ev w21 91 Ev 84 92 Q 24 93 Ev 74 94 Q 22 95 “Global Finance names the World’s 50 Safest Banks 2011”, www.gfmag.com, August 2011. Subsequently, Global Finance has updated its list, and named BNG as the world’s second safest bank, “Global Finance announces a half- yearly update World’s 50 Safest Banks: April 2012”, www.gfmag.com.
22 Financing of new housing supply
who want to bring those types of things about”.96 He questioned whether such initiatives really needed government support, saying: “If [...] there is something Government could do, are not doing, and it does not cost a fortune, then come and talk to me, but most of the time my message out there to housing associations and to councils is, ‘We are giving you all these flexibilities. Go and use them.’”97 The Minister was unenthusiastic about the call for a national housing bank, saying that he was “not convinced by that argument at all. I think the banking system in this country needs to work for all industries and sectors”.98
40. We welcome the Minister’s enthusiasm for a housing investment fund run by housing associations. Such a fund could help housing associations, and smaller associations in particular, raise finance for house building. We support the establishment of a pilot housing investment fund run by housing associations, and recommend that, in discussions with the National Housing Federation, the Government explore how it can give its backing. The pilot should consider the viability of a fund, its ability to attract investment, and any risks to the Treasury arising from Government support. Subject to the success of the pilot, the fund could be increased in scale. We further recommend that the Government work with the Confederation of Cooperative Housing on the Confederation’s proposals for an investment fund.
41. We consider that there is merit in the suggestion that a national housing investment bank be established. In other European countries such banks have proved effective at channelling investment into new housing development. The work already underway to create a Green Investment Bank offers a useful opportunity; there is a clear case for allowing this bank to invest in housing as well as green infrastructure. We recommend that the Government consult on proposals for the extension of the Green Investment Bank’s remit to include the funding of new housing and, potentially, of wider infrastructure projects. The bank could play a leading role in offering new forms of finance such as REITs (considered earlier in this chapter) and retail bonds (which we consider later in the report).
96 Q 333 97 Q 334 98 Q 333
Financing of new housing supply 23
3 The private rented sector
Smaller landlords 42. We have seen that investment by large financial institutions and pension funds offers a potential source of finance for new housing in the private rented sector (PRS).99 However, many consider that the sector will continue to be dominated by smaller landlords.100 Paragon Group described buy-to-let landlords as “the backbone of the PRS”, saying they accounted for “89% of landlords and 71% of properties”.101 The British Property Federation said that “probably the most significant source of private sector investment in housing over the past decade has come from small investors buying standalone property”;102 however, it added that such investment had “not made such a powerful contribution to new build stock”.103 The Residential Landlords Association (RLA) agreed that “generally PRS landlords do not purchase new dwellings”104 but said that the sector made an important contribution to new housing both by recycling “existing stock enabling owner/occupiers to buy new properties” and “by converting older stock”, for instance sub-dividing large houses into flats.105 It also said that “in the boom” before 2008:
the PRS helped to fund many new developments [...] often through off plan purchases, particularly of new apartment developments. By putting down initial deposits and pre-purchasing PRS investors gave developers the necessary funding and confidence to proceed with these developments. This is, of course, no longer feasible.106
Issues in the private rented sector 43. Paragon Group suggested that the decline in the availability of mortgage finance had made a significant impact on the private rented sector:
Buy-to-let was significantly affected by the credit crunch with an 81% decrease in the value of new loans, and the number of buy-to-let products declining by 90% from July 2007. Although buy-to-let lending has entered a period of recovery, it remains difficult for private landlords to access finance for property purchases, thus contributing to the current market dysfunction.107
99 See above, paras 14–22. 100 See above, para 15. 101 Ev 149 102 Ev 105 103 As above 104 Ev 142 105 Ev 145 106 Ev 144 107 Ev 150
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Nigel Terrington, Paragon Group’s Chief Executive, referred to buy-to-let having had “a good year”, saying it was “one of the only growing sectors within the mortgage space”; however, he added that “it is actually a big percentage on a very low number”.108
44. The RLA argued that the sector was not as profitable as it was perceived to be, and that the picture of it “doing well” because of rising rents and increasing demand was “highly misleading”. It suggested that those landlords who had invested during “the boom” now realised that the capital appreciation upon which the sector’s business model had been based had been “a mirage”.109 It explained:
Returns are currently too low now that capital appreciation is no longer part of the equation. There needs to be a significant adjustment to provide a worthwhile return on investment in the PRS. Otherwise, large scale disinvestment will follow.110
Mark Butterworth, Director of the RLA, considered that yields were “being eroded” because “the costs of running a property keep going up, the tax take keeps going up and there is more and more regulation coming in”. He added: “Just because rents are going up the odd per cent here or there, or a few per cent in London, that is not generating enough to cover that loss of yield”.111
45. A number of witnesses suggested that changes could be made to the taxation system to encourage private landlords to expand their businesses. Paragon Group suggested the creation of a “business environment more akin to that of countries with comparable private rented sectors where landlords benefit from more competitive taxation regimes and are able, in some cases, to offset capital losses”.112 The housing charity, Shelter, considered that the taxation system hindered growth amongst private landlords because it treated their rental income “as investment rather than trading income”.113 It argued that “landlords operating to professional standards should be treated as professionals by the tax system and offered the same level of encouragement to grow as other small businesses, while being equally subject to effective regulation”.114 The RLA said that there was need for “a structural reform of taxation in the PRS” and “an immediate step to be taken by giving PRS landlords deemed trader status in the same way as furnished holiday lettings are treated”.115 The British Property Federation suggested the creation of “Housing Zones” that offered “tax incentives to investors in new build”, which:
would have to be designated by local authorities to stop building in the wrong place, and be approved by HM Treasury to keep costs under control, but could help force more buy-to-let funds into new build. A capital gain tax relief for example might be the best incentive as many investors are disappointed the current capital gains tax
108 Q 206 109 Ev 144 110 As above 111 Q 219 112 Ev 151 113 Ev 86 114 As above 115 Ev 147
Financing of new housing supply 25
regime, with a flat 28%, makes no distinction between long-term investors and property speculators.116
The private rented sector: conclusion 46. While it is right to consider the potential for large institutions to invest in the private rented sector, it is also important to remember that the sector is, and will continue to be, dominated by small companies and individual landlords. Although these smaller landlords tend to invest in existing property, they do make an indirect contribution to new housing supply, and in the past have provided upfront funding for development by buying property ‘off-plan’. There are a number of issues facing those in the sector: the financial crisis had a significant effect on the availability of buy-to-let mortgages; many landlords no longer have the benefit of capital gains; and there is some concern about the levels of return. We have heard that the burden of regulation and taxation has deterred landlords from expanding their businesses. While constraints on mortgage finance will continue to affect investment in the sector, the Government could provide some support by taking steps to address this burden. We recommend that the Government bring forward a set of proposals to simplify the tax and regulatory structures that apply to private landlords. These proposals should aim to create an environment in which small private landlords are encouraged to expand their portfolios and invest in new build housing.
116 Ev 106
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4 Affordable housing delivery
47. Laying the Foundations: A Housing Strategy for England states that the Government now expects “to provide up to 170,000 affordable homes by 2015, compared with the 150,000 originally estimated”.117 It is anticipated that the Affordable Homes Programme will play a key role in delivering these homes. On 14 July 2011, the Homes and Communities Agency (HCA) announced the 146 successful bidders who, subject to contract, would deliver 80,000 homes for affordable rent and affordable home ownership under the £1.8 billion programme.118 Giving evidence to us in January 2012, Pat Ritchie, Chief Executive of the HCA, said that the programme was on track:
We are confident that we have been able to agree a robust set of contracts with providers; we have 103 providers now in contract and we have committed, through those contracts, £1.6 billion of the £1.8 billion investment through the Affordable Homes Programme. We have yet to sign up local authorities, but that will be next year, once the housing revenue changes are in play. We are on track, as we expected to be, to deliver on 35,000 completions this year, and starts are on track in the new programme.119
Affordable Rent 48. DCLG stated that the Affordable Rent model was the “key innovation” within the Affordable Homes Programme and would allow “providers to set rent at up to 80% of market value”.120 These providers would be able “to borrow more against the higher income stream to help meet the cost of new supply”.121 DCLG claimed that the model represented “a significant shift in the balance of funding for new affordable housing”, pointing to “initial agreements” which it said showed “that Government investment under the Affordable Homes Programme will be less than half previous rates”. It added: “This means it will be possible to deliver more new affordable homes for every pound of public capital investment”.122
49. Our evidence raised a number of concerns about the Affordable Rent model. Some witnesses suggested that the model would have different impacts in different parts of the country. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research, said: “in some areas social rents are close to market rents already, so the concept of affordable rent squeezing between the two is quite difficult”.123 Place Shapers, a
117 Laying the Foundations, p 33 118 “HCA announces successful bidders for £1.8bn affordable homes funding”, HCA press notice, July 2011, www.homesandcommunities.co.uk 119 Q 290 120 Ev 189. The introduction of the Affordable Rent model was announced in the October 2010 Spending Review. Under the model, social housing providers are able to offer tenancies at a rent of up to 80% of the local market rent. The additional income raised by the higher rent can be used to fund new affordable housing. 121 Ev 189 122 As above 123 Q 27
Financing of new housing supply 27
representative body for housing associations, also raised the prospect of geographical differences, stating:
In the Midlands and North the emerging picture suggests some marginal benefit of charging affordable rents, but not enough to see a stepped change in new supply. The picture elsewhere in the country particularly London and South East is more focussed around affordability of the new affordable rents by customers.124
50. The London Borough of Newham was amongst those concerned about the affordability of Affordable Rent in London, stating that “many ‘affordable rents’, ie ones that are above 60% of market rent, are unaffordable for Newham residents in larger homes”.125 Hackney Council said that it had “formally advised providers that 25% of newly-built homes should be for social renting, with the remaining 75% for AR [Affordable Rent]”. It explained, however, that the HCA would “only fund the building of new homes for social renting in exceptional circumstances outside of estate regeneration and some supported housing”; at the time of its submission (October 2011) there was “no evidence” of the HCA having “agreed any exceptional cases”. Registered providers had therefore advised Hackney that it might need to make its own investment if the 25% target was to be met.126 Pat Richie, Chief Executive of the HCA, said that she understood that investment would be going into Hackney and Newham and that issues had been resolved “through the contracted arrangements with providers”.127 Asked whether local authorities had been by- passed, she said:
The boroughs have been involved in the discussions on the contracts in London, and there has been consultation with each of the London boroughs to help prioritise those projects that are included in the four-year contracts that we have signed up through the Programme.128
It is important that local authorities are fully signed up to the delivery of the Affordable Homes Programme within their areas. The Homes and Communities Agency should work with councils to ensure that any concerns they may have, for instance about the affordability of rents, are addressed.
51. Alan Benson, Head of Housing and Planning at the Greater London Authority (GLA), said that the Mayor of London did not agree that the Affordable Rent model made rents unaffordable. He told us that the GLA had sought:
to make sure that all sizes of properties would still be affordable to tenants under the future caps that are being charged. This has meant they have had to suppress the rents down for the larger family homes, which would have been the ones that were most impacted by the universal cap.129
124 Ev w56 125 Ev w75 126 Ev w59 127 Qq 292–3 128 Q 294 129 Qq 147–8
28 Financing of new housing supply
Letting housing benefit take the strain? 52. Roger Harding, Head of Policy, Research and Public Affairs at Shelter, suggested that the introduction of Affordable Rent would lead to a shift from capital to revenue investment:
it is hard to see how, given that we are cutting back on capital investments and therefore paying out less per unit, we will not, in effect, end up paying for that in housing benefit in one form or another over the longer term and therefore continue the shift from reducing capital investment and putting it into revenue investment.130
Andy Hull, Senior Fellow at the Institute for Public Policy Research, considered that Affordable Rent represented “a decision to let housing benefit take the strain”.131 The Building and Social Housing Foundation said that while revenue subsidy, such as housing benefit, might be appropriate in times of economic prosperity, “such a system inevitably comes under pressure in times of economic constriction, when upward pressures on claimant numbers are likely to coincide with downward pressure on government spending”.132 It added that it “may now be time for supply side ‘bricks and mortar’ subsidies to take more of the strain to ensure that housing support is financially sustainable in the long term”.133
53. Giving evidence in December 2011 on the Performance of the Department for Communities and Local Government, Mr Shapps said that he did not anticipate a significant increase in housing benefit to arise from the introduction of Affordable Rent:
The modelling on Affordable Rent is very interesting, because what it shows is contrary to what a lot of people immediately think that it might show. [...] people think [...] that if you are charging a higher intermediate rent—which in London [...] is an average of 65% of the market rent —surely housing benefit bills are going to go up. The reality is that a lot of the people who will be living in those new Affordable Rent homes are at the moment, in the private rented sector, paying 100% of the market rent. We actually see a reduction in the Housing Benefit Bill in those cases and overall a few tens of millions’ increase over the Parliament, but it is not a dramatic shift.134
54. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research, had a different view about where tenants of affordable rented homes would come from:
There is an assumption in the Government’s own documentation that most of the people going into affordable renting will come from the private rented sector. That is not borne out by empirical evidence. Most social renting generates from within
130 Q 27 131 As above 132 Ev 79 133 As above 134 Oral evidence taken on 14 December 2011, HC 1668-ii, Q 145
Financing of new housing supply 29
families. Therefore there are some discords in terms of how the regime is presented and how it might operate in practice.135
David Orr, Chief Executive of the National Housing Federation, warned that, under the current proposal to use the social rent allocation system for Affordable Rent, the housing benefit bill would increase.136 He added that the Affordable Rent model would “have worked better if we had been able to provide additional social rented homes as well as the affordable rent”.137
55. Asked whether there was a need to build social rented housing alongside those for Affordable Rent, Mr Shapps told us that there was “a very large social house build programme going on right now”.138 This was a reference to the £2.3 billion being spent on existing commitments, mainly the National Affordable Homes Programme 2008–11. DCLG estimated that these commitments would deliver 72,000 homes, including 52,000 for social rent.139 The Minister insisted that there would “always be a need for subsidised social house building in this country”.140
Affordable Rent: the longer term 56. The National Housing Federation stated that the Affordable Rent model “is unlikely to be sustainable far beyond 2015 in its current form”.141 It referred to modelling it had carried out which showed that “if the same investment model was used for the development of new affordable homes post 2015 the security capacity of the sector would be exhausted after 11 [years]”.142 The housing association, Places for People, also considered that Affordable Rent had “a limited lifespan”, pointing out that “the reductions in grant rates require RPs [registered providers] to borrow more money to finance the development of new affordable housing thereby exacerbating gearing levels”.143 Mark Henderson, Chief Executive of the housing association Home Group, said that his organisation was “relatively well-geared” and potentially had “scope to do one more round”. However, he added: “it is a self-limiting funding cycle that I think we would find”.144 The Council of Mortgage Lenders said that housing associations’ ability to deliver further rounds was “questionable and could result in ‘survival of the fittest’”.145
57. The Tenant Services Authority (TSA), which until April 2012 acted as the social housing regulator, stated that over “the longer term (most likely beyond the lifetime of the current programme) there may be issues to be managed with Affordable Rent as a model of
135 Q 27 136 Q 233 137 Q 234 138 Q 326 139 Ev 197 140 Q 326 141 Ev 152 142 Ev 158 143 Ev 169 144 Q 228 145 Ev 122
30 Financing of new housing supply
new supply”. It said that “over time participation in the programme will lead to higher gearing, and where gearing and similar covenants exist reduce borrowing headroom”.146 It added:
The regulator is analysing the impact of this, which is not straightforward. Some associations are unconstrained by gearing covenants, for others covenants may prove a significant constraint by the end of this Spending Review period. Of itself this may not stop further development by those [private registered providers] affected as there may be ways they can take on more debt without breaching covenants, although this could mean taking on risk in other parts of their businesses. The sector is already diversifying its sources of finance through bond issues but also other innovative ways of funding including private finance raised through institutional investors.147
The TSA also referred to a further risk arising from the model’s link to market rents “which may go down as well as up”.148
58. Mr Shapps, when asked whether Affordable Rent had a limited lifespan, said that we would “never go back to the days [...] of the old-fashioned model of only one offer in the socially rented sector”, adding that in his view there would “always be a hybrid in between”. However, he could not tell us how the model “would operate again subject to a 2015–20 spending review”. He stated: “I am pretty confident there is more of this to come; I cannot predict what will happen in the next Parliament”.149
59. The housing association Moat Group proposed “an alternative model, designed as an enhancement of the Affordable Rent model”.150 This would consist of three steps:
a review of rent affordability against the income of residents every set number of years (for example, every two or five years);
where residents are able to pay full market rent for two reviews in succession, their rents would be increased to full market levels;
when a resident is placed into the full market rental category, we would offer the opportunity to move to shared ownership—with the normal rent discounts that apply within this model;
Moat Group said that the additional revenue raised through this model would be reinvested into the development of more homes.151
146 Ev w99 147 As above 148 As above 149 Q 324 150 Ev w6 151 As above
Financing of new housing supply 31
Affordable Rent: conclusion 60. The Affordable Rent model provides the Government with a means of delivering new affordable housing at a much reduced level of capital subsidy. To that extent it is to be welcomed. Nevertheless, the move to Affordable Rent raises a number of issues. There are parts of the country where the model will not bring in additional funding because social and market rents are at similar levels. Conversely, there are concerns that in other areas it will prove unaffordable: we would not want to see a situation in which capital subsidy for affordable housing is reduced, only for housing benefit to make up the difference. We are further concerned about the Government’s proposal to use the social rent allocation system for Affordable Rent properties: if the Minister wants to see more than one “offer” within the social housing system, he should ensure that the offers have distinct allocation systems. A longer term issue is whether the Affordable Rent model can be sustained beyond 2015, given its potential impact on housing associations’ gearing levels. We are disappointed that the Minister appeared unwilling to look beyond the current Parliament and the current spending cycle: a longer term vision is surely needed if we are to find solutions to the country’s housing crisis. We recommend that the Government, before the end of 2012, bring forward proposals for delivery of affordable housing post 2015. These proposals should recognise the need for housing available at both “social” and “affordable” rents, each with a separate allocation system. They should aim for a rebalancing of subsidy arrangements away from housing benefit and back towards “bricks and mortar”; this would give rise to a number of immediate problems which the Government would need to address. Finally, the proposals should consider how housing associations can be encouraged to invest in new housing without stretching their capacity to the extent that they do under the Affordable Rent model. In the next chapter, we will consider some options for the future financing of housing associations.
Affordable housing delivery: possible risks
Section 106 agreements 61. Our evidence commented on the contribution section 106 agreements152 had made to the delivery of affordable housing in recent years. Richard Hill, Deputy Chief Executive of the HCA, said: “section 106 has been a big driver of affordable housing over the last few years. I think in 2010–11 about 29,000 homes were delivered through section 106”.153 A group of academics from the Universities of Sheffield and Cambridge, and the London School of Economics and Political Science said that, in a number of ways, section 106 had “proved to be a very effective means of helping to finance affordable housing as well as to ensure land is available and mixed communities”.154 Jim Vine, Head of UK Housing Policy and Practice at the Building and Social Housing Foundation, however, pointed to one of the “downsides” of section 106, that it was “pro-cyclical: as you see a downturn in building
152 See above, footnote 57. 153 Q 296 154 Ev w63
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for the market, you are also losing construction in your social rented or affordable housing sector”.155
62. There was concern that the introduction of the Community Infrastructure Levy (CIL) could reduce the number of affordable homes delivered through section 106 agreements. The housing association, Midland Heart, said that “a large proportion of social housing has been achieved through section 106 agreements”, but warned that “if CIL were to be set at a level that is too high, then s106 affordable housing proposals will become extremely challenging to secure and could lead to a potentially substantial reduction in new affordable housing”.156 The academics quoted above said that recent research conducted with local planning authorities “found that whilst CIL is broadly welcomed, there is a lot of uncertainty about the interface with s106 and the impact on how much affordable housing will be secured”. They warned that “it may well take a significant recovery in the market before scaled back s106 can deliver the amounts of affordable homes secured in the past”.157 Peter Williams, one of the contributors to this evidence, told us that there was “a real concern” about the future of section 106:
In a survey that we at Cambridge have done looking at CIL and 106, authorities are signalling that they plan to move to CIL, although the numbers are small at the moment, and 106 will increasingly be residualised, so an important stream of finance activity for affordable housing, in theory, is reduced and it is unlikely at the moment that large amounts of affordable housing will be built through CIL, because effectively it is an infrastructure investment fund. The assumption is that that will take most of the cake and what is left will be very small in terms of 106 contributions.158
63. At present, the CIL regulations provide that receipts may not be spent on affordable housing.159 In October 2011, the Government launched a consultation on detailed proposals for CIL. This consultation invited views “on providing local authorities with an option to use the Community Infrastructure Levy to deliver affordable housing where there is robust evidence that doing so would demonstrably better support its provision and offer better value for money”. It also sought “views on the appropriate balance, or combination, between the Community Infrastructure Levy and section 106 planning obligations to best support the delivery of affordable housing”.160
Renegotiation of agreements 64. The 2012 Budget confirmed, following a commitment made in Laying the Foundations,161 that the Government would “publish a consultation to allow the
155 Q 38 156 Ev w9 157 Ev w72 158 Q 38 159 Department for Communities and Local Government, Community Infrastructure Levy: An overview, May 2011, p 6 160 Department for Communities and Local Government, Community Infrastructure Levy: Detailed proposals and draft regulations for reform: Consultation, October 2011, pp 19–20 161 Laying the foundations, p 6
Financing of new housing supply 33
reconsideration of planning obligations agreed prior to April 2010 where development is stalled”.162 Pat Ritchie, Chief Executive of the HCA said that the “alternative [to reconsideration of s106 agreements] in a number of sites across the country is that they are just not delivered, because they cannot deliver some of the section 106 requirements within the current market and because of the changes in the viability of each site”.163
65. David Orr, Chief Executive of the National Housing Federation, suggested that there was unease about this proposal. He referred to the Government’s aim to deliver 170,000 affordable homes by 2015 and the assumptions under which Affordable Homes Programme contracts had been signed:
If those assumptions are significantly varied [...] that will make it more difficult. For example, with the renegotiation of section 106 consents, there is a whole lot of delivery that is contingent on section 106 as part of that 170,000.164
Section 106: conclusion 66. Section 106 agreements have made a significant contribution to the delivery of affordable housing in recent years. With the introduction of CIL however, there is some uncertainty as to how great a contribution they will make in future years. While we are supportive of the aims of CIL, we would not wish it to have a detrimental effect upon affordable housing delivery. We recommend that the Government, at the earliest opportunity, clarify the relationship between the Community Infrastructure Levy and section 106 agreements, and how together they can be used to maximise affordable housing delivery. It should take care to ensure that the introduction of CIL does not lead to a reduction in the number of affordable homes delivered through contributions from developers.
67. The suggestion that developers could require councils to reopen section 106 agreements agreed before April 2010 is one that causes us some concern. There is doubtless a balance to be struck when developments have slowed down or stalled: in some cases it will be preferable to reduce affordable housing requirements than see a development abandoned. This should, however, be a matter for local judgement. Democratically elected local authorities, accountable to their citizens, are best placed to make these decisions in accordance with the housing needs of their wider areas. Enabling developers to compel councils to reopen agreements would run contrary to the Government’s professed commitment to localism. We recommend that the Government leave local authorities to decide whether or not to reopen section 106 agreements in cases where development has slowed down or stalled.
Welfare reform 68. Our evidence highlights changes to the welfare system as posing particular risks to housing provision. The Highbury Group on Housing Delivery stated that measures
162 HM Treasury, Budget 2012, March 2012, para 2.246 163 Q 300 164 Q 229
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included in the Welfare Reform Bill were “likely to lead to lenders being increasingly concerned as the level of security for their investment in terms of the lack of a guaranteed revenue stream from which the interest and debt can be repaid”.165 It referred in particular to “proposals to restrict local housing allowance and housing benefit payments for both private and ‘affordable rented’ tenants and proposals to terminate direct payments to landlords”.166 East 7, an informal grouping of housing associations in the East of England, said that direct payment of housing benefit to tenants would “create funding uncertainty with lenders at a time of economic turmoil and potentially will increase management costs and risk for landlords”.167 A number of witnesses suggested that rent arrears would increase under such an arrangement.168 Waqar Ahmed, Finance Director at the London and Quadrant Housing Association, said that his organisation had conducted a pilot 10 years ago to consider the impact of direct payments and that its “experience was that arrears doubled”.169 Discussing the potential increase in arrears, Mark Henderson, Chief Executive of Home Group, a large housing association, said:
The cost of covering the arrears and of then managing debt recovery [...] would be quite significant. We were estimating that even if debt increased by 2%, the cost of covering that plus the management would cost our organisation circa £2 million. Then, I guess, there is the cost of our borrowing and whether there were any impact on our ability to borrow or on the rates at which we would borrow as a result of this knowledge of a lack of blue-chip revenue coming into the business.170
David Orr said that the National Housing Federation’s estimate of the combined additional transaction costs was about £90 million a year: “That is £90 million of capacity that has been taken out to do something that is less efficient than the present system”.171
69. We commented on the proposal to end payment of housing benefit to landlords in our report last year on Localisation issues in welfare reform:
We are concerned about the potential negative impact of direct payment arrangements for the Universal Credit on social landlords and the availability of finance for investment in the social housing sector. We are encouraged by the Minister's assurance that final decisions have not yet been made on this point, and recommend that a thorough assessment of the possible impact of direct payment on housing associations' ability to borrow be undertaken before arrangements are finalised.172
In response to our recommendation, the Government said that “it is important that the design of Universal Credit contains safeguards to help protect social landlords’ income
165 Ev w48 166 As above 167 Ev w77 168 See, for example, Qq 176-178 169 Q 236 170 As above 171 As above 172 Communities and Local Government Committee, Fifth Report of Session 2010–12, Localisation Issues in Welfare Reform HC 1406, para 72
Financing of new housing supply 35
streams, and it is equally important that sufficient support mechanisms are in place for those who may need help managing their finances”.173 It added:
For this reason the Government will run a number of demonstration projects (beginning in Spring 2012) to test out elements of a direct payment process and to gather the information necessary to design safeguards in Universal Credit. The demonstration projects are an important element in the preparation for the roll out of Universal Credit and we are taking forward an intensive process of engagement with local authorities, housing, lending and voluntary sectors in developing their design.174
70. We remain concerned about the potential impact of direct payment arrangements on the finances of social housing providers. There is a clear risk that these arrangements will have a detrimental effect on providers’ capacity to invest in new housing supply. They could also create uncertainty amongst those providing finance, leading to increases in the cost of borrowing. We welcome the Government’s commitment to introduce demonstration projects to consider the issue in more detail. We recommend that the Government set out clear criteria by which the success of these projects will be judged, and that it fully involve social housing providers and lenders in the process. We further recommend that the Government only proceed to direct payment to social tenants if and when any issues identified by the pilots have been fully resolved.
173 Department for Communities and Local Government, Government response to the Communities and Local Government Select Committee’s Report: Localisation issues in Welfare Reform, Cm 8272, para 53 174 Department for Communities and Local Government, Government response to CLG Committee report on Localisation issues in Welfare Reform, Cm 8272, para 54
36 Financing of new housing supply
5 The future financing of housing associations
71. The Housing Forum, a membership body for organisations involved in the construction and repair of housing, considered the possibility of “a radical reshaping of housing associations”. It said that reduced levels of grant had triggered “a review of value and priorities within associations”, with some “preparing to build without grant”. It added that both “board and senior management teams will need to be robust to take their organisations in new directions, manage financial risk, and develop commercially viable solutions while retaining their social value and objectives”.175 In this chapter, we consider the options put forward in our evidence for the future direction that housing associations might take, and the impact such options could have on their contribution to new housing supply. We first look at their ability to raise finance on the bond markets before considering options for more fundamental change.
Bond finance 72. Our evidence has suggested that the bond markets have become an increasingly important source of finance for housing associations. Home Group said that the bond market had become more competitive because of the “banking crisis and the resulting cost of traditional debt finance”. It added that bond finance enabled “providers to diversify sources of debt funding—an increasingly important consideration given the tightening of lending from traditional sources”.176 Paul Smee, Director General of the Council of Mortgage Lenders, told us that the bond markets were “already providing quite a significant proportion of [housing associations’] income”. He explained that around “37% of their capital needs were raised [through bond finance], compared to 5% some time ago”.177
73. Some witnesses saw particular potential in retail bonds. In June 2011, Places for People issued a retail bond, the first time a housing association had done so.178 Steve Binks, Places for People’s Finance Director, told us about the experience:
It is a form of debt finance across retail bonds. So it is another form of debt, but it has been successful for us. We went out with a relatively small issue, or ambitions for a relatively small issue of £25 million to £50 million. That was our initial asking and we were surprised—almost overwhelmed—by the demand. We ended up raising £140 million in two weeks from people who would invest money with us for five and a half years, put it into an ISA at—I think the interest rate was 5%. We also sold quite a lot to wealth managers and brokers. So I think there is an opportunity to develop that
175 Ev w11 176 Ev 159-160 177 Q 149 178 Ev 160 [Home Group]
Financing of new housing supply 37
market, certainly for ourselves, and we will be back in that market in the near future, but also for the wider housing association movement.179
Mr Binks said that retail bonds appealed to “people who want to put money into ISAs— ordinary people who have £5,000 or £6,000 to invest and put into something that is being spent perhaps in their local area”, adding: “There are lots of ways in which this could be used to generate some sort of involvement in your local community and your local housing association and we would see retail bonds as being ideal for that”.180 We encourage housing associations—individually or collaboratively—to consider the potential of retail bonds which, as well as raising finance, could prove a useful way of enabling people to invest in their local community. There needs to be a clear regulatory framework covering retail bonds both to address any risks to housing association balance sheets and to ensure that the consumer is properly protected.
Historic grant 74. We also heard suggestions that more fundamental changes could be made to the way housing associations are financed. The Cambridge Centre for Housing and Planning Research referred to the treatment of “the £40bn of government grant which has been made to housing associations over the decades to help fund development”.181 It explained:
This [grant] sits as a repayable charge on housing association balance sheets. With the reduction in new grant funding some large associations have been exploring whether this grant could be written off so that it increases the balance sheet capacity of housing associations. Alternatively some have asked if it could become an equity investment though this raises the question of how big the premium might be and how this is paid for on top of the current costs/profit structure. It would imply higher rents. At present the costs of raising equity are probably higher than raising debt.182
Writing off the historic grant 75. The housing association, Regenda Group, argued that a write off of the historic grant “could positively benefit investment in the affordable housing sector”:
Under current rules, landlords cannot borrow against social housing grant held on their balance sheets because the government could under certain circumstances ask for it to be returned. Consideration should be given to the write off of this historic grant which would enable Registered Providers potentially to borrow against the value of this grant and potentially contribute to the funding of new affordable housing supply.183
179 Q 262 180 As above 181 Ev 76 182 As above 183 Ev w46
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76. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research, however, cautioned that the issue of the grant was “a complicated area” and said that for lenders “evidence of public sector funds sitting behind their loan to housing associations is quite important”.184 The Chartered Institute of Housing (CIH) agreed, stating that “existing lenders will have already factored in the existence of this 'comfort factor' in making their original loans: they are likely to want to re-price the loans in the event of it being used to raise other finance”.185 The housing association, Home Group, said that the proposal to write off historic grant sounded “attractive at face value” but raised “many issues surrounding the accounting treatment of the written-off debt”. It warned:
It is possible that the change in status of the debt could have unintended consequences through e.g. increased depreciation charges that could leave little or no advantage in financial terms after write-off. Also, in many cases access to additional borrowing is not the single limiting factor for housing associations when looking to build more homes. Increased borrowing could lead to additional costs to I&E [the income and expenditure account] and interest cover ratios which limit the development capacity of many housing associations.186
Historic grant and equity 77. The other option put forward for the use of the grant was for it to be converted into equity. Places for People set out a proposal “based on Government changing the funding of social housing to an equity finance model”. It said:
For the equity proposal to work, Government would need to change the designation of the historic social housing grant that sits on the balance sheets of registered providers [RPs] in order to create the headroom to release equity into the market. The income payments for equity would be funded by RPs converting the required number of existing social rented void properties through [an] HCA-led Affordable Rent scheme.187
It estimated that “with this mechanism, Places for People alone could attract £750 [million] of equity to fund the production of a further 5,000 new affordable houses, without the need for Government to issue any further grant”. Its modelling further showed that, if applied across the housing association sector, the proposal could deliver around 160,000 affordable homes without the need for additional grant.188 Asked about the equity proposal, Steve Binks, Places for People’s Finance Director, said that in effect it “would be a sale of the interests of the company and you would end up with shareholders owning the company as a whole” and that it “would be a for-profit company”.189
184 Q 12 185 Ev 113 186 Ev 160 187 Ev 167 188 As above 189 Qq 250–51
Financing of new housing supply 39
78. The Tenant Services Authority expressed concern about proposals to write off grant and convert it into equity, warning that they would “not transform the sector’s development capacity as a whole although a few individual providers may free up more capacity”. It referred to “unknown consequences in terms of balance sheet valuations” and “wider ramifications”, for instance:
the system of recycling grant on sales plays an important part in funding new homes across the sector as a whole, which is facilitated by the regulator’s role in granting consents to disposals (sales of properties outside of the sector).
There are legislative barriers to converting a not-for-profit PRP [private registered provider] to a for-profit PRP, which may be relevant to these proposals.
PRPs would need to consider whether the costs of offering an equity return—which may be higher than conventional debt—outweigh the potential initial increase in capacity.190
David Orr, Chief Executive of the National Housing Federation, said that it was “absolutely right that we should be having this kind of discussion [about equity finance], and that we should be exploring all options” but advised that there were “some quite important inhibitors”:
Moving from an industrial and provident society to being a publicly owned company is not an easy thing to do. There are major regulatory inhibitors that stop that happening. I think that a number of housing associations who have explored some of this territory are trying to make some kind of assessment of the relationship between the short-term financial impact that comes from selling equity, and the potential long-term change that that makes to governance, and the potential for people to take value out of the organisation as well as putting it in. So these are pretty fundamental questions.191
Equity stakes in development 79. On Places for People’s proposal, Waqar Ahmed, Finance Director of the London and Quadrant Housing Group, said that his organisation “would prefer to preserve our social values and our social mission”. He nevertheless considered that equity could still play a role:
That role is a risk and reward around development. We have done a number of deals with house builders jointly to procure and develop large-scale development in London. We are happy to work with local authorities and share equity models around land. From a finance perspective, we would see purely equity and no additional value as more expensive than what we can currently borrow in the capital markets. Therefore, our preference would be to exhaust our options in the capital markets first.192
190 Ev w99 191 Q 257 192 Q 252
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Mr Ahmed said that surpluses generated by L&Q Group were converted into an equity stake and invested in development. Referring to the association’s joint work with house builders, he said “we not only share construction risk and sales risk, but we jointly put in equity. At the end of the day, our share of the returns will enable us to subsidise the affordable”.193
Smaller housing associations 80. Places for People and L&Q Group are two of the countries’ largest housing associations. Referring to the equity models they discussed, David Orr warned: “this is not a game for small organisations to play”. He nevertheless considered that smaller housing associations could “look at smaller-scale, local joint ventures with local developers and sometimes with local authorities, which try to stretch the way they are able to use the assets they have at their disposal”. He suggested that there should be “a more encouraging environment—both in terms of the HCA and the regulatory environment—to try to ensure that that happens”.194 The CIH also referred to the different financial needs of smaller housing associations, saying that the discussion about raising finance on the bond markets was “somewhat dominated by the larger housing associations”:
This view presents risks for smaller housing associations for whom lending portfolios and risk appetite will be considerably different. The Committee should note that different housing associations have different financial models so a one size fits all approach will not work for everyone; size matters in terms of funding options especially to access bonds.195
The National Housing Federation referred to the role of intermediaries such as The Housing Finance Corporation (THFC) saying that they enabled “smaller and midsized housing associations to access the capital markets by aggregating their individual funding requirements to an amount which is acceptable to the market”.196 The housing association Midland Heart, also referred to the role of THFC, and said that for smaller associations “the continuing use of club deals [...] should be encouraged and expanded where possible”.197 We have already expressed support for a housing investment fund run by housing associations.198 Such a fund could play an important role in the financing of smaller housing associations.
193 Q 254 194 Q 257 195 Ev 114 196 Ev 153 197 Ev w9 198 See above, para 40.
Financing of new housing supply 41
Historic grant: the Government’s view 81. A number of witnesses said that it would be helpful for the Government to provide some clarity on the status of the historic grant.199 We asked Mr Shapps whether he could clarify his intentions. He replied that there was:
nothing immediate that I am about to spring on you [...] not today or over the next few days.
[...]
The argument that is made is: if you left [the historic grant] with the bodies that are there and they could take it off their balance sheets, they could then leverage their balance sheets and build more.
I have to say, we have tested this several times over in different ways and put those arguments through the balance sheets, and I have had my officials work on it. I am not entirely satisfied that would be the upshot. There is a definite issue to negotiate with the wider deficit in the Treasury. To put you out of your misery, there is nothing immediate you are about to hear from me on this front.200
The Dutch experience 82. During our visit to the Netherlands, we heard that in 1995 Dutch housing associations were granted complete financial independence from the Government. A publication produced by Aedes, the body representing these associations, explained the nature of the settlement reached:
Briefly, brutering was a huge financial operation in which both the money still owed to the housing associations by the State (subsidies) and the money that the associations owed to the State (loans) was settled all at once. So, both parties received in one lump sum what they otherwise would have got over a period of years. In 1995, the law regulating this operation was passed by Parliament and all accounts were settled.201
83. Aedes said that “to a great extent, the brutering operation broke the financial relationship that existed between the State and the housing associations”. We learned that, since the brutering process, Dutch housing associations had received no government subsidy. They had funded the building of new housing through a revolving fund generated through the sale of existing and new build properties at market rate: they sold around 15,000 properties per year. Loans to housing associations were guaranteed by a special guarantee fund for social housing; this enabled the banks—for the most part, two publicly- owned banks—to lend at relatively low interest rates.202
199 See, for example, Q 260 [David Orr] and Q 261 [Mark Henderson] 200 Q 330 201 Aedes, Dutch social housing in a nutshell, May 2007, p 10 202 See above, para 38.
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84. Some of those we met considered brutering to have been a positive process which had made housing associations financially independent and strong performers in a tight housing market. However, we also heard that politicians had recently been looking for ways in which the state could have access to a share of the increase in value of housing association stock: this was reflected in recent government policy, including proposals to remove certain tax advantages and make housing associations pay corporation tax. There were also concerns that housing associations had strayed too far from their core role: such concerns are perhaps exemplified in reports that the Netherlands largest housing association has recently lost over £2 billion in a derivatives deal.203 As a result of this loss, the Dutch Parliament is reported to have established a full Parliamentary inquiry into the Dutch social housing sector. This raises issues about the role of housing associations as financial risk takers.
Future financing of housing associations: conclusion 85. We are not persuaded that the Government should convert the historic grant to equity, especially if proposals bring housing associations’ not-for profit status into question. Housing associations’ not-for-profit status and social mission are central to their role, and it is important that they are preserved.
86. That is not to say that equity cannot play its part in other ways. In Chapter 2, we saw how housing associations can work with institutional equity investors to cross-subsidise social housing, and here we have considered how housing associations can take an equity stake in development. We encourage housing associations to enter into equity sharing arrangements with local authorities and developers where this can contribute to the building of new homes. It is also important that financial innovation does not become the preserve of the larger housing associations. Smaller housing associations should consider entering into smaller scale joint ventures and also raising finance by working together or using intermediaries to generate scale. The Government should foster an environment in which they can do this.
87. There are some advantages to writing off the historic grant on housing association balance sheets. In particular, it could enable more borrowing and thereby increase the finance available for new homes. Nevertheless we have heard that lenders consider the presence of Government grant on housing associations’ balance sheets to be important, and writing it off could in fact weaken associations’ ability to borrow. The importance to lenders of this Government grant also raises questions about giving housing associations too much autonomy. In the Netherlands, we saw some of the benefits of housing associations being independent of Government: they built significant numbers of new homes without Government subsidy and were also involved in wider regeneration. The Dutch experience, however, highlights some of the potential pitfalls of a more independent approach and emphasises the need for a robust regulatory framework, and active scrutiny from a fully empowered regulator. The Government needs to consider all these issues in determining how housing associations will be financed in future.204 We recommend that the Government consult on proposals for the future financing of housing associations.
203 See, for example, “UK landlords warned as Dutch giant loses £2.1 billion”, Inside Housing, 2 March 2012, p 5. 204 See above, para 60.
Financing of new housing supply 43
This consultation should invite views on the treatment of the historic grant on housing association balance sheets. The outcomes of the consultation should be used to inform the Government’s proposals on the future delivery of affordable housing. The Government must also ensure that appropriate regulation is central to its proposals.
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6 The role of local authorities
88. We consider in this chapter the role that local authorities can play in the financing of new housing. Some of our evidence suggested that local authorities had a direct contribution to make to the provision of new homes; Cllr Clyde Loakes, Vice Chair of the Local Government Association’s Environment and Housing Board, for instance, pointed to research that showed “in every region of the country it is cheaper for the local authority to build a new build than for a housing association to do it”.205 Other evidence referred to councils’ role as enablers of housing development, and the important contribution they could make through the provision of land.206 During our visit to the West Midlands, we saw for ourselves the direct role the councils in Birmingham and Dudley played in the provision of new housing supply, and the effective partnerships they had established with housing associations, developers and other organisations.
89. In this chapter we will first consider how to maximise the opportunities for local authority house building offered by reform of the Housing Revenue Account (HRA); we will then examine the contribution local authority land can make to development; finally, we will look at the implications of the revival of the Right to Buy upon local authorities’ ability to fund new housing development.
Reform of the Housing Revenue Account 90. The Government’s evidence, provided in October 2011, described the reform of the HRA:
The abolition of the Housing Revenue Account subsidy system and a new system of self-financing should put councils in a better position to increase their supply of new homes. These reforms, which are being taken through in the Localism Bill [now enacted], will mean councils with their own housing stock will be able to keep their rental income in return for a one-off adjustment of their housing debt (councils will only be asked to take on extra debt if their rental income will be able to service it after costs are met). When reforms come into effect in April 2012, councils will have an average of 14% more to spend on their stock than under the present system. They will also be able to plan more effectively over the long term on the basis of a reliable income stream.207
Witnesses supported the reforms of the HRA in principle, and agreed that they could potentially increase the finance available for the building of new homes, but considered that there were further steps that should be taken to increase councils’ borrowing capacity if the reform was to lead to the delivery of significant numbers of new homes.208 In our view, it is important that councils are able, working in partnership, to maximise their
205 Q 82 206 See, for example, Ev 127. 207 Ev 192 208 See, for example, Ev 95 [Local Government Association]; Ev 133-5 [London Councils]; Q 154 [Sir Steve Bullock, Chloe Fletcher and David Edwards].
Financing of new housing supply 45
potential contribution to the building of new homes. We consider some of the suggested steps in the following paragraphs.
HRA reform: maximising the benefits
Lifting the borrowing cap 91. Some witnesses expressed concern that, notwithstanding greater capacity to borrow under HRA reform, the Government was imposing a cap on local authority borrowing for housing. Birmingham City Council stated that it, along with a number of other authorities, would be at the “maximum cap at the start of the reforms and will therefore not be able to generate more funding for new housing in the short term until such time [as] that debt is repaid over the medium term”.209 We heard similar concerns when we visited Dudley. The Local Government Association (LGA) suggested that local government had a “strong track record of prudent financial management, a strongly positive net worth, and a manageable, low level of debt” and said that if “councils were to have the cap removed and follow the principles of the Prudential Code,210 this would enable many councils to borrow to build additional housing”.211 The Chartered Institute of Public Finance and Accountancy (CIPFA) stated that the Prudential Code had “clearly proved that Local Authorities can be trusted to act prudently with regard to borrowing”, pointing out that since 2004, when the Code was introduced, the Treasury had “never had to use its reserve powers to intervene in these borrowing arrangements”.212 It added that local authorities’ borrowing for council housing was “around £7,000 per unit—less than half that of housing associations”, and that “councils could borrow more than this and still stay within the agreed borrowing rules under the prudential borrowing framework”.213
92. Asked whether he would reconsider the decision to impose a cap, Mr Shapps said that the answer was “no, for the time being, but I will keep this under review”. He considered that the call for the cap to be lifted was essentially “a plea for more borrowing, and more borrowing means more debt”. The Government was therefore “very hesitant lest we lose sight of the big national goal of getting the deficit under control and having a convincing plan in place to do that”.214 The 2012 Budget referred to the Office of Budget Responsibility forecasts that the HRA reform would “increase public borrowing more than originally estimated”. It said that while these estimates were “very uncertain”, if they remained the same, “then the Government will take action to address the increase in public debt”.215
93. We understand the Government’s desire to reduce the national deficit, and nobody wishes to see council borrowing for housing getting out of control. However, we consider that the principles of the Prudential Code should provide sufficient safeguards to ensure
209 Ev w16 210 Ev w104 [Chartered Institute of Public Finance and Accountancy] explains that under “prudential borrowing, a local authority must only borrow when and if the debt repayments and interest are affordable”. 211 Ev 95 212 Ev w104 213 As above 214 Q 337 215 HM Treasury, Budget 2012, March 2012, para 1.223
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that council borrowing is affordable. Were the Government-imposed cap to be lifted and councils allowed to borrow within prudential limits, more finance could be raised for the building of new homes. We heard that it is cheaper for councils to build new homes than housing associations. Increasing councils’ ability to do this would therefore secure good value for the taxpayer. We recommend that the Government lift the cap on local authorities’ borrowing for housing, and allow councils to borrow in accordance with the Prudential Code. We are also concerned at the Government’s warning that it will “take action” if public borrowing increases as a result of Housing Revenue Account reform. It is important that it does not place any further constraints upon local authority borrowing for housing. The cap is already unnecessary, and further borrowing restrictions would have a detrimental impact upon the contribution councils can make to new housing supply. Later in this chapter, we consider whether councils’ borrowing for housing needs to be included within the public sector debt calculation.216
Sharing and pooling headroom 94. We also heard that additional homes could be built if councils were given the freedom to ‘trade’ or otherwise share the borrowing headroom created under HRA reform. London Councils referred to research they had commissioned, which had identified the ‘trading’ of headroom as one option London Boroughs could pursue to increase housing supply. They suggested that:
it may be the case that some boroughs will have the desire or need to access capital to invest in their housing stock, but are constrained by their debt cap from doing so. Similarly, some boroughs will find themselves with some borrowing capacity that they do not need to use, as their investment priorities can be met without borrowing. In these circumstances, there is the potential for the authority with higher needs but no borrowing headroom to access the borrowing headroom of the ‘better off’ authority. The lending authority could charge a fee for providing this capital [...].217
Another option put forward by London Councils involved boroughs with a shortage of land but a high borrowing capacity working in partnership with those in the opposite position to make best use of the limited financial and land resources available.218 London Councils also suggested that in the longer term HRA reform could see councils “combining their HRA operations”, potentially “even pooling or aggregating the debt caps of a number of authorities”.219 They said “that these options would require consent if not legislation from Government permitting them”.220 Birmingham City Council also expressed support for “a mechanism to allow the transfer of any headroom across local authorities” but
216 See below, paras 102–103. 217 Ev 134 218 As above 219 Ev135 220 As above
Financing of new housing supply 47
warned that “this would be complex to administer and require an ongoing national framework to be maintained”.221
95. Mr Shapps said that the Government was not minded to support pooling or swapping arrangements between local authorities. He welcomed “more innovation and creative ways of their working together” but explained that:
This is a settlement that has taken many years and a piece of primary legislation to work out. I have looked through all the figures and the percentages available to each authority, and although there is movement it is not that some authorities only have 2% more and some have 25% or something. There is not that much of a range in there. I think the average is 15%. I am satisfied that authorities can work within those means to make sure that they provide the best possible service to their tenants.222
96. We are disappointed that the Minister has ruled out allowing local authorities to pool or swap Housing Revenue Account borrowing headroom. Such arrangements could help to make best use of councils’ borrowing capacity, enabling more homes to be built. In our experience, the Government is usually enthusiastic about local authorities collaborating, sharing services and pooling resources to achieve better value for money; we consider that it should take a similar attitude to joint working on housing finance. We recommend that the Government consult on proposals to enable local authorities to ‘trade’, swap and pool borrowing headroom. This should be subject to councils’ agreeing that any borrowing under these arrangements will still be in accordance with the Prudential Code.
Changing the constitution of Arm’s Length Management Organisations 97. We heard that borrowing capacity could also be boosted by enabling Arm’s Length Management Organisations (ALMOs)223 to change the way they are constituted. In June 2011, the National Federation of ALMOs (NFA) produced a report setting out a series of options for the future of ALMOs.224 The Chartered Institute of Housing (CIH) said that “the approaches explored would all require ALMOs to be reconstituted so that their majority ownership passes from the LA to tenants”.225 Chloe Fletcher, Policy Manager at the NFA, said that the models would “allow the ALMO to borrow additional moneys privately, which would not count on the public sector [balance] sheet”. Therefore, changing the ownership would enable ALMOs, amongst other things, to “significantly add to the new build properties in the country”.226 She also indicated that such models would not be necessary in financial terms if council borrowing for housing was classified as a trading activity and did not count towards public sector debt.227
221 Ev w16 222 Q 340 223 An ALMO is a not-for-profit company established by a local authority to manage its housing stock. 224 National Federation of ALMOs, Building on the potential of ALMOs to invest in local communities, June 2011. 225 Ev 114 226 Q 154 227 Q 202
48 Financing of new housing supply
98. The NFA’s report set out three models. The first model involved “the ALMO having a much longer contract and on the local authority having a one-third (rather than sole) interest in the ALMO’s ownership”. The second model was similar but also involved the transfer of some vacant properties or land, thereby giving the ALMO an asset base. The third, and most radical, model involved a transfer to a “Community- and Council-Owned Organisation (CoCo)”. This model would see the ALMO becoming “the owner of the stock, but on a different basis to current stock transfers”.228 The report set out some of the key legal implications of these models:
In Models 1 and 2, the ALMO is primarily still a management vehicle, but no longer majority-owned by the local authority. The authority could no longer award the management contract to the ALMO without a tendering process that complies with EU procurement rules. They would need to assess the risk that potentially another housing management provider could be awarded the contract. However, steps can be taken to reduce this risk while still complying with the rules.
In Model 3, where the ALMO takes ownership of the stock, there is no requirement for a tendering process. But it would mean that tenancies would no longer be secure council tenancies. However, legal steps can be taken which effectively give all tenants the same security in future as they enjoy now.229
99. We asked Mr Shapps for his view on the NFA proposals:
This could be the so-called CoCo model in particular. [...] actually, I like all this innovation. Colleagues in the House sometimes come to me with a chief executive or housing boards and put these ideas to me. I am always keen to explore them. Some of them stack up and some of them do not. They all have the same test, which is: number one, is it good value for the public purse; and number two, are the tenants going to be better off? Are they going to get better quality housing and more say over their housing? I am very keen to promote the interests, or allow tenants to, on all of these things. They are always subject to tenants being happy and voting on it, and I think it is absolutely right it should be that way.230
Chloe Fletcher confirmed that the NFA had held “very warm discussions with DCLG” but that it also needed the engagement of the Treasury.231 She stated: “We have not been told that [the Treasury] is not interested; it is just that we are waiting for a meeting”.232
100. In March 2012, Inside Housing magazine reported that the ALMO, Gloucester City Homes, was “set to become the first ‘community owned, council owned’ organisation”, subject to its tenants approving the change in a vote later in the year. The report said that ALMO representatives had met with Mr Shapps the previous month “and he was
228 National Federation of ALMOs, Building on the potential of ALMOs to invest in local communities, June 2011, p 22 229 National Federation of ALMOs, Building on the potential of ALMOs to invest in local communities, June 2011, p 23 230 Q 341 231 Q 200 232 Q 201
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reportedly ‘positive’ about the move”.233 A slightly different example can be seen in Rochdale. In December 2011, tenants of the ALMO Rochdale Boroughwide Housing (RBH) voted in favour of transferring ownership of 13,700 homes from Rochdale Borough Council to RBH, creating “the largest housing mutual in the country”.234
101. We consider that Arm’s Length Management Organisations should be free to adopt one of the new ownership models, subject to approval from the council and tenants. As well as promoting the involvement of tenants in the management of their housing, these models could also enable ALMOs to raise additional finance for the building of new homes (although any borrowing should continue to be affordable and sustainable). We are encouraged by reports that Gloucester City Homes will be consulting its residents on proposals to establish a ‘community owned, council owned’ organisation. We recommend that the Government give its support to those ALMOs wishing to adopt the new models, which would enable them to borrow prudentially to build more homes.
Changing the classification of debt 102. Some witnesses suggested that another way to increase councils’ borrowing capacity would be to change the way their debt was classified, so that it was not included within the national debt figures. Jim Vine of the Building and Social Housing Foundation explained:
In the UK we work on the public sector net cash requirement, similar to the old public sector borrowing requirement, where all the debts of local authorities are treated as public sector debt. Pretty much everywhere else in Europe they use the GGFD—general government financial deficit—model, which means that trading activities, such as housing, are viewed as off-balance sheet, off the national debt figures. It would be a relatively simple step to move to that, because in terms of the perception of our national debt on international markets, which like to compare like with like anyway, they are probably looking at our GGFD figures anyway.235
Mr Vine said that he could not “see our moving on to the same accounting system as is used across the rest of Europe causing too much of a problem”.236 Westminster City Council proposed that local authority housing be “regarded as an activity outside the main public sector debt so councils would be brought into line with housing associations in their ability to borrow”.237 The CIH stated that, when four councils made this case for this change in 2011, it was rejected by HM Treasury.238
103. The Government argues that a cap on local authority borrowing for housing is necessary because of the need to reduce the deficit; by implication, a cap would not be
233 “Gloucester ALMO to form first COCO”, Inside Housing, 9 March 2012, p 7 234 “Tenants say ‘Yes’ to co-operative”, Rochdale Boroughwide Housing website, December 2011, www.rbhousing.org.uk; see also “Rochdale joins staff and tenants together as biggest mutual in housing”, Guardian online, 17 February 2012, www.guardian.co.uk. 235 Q 28 236 As above 237 Ev w26 238 Ev 115
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necessary under the GGFD rules as such borrowing would be outside of the national debt. We are not convinced that the existing accounting treatment, or the cap, is justified. A change of rules would bring the UK in line with other European countries and enable councils to borrow on the same terms as housing associations. As we have already established, the provisions of the Prudential Code should be a sufficient control upon council borrowing. We recommend that the Government thoroughly examine a move to the General Government Financial Deficit rules and then consult on proposals.
Sources of finance 104. Birmingham City Council suggested that local authority bonds could provide a new source of finance for house building,239 as well as an alternative to the Public Works Loan Board. It said that bonds had been used by councils in the past, pointing to its own use of a bond to finance to National Exhibition Centre. It pointed out, however, that “central government tightening of financial regulations on the use of public sector debt have made this much harder since the 1980s”, and called on the Government to ease restrictions on bond finance.240 The LGA told us that it was investigating the development of “a financing institution owned and run by the local government sector which would issue bonds on behalf of all participating councils”. It considered that “this has the potential to deploy the sector’s considerable financial strength to good effect and will manage risk in a collective manner”.241
105. The New Local Government Network (NLGN) recently produced a report considering the potential of retail bonds in local government capital finance. The NLGN suggested that in some circumstances bond finance might prove cheaper for councils than borrowing through the Public Works Loan Board. It said that while the focus had previously been on wholesale bonds, “retail bond issuance could provide some unique advantages alongside the potential for a cheaper cost of credit”: it could take place “on a smaller scale than wholesale issuance and as such would allow far more authorities to access bond markets”; it would allow for a “stronger, more local connection between citizen, council and housing investment”; and would enable authorities to “significantly widen their investor base”.242 We have already considered the potential of housing associations to issue retail bonds and established the need for robust regulation both to address any risks to balance sheets and protect the consumer.243
106. The bond markets could offer local authorities an alternative source of finance from the Public Works Loan Board. We welcome the Local Government Association’s work to explore the possible establishment of a financial institution to issue bonds on behalf of councils. There are also good arguments in favour of local authorities issuing retail bonds to raise finance for housing: as well as potentially giving more authorities access to the bond market, they could also enable people to invest their money in a way that brings social benefits to their local area. We recommend that the Government
239 Ev w17 240 As above 241 Ev 94 242 Ev w113 243 See above, para 73.
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work with local government to enable councils to raise finance through the issuance of retail bonds; in doing so, it should establish whether there are any current restrictions on bond finance that can be eased.
Local authority land 107. Councils could support the building of new homes through the release of their land. On the provision of land by public bodies, Andy Hull, Senior Fellow at the Institute for Public Policy Research, said that it was important to bear in mind that “51% of the publicly held land that is fit for residential development is owned by local authorities, not by central Government”.244 Cllr Clyde Loakes, Vice Chair of the LGA’s Environment and Housing Board, said that local authorities were “doing a lot already” to bring land forward for development. He explained:
In the scenario where they cannot build because they cannot borrow the money, they are working in partnership with housing associations, private developers, adding their land to a piece of land that a private developer has got to create a better scheme.245
On the suggestion that a local authority might contribute a site for housing alongside privately-owned land, John Stewart, Director of Economic Affairs at the Home Builders Federation, said:
Surely the local authority should work with the developer and if the two sites combined make a critical mass and give a good scheme, the two of them together can come up with a good scheme that meets the needs of local people.246
Cllr Loakes said in response that this was what tended to happen but that there were “instances where you cannot necessarily bring the two sides to agreement”.247 We urge local authorities and developers to work together wherever possible to make land available for development in a way that meets the needs of local people. We encourage councils to enter into partnerships with developers, and to maintain equity involvement in the development to secure best value for the taxpayer.
108. We heard that there were many examples of local authorities using their land to support development. Birmingham City Council, which had a programme to build 1,340 new homes for both rent and sale, said that it had established an “innovative model for derisking development and attracting private sector developers to build in challenging market conditions”.248 It stated that its model—branded as the Birmingham Municipal Housing Trust (BMHT)—demonstrated how councils could “use their land to incentivise development”.249 The Council explained that under the model:
244 Q 34 245 Q 68 246 Q 78 247 As above 248 Ev w12 249 Ev w13
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The Council enters into a profit sharing arrangement with the developer through which instead of receiving the land plot premium at point of sale the Council receives a percentage of the overall development profit.250
109. Oxford City Council told us that it had established a joint venture partnership to build around 1,000 homes on its own land. It said that this project aimed “to deliver the greatest number of affordable homes at social rent as is possible in the current economic circumstances”.251 David Edwards, Executive Director of Housing and Regeneration at the City Council, said that it effectively had “a relationship with a master developer and funder for a period of probably five to eight years”.252 We have already established that the investment of public land into “build to let” projects can play an important role in securing investment from large financial institutions.253
110. The provision of local authority land can make a contribution to the financing of new housing supply by helping to reduce the risks of development and to make it viable for the private sector developer and social landlords. It can also help ensure that the maximum number of affordable homes is delivered. We encourage all councils to consider how they can release land to support the delivery of new homes, whilst securing full value from the development. There are a variety of ways to do this, in line with the localism agenda.
The Right to Buy 111. The Government plans to “reinvigorate” the Right to Buy. Laying the Foundations set out proposals to raise discounts to make the Right to Buy more attractive to tenants and included a commitment to “replace every additional home sold under Right to Buy with a new home for Affordable Rent”.254 This has implications for the supply of housing.
112. In December 2011, the Government launched a consultation on Reinvigorating Right to Buy and One for One Replacement. As well as a proposal to increase the cap on discount entitlement to £50,000 throughout England, the consultation set out options for how the replacement programme could be delivered. These options ranged from local delivery, where receipts would be left with the local authority, to national delivery, where receipts would be brought together centrally and then allocated by the Greater London Authority and the Homes and Communities Agency.255
113. On 12 March 2012 in its response to this consultation, the Government announced that it would increase the discount cap to £75,000. It also stated that the best option for delivery would be “a version of the ‘Local Model with Agreement’”. It explained how this would work:
250 Ev w14 251 Ev 137 252 Q 181 253 See above, para 19. 254 Laying the Foundations, p 26 255 Department for Communities and Local Government, Reinvigorating the Right to Buy and one for one replacement: Consultation, December 2011
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The Government expects that, if it were to retain the net receipts, it would be able to provide one-for-one replacement homes while restricting the contribution made from the net Right to Buy receipts to 30% of the cost of the replacement homes. Where a local authority is satisfied that it can match this (in other words, that it could apply the remaining receipt—after deducting the cost of covering the debt, administration costs etc—to new affordable rented housing, while restricting the contribution made from the net Right to Buy receipts to 30% of the cost of the replacement homes), the Government will be willing to enter into an Agreement that the authority may retain the remaining receipts.256
The Right to Buy: concerns 114. We heard a number of concerns about the Government’s Right to Buy proposals. In particular, some witnesses questioned the Government’s ability to achieve one-for-one replacement. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research, said that the “idea that it will allow one-for-one replacement seems highly questionable” and considered it to be “a policy that has been advanced in advance of the evidence”.257 Hometrack, an independent property analytics business, had carried out analysis of the Right to Buy proposals, on the basis of a £50,000 discount cap. This analysis found “that to deliver one new home would require an average of 1.4 RTB sales”, ranging “from a 1.1:1 rate in the North West to 1.6:1 in London”.258
115. There was some unease amongst witnesses that social rented properties sold under Right to Buy would be replaced with housing for Affordable Rent. David Orr, Chief Executive of the National Housing Federation, was concerned that one-for-one replacement differed from “like-for-like, because we would be selling social rented homes and replacing them with near market rented homes”.259 Some witnesses also said that the impact of the policy on the availability of social housing stock would be particularly acute in certain areas. Cllr Paul Andrews, representing the Association of Greater Manchester Authorities, said that past experience in Manchester had suggested that Right to Buy took “large, family-type houses out of the stock”; he considered that there had to be a way of replacing this type of housing in particular.260 The Highbury Group on Housing Delivery considered that there had to be “one for one replacement in qualitative as well as quantitative terms: i.e. the receipt from the sale of a low rent social [three] bedroom house in inner London should be sufficient to fund the provision of a replacement low rent social [three] bedroom house in central London”.261
116. Mr Shapps accepted that there was a difference between “one-for-one” and “like-for- like” replacement, but suggested that the need to get the figures “in proportion”. He said that of the 2.5 million homes to which the Right to Buy would apply, “this policy looks to
256 Department for Communities and Local Government, Reinvigorating Right to Buy and One for One Replacement: Consultation: Summary of responses, and Government response to consultation, March 2012, p 12 257 Q 32 258 Ev w92 259 Q 268 260 Q 170 261 Ev w49
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take 100,000 of them over a period of time”. He thought that this was “unlikely to decimate the stock of social housing”.262
117. We heard some concern about the interaction between Right to Buy and the moves to self-financing resulting from the reform of the HRA. Oxford City Council said that the “ability of councils to repay the substantial housing debt that they will take on as part of the HRA reforms would be significantly undermined as the size of their stock is reduced through RTB purchases”. It continued:
This would in turn limit Councils’ ability to fund new house building and, in a location such as Oxford where land values are high and developable land in short supply, would mean that value taken out of the council’s stock would most likely be used to build affordable homes in other locations where easier and more profitable development conditions obtain.263
118. Many of those submitting evidence argued that councils should be able to retain all their receipts at the local level. David Edwards, for example, said that in Oxford the City Council “would need a significant proportion of those receipts because, in our context, for example, to provide a two or three-bedroom family house will cost us, the council, at least £300,000”. He argued: “The more we are left short, the more we are not going to be able to finance or replace housing stock”.264
119. In its analysis of consultation responses, the Government stated that 80% of those responding to the question about the delivery of replacement housing—the majority of whom were local authorities—favoured either the “local model” or the “local model with direction” (under which the local authority retained all receipts but restrictions were placed on their use); 64% favoured the “local model” in particular.265 However, the Government considered that these models did “not give sufficient assurance of one-for-one replacement for England as a whole” and, because of this, it had opted for the “local model with agreement” as described above.266 The initial consultation document stated tellingly that this model added “a layer of administrative complexity and cost for both local authorities and this Department” and that it “would require local authority proposals to be assessed, specific arrangements to be drafted, and monitoring and enforcement arrangements implemented”.267
120. In March 2012, following the publication of the Government’s consultation response, the LGA expressed concern about the “single centralised” £75,000 discount cap, which it said failed “to take into account local housing demand and the cost of building new homes”. It said that its consultation with councils had indicated that “different models
262 Qq 342–3 263 Ev 137; see also Ev 140 [National Federation of ALMOs]. 264 Q 165; see also Ev 95 [Local Government Association]. 265 Department for Communities and Local Government, Reinvigorating Right to Buy and One for One Replacement: Consultation: Summary of responses, and Government response to consultation, March 2012, p 20 266 Department for Communities and Local Government, Reinvigorating Right to Buy and One for One Replacement: Consultation: Summary of responses, and Government response to consultation, March 2012, p 12 267 Department for Communities and Local Government, Reinvigorating the Right to Buy and one for one replacement: Consultation, December 2011, p 21
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would provide optimal levels of demand for right to buy and receipts for re-supply in different areas” which reinforced “the argument that councils are best placed to set the discount locally”.268 It was also disappointed by the Government’s opting for the “local model with agreement” which would “make it difficult for many councils to retain receipts to reinvest locally because of constraints on alternative sources of funding, like land and borrowing”.269 It called on the Government to ensure that the “criteria ‘agreement’ required for councils to retain receipts is light-touch, does not require burdensome monitoring or reporting and allows councils reasonable timescales to reinvest receipts”.270 It also proposed that the Government review the discount in April 2013, and that “newly built properties should be automatically exempt from pooling arrangements rather than requiring councils to apply for exemption”.271
121. There were also concerns that Right to Buy, along with the NewBuy scheme, would lead to a reduction in the availability finance in other parts of the mortgage market.272 Paul Smee, Director General of the Council of Mortgage Lenders, said, however, that he thought that the scheme could be “be accommodated”. He added that lenders would “want to look at the properties that are being purchased to ensure that those who are applying under the scheme can afford the payments under their mortgages and do not get into financial difficulties with them”.273
122. We are not convinced that the Government will deliver on its plans for “one-for-one” replacement of additional properties sold under the new proposals, especially if the discount cap is set as high as £75,000. We are also concerned that the proposals will lead to a reduction in the country’s social housing stock, with social housing being replaced by homes for Affordable Rent. Moreover, without a commitment to “like for like” replacement, there is a risk that more expensive family homes could be replaced by cheaper flats. We recommend that the Government ensure “like for like” replacement of homes sold under Right to Buy, so that each socially rented property is replaced by a new home of the same type for social rent. In order to achieve this, we further recommend that the Government commit to making additional resources available in the event that “like- for-like” replacement cannot be delivered under the proposed levels of discount.
123. We are concerned about the Government’s proposals for the distribution of receipts, which, by its own admission, will be costly and complex for both local authorities and the Government. Moreover, even if the proposals succeed in delivering “one-for-one” replacement at the national level, they are unlikely to do so at the local level. They could see replacement homes concentrated in parts of the country where it is cheaper to build, leading to significant reductions in social housing stock in some higher value areas. There is a risk that social housing stock could disappear altogether from places, such as rural villages, where it is already limited. Along with the majority of respondents to the Government’s consultation, we favour a local model under which all receipts are retained
268 Ev 100 269 Ev 100 270 Ev 101 271 As above 272 Qq 40 [Peter Williams, discussed further in para 132, below] and 168 [David Edwards] 273 Q 102
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by the local authority. We recommend that the Government reconsider its decision not to opt for a local model for the replacement of additional homes sold under the new Right to Buy arrangements. We further recommend that the Government grant exemptions from increased discounts to places such as rural villages and other areas where social housing is limited and cannot easily be replaced. These places could otherwise be left with no social housing stock if there is significantly increased take-up of the Right to Buy.
124. Some councils will be unable to meet the Government’s requirement that Right to Buy receipts only fund 30% of the cost of the replacement homes, and will therefore not have the option of local delivery. This is especially true for those authorities with limited borrowing headroom, either because they have taken on debt under the Housing Revenue Account reform or because, often through no fault of their current administration, they are burdened with historic debt. The Government must ensure that these authorities are not precluded by their debt from replacing properties sold under the Right to Buy.
125. In the longer term, in line with the spirit of localism and moves to self-financing, we recommend that the Government give councils greater freedom to decide on the best housing solutions for their communities. The Government should consult on allowing local authorities to apply to the Government for an exemption to the Right to Buy where the council can demonstrate that housing is limited and cannot easily be replaced.
Extension of the Right to Buy to housing associations 126. Some housing association tenants also have the right to buy their property under the Preserved Right to Buy.274 The housing association, Home Group, has suggested that the Right to Buy should be extended more widely. It set out a proposal, involving the use of the historic grant discussed in the previous chapter:
[Registered provider] homes could be offered to tenants at a sale price which would cover the build cost of a new affordable home of a similar size locally. The sale proceeds generated would be used by the RP to build a home of equivalent size within the same local housing market area wherever possible. In order to help the tenant move into home ownership, Government would gift some of the grant that was utilised when building the original home to the tenant to use as a deposit when seeking a mortgage.275
Mark Henderson, the Chief Executive of Home Group, said that he would welcome “clarity about the former grant that would allow us to take it to the next step to model that through
274 The Preserved Right to Buy is the Right to Buy enjoyed by a secure tenant where their home is transferred to a new landlord (usually a housing association). The “Right to Acquire” scheme also gives some housing association tenants the opportunity to buy their property. This scheme operates different discount arrangements and is not affected by the current Right to Buy proposals. 275 Ev 161
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and, perhaps, potentially look at some pilot local authority areas where we could see whether it actually works and how it might be implemented”.276
127. When we asked Mr Shapps about the extension of the Right to Buy to housing associations, he replied:
I would love to do it, if I am blunt. The trouble is, again back to Government debt, if we were to do that, these are housing associations who have gone out, borrowed the money or taken some subsidy from us and built the things, have a 30-year income projection, and would quite rightly turn around to the Minister and say, “We are happy to sell this house. Now you need to pay us per home that is sold for the privilege.” Guess what? We do not have the money.277
Home Group, however, stated that its proposals “would not require ‘new’ Government money but the innovative recycling of historic grant”.278
128. For some housing associations giving tenants the Right to Buy might be a useful means of raising funds for new housing. We are not convinced that it needs to cost the Government any money. We recommend that the Government work with housing associations wishing to introduce the Right to Buy to explore how their proposals might work in practice. If it is satisfied about levels of risk and value-for-money for the taxpayer, it should allow housing associations to run pilot projects. Any introduction of the Right to Buy should be a matter for individual housing associations.
Conclusion: the role of local authorities 129. We have seen that local authorities, working in partnership, have the potential to make a significant contribution to the financing of new housing supply. There is, however, a risk that local government will not be able to make the most of this potential because of constraints placed upon it by central government. The moves towards self- financing under Housing Revenue Account reform are positive and could significantly increase the finance available for housing supply. However, the cap upon borrowing, the refusal to allow councils to share headroom, and the centrally-imposed Right to Buy proposals will all place restrictions on councils’ ability to finance the building of new homes. The local government sector should be trusted to manage its own finances in accordance with the Prudential Code. We urge the Government to give councils the freedoms they need to provide finance for new housing supply.
276 Q 270 277 Q 346 278 Ev 165
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7 Financing new build for owner occupation
130. In this chapter we will consider possible ways of funding the building of new homes for owner occupation. We will begin by considering the Government’s proposals for the NewBuy guarantee scheme. We will then examine the funding of shared ownership and shared equity mortgage schemes, followed by the potential for building new homes on Government land. Finally, we will consider some alternative models for housing delivery, focussing in particular on the contribution self or custom-build schemes can make to new housing supply.
NewBuy Guarantee scheme 131. Laying the Foundations announced the introduction of a “new build indemnity scheme”, led by the Council of Mortgage Lenders (CML) and the Home Builders Federation (HBF). It said that the scheme would:
provide up to 95 per cent loan to value mortgages for new build properties in England, backed by a housebuilder indemnity fund. Housebuilders will deposit 3.5 per cent of the sale price in the indemnity fund for each home sold through the scheme, and the Government will provide additional security for the loan in the form of a guarantee. In the event of repossession, the lender will be able to recover any losses on mortgages to the maximum covered by the scheme.279
The scheme, which has been branded as the NewBuy Guarantee, was launched on 12 March 2012.280
132. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research, giving evidence in November on the day the scheme was first announced, warned that the lending enabled by this scheme would “be netted off against an aggregate volume of mortgage finance, which is still very limited”.281 He explained: “Both this and the right to buy are new priorities, but actually it will mean less mortgage finance out there in the rest of the market to support other things”.282 Since the launch of the scheme, concerns have been expressed in the media about the risk of buyers falling into negative equity.283 The CML’s guidance for potential buyers explains that some “new build properties include an extra premium on the sale price that can reduce as soon as someone moves into the property” and warns potential buyers that were house prices to fall they “may not have enough money from selling the property to repay the mortgage”. It adds, however, that negative equity is “a risk of high loan-to-value borrowing [...] not of the NewBuy scheme
279 Laying the Foundations, p 8 280 “Grant Shapps: Unlocking aspiration for a new generation of home buyers”, Department for Communities and Local Government press notice, 12 March 2012, www.commmunities.gov.uk 281 Q 40 282 As above 283 See, for example, “NewBuy borrowers risk negative equity”, Financial Times online, 16 March 2012, www.ft.com.
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itself”.284 We recommend that the Government review the NewBuy Guarantee after the first year of its operation, to assess its impact upon mortgage finance in other parts of the market. It should also consider how many properties sold under the scheme have fallen into negative equity, and the impact this has had on buyers.
133. We asked Paul Smee, Director General of the CML, how the Government planned to control valuations, so that builders did not increase the sales price to cover the cost of their 3.5% deposit into the indemnity fund. He pointed to the Royal Institution of Chartered Surveyors’ guidelines on conducting valuations and said that the CML and the Government would require “absolute transparency about the prices at which comparable properties—for example, on a particular development—are changing hands”.285 Nick Jopling of Grainger plc considered this issue to be “a particularly important point”, saying that he “would expect the lender and the Government to have an RICS evaluation backed by a professionally indemnified professional, who is going to ensure that exactly what you are worried about does not happen”.286 The HBF guidance for builders states that those valuing the properties “will be very sensitive” to concerns about artificial price increases, “and will not allow the valuation to incorporate any inflation of the new build premium, other than any general movement in local house prices”.287
134. Igloo Regeneration submitting evidence on behalf of the Local Developers’ Forum (LDF), a group of small volume residential developers, expressed the LDF’s support for the NewBuy scheme, but raised concerns “that the implementation will discriminate against small volume builders”.288 It stated that to establish a “cell” with a lender on its own, a builder would have to build “an absolute minimum volume of 100 units per annum”. It claimed that, as a result of this, around 40% of builders could be excluded. Although there was a proposal for smaller builders to share in a cell, this would be more complicated to establish, take longer and involve builders “sharing risks and returns with their competitors”. Igloo also suggested that the costs of joining the scheme should be “on a per home basis rather than fixed amounts” and that a “lack of transparency” in the process of setting up the scheme had further disadvantaged smaller builders.289
135. Paul Smee, giving evidence to us in December 2011, said that there was already interest in the scheme from smaller lenders and that it was possible to “envisage situations where smaller builders, with perhaps strong regional presences, are talking to lenders with equally strong regional presences, which gives a local flavour to the scheme”.290 We consider it important that local builders have the opportunity to be involved in the scheme. We recommend that the Government bring forward changes to the NewBuy Guarantee to allow smaller builders to become fully involved in the scheme. In doing so, it should work closely with the Local Developers’ Forum and other smaller builders to ensure
284 “NewBuy, what you need to know before you go ahead”, www.cml.org.uk 285 Q 124 286 Q 125 287 Home Builders Federation, Guidance for home builders thinking of applying to join NewBuy, March 2012. 288 Ev w105 289 As above 290 Q 125
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that the changes address their key concerns. It should also promote opportunities for smaller builders and smaller lenders to work together.
‘Intermediate’ products 136. Our evidence suggests that one way of supporting the building of new homes is through the use of ‘intermediate’ products such as shared ownership and shared equity mortgages.291 The National Housing Federation stated that it had “recently called for Government to invest £1 billion in building shared ownership over the next three years”; this investment would deliver 66,000 homes, create jobs and bring some wider economic benefits.292
137. The Chartered Institute of Housing (CIH) suggested that shared ownership products “clearly have a role but suffer from a number of handicaps such as the often narrow gap between the costs of shared and full ownership, unfamiliarity by buyers, etc”. It added that in the past governments had “not succeeded in raising levels of shared ownership much above 100,000 nationally at any one time (given that units eventually move out of shared and into full ownership)”.293
Private sector models 138. We heard from a number of private sector organisations developing shared investment models, some of which involved investment from large financial institutions. David Toplas, Chief Executive of Mill Group, told us his organisation’s “co-investment” model was “seeking to bring long-term investment money to people so that they can buy homes through co-investment in the mainstream housing market”.294 Graeme Moran, Managing Director of Assettrust, said that his organisation was developing a “shared ownership version of right to buy, which is aimed at helping social rented tenants get on and meet their home ownership aspirations and purchase their existing social rented home”.295 We also heard from Sean Oldfield, the Chief Executive of Castle Trust; his organisation, subject to authorisation from the Financial Services Authority,296 planned to introduce a shared equity mortgage product alongside an investment product for savers through which the mortgages would be funded.297 We received written evidence about a number of further intermediate schemes.298
139. Castle Trust suggested to us that the Government “should make clear its strong support for privately financed shared equity for the housing market, as a complement to
291 In shared ownership schemes, the individual takes out a mortgage to buy a share of a house and pays rent on the remaining share (which is often owned by a housing association). In shared equity mortgage schemes, the mortgagor buys 100% of the home but funds part with a traditional mortgage and part with an equity mortgage. 292 Ev 154 293 Ev 111 294 Q 276 295 As above 296 Castle Trust indicated that it was “not yet open for business and has applied for but not yet received authorisation by the FSA to undertake regulated investment activities “,Q 275, footnote. 297 Ev 171–176 298 See, for example, Ev w61–63 [Nigel Grainge], Ev w95–97 [Gentoo Group].
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the Government’s own shared equity offerings”.299 Sean Oldfield told us that such “support, not the financial support, does provide a very real impetus to the ongoing growth of such solutions”.300 Mill Group expressed similar sentiments saying that in the absence of cash, “the State can have a significant influence in gaining traction for new models by declaring publicly that it can see merit in the concept and would like to see it in action”.301 In written evidence, David Toplas referred to the NewBuy Guarantee scheme and asked “that Government provide a similar financial encouragement to institutions to provide investment finance to enable consumers to buy homes and simultaneously initiate a new investment market for institutions”.302
140. Mr Shapps said: “I really like shared equity and shared ownership products”. However, he added that he felt that such products “suffer a little bit through complexity”. He added that there were “some very interesting ideas coming down the track that I will back to the hilt, assuming they do not require taxpayer subsidy”.303
141. There are benefits to investment in shared ownership schemes, which can help those people looking to get on the housing ladder, and can make an important contribution to new housing supply. They allow housing associations to recycle funding in that they receive a proportion of the price immediately on sale and further inflows as “staircasing” occurs. We have heard, however, concerns about the complexity of both shared ownership and shared equity mortgage products.
142. There is a case for the Government enabling the growth of private sector shared ownership and shared equity mortgage products, through, for example, a clearer regulatory framework. In giving its endorsement to such products, however, the Government should not be perceived as providing a guarantee. It therefore needs to be clear about its intentions.
143. We have also heard suggestions that the Government could go further by providing financial encouragement to private shared investment schemes. There may be some merit in introducing a version of the NewBuy Guarantee to underwrite investment in shared ownership and shared equity mortgage products as long as the individual risks are clearly recognised. We recommend that the Government bring forward proposals to establish such a scheme, making clear that it will only be provided if a number of steps are followed to make the product more transparent for the consumer.
Government land 144. We have established that the release of publicly-owned land has a role to play in supporting development,304 and have considered in particular the release of local authority land.305 Mr Shapps identified plans to build 100,000 homes on land currently owned by the
299 Ev 175 300 Q 282 301 Ev 183 302 Ev 184 303 Q 362 304 See above, para 7. 305 See above, paras 108–110.
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Government as one of the key measures in Laying the Foundations.306 He stated that “very good progress” had been made with this initiative and that he considered the Government to be “ahead of where we thought it might be by this stage”.307 He referred in particular to the “Build Now, Pay Later” initiative, through which developers could build on certain sites and pay for the land at a later date.308
145. Alan Benson of the Greater London Authority said that one of the challenges in releasing public land was a difference between land owned by departments and agencies with a housing objective and that owned by those “responsible for something very different indeed”. He explained:
If you are the Ministry of Defence and you are required to replace your missiles, and are given the option instead of handing over some land at a less-than-best-cost deal to build some homes, that is not a compelling case to make to the Ministry of Defence. They would rightly say back to you [...] that if you want to build housing, you should put the money into the housing budget and pay the Ministry of Defence for that land.309
Abigail Davies of the CIH suggested that in some cases an alternative to Build Now, Pay Later might be “some kind of joint venture model [...] to enable the public sector to keep a stake in it and to benefit from the uplift in that value”.310
146. Grainger plc said that it had established a partnership with the Defence Infrastructure Organisation (DIO) “to develop up to 4,250 houses on under-used military land” in Hampshire. Nick Jopling, Grainger’s Executive Director of Property, said that the partnership was intent on “maximising the value” of the DIO’s asset. Grainger was responsible for master-planning the site and putting infrastructure in place. When it was ready for sale to developers on the open market, Grainger would “take a small share of the receipt; the Government will get the vast majority of it”.311 By enhancing the value of the land before sale, partnerships of this kind could secure better value for taxpayers’ money.
147. We welcome the Government’s commitment to release land for development and the progress it has made so far in doing this. We support the Build Now, Pay Later initiative and recognise that it has an important role to play in stimulating development. We would also, however, encourage the Government to be mindful of other approaches to making land available—such as joint ventures or partnerships with developers—where these offer a better deal for the taxpayer.
Other models 148. The Building and Social Housing Foundation (BSHF) suggested that the “Government should investigate the barriers to adequate finance being available for a
306 See above, para 9 307 Q 354 308 Qq 356–7 309 Q 140 310 Q 67 311 Q 139
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diverse range of housing models”, including sweat equity, community land trusts, self build and housing cooperatives.312 It said that models such as these “account for only a fraction of the housing stock in the UK, unlike some other countries in Europe or North America where they are much larger, both in terms of total numbers and as proportions of the stock”.313 Jim Vine, Head of UK Housing Policy and Practice at BSHF, said that such models could make a significant impact given “the right following winds”.314 Andy Hull, Senior Fellow at the Institute for Public Policy Research, referred to community land trusts, saying that they had “worked okay in rural settings in this country so far, but we have not really pulled one off in an urban setting”. He explained: “it is notoriously difficult to upscale those sorts of models. Part of what we are exercised by here is scale”.315
Self/custom build housing 149. During our inquiry, we heard in particular about the potential of self or custom build housing, in which prospective home owners buy a plot of land and either build a house themselves or employ contractors to build it for them. We visited the city of Almere in the Netherlands, home to Europe’s largest self build project: since the project’s inception, 800 self build homes had been built on publicly-owned land reclaimed from the sea. The municipal authorities played a number of important roles, including designating plots, putting in place purchase arrangements, and providing roads and other infrastructure. They had taken a relaxed approach to regulating the design and construction of buildings; which had led to some of the homes having innovative designs. Nevertheless, they still enforced building regulations, including ones relating to safety and energy conservation. We heard that it was on average €50,000 cheaper to build a house than to buy one on the market: a number of residents had opted for modern system-build houses, which had enabled them to dramatically reduce the cost. We were also told that demand for plots had been high and that, so far, lenders had been willing to provide finance for self build. It was intimated to us that the Netherlands would be aiming to deliver 40,000 to 50,000 self build homes over five years; similar numbers per head of population in England could result in up to 150,000 self build homes being built over the same period.
150. Laying the Foundations included a section on what it described as “custom build” housing, which included the case study of the Almere project. It referred to “huge untapped potential”, pointing out that currently only one in ten homes were custom built, “a very low proportion by international standards”. It said that over 100,000 people were looking for plots to build on and added: “we know from recent market research that one in two people would consider building their own home if they could”. It also set out a number of steps the Government would take to support custom build, including making “up to £30 million available to support provision of short-term project finance to this sector on a repayable basis”.316 Giving evidence to us, Mr Shapps was very enthusiastic about self and custom build housing. He said that the self and custom build market had “accounted for
312 Ev 81 313 As above 314 Q 25 315 Q 26 316 Laying the Foundations, pp 14–15
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13,000 houses built last year”, making it the “nation’s biggest builder”. He said that it was the Government’s intention “to double that marketplace in the next 10 years”.317 We welcome Mr Shapps’s enthusiasm, but consider that the Government needs to assist further in addressing some of the barriers to self and custom build development.
151. The National Self Build Association (NaSBA) considered the “biggest hurdle” faced by self build projects to be “finding a suitable building plot”, although it noted that the Government was taking steps to assist, in particular through proposals in the draft National Planning Policy Framework requiring councils to assess demand for self build, and through the Homes and Communities Agency’s release of five large sites.318 BuildStore Financial Services, an organisation providing support to self builders, agreed that finding land was a major problem and referred in particular to the need to make “land available in the major conurbations”.319 It further noted that land accounted for a third or, in some cases, half of a self builder’s budget and suggested that “if land were to be offered at a reduced price as a means of assistance, this would have a substantial impact on the accessibility of self build housing”.320
152. The second major barrier in NaSBA’s view was the availability of finance. It said that mortgages were “still available for individuals hoping to build their own homes” but that they would “still need a sizeable deposit for the land and the construction cost (around 25% of the total is typical)”. It did not consider that incentives such as the NewBuy Guarantee would “ever be practical to help one-off self builders”.321 Paul Smee of the CML said that there was:
limited availability of self build mortgages among mainstream lenders. Where finance is available, there are often a number of conditions attached to it—for example, no lending against the first stage of the build or lending only up to the value of the part-build rather than against a projected valuation of the completed build. In addition, self build often requires specialist underwriting. This is a resource that, at this stage, cannot be justified by many lenders given the relatively low demand for self build finance coupled with its inherent risk.322
BuildStore said that the self build mortgage market was dominated by small regional building societies.323 It noted that the “tightening of lending criteria across the mortgage market has hit self funding harder, due to the majority of self builders needing to fund two mortgages simultaneously, for at least a part of the build period”.324 It considered that lenders would often “shy away from the self build lending market” because of the perceived risk that borrowers would not complete their projects when “in reality, that risk is very low, and the incidence of loss is minimal”. It had seen an average repossession rate of 0.46%
317 Q 364 318 Ev w101 319 Ev w111 320 As above 321 Ev w101 322 Ev 124 323 Ev w111 324 Ev w112
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since 1998, and the average percentage of mortgages in arrears between 2002 and 2008 had been 0.41%, compared to the CML average of 1.11%.325
153. We also heard about the possibility of self build development taking place at a larger scale. NaSBA referred to “groups of people trying to get a community self build project off the ground—say 10–15 families”, noting that they would have difficulty getting finance to buy a large plot. It suggested that the Government’s £30 million fund would be helpful for such groups and would “enable them to bid for sites (against the more nimble land buyers from the major housebuilders)”.326
154. On the potential of “volume self build”, Buildstore described proposals it was developing to enable individuals “to purchase land on larger sites specifically for self build”:
The model is very flexible and can be tailored to suit different types of people in different areas. Grouping individual builds together on larger sites removes the requirement for large scale development finance that has been so difficult to obtain in recent years, while creating significant numbers of new homes.327
It argued that such an approach could suit shared ownership and shared equity schemes, suggesting that a council could provide the land “at no initial charge” and the participant could “buy out their plot over an extended period of time via staircasing”.328 NaSBA stated that it would welcome projects similar to the one in Almere being established in the UK, but noted that they would “require a mind-shift from some people in the planning world”. It considered that the key challenge would be “finding a local authority with the vision and enterprise to give it ago”, although the initial cost of the land would also be an issue.329
155. We fully share the Government’s enthusiasm for self and custom build development, which provides a very different model for the delivery of owner-occupied homes. It enables homes to be built a lower cost and brings economic benefits to an area by creating opportunities for smaller builders and other local businesses. It already delivers significant numbers of new homes in England but does not come close to fulfilling its potential. We were impressed by the large scale project underway in Almere. A similar, high-profile scheme in England could help to kick-start a new enthusiasm for self build across the country. There are clearly a number of barriers, including land supply, the availability of mortgage finance, and planning constraints. We welcome the steps the Government has taken so far to address some of these issues. However, it will need to take further action if it is to succeed in its aim of doubling the self build marketplace in the next ten years. We recommend that the Government work with mortgage lenders to identify and overcome the barriers to lending to self builders. We further recommend that the Government establish a fund to incentivise local authorities to support pilot “volume self build” schemes by allocating sites and taking a flexible approach to planning (whilst ensuring continued compliance with energy and safety regulations). We see no reason
325 Ev w112 326 Ev w101 327 Ev w110 328 As above 329 Ev w101
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why the first pilots could not be up and running in two years’ time and ask that the Government report back to us in 2014.
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8 Conclusion
156. England is suffering from a major housing shortage and urgently needs to build more homes. There is currently not only a major shortfall between housing supply and housing demand, but also a significant backlog, and it is clear that finance is a major constraint. Traditional debt finance is in short supply, and alternatives will need to be found, both to provide a short term catalyst and to deliver longer term change. We welcome the publication of the Government’s housing strategy; many of the measures it sets out should provide a welcome boost for house building in the short to medium term. However, further action and a long term approach will be needed if we are to bring in enough finance to see sustainable change in housing supply.
157. There is clearly no panacea and a range of solutions is called for. We have, however, seen that there is plenty of scope for new approaches to housing finance. The Government has to look to new forms of investment and foster an environment in which innovation can be taken forward. It also has to be mindful that the private sector on its own cannot deliver all the homes the country needs. Housing associations have a vital role to play, and the Government has to take some important decisions if they are play their full part in future. Local authorities should be given greater freedom, to enable them to drive housing delivery within their areas. Moreover, the scaling-up of alternative models, such as self build, can help to plug the gap between supply and demand. We hope that, taken together, the package of measures we have set out will make a significant contribution to delivering the number of homes the country needs.
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Conclusions and recommendations
Private investment 1. We heard about a number of steps that public sector organisations can take to encourage institutional investment in the private rented sector, addressing the key barriers of scale, suitability of stock and yield. We recommend that all public bodies, both local and national, consider the potential for contributing their land alongside institutional finance to support build-to-let initiatives. We urge local authority pension funds to be alert to the benefits of investment in residential property, whilst ensuring transparency and security for their investors. We would hope that their doing so would pave the way for private funds also to invest in residential property. Finally, we encourage local authorities to consider taking a flexible approach to affordable housing requirements in planning obligations on a case-by-case basis, where this will help to stimulate build-to-let investment and will not be to the detriment of the wider housing needs of the area. (Paragraph 22)
2. Housing associations should play a role in attracting institutional equity investment, either by expanding into market renting and providing the economies of scale required by investors or by using finance from institutions to bring investment into social rented housing. We encourage housing associations to explore such opportunities and to establish a dialogue with potential investors. (Paragraph 26)
Real Estate Investment Trusts (REITs) 3. We recommend that the Government put in place measures to address concerns about the distinction between trading and investment specifically in the context of residential REITs. We further recommend that the Government allow the creation of private, unlisted residential REITs. (Paragraph 32)
Self Invested Personal Pensions 4. Self Invested Personal Pensions could provide another source of finance for rented housing. We recommend that the Government look in detail at the contribution SIPPs could make and the risks and benefits for those investing in SIPPs. If satisfied about these risks and benefits, it should bring forward proposals to facilitate their investment in residential property. (Paragraph 34)
Housing Investment Fund/Housing Investment Bank 5. We support the establishment of a pilot housing investment fund run by housing associations, and recommend that, in discussions with the National Housing Federation, the Government explore how it can give its backing. The pilot should consider the viability of a fund, its ability to attract investment, and any risks to the Treasury arising from Government support. Subject to the success of the pilot, the fund could be increased in scale. We further recommend that the Government work
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with the Confederation of Cooperative Housing on the Confederation’s proposals for an investment fund. (Paragraph 40)
6. We consider that there is merit in the suggestion that a national housing investment bank be established. In other European countries such banks have proved effective at channelling investment into new housing development. The work already underway to create a Green Investment Bank offers a useful opportunity; there is a clear case for allowing this bank to invest in housing as well as green infrastructure. We recommend that the Government consult on proposals for the extension of the Green Investment Bank’s remit to include the funding of new housing and, potentially, of wider infrastructure projects. (Paragraph 41)
Private Rented Sector 7. We recommend that the Government bring forward a set of proposals to simplify the tax and regulatory structures that apply to private landlords. These proposals should aim to create an environment in which small private landlords are encouraged to expand their portfolios and invest in new build housing. (Paragraph 46)
Affordable Housing Delivery 8. It is important that local authorities are fully signed up to the delivery of the Affordable Homes Programme within their areas. The Homes and Communities Agency should work with councils to ensure that any concerns they may have, for instance about the affordability of rents, are addressed. (Paragraph 50)
9. We recommend that the Government, before the end of 2012, bring forward proposals for delivery of affordable housing post 2015. These proposals should recognise the need for housing available at both “social” and “affordable” rents, each with a separate allocation system. They should aim for a rebalancing of subsidy arrangements away from housing benefit and back towards “bricks and mortar”; this would give rise to a number of immediate problems which the Government would need to address. Finally, the proposals should consider how housing associations can be encouraged to invest in new housing without stretching their capacity to the extent that they do under the Affordable Rent model. (Paragraph 60)
Section 106 Agreements 10. We recommend that the Government, at the earliest opportunity, clarify the relationship between the Community Infrastructure Levy and section 106 agreements, and how together they can be used to maximise affordable housing delivery. It should take care to ensure that the introduction of CIL does not lead to a reduction in the number of affordable homes delivered through contributions from developers. (Paragraph 66)
11. We recommend that the Government leave local authorities to decide whether or not to reopen section 106 agreements in cases where development has slowed down or stalled. (Paragraph 67)
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Direct Payments 12. We remain concerned about the potential impact of direct payment arrangements on the finances of social housing providers. There is a clear risk that these arrangements will have a detrimental effect on providers’ capacity to invest in new housing supply. They could also create uncertainty amongst those providing finance, leading to increases in the cost of borrowing. We welcome the Government’s commitment to introduce demonstration projects to consider the issue in more detail. We recommend that the Government set out clear criteria by which the success of these projects will be judged, and that it fully involve social housing providers and lenders in the process. We further recommend that the Government only proceed to direct payment to social tenants if and when any issues identified by the pilots have been fully resolved. (Paragraph 70)
Housing Associations 13. We encourage housing associations—individually or collaboratively—to consider the potential of retail bonds which, as well as raising finance, could prove a useful way of enabling people to invest in their local community. There needs to be a clear regulatory framework covering retail bonds both to address any risks to housing association balance sheets and to ensure that the consumer is properly protected. (Paragraph 73)
14. We encourage housing associations to enter into equity sharing arrangements with local authorities and developers where this can contribute to the building of new homes. It is also important that financial innovation does not become the preserve of the larger housing associations. Smaller housing associations should consider entering into smaller scale joint ventures and also raising finance by working together or using intermediaries to generate scale. The Government should foster an environment in which they can do this. (Paragraph 86)
15. We recommend that the Government consult on proposals for the future financing of housing associations. This consultation should invite views on the treatment of the historic grant on housing association balance sheets. The outcomes of the consultation should be used to inform the Government’s proposals on the future delivery of affordable housing. The Government must also ensure that appropriate regulation is central to its proposals. (Paragraph 87)
Local Authority Borrowing 16. We recommend that the Government lift the cap on local authorities’ borrowing for housing, and allow councils to borrow in accordance with the Prudential Code. We are also concerned at the Government’s warning that it will “take action” if public borrowing increases as a result of Housing Revenue Account reform. It is important that it does not place any further constraints upon local authority borrowing for housing. The cap is already unnecessary, and further borrowing restrictions would have a detrimental impact upon the contribution councils can make to new housing supply. (Paragraph 93)
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17. We are disappointed that the Minister has ruled out allowing local authorities to pool or swap Housing Revenue Account borrowing headroom. Such arrangements could help to make best use of councils’ borrowing capacity, enabling more homes to be built. In our experience, the Government is usually enthusiastic about local authorities collaborating, sharing services and pooling resources to achieve better value for money; we consider that it should take a similar attitude to joint working on housing finance. We recommend that the Government consult on proposals to enable local authorities to ‘trade’, swap and pool borrowing headroom. This should be subject to councils’ agreeing that any borrowing under these arrangements will still be in accordance with the Prudential Code. (Paragraph 96)
18. We consider that Arm’s Length Management Organisations should be free to adopt one of the new ownership models, subject to approval from the council and tenants. As well as promoting the involvement of tenants in the management of their housing, these models could also enable ALMOs to raise additional finance for the building of new homes (although any borrowing should continue to be affordable and sustainable). We are encouraged by reports that Gloucester City Homes will be consulting its residents on proposals to establish a ‘community owned, council owned’ organisation. We recommend that the Government give its support to those ALMOs wishing to adopt the new models, which would enable them to borrow prudentially to build more homes. (Paragraph 101)
19. We recommend that the Government thoroughly examine a move to the General Government Financial Deficit rules and then consult on proposals. (Paragraph 103)
20. The bond markets could offer local authorities an alternative source of finance from the Public Works Loan Board. We welcome the Local Government Association’s work to explore the possible establishment of a financial institution to issue bonds on behalf of councils. There are also good arguments in favour of local authorities issuing retail bonds to raise finance for housing: as well as potentially giving more authorities access to the bond market, they could also enable people to invest their money in a way that brings social benefits to their local area. We recommend that the Government work with local government to enable councils to raise finance through the issuance of retail bonds; in doing so, it should establish whether there are any current restrictions on bond finance that can be eased. (Paragraph 106)
Local Authority Land 21. We urge local authorities and developers to work together wherever possible to make land available for development in a way that meets the needs of local people. We encourage councils to enter into partnerships with developers, and to maintain equity involvement in the development to secure best value for the taxpayer. (Paragraph 107)
22. The provision of local authority land can make a contribution to the financing of new housing supply by helping to reduce the risks of development and to make it viable for the private sector developer and social landlords. It can also help ensure that the maximum number of affordable homes is delivered. We encourage all councils to consider how they can release land to support the delivery of new homes,
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whilst securing full value from the development. There are a variety of ways to do this, in line with the localism agenda. (Paragraph 110)
The Right to Buy 23. We recommend that the Government ensure “like for like” replacement of homes sold under Right to Buy, so that each socially rented property is replaced by a new home of the same type for social rent. In order to achieve this, we further recommend that the Government commit to making additional resources available in the event that “like-for-like” replacement cannot be delivered under the proposed levels of discount. (Paragraph 122)
24. We recommend that the Government reconsider its decision not to opt for a local model for the replacement of additional homes sold under the new Right to Buy arrangements. We further recommend that the Government grant exemptions from increased discounts to places such as rural villages and other areas where social housing is limited and cannot easily be replaced. These places could otherwise be left with no social housing stock if there is significantly increased take-up of the Right to Buy. (Paragraph 123)
25. Some councils will be unable to meet the Government’s requirement that Right to Buy receipts only fund 30% of the cost of the replacement homes, and will therefore not have the option of local delivery. This is especially true for those authorities with limited borrowing headroom, either because they have taken on debt under the Housing Revenue Account reform or because, often through no fault of their current administration, they are burdened with historic debt. The Government must ensure that these authorities are not precluded by their debt from replacing properties sold under the Right to Buy. (Paragraph 124)
26. In the longer term, in line with the spirit of localism and moves to self-financing, we recommend that the Government give councils greater freedom to decide on the best housing solutions for their communities. The Government should consult on allowing local authorities to apply to the Government for an exemption to the Right to Buy where the council can demonstrate that housing is limited and cannot easily be replaced. (Paragraph 125)
27. We recommend that the Government work with housing associations wishing to introduce the Right to Buy to explore how their proposals might work in practice. If it is satisfied about levels of risk and value-for-money for the taxpayer, it should allow housing associations to run pilot projects. Any introduction of the Right to Buy should be a matter for individual housing associations. (Paragraph 128)
Local Authorities: Conclusion 28. We have seen that local authorities, working in partnership, have the potential to make a significant contribution to the financing of new housing supply. There is, however, a risk that local government will not be able to make the most of this potential because of constraints placed upon it by central government. The moves towards self-financing under Housing Revenue Account reform are positive and
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could significantly increase the finance available for housing supply. However, the cap upon borrowing, the refusal to allow councils to share headroom, and the centrally-imposed Right to Buy proposals will all place restrictions on councils’ ability to finance the building of new homes. The local government sector should be trusted to manage its own finances in accordance with the Prudential Code. We urge the Government to give councils the freedoms they need to provide finance for new housing supply. (Paragraph 129)
NewBuy Guarantee 29. We recommend that the Government review the NewBuy Guarantee after the first year of its operation, to assess its impact upon mortgage finance in other parts of the market. It should also consider how many properties sold under the scheme have fallen into negative equity, and the impact this has had on buyers. (Paragraph 132)
30. We recommend that the Government bring forward changes to the NewBuy Guarantee to allow smaller builders to become fully involved in the scheme. In doing so, it should work closely with the Local Developers’ Forum and other smaller builders to ensure that the changes address their key concerns. It should also promote opportunities for smaller builders and smaller lenders to work together. (Paragraph 135)
“Intermediate” Products 31. There may be some merit in introducing a version of the NewBuy Guarantee to underwrite investment in shared ownership and shared equity mortgage products as long as the individual risks are clearly recognised. We recommend that the Government bring forward proposals to establish such a scheme, making clear that it will only be provided if a number of steps are followed to make the product more transparent for the consumer. (Paragraph 143)
Public Land 32. We welcome the Government’s commitment to release land for development and the progress it has made so far in doing this. We support the Build Now, Pay Later initiative and recognise that it has an important role to play in stimulating development. We would also, however, encourage the Government to be mindful of other approaches to making land available—such as joint ventures or partnerships with developers—where these offer a better deal for the taxpayer. (Paragraph 147)
Self/Custom Build 33. We recommend that the Government work with mortgage lenders to identify and overcome the barriers to lending to self builders. We further recommend that the Government establish a fund to incentivise local authorities to support pilot “volume self build” schemes by allocating sites and taking a flexible approach to planning (whilst ensuring continued compliance with energy and safety regulations). We see
74 Financing of new housing supply
no reason why the first pilots could not be up and running in two years’ time and ask that the Government report back to us in 2014. (Paragraph 155)
Financing of new housing supply 75
Formal Minutes
Monday 23 April 2012
Members present:
Mr Clive Betts, in the Chair
Heidi Alexander George Hollingbery Bob Blackman James Morris Simon Danczuk Mark Pawsey Mr David Heyes Heather Wheeler
Draft Report (Financing of New Housing Supply), proposed by the Chair, brought up and read.
Ordered, That the Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 157 read and agreed to.
Summary agreed to.
Resolved, That the Report be the Eleventh Report of the Committee to the House.
Ordered, That the Chair make the Report to the House.
Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.
Written evidence was ordered to be reported to the House for printing with the Report, together with written evidence reported and ordered to be published on 31 October, 9 November, 21 November, 28 November, 14 December 2011, 16 January, 30 January and 27 February 2012.
[Adjourned till Monday 30 April at 4.00 p.m.
76 Financing of new housing supply
Witnesses
Monday 21 November 2011 Page
Andy Hull, Senior Research Fellow, Institute for Public Policy Research, Peter Williams, Director, Cambridge Centre for Housing and Planning Research, Jim Vine, Head of Programme, UK Housing Policy and Practice, Building and Social Housing Foundation and Roger Harding, Head of Policy, Research and Public Affairs, Shelter Ev 1
John Stewart, Director of Economic Affairs, Home Builders Federation, Cllr Clyde Loakes, Vice Chair, Environment and Housing Board, Local Government Association, Ian Fletcher, Director of Policy (Real Estate), British Property Federation and Abigail Davies, Assistant Director of Policy and Practice, Chartered Institute of Housing Ev 12
Monday 28 November 2011
Nick Jopling, Executive Director of Property, Grainger plc, Paul Smee, Director-General, Council of Mortgage Lenders and Alan Benson, Head of Housing, Greater London Authority Ev 22
Monday 19 December 2011
Councillor Paul Andrews, Member, Planning and Housing Commission, Association of Greater Manchester Authorities, Mayor Sir Steve Bullock, Housing Portfolio Holder, London Councils, David Edwards, Executive Director, Housing and Regeneration, Oxford City Council and Chloe Fletcher, Policy Manager, National Federation of ALMOs Ev 32
Mark Butterworth, Director, Residential Landlords’ Association and Nigel Terrington, Chief Executive, Paragon Group Ev 40
David Orr, Chief Executive, National Housing Federation, Mark Henderson, Chief Executive, Home Group, Steve Binks, Group Director, Finance and IT, Places for People Group and Waqar Ahmed, Group Director of Finance, London and Quadrant Group Ev 44
Monday 30 January 2012
Sean Oldfield, Chief Executive, Castle Trust, Graeme Moran, Managing Director (Portfolio & Acquisitions), Assettrust, David Toplas, Chief Executive, Mill Group and Peter Mahoney, Chief Executive Officer, R55 Group Ev 53
Pat Ritchie, Chief Executive and Richard Hill, Deputy Chief Executive, Homes and Communities Agency Ev 57
Rt Hon Grant Shapps MP, Minister for Housing and Local Government, Department for Communities and Local Government Ev 62
Financing of new housing supply 77
List of printed written evidence
Assettrust Ev 177 Association of Greater Manchester Authorities Evs 127, 131 British Property Federation Evs 101, 106 Building and social Housing Foundation Ev 77 Cambridge Centre for Housing and Planning Research Ev 75 Castle Trust Ev 171 Chartered Institute of Housing Ev 108 Council of Mortgage Lenders Evs 121, 123, 124 Department for Communities and Local Government Evs 187, 193, 196, 197 Grainger plc Evs 116, 120 Greater London Authority Ev 124 Home Builders Federation Ev 89 Home Group Ev 158 Institute for Public Policy Research Ev 74 Local Government Association Evs 91, 96, 100 London and Quadrant Group Ev 169 London Councils Ev 133 Mill Group Evs 179, 184 National Federation of ALMOs Ev 138 National Housing Federation Ev 151 Oxford City Council Ev 136 Paragon Group Ev 149 Places for People Group Ev 166 R55 Group Ev 186 Residential Landlords Association Evs 141, 149 Shelter Ev 83
List of additional written evidence
(published in Volume II on the Committee’s website www.parliament.uk/clgcom)
Birmingham City Council Ev w12 BuildStore Financial Services Ev w106 Chartered Institute of Public Finance and Accountancy Ev w102 Coalition for Economic Justice (CEJ) Ev w1 Confederation of Co-operative Housing Ev w20 Professors Tony Crook and Peter Kemp Ev w50 Professors Tony Crook and Christine Whitehead, Drs Ed Ferrari and Gemma Burgess and Ms Sarah Monk Ev w63 East 7 Ev w76 G15 Ev w34
78 Financing of new housing supply
Genesis Housing Association Ev w80 Gentoo Group Ev w95 Nigel Grainge RIBA Ev w61 Hackney Council Ev w56 Highbury Group on Housing Delivery Ev w46 David Holliday Ev w1 Hometrack Ev w91 The Housing Forum Ev w10 Igloo Regeneration Ev w104 Dr Tim Leunig Ev w89 London Borough of Newham Ev w73 Newark and Sherwood Homes Ltd Ev w3 Moat Ev w6 Midland Heart Ev w7 National Association of Estate Agents and Association of Residential Letting Agents Ev w22 National Self Build Association Ev w100 New Local Government Network Ev w113 Northampton Borough Council Ev w19 Northern Housing Consortium and North West Housing Forum Ev w26 PlaceShapers Ev w53 Regenda Group Ev w45 Resolution Foundation Ev w88 Riverside Ev w29 Scottish Government Ev w83 Southwark Council Ev w40 Tenant Services Authority (TSA): the social housing regulator Ev w97 Waterloo Housing Group Ev w35 Westminster City Council Ev w24
Financing of new housing supply 79
List of Reports from the Committee during the current Parliament
The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.
Session 2010–12 First Special Report Beyond Decent Homes: government response to the HC 746 Committee’s Fourth Report of Session 2009–10 First Report Local Authority Publications HC 666 (HC 834) Second Report Abolition of Regional Spatial Strategies: a planning HC 517 (CM 8103) vacuum? Third Report Localism HC 547 (CM 8183) Fourth Report Audit and inspection of local authorities HC 763 (CM 8209) Fifth Report Localisation issues in welfare reform HC 1406 (CM 8272) Sixth Report Regeneration HC 1014 (CM 8264) Seventh Report Pre-appointment hearing for the Government’s HC 1612 preferred nominee for Chair of the Homes and Communities Agency Regulation Committee Eighth Report The National Planning Policy Framework HC 1526 (CM 8322) Ninth Report Taking forward Community Budgets HC 1750 Tenth Report Building regulations applying to electrical and gas HC 1851 installation and repairs in dwellings
Communities and Local Government Committee: Evidence Ev 1
Oral evidence
Taken before the Communities and Local Government Committee on Monday 21 November 2011
Members present: Mr Clive Betts (Chair)
Heidi Alexander George Hollingbery Bob Blackman David Heyes Simon Danczuk James Morris Bill Esterson Mark Pawsey Stephen Gilbert Heather Wheeler ______
Examination of Witnesses
Witnesses: Andy Hull, Senior Research Fellow, Institute for Public Policy Research, Peter Williams, Director, Cambridge Centre for Housing and Planning Research, Jim Vine, Head of Programme, UK Housing Policy and Practice, Building and Social Housing Foundation, and Roger Harding, Head of Policy, Research and Public Affairs, Shelter, gave evidence.
Chair: Thank you very much for coming. Welcome households. We must not forget that. I think it is to the first evidence session in our inquiry into the probably to be welcomed that, in the strategy Financing of New Housing Supply. Thank you for the published today, the Government seems to be written evidence you have so far provided and for indicating that it acknowledges that housing coming this afternoon and being early enough for us undersupply is an issue. to start a little bit early, which is always helpful. Could Andy Hull: I think you will all know from your you just begin by indicating who you are and the surgeries that there are some fairly acute, immediate organisation that you represent? short-term pressures on housing, but there is a chronic Peter Williams: I am Peter Williams, director of the crisis underway as well. It affects all the different Cambridge Centre for Housing and Planning sectors. Social housing has been residualised; Research. meanwhile, owner-occupation is becoming Jim Vine: I am Jim Vine, from the Building and increasingly unaffordable unless you have access to Social Housing Foundation. the bank of mum and dad to get hold of the deposit, Andy Hull: I am Andy Hull, a senior research fellow so people are being funnelled into a private rented at the Institute for Public Policy Research. sector that is, in large part, unprofessional and Roger Harding: I am Roger Harding, Head of Policy, insecure and often indecent. Our calculations suggest Research and Public Affairs at Shelter, the homeless that, all other things being equal, by 2025 we will be and housing charity. 750,000 homes short of what we need as a country. Chair: If you do happen to agree with something Roger Harding: It is worth stating that, because this is somebody else has said, there is no need for all the a long-term problem that has in effect been potentially rest of you to repeat it. We will make more progress created by successive Governments, or at least and will cover more ground if that does not happen. successive Governments have dropped the ball on the George Hollingbery: May I draw Members’ attention issue of housing, the onus is on all parties to come to my entry in the Register of Members’ Interests? together to start looking at solutions for the long term. It is also important to state that one of the problems Q1 Chair: Myself and Bill Esterson also have items that we have with housing is that high demand and registered there and I draw attention to them for the high prices have not fed through into supply in the public record. way that you would tend to see in other markets. It is How big a housing problem does the country face? Is clear that something is fundamentally broken in the it a here-and-now problem, is it created by the market. It is also clear that this problem was occurring immediate economic problems that the country is before the credit crunch. It is important that we do facing, or is there a real long-term challenge that we not get caught up in some of the short-term pressures need to address? unnecessarily and feel that just by working on those Peter Williams: There is a very, very, very substantial we will address the longer-term problems, too. and immediate problem and an ongoing problem in terms of scale, structure of the market and Q2 Chair: As things stand at present, including the Government policy, so yes is the answer to all of the announcement today, how do you see the supply of questions you have raised. There are serious issues new housing going up to the end of the Spending confronting the UK, with huge implications for social Review in 2015? Do you think the Government will mobility, economic development and opportunity. hit its target of 170,000 affordable new homes in that Jim Vine: I would concur with that. As well as the period? economic and social issues, there is the undersupply Peter Williams: It has a possibility of meeting that of housing that we face, which also affects individual target of 170,000 new homes. The affordable rent Ev 2 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding regime will clearly have some impact. A number of the market is not getting that through to supply at the other initiatives announced today will lever in new the moment. supply of affordable housing. There is a major On finance, because we are not going to get to that question about whether overall housing supply will supply in this Parliament, we will have further pent- ramp up as quickly as the Government imagines. up demand, which will mean that many fewer people Then, as Roger and others have touched on, there is a are becoming home owners—home ownership has huge backlog that has yet to be dealt with. If we are been decreasing since 2003 and that is likely to talking of 230,000 new households per annum, continue. Social house building will not increase 170,000 affordable homes over that period is only a dramatically, so not too many people are going to end partial contribution to a long, substantial backlog and up there. That means that many more people are going ongoing requirement. We are struggling to see how to end up in the private rented sector. The number of the numbers that are likely to come through will families living in that sector has increased by 77% in address some of the problems. That relates back to the last two years, and it is not a sector that is well affordability in the home ownership sector, access to suited to young families: it is not a particularly stable the expanded affordable rented sector as well as foundation for their family home and, unfortunately, provision of social rented housing of a sufficient scale. people face unpredictable rent rises. Although it is Andy Hull: We have said we need 250,000 new welcome that there is a chapter on the private rented homes each year, moving forward through the next 15 sector in today’s strategy, it is not particularly years, to avoid that 750,000 gap I talked about. For welcome that there is not more of a discussion about the last 20 years the average has been 160,000 new how it can better be fixed to work for families. homes each year, and last year it was 106,000—the Jim Vine: In your question you referred to the lowest since World War Two—so it is not looking affordable housing target. It is notable that the rosy; but even if planning reform works and even if Government will not lay out a target for housing you take into account public land release and so on, building overall, which would be okay if the strategy there is another side to this coin, which is about that they presented had some sort of strategic vision whether we can get the developers to develop the sort against which house building or the supply of housing of houses we need in the places we need them. I think could be measured in broader terms. The closest the today’s housing strategy is something of a bonanza strategy gets to that is in referring to stability in the housing market, although I would be looking first for for those developers, with “Build Now, Pay Later” a bit more indication about what stability means. It is giving them land, “Get Britain Building” giving them not precise about whether that means stable house money, and the mortgage indemnity scheme prices or steady increase in house prices. If the underwriting some of the house-buying borrowing Government set a target, “We won’t tell you how that they rely on, but there are big question marks many homes will be built each year, but we do want about whether they will be able to deliver their side to see house prices steady in the long run,” that would of the deal, or whether they are going to want to meet be an acceptable alternative. their side of the bargain. Peter Williams: The new constraint in all of what has Roger Harding: Although I will not make predictions been said is the shortfall that we will face in terms of about what will be built in the next few years, it is mortgage finance. There is clearly a capacity very clear that that will not meet the demand that we constraint in the mortgage sector now and going face, which is around the 250,000 mark per year. We forward for at least five years, and possibly longer, are going to fall substantially below that; we are only which really has a big implication for the shape of UK building about 100,000 a year at the moment. housing provision. Therefore, although today’s strategy is welcome in the profile that the Prime Minister and the Deputy Prime Q3 George Hollingbery: You just said, I think, this Minister have given the issue and some of the is about housing finance rather than anything else, but stimulus that they have brought forward in the short I think we need some context. If we are going to make term, it is clear to us at Shelter that it is a not a long- real progress towards building the number of houses term strategy for how we will get to the 240,000 to that we want, where does the problem lie? Is it 250,000 homes per annum mark. finance? Can you split it between public and private? It is important to consider in this area that there is a Are there other factors out there we need to clear role for the state, in overall principle terms, understand before we can get on with the idea of because the private market has not delivered over the raising finance for housing? post-war period, particularly. Private construction has Roger Harding: Finance is clearly an important been remarkably stable and very consistent during the aspect, because in a typical free, well functioning whole post-war period, despite widely differing market you would expect the rising prices and rising financial arrangements and planning rules. The big demand that we have seen to feed through into greater difference has been state investment during that supply, and that has just not happened. We need to period, which ramped up the figure to more than unpick that a lot further, so it is good that the 250,000. Clearly we are in different economic Committee is looking at that. Other factors should be circumstances now, so some of the levers that we used considered as well, such as the structure of the before we may not be able to use now and in the construction market and the land supply market. future; nonetheless, we need to look at how the state Over the longer term, it is key that the Government can intervene in this market to ensure that we can set out how that finance will come on stream and channel investment into supply, because it is clear that consider the state’s facilitation of it, because the Communities and Local Government Committee: Evidence Ev 3
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding market has not delivered. It is clear that public there are examples in Manchester, for instance, of financing will not get to the levels that are required local authorities teaming up to spread some of that over the next 10 years, unfortunately, but the state can risk. We found, and detailed in the report, a few do many things to facilitate private investment getting emerging precedents of local authorities beginning to to the housing supply that we need. Those look to invest their pension funds in new-build mechanisms are used in many other European housing. countries—for example, many allow their local Peter Williams: We should not imagine that authorities to borrow on the back of potential capital institutional investment is going to be the solution for or houses that they have to generate new supply. There the private rented sector. It will always be a sector are also examples in many European countries of dominated by small landlords, but it can be much national housing banks being used, treating housing more significant than it is—of course, historically, in as a very different asset class, because it provides both the 1930s to the 1960s, it was quite significant. a capital unit and a very predictable long-term supply Institutional investment has its place and the issue of revenue. It is something far more secure to base now is partly about how we get there. It is unfortunate lending on the back of than just typical Government that the Government has announced yet another spending, so it is something that is treated differently review. Institutional investors will wonder, “When in tax and accounting rules on the European level. We does review cease and when does action actually take really need to consider that. place?” There are a number of individual elements Chair: We will probably move on to some of these that investors and others in the Treasury review have issues in later questions. asked for, which the Government really could Peter Williams: Can I just add a point to that? We all respond to. struggle to understand why housing supply does not respond more effectively than it does. There is clearly Q7 Mark Pawsey: What do you think the a package of issues around that, but it is extraordinary Government could do to encourage the institutions? how the private sector output has remained Peter Williams: There are loads of little detailed remarkably constant, all through the cycles, without points. There is no single silver bullet. responding to what normal markets would respond to. Q8 Mark Pawsey: Give us a few. Q4 Mark Pawsey: I should like to ask about the Peter Williams: The trading requirement, for example, potential for bringing institutional investment into on institutional investment—you cannot sell more housing. The IPPR have drawn attention to the fact than 25% of the stock, I think. Some people who want that there is a pot of money in the City on the one to invest in that want the capacity to turn over the hand, going into all sorts of types of investment but stock if they need to. These restrictions on businesses not housing; and on the other hand, Mr Harding, you that are set up to do the job that people want them to just referred to rising demand and rising prices. Why do, but need the freedom to do it in the way that they have institutions, historically, not put money into choose, conflict with the view that if this private housing? rented sector is providing homes for a large number Andy Hull: Basically, they do not think that they can of people, we have to control that tendency. The get the right yield and they think it is too high hassle, difference here is that institutional landlords, we hope, which is why in our report that we sent to this would behave in different ways than maybe landlords Committee we suggested that one source of that are only there to trade. institutional investment that might work would be Roger Harding: As Peter says, it is important to keep local authority pension funds, because they have in the potential scale of institutional investment in check. excess of £150 billion worth of funds, because they The Rugg review has commented on the private can be quite patient to see the return over time and rented sector and a Treasury review also looked into because they have councillors on their management this last year. Looking across Europe, even in boards who should understand, as MPs do through countries that have managed to get a lot of private their monthly surgeries, what a crisis we are facing in institutional investment on stream, those landlords terms of housing need. still do not become majority landlords. Even in Germany, where a lot of institutional money has been Q5 Mark Pawsey: Should that be an altruistic channelled into the private rented sector using a lot of objective for those pension funds, or should they state incentives, still just over 60% of private consider it as a best investment return policy? landlords are individuals and couples. Andy Hull: I do not think altruism will work here; it needs to be hard-headed and it is right that it should Q9 Mark Pawsey: Are you suggesting that this is be. something that is not going to happen? Roger Harding: It can be an important part of the Q6 Mark Pawsey: If it is hard-headed for local mix, but we should not overlook the other chunk of authority pension funds, why should it not be hard- the sector, which is individuals and couples. As Julie headed for others? Rugg suggested, we should look at ways to enable Andy Hull: It should be. There are ways around some them to increase their quite small portfolios into of the problems that are often posed in terms of local medium-sized portfolios. In Europe, there are often authorities getting involved with their pension funds: interesting tax breaks for landlords staying in the people would often say, “You can’t afford to invest in sector—for example, they can have depreciation your own back yard with your own pension fund,” but allowances against the income they get from rent. Ev 4 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
They also get allowances whereby they do not have to Capital Grant Fund and they have three years to spend pay capital gains tax provided they have had a single it. For lenders, though, evidence of public sector funds property in the sector for more than 15 years, which sitting behind their loan to housing associations is quite encourages landlords to take a long-term view and important. Of course, the issue then of taking it away therefore tends to feed into landlords giving more of and converting it into equity does have implications a stable tenancy to tenants. about the mainstream lending—the debt lending—to the sector. Q10 Mark Pawsey: Shelter have reported that 70% of Conversion from grant to equity clearly has some landlords only have one property. Would you like momentum, but it carries with it certain pressures, not existing landlords to increase their portfolios and take least of which is that you will probably need higher it more seriously and become bigger holders of private rents to ensure that there is a premium payment to the rented property? investor. Government could oversee higher rents Roger Harding: Potentially, yes, absolutely. There is through the affordable rent regime, with a premium certainly no guarantee that a bigger landlord is a payment to the Government as an equity investor, the necessarily a better landlord—there are plenty of question then is: as equity investor, what implications individuals who are landlords who are very good does that have for governance of the structure? Then the landlords indeed—but we would like to see a lot of Government could sell its equity holding to the private landlords with small portfolios become more sector, release the cash that is inside that equity professional in their business dealings. investment and, in theory, put it back into the social rented sector to generate new development. That new Q11 Mark Pawsey: You would like to see the development could then, of course, add to the capacity accidental landlord become a deliberate landlord? of the housing association, which would then itself Roger Harding: Absolutely, yes. Or even if you do underpin some of the private sector borrowing that has become an accidental landlord, you then very much been made against this sector. consider yourself to be a landlord and to be a business There is a virtuous circle here, in some degree, but it and to run your operation as a business, which is not does require Government, ultimately, to pass the cash necessarily the case at the moment. realised back to the sector as one of the options. That 1 Jim Vine: Another recent review into this conducted then raises the question: where would a private rented by academics at the LSE, among others, identified one sector investor sit in the governance of the housing country—Switzerland, I believe—that did achieve the association and what long-term implications would a goal of having institutional investors as the largest hybrid sector with public and private investors involved sector in the PRS. I am happy to pass on a copy of that have for the shaping of the sector? It probably would paper afterwards, if it helps. I think one of the factors begin to generate more competitive tensions and more there was legislation requiring single ownership of normal plc-like behaviour, with mergers and takeovers, residential blocks, avoiding things like leasehold which many people would argue could be positive, But enfranchisement, because that makes management I think there is unknown territory here with regard to easier, but it also obviously favours larger-scale institutions taking on that lease. how the conversion of grant to equity could ultimately play out. Q12 George Hollingbery: It has been mentioned that huge amounts of Government grant are capitalised in Q13 George Hollingbery: Can we just have a little bit the property market—£40 billion or so. Could you more on that issue about the covenant—the reduction in enlarge on how that £40 billion could be used and the strength of the covenant of the borrower by leveraged to provide more housing? equitisation of the value in housing? Peter Williams: The £40 billion of grants? This is a Peter Williams: It is simply that there is something like complicated area, without doubt, and is an ongoing £60 billion of private finance sitting behind housing debate. It sits as a charge behind private sector lending association finance. It is worth reminding ourselves that and in theory Government has the right to reclaim it that is where a lot of institutional investment in renting and, indeed, if you sell a property with grant, the grant has already taken place. Something like £15 billion of returns to the housing association under the Recycled that investment is from institutions into the social rented sector. Back on the previous question, if we 1 Towards a sustainable private sector edited by Kath Scanlon divert lots of activity of institutions in the private rented and Ben Kochan, www.lse.ac.uk/geographyAndEnvironment/research/London/ sector, we do not want them extricating themselves research. from the social rented sector. That sets as a comfort, in The witness added: “the publication identifies that two ways. Government has its own money in there, Switzerland has a majority of housing being private rented which shows that it is committed to the sector and in (“about 56%”, p19) but does not say that institutional ownership of private rented housing is in the majority in the some senses it stops Government tinkering with the country. It does note that “pension funds play a particularly sector to the extent that it might threaten its own important role because they are required to hold real estate investments, so it is seen as reassurance to the lender, as part of their portfolios, and private rental apartment buildings are a popular asset class for pension fund as well as the fact that the lender has first charge and managers.” Government has second charge. The requirement that I mentioned on multi-unit buildings remaining in single ownership is or has been present in Q14 George Hollingbery: As you were addressing Denmark, Sweden and Switzerland, and in Denmark and Switzerland they can only be converted into co-operative the previous question, can I just ask other members of dwellings or remain privately rented (p37). the panel about liquidity? Communities and Local Government Committee: Evidence Ev 5
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
Roger Harding: It is sensible to look at all the options Q18 Bill Esterson: Between you, you have raised a here, because a lot of Residential Social Landlords are number of issues already: affordability of rents; lack of quite well leveraged at the moment. The signals coming surplus for landlords; difficulty in buying; reluctance to from the sector seem to be that they cannot do another lend; and liquidity. Those all seem to be linked to the iteration of affordable rents; they could it for this one high prices and the high valuations, which again is term, but the leveraging would tip them over an linked to the fact that the housing market has become acceptable level in future. I would welcome a look at very, very high compared to incomes historically. I do these kinds of options, but I am particularly nervous not know which comes first: do we need to cut prices in about the prospect of this potentially raising social rents order for supply to increase and for people to be able to to meet the return that equity investors would need. buy or rent, or is it the other way round? Is that at the Some important safeguards would be needed, both on heart of this discussion? rents and the governance of RSLs, given the private Andy Hull: If you want to stabilise house prices, sector involvement. whatever stabilise might mean, we have to pull multiple levers simultaneously, and supply is certainly one of them. I do not think that you can discuss housing these Q15 George Hollingbery: I am interested in the days without mentioning increasing supply. There are liquidity for the private investor. This is not like buying also fiscal levers one could pull, and monetary levers stocks and shares. Bricks and mortar is a much less too. The one that we flagged up most emphatically in liquid investment, is it not? a previous report was credit control. We think, and the Peter Williams: It is a point that Andy and IPPR have Organisation for Economic Co-operation and made about institutional investment in the PRS; there Development (OECD) and the International Monetary are real issues about liquidity in the housing system. Fund (IMF) agree, that loose lending was a primary Typically, when you want to exit, the market is in a driver of the trebling of house prices that we saw in a difficult position and there is not an easily tradeable decade and that a return to loose lending is not what position: it is not quoted daily in the markets and you first-time buyers need. “Let them eat credit” is not the are not necessarily easily able to liquidate it in the way answer. you might a conventional investment. Roger Harding: It is not what first-time buyers want, either. We, at Shelter, surveyed them and they would far Q16 George Hollingbery: Are all of you convinced prefer prices to become more affordable than simply to that the governance issues are complex but be offered larger loans, frankly. Therefore it is really surmountable, or are they going to produce real important that the Government commits to the problems about how this asset is managed in the long Financial Services Authority’s mortgage market review term? on this, to keep that lending in check. Andy Hull: Roger is right. Affordable rent is just that: an attempt to sweat the housing associations’ assets. Q19 Bill Esterson: Neither of you sound keen on the The majority, but not all of them, are saying that they 95% mortgages, even with all the support. will have reached their gearing limit by 2015, so Andy Hull: We are not particularly keen on that, no. another iteration of that will be very difficult. Roger Harding: There have to be incredibly rigorous I want to flag up that behind some of these problems, affordability checks in place. Also, it must be ensured there is tension between housing associations having a that this money feeds through into supply. An awful lot social purpose that is best delivered locally and housing of lending was flowing into the housing market in the associations merging, syndicating, collaborating and boom years and that did not translate into supply. The becoming big, quasi-private businesses. The two are Government needs to be really clear that when it is sometimes in tension. getting involved in the market and putting in place Roger Harding: Whether it is surmountable or not is policy interventions, that will feed through into new very difficult to know. As Peter highlighted, this will be supply, because the market has proved that it does not new territory in the UK, and it carries a lot of risks with channel it itself particularly effectively. it, so we would need a thorough assessment of it before It is important to note that the number of first-time we were comfortable with that being taken forward. buyers has been dropping for a couple of decades. A financing model based on residential mortgages channelled towards first-time buyers is very unlikely to Q17 Chair: Something like it has happened in the get the kind of financing that we will need for new Netherlands, hasn’t it? supply. While I can see why it might be politically Peter Williams: Yes. important to talk about first-time buyers, in terms of Chair: Do we have information about how has it getting housing built, indemnities and so on are not worked there? going to be particularly important in the scale of things, Peter Williams: They effectively privatised the housing given the numbers involved. association regime and the grant was converted into Jim Vine: Ultimately, cheaper homes would be housing association equity investment. I think the preferable to cheaper credit. Unfortunately, with the Government parked the equity with the housing level of supply that we are talking about, even the associations; they did what people here would like them 250,000 that Andy mentioned, the best econometric to do. There is also ultimately an issue about the balance modelling that has been done of what housing supply between the cost of equity and the cost of debt. Some does to house prices suggests that even at those levels associations would take the view that, at the moment, we would still see increases in house prices. Those debt is cheaper than equity. researchers did not put a number on how many homes Ev 6 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding you would need to build each year to constrain house Q21 Bill Esterson: One way that you are proposing to price increases, but it was somewhere in excess of do that is through a national investment bank. Will you 250,000 a year—maybe 350,000 or 450,000—which is tell us how that would work? an awful lot if you are trying to constrain it through Roger Harding: Absolutely. It is a model that has been supply-side alone used in many other European countries, because Peter Williams: At the National Housing and Planning housing is a different asset to many others, and we are Advice Unit—long-lamented, perhaps—when we now starting to use that model increasingly in the UK modelled the impact of housing supply on price we had with regard to green technology and green investment. to push up supply an enormous amount, well beyond We have the Green Investment Bank and I do not see an the capacity of the industry’s historic record, to secure argument against us extending that to housing as well, any noticeable mitigation in house price increases. This so using some public finance to leverage in more private is the territory into which the Financial Policy finance off the back of it. The National Housing Bank Committee is planning to step forward. One of the could potentially intervene in areas where scale is issues here is that a new agenda is being set out by the needed for things to get off the ground, whether that be Government and the authorities in terms of financial new towns or new industries, as with institutional stability and price control in the housing market. How investment in the PRS. A lot of institutions are nervous that will work through, what signals it will try and send because it is an immature market and they need to start to the market and how it will intervene, are important out. new components of the housing landscape going forward, which will be very demanding. Q22 Bill Esterson: Not just housing? Andy Hull: Even after the onset of really loose lending Roger Harding: It could cover more than housing. It in 2000—01—110% loan to values, self-certification could cover infrastructure and other things as well and interest-only mortgages—the number of first-time which bring on housing, but it could particularly help in buyers actually dropped; it did not go up. It was areas where scale is needed from the off to get private enabling people who had houses to trade up. I am a bit investors interested. worried, given today’s announcement, about any talk of Andy Hull: We at the IPPR are certainly arguing for a Government-backed sub-prime mortgages, because we national investment bank from a number of different have heard of that before. perspectives, not just a housing one, but we do draw Peter Williams: But 95% is not sub-prime; it is, attention in the paper we sent in to other national historically, the mortgage product that supported the investment banks or their equivalents that are investing first-time buyer market in the UK. in new-build housing.2 Bill Esterson: It might be if prices fell. Q23 Bill Esterson: How would you fund it? How Q20 Heidi Alexander: I have a question about how would you capitalise the bank to start with? housing developers will behave, going forward. Roger Harding: You could start off with a typical Obviously you are not soothsayers, but it is not in grant—the affordable housing grant that you use developers’ interest, is it, to flood the market with lots typically. It is important to note that although the of new homes in order to reduce prices? What is your additional £400 million funding stream we have seen take on how you deal with some of that behaviour? today is welcome, the overall grant funding was cut by Andy Hull: Too often, the approach taken by the over 60% just a year ago. If we brought more of that on industry in this country has been to make large profits stream, because that was a disproportionate cut to off small volumes—in fact, they have become land housing over many other issues, as has been done with traders rather than house builders. We need to introduce the Green Investment Bank—we have a precedent set some competitive pressures into the development up here in the UK already—we could leverage private industry. finance on the back of that, invest it in housing, recycle Roger Harding: Regardless of their motivations and so that public money back into the system and then on, the fact is that over the past 40 or 50 years, the potentially get some quite scaleable, interesting new private developer market or industry has not built products going. enough homes, so clearly we will need other interventions within the market to get to the supply levels that we need. That will probably have to be state- Q24 Bill Esterson: There is a limited amount of debt facilitated. Another important area we can look to in available. I think Peter mentioned the balance between order to generate some choice and competition would debt and equity earlier. Is there a risk that everybody is be to encourage more self-build and community self- going to be drawing on the same resources and build options, because some estimates suggest that self- competing for the same money? build is already generating about 10% of the new supply Peter Williams: This is where bringing in investors is that we bring forward in the UK, and in many other important. The Government has significant assets in the countries you can get that up to about 20%. Those housing sector. Shared equity loans, for example, could smaller-level developments are classic Big Society in be liquidated and sold out to the market, and there is a action, with the community coming together, number of pots of money sitting out there that generating the finance together, setting up their own potentially have capacity to replace Government plans and getting things built. It also gives people the funding with long-term institutional investment, which choice to not pick the classic design of a private 2 See Ev 74 and Build now or pay later? developer; they can pick and choose their own, and www.ippr.org/publications/55/8116/build-now-or-pay-later- therefore we get a bit more diversity in design and size. funding-new-housing-supply Communities and Local Government Committee: Evidence Ev 7
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding you might argue matches quite well with some of things—if Government signalled to local authorities, or those products. if Eric Pickles wrote a letter to every local authority Jim Vine: I echo what Roger said about the diversity saying, “I’d be minded to grant you the powers under that you could bring into places. As well as self-build, the urban development corporation powers, or if you that might be done through community land trust approach me with proposals I would be minded to do models or freeing things up more for small private this.” I do not think it is about central Government sector builders. One model that we have discussed in instructing local areas to be doing this. terms of how a lot of small things might be brought Peter Williams: There is an issue here about leadership. together is through a local authority taking a lead on a In essence, one of the problems—the strategy joint vehicle. The output of that and where that ends up document published today symbolises it perfectly in depends on whether they can parcel out the land and many ways—is that there are a large number of make certain proportions available to self-builders and initiatives, but the Government has avoided, and said it to whichever models make sense in that local authority has avoided, setting down the scale of the task. I think area. markets are informed by understanding the scale of the That model has worked in various places across task. That is not an admission of failure; that is setting Europe. If we look back to our own history, although it out some sense of what is required and saying, “We can probably works better on large-scale new do so much and other people should do a lot more.” developments, we have had examples of this happening That is where Government at the moment is confusing both in the private and public sector—for example, the leadership and responsibility. If it takes a leadership new towns were public developments and the original role in some of these areas, people assume that it will garden cities were developed privately and the therefore own it. Actually, it does not have to own it, but Rowntree-type developments would have been private. it does have to lead it. Looking to Europe, there is an example of a large Andy Hull: I think we need to see some success stories extension to the town of Amersfoort, called Vathorst, in as well. Community land trusts have been mentioned, the Netherlands, created using a hybrid model between and they have worked okay in rural settings in this public and private, where they brought together the country so far, but we have not really pulled one off in council, the local authority—so ensuring there was a an urban setting. I think the work that London Citizens strong democratic mandate for that model—and five are doing on the St Clement’s Hospital site is an private sector operators. That model merits being interesting test study, but it is notoriously difficult to looked at in this country. If the local authority is taking upscale those sorts of models. Part of what we are a title of the land, perhaps, or striking a deal with the exercised by here is scale. land-holder that they are only going to take a moderate Roger Harding: This is not an issue that will be dealt amount of the uplift that would come through granting with by a silver bullet. We have quite a few options that planning permission and building the site out, we might could potentially, if done in unison, add up to an awful see that that is able to generate the funding to put in the lot of finance and therefore an awful lot of supply. infrastructure and put in the roads, which all points to Ultimately, building on Peter’s point, we have to face being able to parcel this out in a reasonable fashion. up to the fact that this is a political choice as well. Roger Harding: If there is a limited amount of debt, it is Certain issues have priority over others. Clearly, vitally important that we channel it towards new supply Shelter’s perspective is that housing should be given rather than just inflating the market that we have got and more of a priority. Some of the recognition today is feeding through into unsustainable loans. That is a key welcome, because politically and at governmental role for the state. level, people are starting to understand that housing is an important economic driver in itself in terms of Q25 David Heyes: To pick up from what Jim Vine was construction and it is vitally important in terms of just saying, can these alternative models, some of which stimulating the economy and allowing people to live you have mentioned, ever make more than just a where the jobs are, which is a significant problem in marginal contribution to boosting housing supply, or certain parts of the country. The crisis is now getting to are you saying that this is a new way forward to make a state where it is really starting to bite down on higher- massive change? income groups in particular parts of the country. This Jim Vine: Given the right following winds, they really is a squeezed-middle issue. Many people who certainly can. We have seen in the past the new towns would understandably aspire to own will now not be delivered substantial amounts of housing. The example able to own and now see themselves living in the private in the Netherlands that I have described extended a rented sector for 10 or 20 years. While political rhetoric town by 40%—they had substantial housing need in has tended to focus around some of the older debates that area and they managed to grow the town about home ownership and so on, the market is substantially. That does not mean it is trivial, of course. changing quite dramatically and it is important for all You need the right support to be put in place. politicians to catch up with that and start focusing on a long-term plan. Q26 David Heyes: What does that need to be? What Andy Hull: Part of the reason that owner-occupation should the Government be doing to make sure that has become a primary manifestation of aspiration in this support is in place? country is that the alternatives have been so poor. The Jim Vine: The first thing I would say is that this solution private rented sector has not offered a decent alternative will not necessarily work everywhere. Government Jim Vine: Peter’s comment on leadership reminded me should be supporting local areas that want and are of something. One of the huge success factors in the capable of doing it. They might be able to do some Dutch example was a very strong local leader, a former Ev 8 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding alderman in the town council there, who was a fairly will not necessarily give increased borrowing power in savvy political operator and was able to work around the way that people hoped. and build bridges between the different layers. In local There is an assumption in the Government’s own government in this country there are excellent examples documentation that most of the people going into of authorities that have strong leadership, but others affordable renting will come from the private rented may not have so much experience of using a lot of these sector. That is not borne out by empirical evidence. powers over recent years, so a bit of signalling from Most social renting generates from within families. central Government that they can step up to the plate Therefore there are some discords in terms of how the and take up that role would be welcome. regime is presented and how it might operate in practice. I think all of us probably—I am guessing Q27 Heidi Alexander: Can I return to increasing the here—would take the view that, yes, it is welcome and supply of social rented housing? We have already it may be useful, but it certainly is not a solution in itself referred to the affordable rent model in our discussions. and there is a question about the long term. Of course, over the next three years Government grant Andy Hull: Developing what Peter said, affordable rent going into the building of social rented accommodation does represent a decision to let housing benefit take the will be £4 billion less than in the previous three years. strain. That is not a decision that we at IPPR would In your view, how effective is the affordable rent model make, because we think you need to be reversing the going to be at encouraging the new supply of social proportions of HB versus bricks and mortar back to rented housing? where we were 40 years ago, when 85% of Government Roger Harding: One difficulty of this is that the spend was on bricks and mortar, not on HB. Today it is affordable rent model would be okay and would be 85% HB. acceptable if it came as part of a package of new supply Jim Vine: I only had similar headlines to say: I am sure options—part of a portfolio that included social rented that over this Parliament it can deliver roughly the sort homes. The difficulty at the moment is that it is hard to of numbers that they have talked about, but it is a see how, given that we are cutting back on capital different product to social renting and, like everybody investments and therefore paying out less per unit, we else, I do not have much of a view that it would will not, in effect, end up paying for that in housing necessarily be able to deliver past this Parliament. benefit in one form or another over the longer term and therefore continue the shift from reducing capital Q28 Heather Wheeler: I am very interested in the investment and putting it into revenue investment. changes to the housing revenue account, because I am Either these properties will go to people claiming an anorak and I understand these things. With the housing benefit or who could claim it in future— changes, how do you think that councils are going to be because the rents are higher their housing benefit will able to build new houses? What support do you think the councils will physically have to build new council be higher—or, alternatively, they will go to people who houses? are not claiming housing benefit and are not on the Peter Williams: There are question marks about how waiting list and so on, and so therefore those who are far the reformed system will feed large numbers of new will end up in the private rented sector where again homes in local authorities. There is already a debate rents are higher and we are therefore likely to be paying going on about the level of rental uplift, about whether out more in housing benefit. In the short term this will it is Consumer Price Index (CPI) or Retail Price Index give us more numbers, but in terms of finance over the (RPI), and whether the constraining of that will take long term we will again end up paying for it in housing away extra borrowing power that would have been benefit. The Government needs to look at many more generated. options and not just have this one option that you can The expectation in terms of the numbers of new homes have if you take grant from a national level. that local authorities can support through increased Peter Williams: It will clearly play out in different ways borrowing power is quite limited; 5,000 would be a in different areas, because in some areas social rents are high number on an annual basis. Although it is a close to market rents already, so the concept of welcome step forward and it will evolve over time and affordable rent squeezing between the two is quite become more powerful, much turns on how the rent- difficult; in other areas, such as London, there is lots of setting regimes around local authorities are capacity, so the capacity of landlords and housing conditioned. Also, do not forget that this goes into the associations to respond will vary hugely. Some will general coffers of the local authority. There will be have a very short window of opportunity to supply the other demands on how the local authority spends its affordable rent requirement in that locality and that will money and housing will only be one of those potential be it, so the amount of extra cash that they will receive demands. I think there is a fairly sanguine view out is limited. In others it could be played out over a long there in terms of the likeliness of the new regime period of time. Clearly, of course, you are creating new providing the new cavalry coming to the rescue of the assets that give you more borrowing capacity over the housing undersupply problem. long term. Jim Vine: In terms of local authorities delivering on the It is not absolutely clear yet how far lenders will back of this, if we look back 30 years one thing that recognise the uplift in value on affordable rents in terms stopped authorities delivering much housing was the of the borrowing power of an organisation because of right to buy. We have had recent announcements that the uncertainty about how the affordable rent regime the right to buy is likely to come back in a fairly will play out over the long term. Some of the benefit of substantial form. It will be interesting to see what the that new regime is at the moment uncertain, because it interaction of those two policies is. Communities and Local Government Committee: Evidence Ev 9
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
The other thing that, broadly speaking, puts a damper Q32 Heather Wheeler: One of you did start to talk on local authorities being able to supply housing is the about the issue around right to buy and the amount of treatment of their debt. In the UK we work on the public financing that that will give to local authorities, albeit sector net cash requirement, similar to the old public that it might be reduced to 50% of the property value, sector borrowing requirement, where all the debts of or something. How much of a threat or a promise is this local authorities are treated as public sector debt. Pretty extra cash coming through? Will they really be able to much everywhere else in Europe they use the GGFD— push that through into building again, because that general government financial deficit—model, which would be a priority, wouldn’t it? means that trading activities, such as housing, are Peter Williams: The idea that it will allow one-for-one viewed as off-balance sheet, off the national debt replacement seems highly questionable. This seems to figures. It would be a relatively simple step to move to me to be a policy that has been advanced in advance of that, because in terms of the perception of our national the evidence. debt on international markets, which like to compare like with like anyway, they are probably looking at our Q33 Heather Wheeler: It is a southern thing, GGFD figures anyway. I cannot see our moving on to compared with a northern thing? the same accounting system as is used across the rest of Peter Williams: Maybe. There is a question mark about Europe causing too much of a problem. that replacement capacity, which is obviously an issue. Clearly, at 50% discount there is a risk that we take some people into home ownership who should not be Q29 Chair: You could reduce Government debt at a there. Citizens Advice published a very important stroke. report in 2007 called Set up to Fail, showing that people Jim Vine: You would reduce the number. You would were lured into home ownership, not given proper alter the treatments of some of it. It would be perfectly financial advice and ended up with a backstreet loan at reasonable to say, “Well, we’re going to carry on high interest rates, buying what might have been seen publishing the old numbers in the interests of as a poor property in a poor location. It would be transparency. We’ll still show as a secondary measure obscene if that was the outcome of the new what our other measure is.” It is a perfectly reasonable right-to-buy programme. treatment that a lot of other countries use. Roger Harding: If I could just add to that from a consumer perspective, other research from Consumer Q30 Heather Wheeler: Would those controls be Focus highlighted that right-to-buy borrowers were enough, just publishing the GGFD figures as a corollary twice as likely to get into mortgage difficulties as a to the national debt figures? typical borrower. We have to remember that the average Jim Vine: There would always remain a requirement on household income of a social tenant is around £15,000. all public sector bodies to borrow in a prudential There are a lot of tenants in the social sector whose fashion. If we can trust our housing associations to circumstances are not well suited to becoming a home borrow and not go bust, would we be able to trust them? owner, so it is vital that proper affordability checks are Maybe some Committee Members do not think that we done to ensure that any change of right to buy does not can trust local authorities to borrow. become a failure for a lot of borrowers and consumers. Roger Harding: Within this you can always Finally, on an important related point, the Government importantly add checks and balances and certain caps is asking for right-to-buy sales to ramp up significantly. on these things to keep things more prudential. On Last year they were under 3,000. To get to the 100,000 general support for local authorities, clearly a lot of figure, sales are going to have to go up ninefold very local authorities understandably have lost their quickly if the Government is going to make its 100,000 capacities and skills for development that they would target. That makes me concerned, from a consumer have had previously, because they were no longer perspective, about whether the right decisions are being required. That is not necessarily a bad thing, because it made in the interests of the consumer and their ability will force a lot of them—if they are using funding under to sustain a loan. the HRA reform—to work in partnership and to use Andy Hull: A number of us were at CLG this morning and heard that the reinvestment mechanism for right to other developers to get a diversity of development buy was up for grabs, so it is not as simple as local going on in their area. I think that is very welcome. authorities getting the cash and reinvesting it one-for- There will need to be some support for councils that one. transferred their stock and therefore do not have an HRA to get development going in their area, because Q34 James Morris: The Government has made quite they will not have that financing. a play of getting as much public sector land released as possible. On Friday I was talking to a local authority, Q31 Heather Wheeler: We are talking about 137 part of which I represent, and they were expressing councils, aren’t we? some frustration with central Government, specifically Roger Harding: Exactly. Finally, just to reiterate points the Department for Education. They have a housing that have been made already, we will need some kinds project that is ready to go and they have identified a site of safeguards on rents, which is important for that was previously a school, which was knocked down affordability for tenants and also important to ensure three or four years ago, but that Department is still that any changes here do not end up back on a housing reluctant to release the land for housing development. I benefit bill, meaning that we are paying for it in a just use that as an illustration. I want to get a feel for revenue way again, rather than in a capital way. the extent to which you think getting more public land Ev 10 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding supply would have an impact on the problem that we Q36 James Morris: Mr Vine, in your submission you are addressing. Secondly, given the example that I have talked about a proposal to create local ventures for just given, how do we make sure there are incentives large-scale strategic sites. Will you elaborate a little bit for central Government to release land, and how do we on what you meant? make that beneficial to taxpayers? Jim Vine: This is the idea I was discussing earlier. We Andy Hull: Releasing public land has an important part think that there is probably more of a role for a to play, particularly where you can make it available in partnership approach to delivering large-scale sites than return for an equity stake that means you get public necessarily either the fully private models that we saw benefit for it, but in this discussion we need to bear in in some places in the past or the fully public models, mind who has it: the answer is that 51% of the publicly such as the new towns. This would be, I think, reliant held land that is fit for residential development is owned on having strong local leadership and these bodies by local authorities, not by central Government. In fact, potentially taking substantial powers, including the central Government Departments own 2% of it, and ability to take title to sites, to promote the sites, grant people like the NHS and maybe schools have some planning permission, put in the infrastructure, which is more. A good Office of Fair Trading report from 2008 an important part, and then, if it appropriate, to parcel breaks down who has that land. It is worth remembering that out so that you get a range of different developers, that the vast majority sits with local authorities, not potentially using a range of different models—whether central Government. that is community land trusts, small and big builders or Roger Harding: It is worth bearing in mind as well that, self-builders—all working on one site. again, there will not be a silver bullet in this area. It can make an important contribution, but probably not a Q37 James Morris: So the local authority is a majority or a significant contribution over the longer facilitator in that? Are they the pivot around which that term. There have been an awful lot of announcements happens? about public land over the last few years—a significant Jim Vine: I would not look to be too prescriptive about number of them by different Housing Ministers—and how to design this; it is about what suits the local we have not necessarily seen so much come on stream. situation, but yes, I would envisage a model where the Where it does, it is important, as Andy says, that local local authorities play a very important role in that, authorities, or others, take an equity stakes to make sure alongside other actors as well. that value is retained. It is important to remember that schools and the NHS will be looking at that asset in the Q38 Simon Danczuk: Can section 106 agreements light of market value at the moment, and they also have continue to play a major role in supporting new incentives, in respect of the Government, to make sure affordable housing?3 What do you think of the that they realise that entire value. In that sense, they are Government’s proposal today to review or reconsider no different from private holders of land. It therefore planning obligations that were made in this regard becomes a political decision. before April 2010? Peter Williams: Section 106 has been very important: a Q35 James Morris: It is a particularly acute problem significant volume of affordable housing has emerged in areas of urban density. I take the point about local from it and significant value has been extracted through authorities owning a lot of land, but in areas where there section 106. The move to the Community Infrastructure might not be appropriate local authority assets to Levy (CIL) regime has overshadowed the future of dispose of, it becomes particularly important that we section 106. I am afraid that I have not caught up with find a model that incentivises central Government to today’s announcement on 106. release land. There is a real concern. In a survey that we at Jim Vine: The word you have used there that is key to Cambridge have done looking at CIL and 106, me is “appropriate”, that “appropriate” land should be authorities are signalling that they plan to move to CIL, released, because ultimately I would hope we are all although the numbers are small at the moment, and 106 aiming to build homes in places where people want to will increasingly be residualised, so an important live and where they can form sustainable communities. stream of finance activity for affordable housing, in As we have heard, it should not be treated as a silver theory, is reduced and it is unlikely at the moment that bullet that just because the state—the public sector— large amounts of affordable housing will be built owns some land, that that will necessarily be in the right through CIL, because effectively it is an infrastructure place to build new homes. investment fund. The assumption is that that will take most of the cake and what is left will be very small in In terms of the specific question about incentivising terms of 106 contributions. We expect this route of extra people to divest themselves of this land, an idea that we investment, done through land and planning have discussed—although it will certainly need further permission, to shrink. consideration—is to require public bodies to reflect in Roger Harding: As Peter says, it is vital to consider, their accounts what is known as a shadow market rent: as you are doing, in the housing finance mix, because what the market rent on that land or asset would be. I in effect it supplies about £2 billion worth of housing am led to believe, although I was never able to find a finance for affordable housing per year in kind. reference for it, that the Treasury undertook this exercise on their own office space a few years back and, 3 Section 106 agreements, or planning obligations, involve a as a result, slimmed it down considerably, because they local planning authority entering into an agreement with a developer in association with the granting of planning said, “We’re using a lot more office space than we ought permission. They have been frequently used to secure a to be.” It is an idea worth investigating, although it is contribution from a developer to the provision of affordable not one that we necessarily say is worth taking forward. housing. Communities and Local Government Committee: Evidence Ev 11
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
Importantly in addition to that it delivers affordable Jim Vine: Building and Social Housing Foundation housing on site. When done well, it genuinely delivers (BSHF) is not necessarily what you would good, affordable mixed communities, and councils are traditionally call a think-tank, either. It is a housing increasingly getting better at it, as well. It is becoming research charity. increasingly bedded down. Council officers, while not Simon Danczuk: Just a good, simple answer I was perfect in all areas—far from it—are getting better at looking for. negotiating this with developers. Jim Vine: We have not researched what public One other potential threat to it is the definition of opinion on this is. Ultimately, we as an organisation affordable housing within the National Planning would like to see more decent homes being built in Policy Framework (NPPF). It will be vitally important places where people want to live. Then it becomes a that that is tightened up, so that the housing built case of using whichever tool sees that delivered in a through section 106 agreements is genuinely way that is most effective for the public purse and for affordable for the people who live in the delivering the right outcomes at the end of the day. neighbouring area. Peter Williams: This Government has delivered a Jim Vine: Not to argue against the use of section 106, huge amount of support for the house-building sector. but to note one of its downsides, it is pro-cyclical: as Reasonably, therefore, our expectations of what that you see a downturn in building for the market, you sector should do, now and into the future, are are also losing construction in your social rented or massively increased. We look forward to seeing a new affordable housing sector. level of performance, competition and output from the house-building industry. If that is not achieved, the Q39 Simon Danczuk: Just a final quick question. British public could rightly be angry. Asking you to step outside your think-tanks for a Andy Hull: We are going to publish a report next moment, things are pretty tough out there. month, which I am happy to send you, which is all Homelessness is increasing, there is lots of about what sort of reform we need to see in that 4 overcrowding and people cannot get on the housing development industry. I will happily send it to you. ladder. Do you not think that there is a sense among the public that there is something quite ugly about Q40 Heidi Alexander: Following on from Simon’s Government making more concessions to private question, we discussed earlier the Government-backed house builders and throwing more of British mortgage schemes that have been announced today. taxpayers’ money at house builders in a desperate Peter, you just said that the public will expect to see attempt to try to convince them to build houses? What something back for that. How confident are you that do you think the public think about all this? that particular initiative would get the housing Andy Hull: I do think that. I think the public might supply moving? say, “We bailed the bankers out without sufficient quid Peter Williams: It will clearly help, because there has pro quo and there’s a danger we’re going to do the been difficulty in the first-time buyer market and the same with the builders.” resale market for getting 95% mortgages, and this will Roger Harding: If I can add, not as a think-tank but increase the incentive for lenders to provide them. as a service provider providing to homeless people Unfortunately, and rightly in a sense, it does not deal with the underlying problem, which is the shortage of at the moment, I am not going to be called on this mortgage finance. I would be concerned that although Government’s work on that versus the last this will help propel more money into the 95% Government’s as well, because there is a danger of territory, which will help builders and first-time getting into a tit-for-tat on what this Government has buyers, it will be netted off against an aggregate done and what the last one did not do, when in fact volume of mortgage finance, which is still very both main political parties have dropped the ball on limited. Both this and the right to buy are new housing. Therefore, rather than us focusing on some priorities, but actually it will mean less mortgage of the downsides of specific policies, we really need finance out there in the rest of the market to support now to develop a genuine consensus about a long- other things. Expectations for 2012’s mortgage term vision for housing, which frankly has been lending are no better than this year and are possibly lacking so far. down on this year, so this is netted off that total. So Another area where both parties could really come yes, it is a new priority, but it will have implications together, which was missing from the strategy and was for the mortgage market more generally, which have only belatedly covered by the last Government is, as not been resolved. I have mentioned, the private rented sector. The public are aware that the market is changing, particularly in Q41 Heidi Alexander: How big an impact do you pressurised areas, such as London and the south-east, think the Government-backed mortgage scheme will and are adjusting their aspirations accordingly—They have? How would you characterise the impact that now do not, for example, expect to become home you think it will have? owners. Therefore they are wondering—in fact they Peter Williams: I understand that the expectation is know—what the offer is for them in the private rented that 50,000 to 75,000 households will be helped sector and they are not particularly happy with it and do not see it as the kind of place where they can spend 4 We must fix it: Delivering reform of the building sector to the next 10 or 20 years and raise a family. All three meet the UK’s housing and economic challenges. www.ippr.org/publications/55/8421/we-must-fix-it- main political parties have not really paid attention to delivering-reform-of-the-building-sector-to-meet-the-UKs- that and they need to do so in future. housing-and-economic-challenges Ev 12 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding through this programme over a period. We have talked whole of local authority borrowing for housing about right to buy being up to 100,000, so that is counting as Government debt, but actually any 175,000 over, let us say, three to four years, which is guarantee a local authority makes against borrowing 50,000 a year over a base of 200,000 first-time buyers. by another party counts in totality as Government It is obviously quite a significant step forward, but it debt. Do we know how this guarantee will be treated is 50,000 loans the market capacity to supply by the Government? elsewhere is probably reduced. Peter Williams: My understanding is that this is Andy Hull: It is important to note that it is not just counted as 100% of the value of the guarantee, for first-time buyers; they were very clear about that whereas my understanding of local authority mortgage at CLG this morning. You have to ask who will guarantees is that it is the loss given default benefit, not just how much. experience—in other words, it is the amount you have Roger Harding: Absolutely. Finally, it is important to lost previously you have to set aside. Central note that this protects the risk of the mortgage lender; Government counting may be therefore different in it certainly does not protect the risk of the borrower. this sense. If it is the full value of the guarantee—I It will be vital for new and existing borrowers that understand that it is CLG money backing this—that is proper affordability checks are made. a significant commitment by Government. As was helpfully pointed out by a blogger this morning, in 2008 Mervyn King highlighted an Q43 Chair: So it is not the amount that may be lost important point about mortgage guarantees when that eventually counts. talking about the experience in the US, saying that it Peter Williams: It is the total value of the guarantee. reduces the risk for the lender and therefore could That is my understanding, although I might be wrong. have the consequence of increasing the lender’s risk- Roger Harding: That Treasury rule has typically in taking behaviour, because it knows that certain parts the past blocked a discussion of another type of of the risk will be picked up by the state. guarantee that can potentially be more beneficial, Peter Williams: I am less concerned about that, in the which is investment guarantees for large-scale sense that inside lenders there will be a real struggle projects, but again the risk has had to be qualified as about the risk profile of those borrowers and how this 100% of the risk, rather than a reasonable calculation can be done in a proper and appropriate way. I am less of it. It will be interesting for the Government and worried about lenders chasing down the risk curve in this Committee to consider further the idea of bigger terms of funding this, but clearly there are tensions investment guarantees, rather than placing our around this that we will need to keep an eye on. guarantees with a series of borrowers who are not protected by this guarantee. Q42 Chair: In terms of this guarantee, in the past Chair: Thank you all very much for covering so much there has been this problem, not merely about the ground for us.
Examination of Witnesses
Witnesses: John Stewart, Director of Economic Affairs, Home Builders Federation, Councillor Clyde Loakes, Vice Chair, Environment and Housing Board, Local Government Association, Ian Fletcher, Director of Policy (Real Estate), British Property Federation, and Abigail Davies, Assistant Director of Policy and Practice, Chartered Institute of Housing.
Chair: Good afternoon to you all. Thank you for the general solutions to remove those barriers and get coming and for the written evidence you have the housing supply moving upwards? supplied so far, and for being our second panel in the Ian Fletcher: From my perspective—and I am in a first evidence session of the inquiry into the Financing slightly unusual position in that compared with the of New Housing Supply. Could you say for the record broader housing sector—the major barrier is not who you are and the organisation you represent? accessing debt finance. My members are trying to Ian Fletcher: I am Ian Fletcher, Director of Policy encourage equity finance into housing; they tend to be at the British Property Federation, which is the trade relatively low-geared—20% to 40%—and are trying association for the property investment sector. to encourage large-scale institutional investors into the John Stewart: John Stewart, Director of Economic sector. If they can raise the equity, the debt will be Affairs at the Home Builders Federation. there. For them, the challenges are, first, finding Abigail Davies: I am Abigail Davies, Assistant sufficient scale of opportunity for those institutions Director of Policy and Practice at the Chartered and, secondly, trying to encourage institutions that are Institute of Housing. unfamiliar with the housing sector to invest in that Councillor Loakes: Councillor Clyde Loakes, sector. representing the cross-party Local Government John Stewart: On the demand side, since 2007, the Association. mortgage situation—the availability of mortgages, particularly high loan to value ones—has been a very Q44 Chair: You are all welcome. As a general start, serious constraint. On the supply side, the supply of what do you think are the key barriers at present to permissioned land has been a very long-term problem. increasing housing supply—presumably, you all agree The regulatory burden, both from national that it ought to be increased—and what do you see as Government and local government, is a significant Communities and Local Government Committee: Evidence Ev 13
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies issue. And the supply of development finance government is doing really well in helping developers, probably—it is difficult to pin that one down because RSLs and housing associations put through there are no statistics—seems to be a constraint. applications at a pace that represents developers’ Abigail Davies: Finance, of course, and particularly frustrations in many experiences, but unfortunately lack of certainty about what is going to happen to they are not getting through to being built. finance going forward and changes in the financial Chair: There are two different views expressed there. markets; I suppose, Government preferences; also We will come back to finance now, because that is confidence, whether that is on the consumer side or really what the inquiry is about, and try to focus on the business provider and lender side. Those are the how we can get the money into housing. particular issues. Councillor Loakes: It is certainly not planning or Q47 Mark Pawsey: We have heard that mortgage forming local partnerships; local government has a finance is the biggest issue, but what about the good track record when it comes to getting residential financial position of the people who deliver these properties through the planning process and working houses? The Government has brought out today the with housing associations and the private sector to £400 million Get Britain Building fund, which some develop sites in partnership. It is primarily about have expressed anxieties about. Will that help get giving a level playing field to local government to act more houses delivered, given that a lot of developers, as a house builder in the sector. The schemes that we particular the smaller builders, cannot get finance to have seen and the announcements that we have had get developments underway? Will this do the job? today probably do not go far enough when it comes John Stewart: It will help them. Where there are to enabling local government to have that level smaller and medium-sized house builders who have playing field, where debt is counted as national debt land that they cannot develop because they cannot get rather than under prudential borrowing systems that development finance through the banking sector, local government can already borrow under. assuming they can get access to this money—they will have to bid for it and be successful—yes, that should Q45 Chair: I saw John Stewart’s eyes light up when open up those sites. It is not a panacea. There are lots the word “planning” was mentioned. It is the major of reasons why sites do not get developed, but where obstacle, isn’t it, when all the house builders tell us development finance is the primary constraint this that? should help. John Stewart: It is a major obstacle; it is not just me saying that. Kate Barker carried out a landmark study Q48 Mark Pawsey: Has this been a big issue for in 2003Ð04, which was the most comprehensive study your members over the last year or two? of housing supply, probably since the 1977 Green John Stewart: It is less of an issue than it was; back Paper. It was very clear that planning was a very in 2008 it was certainly a very serious issue and the serious constraint. I talk to house builders every day Kick Start scheme was aiming to address that, but it of the week and it is a very major issue, so, I am sorry, still is an issue. but I disagree with my colleague. Q49 Mark Pawsey: Do you think it will support Q46 Chair: But if the planning regime was many of the smaller builders, who are not operating completely liberalised tomorrow, you would not build at the moment? In some cases, smaller builders have any more houses next year, would you? I mean, you gone bust. Will this prevent builders in the future are sat on so much land with planning permission now going bust and will it keep builders there enabling that you are not building on. This is the case, isn’t it? additional housing to be delivered? John Stewart: No, that is not the case at all. The John Stewart: I think in combination with the primary constraint at the moment is mortgage finance, mortgage initiative, which has been announced today, as I said at the beginning. If we could miraculously it will help. Whether it will keep those individual wave a wand and tomorrow there was mortgage builders alive depends on their own individual finance back, very quickly planning would become a financial circumstances, competence and so on, but in constraint. House builders have land banks, of course. principle it should make it easier for companies to Housing is a very long-term activity; it takes many survive than if there were no development finance. If years to get planning permission and many years to you bought a piece of land on the expectation that you build out a large site, so they have to have a degree were going to be able to develop it and then you of land, but there is no evidence they are sitting on cannot get development finance, you have a bit of a permissioned land that could be developed. The OFT problem. If you now have development finance and if did a very comprehensive study in 2008—I would not there is a possibility that you can get buyers, the call the OFT a friend of the industry—and it situation is obviously radically improved. concluded that the industry certainly was not sitting Abigail Davies: There is also a need to consider what on excess land with permission. will happen to providers of affordable housing, often Councillor Loakes: There are 175,000 planning in the not-for-profit sector, not so much at the applications that have been granted for residential moment, when most of them are fully financed and units in London alone. If that is not a bank waiting to okay, but for the next couple of years—looking ahead be delivered, I do not know what is. Planning to that turbulence on the financial markets, the risks applications went up to 80% being granted last year— that loans are going to be re-priced and the shortening that is on major applications—and there was a of availability of long-term finance to be quite short significant increase on minor applications also. Local to medium-term now. There is a question about Ev 14 Communities and Local Government Committee: Evidence
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies whether those providers will be able to finance their missing parts of today’s announcements was that there developments and how much it will cost them to do was very little in the way of ambition and dates. that, going forwards. Ian Fletcher: My members are larger-scale mixed-use Q53 Mark Pawsey: Targets? developers, many of whom have recapitalised during Councillor Loakes: Targets, yes. Cards on the table: the credit crunch with rights issues. They have raised I am a fan of targets, especially when it comes to capital and finance and therefore are in a far better house building. We know that we have so much position to be able to raise development finance than already ready to go in London; in the East Midlands, they were, say, two years ago. I cannot speak for the 85,000 are ready to go. You would have thought that smaller builder, because I do not have much there would have been a date that says, “Boomph. We experience with them. want to get this money out the door, spades in the ground, foundations laid, by 1 April 2012,” or Q50 Mark Pawsey: Mr Fletcher, your organisation whenever. That was not there; that was missing. My spoke about housing zones. How will housing zones greatest fear is that we end up spending the next 12 stimulate particularly in the buy-to-let sector? months coming up with a complex way of getting that Ian Fletcher: That is a slightly tangential issue. One £400 million out the door, when actually we know driver of the housing market over the last decade has there are some pretty easy ways of doing so. been the smaller buy-to-let investor. I think about £300 billion has come through the buy-to-let sector Q54 Mark Pawsey: Do you think targets have into housing. Really, on the suggestion of housing previously been helpful in housing policy? zones, it is quite surprising that no Government has Councillor Loakes: Yes, I do, and they are a key ever tried in any way to nudge that in the direction of component of going forward. particularly policy priorities. To some extent it supports development, because there is a wider pool Q55 George Hollingbery: If the Chair could indulge of buyers out there for new-build products, but a lot me briefly: Mr Stewart, would you be happy, from the more could be done to try to nudge some of that financial point of view of your members at least, if equity and debt finance. At the moment about 25% of we allowed anyone to build anything anywhere, any mortgage loans are to buy-to-let investors, so there is time, as of tomorrow—if all requirements for planning continuing demand coming from that sector and it is permission were removed? Would that suit your being met by the lending institutions. members? A lot of my members talk fondly about the previous John Stewart: No, I do not think it would. recession and business expansion schemes and what Simon Danczuk: They would never be happy, that did for the housing sector. I know that was not George, I think we have established that. widely supported in retrospect, in terms of proving to George Hollingbery: Let me go on to what I am be very expensive, hence some of the restrictions we supposed to be asking. suggested for housing zones—that they would have to John Stewart: Can I answer you? I have worked in be designated by local authorities and approved by the the industry for over 30 years and I have never heard Treasury so that costs did not run out of control—but anyone make that claim, so I don’t think that is in the current economic climate it would be a good plausible. way of stimulating the housing market, particularly in areas where there is great difficulty in terms of the Q56 George Hollingbery: On the role of large housing economics. It would not involve costs now— financial institutions in solving this problem—getting you are looking at capital gains tax concessions, for private finance into new housing—how will that example. That does not cost anything to Government work? Have they a role? Will it work? now, but obviously it has an impact on Government Ian Fletcher: To some extent, institutions are revenues downstream. investing in this sector at the moment. I set out some Lastly, the other stimulus to that idea was that there is examples in our written evidence. An interesting no differentiation in the tax system for investors phenomenon over the last year has been the breadth between pure speculators and those putting in capital of different interventions: both policy interventions for 10 or 20 years. I think that is wrong. During the but also players in this market intervening in the boom, whether you were investing for three months, sector. It is not just a case of looking at pure market purely leaving a property empty and making a return renting now and what we call build to let, but is also on that or a respectable landlord putting capital in for about capital finding its way to affordable housing. 20 years, the tax system did not differentiate between I think the conditions are all there for large-scale the two of you. institutional investment in the sector. There is significant demand for renting. In terms of comparable Q51 Mark Pawsey: So you would like to see a assets, they compare favourably if you want to invest capital gains tax incentive? in residential property. We are getting the political Ian Fletcher: Yes. support, as I said, that is required. It is now or never. Over the next year, we need to see that being Q52 Mark Pawsey: Councillor Loakes, what do you significantly upscaled. The one thing that is probably think about the £400 million Get Britain Building holding it back, as I said earlier, is the scale of fund? In your view, will that stimulate new housing? opportunity in terms of being able to find particular Councillor Loakes: It will make a start, maybe, but I housing opportunities that the institutions want to think we have a long way to go. One of the key invest in. Communities and Local Government Committee: Evidence Ev 15
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
Q57 George Hollingbery: What about in the housing Councillor Loakes: Yes, it is a cross-party associations and public housing generally? We know organisation; my colleagues have been doing that. there is £40 billion of outstanding grant out there, and some appetite in the private sector, in long-term Q60 George Hollingbery: Can you reveal anything pension funds, for leveraging that and equitising it. to us about the attitude? Any thoughts on that issue? Councillor Loakes: No. Abigail Davies: The discussion on this sort of finance George Hollingbery: Fair enough. feels like it has changed over the last six to eight John Stewart: Could I just make a comment on months, from having been a, “This is nice, but we’ve institutional finance, although it is much more Ian’s been talking about it for 30 years,” kind of discussion patch than mine? I am slightly concerned because to within the last six months people starting to feel institutional finance is just one source of finance into that it is becoming a real possibility. housing. You often hear glib comments about, for There is quite a lot of that kind of finance in the social example, making private rented sector schemes work sector already. I think it is worth having a by waiving affordable housing. One of my three conversation about what role that sector could play, constraints on the supply side was the regulatory not just in having the money and spending it, but what burden. I am always rather concerned when there is role it could play more widely in enabling that sort of talk about reducing the regulatory burden for one investment to come forward. Obviously, there is a source of capital or one particular provider within one range of different types of potential investors for tenure. I am much more of a believer in a level different interests, but for those who maybe do not playing field. want to get involved with development, there is a role Ian Fletcher: Let me give my response to that, for somebody else to develop it and then sell it to because we have sparred on this issue in the past. an investor; for those who are less comfortable about John’s members are investing capital for the best part ongoing management, there is a role, for example, for of a year at most, sometimes; my members are associations to wait for a property to be built and then investing in capital for 20 years; there is a greater cost they could deal with letting and managing it. I think to their doing that and they should be treated more there is definitely merit in exploring the facilitation favourably. role that could be played in making the money flow more easily and overcoming some of those concerns Q61 David Heyes: One way to get individuals’, about risks and exit strategies and reputation and so rather than institutions’, investment into housing on, which have been talked about for a while. would be through real estate investment trusts (REITs). They have not been a great success in the Q58 George Hollingbery: Councillor Loakes, in residential investment field, but if the Government are your evidence you have some interesting ideas about promising to take action to make them more local government schemes, in particular local conducive to residential investment, what benefits do government pension funds and local government- you think that might create? backed instruments. Will you tell us a little bit more Ian Fletcher: For the investor they address one of the about those? big issues you were discussing in the previous session, Councillor Loakes: Housing finance is already which is liquidity. Housing is quite a difficult complex. There has been a lot of talk lately about commodity to get into and to trade, so a REIT localism and I think that local government provides that benefit for the investing institutions and collectively, as individual councils, can help stimulate provides what is called tax transparency, so a pension house building and housing growth. It can do that if fund investing through a REIT is getting the same tax it has a level playing field, but there seems to be this advantages as if it was a pension fund. kind of pathological trust issue—a feeling that there There has been—we should acknowledge and is a need to have a cap on what local government can welcome it—progress in terms of a consultation on borrow. When you think that local government has liberalising some of the REIT regime. The original access to land, that it potentially has access to use of REIT regime was pretty much designed for pension funds and it already prudentially borrows to commercial property investors rather than residential fund all sorts of different schemes, it seems a little bit investors. Some of the changes that the Treasury is weird that we cannot get in on this particular act. proposing are welcome. But if you were to push me, At the end of day, it is local government that is there I do not think they will lead to a significant amount long after the developer has built and moved on and it of residential REITs. There are still outstanding issues is local councillors who are knocking on the residents’ that HM Treasury officials have red-lined, one of the doors, finding out what their issues and concerns are. most significant being the ability of a REIT to trade. They have a key stake in developing those sustainable In the commercial sector REITs are very much communities and moving forward. They want to build constrained in terms of their trading, for good tax houses, whether on their own or with partners in the reasons, so officials’ cautiousness is understandable in private or public sector. Give us the tools and the trust this area; but in the residential sector, trading is a far to be able to go forward and do that. Again, one of more common thing, from the private rented sector, the ambitions lacking today was that trust of localism even through to the affordable housing sector. If you and its ability to deliver on this agenda. were setting up an affordable housing REIT, right-to-buy sales or a shared ownership staging-out Q59 George Hollingbery: Have you had any could all be included in the trading, and potentially conversations with the Government on this theme? you would lose your REIT status. Ev 16 Communities and Local Government Committee: Evidence
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
A dialogue still needs to be had between the Treasury Q66 James Morris: The Government makes quite a and the industry. It should not be beyond the big play about trying to get public sector land capability of policy makers to produce, for example, released. Do you think it will make any significant a white-list of activities that will allow those sorts of contribution to the problem of housing supply that we activities to take place that will only apply to the are discussing today? residential sector and not open us up to any particular John Stewart: I think what this Government is doing tax abuses that might happen in the commercial sector. is very significant. There has been talk for many years We are a long way along the road, but we are not about releasing public sector land. The OFT report quite there yet in terms of having a residential REIT back in 2008 concluded that somewhere between a regime that would be supportive of residential REITs. quarter and a third of all the land that was potentially suitable for housing was owned by the public sector, Q62 David Heyes: Is that a shared view on the whether central Government or local government, and panel? so on. We work quite closely with the Homes and Abigail Davies: Yes, Ian is very much the expert. This Communities Agency (HCA) on the public land is slightly a step away from REITs, but there is an programme that is going forward now—we have quite issue about enabling access to assets for people who close liaison with them to find out what is otherwise cannot. There has been a lot of talk today happening—and I think this Government is really about helping first-time buyers, the right to buy, and committed to that, so I think it will make a difference. so on, but there will always be that core of people It will not solve the housing problem, because it is who really cannot buy, and I think that that is going multidimensional, but it will make a difference, yes. to grow. That gap between the asset haves and have- Abigail Davies: I think that there is a step further; it nots will grow, so some sort of unitised vehicle that was presented to us this morning as phase 3 of the enables the man in the street to have a stake in public sector land initiative. I think that is the point housing, and thus a return from it, is quite attractive. you are making, John: we seem to have been stuck in A REIT, I think, is not it, but that idea is worth having phase 1 for quite a long time. on the table. Q67 James Morris: Why do you think we are stuck Q63 David Heyes: Just going back to Mr Fletcher, in phase 1? for a follow-up on what you said: is timidity, perhaps, Abigail Davies: That was because it was always the or over-caution, a way of interpreting the Treasury’s Department responsible for housing that looked at action on this? If it were less cautious, could this hold their own assets. There was always a comment to be some real prospects for boosting housing supply? Is made about local government, and then it was just, that a summary of what you said? “What does the Department for Communities and Ian Fletcher: Certainly, for the people who I am Local Government, or whatever else is responsible for talking about getting into institutional investing in housing at that time, look at?” Since then we have residential, REITs both provide them with a good gone beyond: we have looked at Health and Defence, vehicle for getting into the sector and allow them an and now we are going again to the agency level, exit strategy. Although I have said that our members asking what the police have got, and so on. That work invest for 20 years, at some point in future they will to get a real, proper picture of what is out there and want to divest themselves of that investment and can be used has been quite helpful. REITs are the ideal way of doing that as well. There are questions about what you do with the land, I do not want to be too critical of Treasury officials, whether that is sold upfront or on the “buy now, pay because there are some complex issues here and they later” kind of approach, or whether it is some kind of are scared about opening up potential avenues to joint-venture model, which there has been effort on commercial property tax abuse. As a result, officials over the years, to enable the public sector to keep a are tending to be perhaps overly cautious. The last stake in it and to benefit from the uplift in that value. round of consultation very much said that that issue That is important, because you can only sell a site was not up for discussion, which was a pity, because once and can only build on it once. Something that I think a discussion has to be had. enables some kind of funding for future generations is important, because all these things will make a Q64 Chair: We are expecting a Government contribution to housing supply but they are never announcement on REITs at some point, aren’t we, going to solve the problem. Some potential to keep maybe in the Autumn Statement? reusing that asset would be very valuable. Ian Fletcher: I believe so. Q68 James Morris: Councillor Loakes, in the last Q65 Chair: If we do get something before the end of session it was clear that local authorities are sitting on our inquiry, would it be possible for Mr Fletcher, or a lot of public sector land—I think somebody quoted indeed anyone else, to let us have a note on how you 59%. What more could local authorities do to release respond to that and what you think the new proposals their land for housing supply? What are some of the may or may not do in terms of housing supply, and constraints that you see? whether there are still barriers existing in those Councillor Loakes: To be fair to local government— proposals that need to be removed to get REITs up I would say this, wouldn’t I?—they are doing a lot and running and delivering? already. In the scenario where they cannot build Ian Fletcher: I will do.5 because they cannot borrow the money, they are 5 See Ev 106 working in partnership with housing associations, Communities and Local Government Committee: Evidence Ev 17
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies private developers, adding their land to a piece of land expertise is not there and it is not brought in at the that a private developer has got to create a better start of the discussions; it is some way down the track scheme. They are doing that and have been doing it before HCA is brought into those discussions. for years and years. Although the best local authorities ensure that Sometimes there is tension where a private developer expertise is in there from the start, some do not and comes along, buys a private piece of land and then everybody gets frustrated as a result. starts eyeing up a council asset and the council may not be ready to, or may not want to, develop that asset Q71 Mark Pawsey: Can I just press Councillor but comes under some kind of developer mentality, Loakes on the ability of councils to bring that attitude and pressure to move that particular piece of forward? You said in your evidence that councillors land forward. There is no resistance from local “overwhelmingly take a proactive and positive government per se to releasing land that it owns for attitude towards development locally”, but we have housing development. just had a review on the NPPF when we have heard many communities saying, “We want a right to Q69 James Morris: What more could Government prevent development in our area.” What evidence is do to facilitate local authorities doing that? there that councillors are willing to push for land to Councillor Loakes: Well, it can give us the powers to come forward for housing? Will that contravene the move our assets forward ourselves, because that will wishes of those people who have put them in their start to take out a number of players and negotiations position? and move to us putting spades in the ground and Councillor Loakes: There have been tensions in that foundations being laid, and moving forward a lot relationship for years and years and years, so what quicker than the current scenarios lend themselves to. comes out of early deliberations about the NPPF are not new in that respect. Fundamentally, councillors Q70 James Morris: In the Localism Bill there is a want to see good development come forward— general power of competence, which effectively development that benefits their existing local allows local authorities to do anything within the law. communities as well as communities going forward. Do you think that could be applied to scenarios where That is about sustainable local communities. Often we need to be kick-starting housing developments? that is where the tension comes in, because that is not If a local authority has an idea and wants to build a what is put forward. Councillors are often therefore in partnership and do things, and wants to borrow X, a difficult position, where they are having to advocate have not the Government given them power to do maybe not for the best development but for one that that? is certainly a step in the right direction, although there Councillor Loakes: And it was doing that anyway. is still conflict with existing local communities Don’t over-exaggerate the power of competence. already. There are still very many real restrictions in place that prevent local government and prevent trust in local Q72 Mark Pawsey: But they are not always government in moving forward and delivering these interested in development in the neighbouring ward or sites. The biggest one is that, for some reason, we are the neighbouring authority. not allowed to borrow the same amount of money as Councillor Loakes: No. an RSL can borrow, yet we are the councils that will be there knocking on doors and finding out what is Q73 Mark Pawsey: What can central Government wrong with particular housing schemes, if they go do to change their attitude and to bring more land wrong. We can and do do lots, but actually the big forward? blockages to us doing even more are around the fact Councillor Loakes: I think that is slightly unfair. I that the financing field is not level, by any stretch. have been involved in many planning committee John Stewart: You asked why things have changed decisions about complex schemes in my own ward recently. I think there is recognition that we have a that I have championed because I have felt that they very serious housing crisis, particularly post-2007, were the best things for my neighbourhood at the because numbers have fallen so much; last year had time, and we have delivered and, actually, residents the lowest completion numbers since 1923. Also, afterwards have welcomed the scheme. It is like there are the worries about the economy. House anything: people often do not like change. That former building can play a significant part in helping that garage forecourt being turned into a four-storey block recovery. The commitment from the Prime Minister of flats will be challenging to the residential terraced and the Chancellor is extremely important—it was the streets around it. It is about working with the local Prime Minister who announced the housing strategy residents, taking them forward, engaging with them, today—and their commitment to that will, I am sure, bringing the developers to the table so the residents encourage the MOD and the NHS, and so on, to be a can have that conversation with them and put forward little more proactive in releasing land. Whether it their challenges and concerns, and acting as an works for local authorities, I am not sure. advocate and facilitator for those tricky negotiations. Ian Fletcher: The specific issue for my members is That is, by and large, what local councils have done that they are trying to negotiate, what are often very and will continue to do. complex issues: it is not £1 today, but £1.50 in 20 years’ time, and ground rent, and a joint venture and Q74 Bob Blackman: With regard to a private some sort of equity share. My members often get developer coming along wanting to develop some frustrated that in particular local authorities that private land and a local authority asset alongside, can Ev 18 Communities and Local Government Committee: Evidence
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies you give us an example of where that has happened, appropriate for the local people. If the council is the or indeed why it would be that, given the owner of the land and also, ultimately, the planning circumstances of new homes bonus and lots of authority, is not that an odd view of things? encouragement for local authorities to give up the land and develop housing—there is a housing crisis, as we Q78 Bob Blackman: Control. said—a local authority not say, “Wonderful. We’ve John Stewart: Exactly. Surely the local authority got a great partnership going here”? should work with the developer and if the two sites Councillor Loakes: Because it may not be the best combined make a critical mass and give a good scheme for that local place. It may just be about bricks scheme, the two of them together can come up with a and mortar. Local councils are ultimately about good scheme that meets the needs of local people. building good-quality accommodation that strengthens Councillor Loakes: I am pleased to say that is what communities and does not isolate them and does not, tends to happen, but there are instances where you in five years’ time, start causing lots of housing- cannot necessarily bring the two sides to agreement. related problems for that local council. Q79 Heidi Alexander: I would like to move on to Q75 Bob Blackman: Can you give a prominent the reform of the housing revenue account and how example of where that has happened? much in effect that would enable councils to increase Councillor Loakes: Not off the top of my head, but I the supply of new housing. Certainly from my own can get officers to provide you with some local authority’s perspective we have a very large examples.6 Decent Homes backlog of work. One hope is that by reforming the HRA and bringing it down to that local Q76 Bob Blackman: That would be helpful, because level, more of that investment can go into doing the one of the things that we are looking at today, with Decent Homes work. How realistic is it to think that respect to all the announcements made today, is to this could be a really significant way of increasing encourage local authorities to come forward with land supply? to encourage development, and if people are stopping Councillor Loakes: I do not think it is a going to be that, we need to know why. a significant way. There is the detail that sits behind Councillor Loakes: I can also give examples of the headline: the fact that an extra £1 billion of debt innovative approaches to building. We owned the was added as a result of fixing the inflation rate figures freehold to the site of the football club in my own in September was not particularly helpful. Until we borough, Leyton Orient. We worked with the football can borrow on a level playing field—I will keep club and the housing developer to put four small tower sticking to that point—we are not going to be able to blocks in each of the corners, which helped make that realise our ambition and do as much as we could football club sustainable going forward, with some of possibly do. The ambition may well simply be about the challenges it has regarding the Olympics, but also maintaining the quality of existing housing stock, created much needed social housing for local rather than necessarily being able to increase stock. residents. It was an innovative scheme using the There is of course the issue about the right-to-buy freehold of a site, and that is moving forward. announcements, which have implications for the We are about breaking down barriers where we can, HRA today. but I come back to the fundamental principle: give us that level playing field on how we can borrow money Q80 Heidi Alexander: Before we discuss the right so we can build houses. Councils want to build to buy and how that could result in more housing houses. They have the capacity and the willingness to being built, are you not concerned in any way about do it, but we should not just have to solely rely on excessive borrowing by local authorities should the developers and should not have to rely, in that cap be removed? example, on a football club. Councillor Loakes: No, very simply. It is about trust. We can borrow for other things; why should we not Q77 Bob Blackman: You have raised that issue of be able to borrow for what local authorities and their borrowing, which is going to come up in a minute. residents think are the priorities for them locally? If Right across London, there are local authorities with housing is a priority for a local council and a priority billions of pounds of debt, which are created from the for local residents, they should be able to borrow to 1960s and 1970s developments, and they are do that. That is what the whole localism agenda is millstones around the neck of any local authority that about, surely. That is what trust is about. We are wants to develop housing. How would you deal with trusted to do many other things; why on earth are we that issue? not allowed to build houses? Councillor Loakes: I think we have got quite a Abigail Davies: I think the reform of the housing detailed paper on that response. It would be better that 7 revenue account is absolutely one of the best things I give that to the Committee afterwards. to happen to council housing for years and it is great John Stewart: Perhaps I could make a comment on to be so close to having it. We do know that having your question. You posed the example of a private site the cap on borrowing below the prudential borrowing next to a council site. Councillor Loakes seemed to limit means that there is headroom that cannot be imply that the council had no control over the scheme used. That limits local authorities’ potential and resisted it being built because it was not contributions, because although that prudential 6 See Ev 100 borrowing is there for a reason there is space 7 See Ev 100 underneath it and we know from looking in some Communities and Local Government Committee: Evidence Ev 19
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies detail at councils’ business plans that they could use against to pay for that total’. We are heading for some that money. It would not be taking risk, but would be really tricky conversations. I am not, at this point, them sweating their assets on the basis of a sound advocating any particular solution, because I think it understanding of their 30-year business. There is room could get quite heated without the detail. to explore going a bit further. There is one extra point that I wanted to make, which We have asked repeatedly for reclassification of is about the sale of social homes to replace with councils’ debt, which you spoke about in the previous affordable rent, because it will not be social rent we evidence session, to be considered. The idea of are going to get back. It is the new model of 80%, harmonisation in how councils are treated—in line which will be politically quite a tricky issue, I suspect, with Europe—would mean a whole load of money for a number of councillors explaining it to their could be taken off the balance sheet and used in a constituents, and also looking at what they want to better, more creative way in future. We understand the provide in their local areas. That will be just as tricky reasons why the Treasury pushes back against that, as talking about where the money goes. not least the idea of starting to move the goalposts Councillor Loakes: Let me just add to that that just when it is advantageous to get your public debt research has just been published showing that in every down, but really that opportunity is there and merits region of the country it is cheaper for the local consideration. authority to build a new build than for a housing association to do it, so why on earth would you not Q81 Heidi Alexander: On this enhanced give the local authorities the powers to maximise that right-to-buy scheme that the Government is talking a opportunity? We can provide you with that lot about at the moment, how realistic is it that a evidence.8 property would be lost from the social housing sector Chair: It would be helpful if you could. when somebody chooses to exercise their right to buy it and replaced with the money that the local authority Q83 Bob Blackman: Mr Stewart and Mr Fletcher, gets in? Do you think that is a realistic model? one issue that has not been raised this afternoon is the Councillor Loakes: I think the devil will be in the absolute level of rents and where they go in terms of detail of the consultation responses on the right-to-buy funding the stream of affordable housing and indeed models that they are announcing today. From the any form of private housing. Is it your members’ view Local Government Association perspective, we want that that rental purpose and rental stream always has local councils to retain all the receipt and for none of to go up in a steady process? Does that encourage the it to go back to central Government; and we want investment? Or has the fact of it not necessarily being local councils to be able to set their subsidy, if there the case led to a drop in the investment? is a subsidy, and to do that locally to suit their own Ian Fletcher: From our perspective, institutions are needs. There are big questions. This will be different investing for yield, so it is not just the rent, but the across the country, but in London, have all the good price paid for that rent. It is not necessarily the level houses already gone, so that what we have left is very of the rent, but the security of that rent certainly does expensive stock to maintain and there is very little have a significant attraction. If you are trying to willingness to buy properties, so having that as a encourage pension funds to invest in this sector, vis- flagship means you do not get in the sort of money à-vis investing in other commercial property or that is anticipated in other parts of the country? government bonds, then the thing that both of those types of assets supply is that security of income. Q82 Heidi Alexander: Ms Davies, do you think that Things that are likely to affect it are the housing all the receipts from right to buy should be retained benefit reforms that the Government is pushing locally? through. Abigail Davies: We will have to have a fairly robust conversation about it. The reasons that the Councillor Q84 Bob Blackman: Is there a fear that the rental puts forward are completely valid. There is an issue return is going to drop as a result of benefit caps and about who replaces the houses that get sold, and how other measures? We heard previously this afternoon and where, because of course if you keep the money that we seem to be moving to a regime whereby at local level, does that local authority have the housing benefit will be picking up the strain on headroom on its balance sheet to pay for a development of housing. Possibly investors may be replacement? Maybe is always going to be the answer. thinking, “Rents are going to come down.” There will always be that tension between the localist Ian Fletcher: The great thing about residential renting agenda and the value or best-possible-return agenda. from the institutions’ perspective is that rental growth It will be attractive to Government to pool all the is quite stable, apart from very recent timeframes. If money centrally and hand it out, I assume, to housing you look back five, 10, 20, 50 years, rental growth associations who would then be able to borrow to that is almost compatible with average earnings, so if bring that up to a one-for-one replacement, or you are trying to pay out a pension on the back of that potentially it is more than one for one, because if you income, that is a very attractive proposition. At the take the average value of a property—in London, say, moment we are in a slightly odd situation in that rents about £100,000—and give a 50% discount, which is are running ahead of average earnings, but so are a lot £50,000, and then pay off the debt that would leave of other costs. In terms of real returns they are not about £30,000. Obviously, you cannot then just say, actually that significant. “Here’s £30,000 to build a house”. It is, ‘Here’s £30,000 worth of grant which you would lever money 8 See Ev 100 Ev 20 Communities and Local Government Committee: Evidence
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
Q85 Bob Blackman: So it is not a barrier for people councils so that they know what is going on elsewhere to invest at the moment? in the country and to replicate, rather than reinvent, Ian Fletcher: No. I would say that security of income the idea? is probably the critical thing, rather than some Councillor Loakes: It does that all the time, whether variations. through member-led events or through its regional Abigail Davies: Changing benefits is causing concern networks where it disseminates best practice. In around those organisations that already do have London, we have London Councils. There are many finance to provide housing, particularly social rented. different networks with opportunities for best practice The concern is that if income streams are not being shared, where support is offered and where guaranteed, rates of lending will go up; thus, what you many councils bring in expertise from other councils, can do with the money is reduced. There are particularly in complex situations, to help them get demonstration projects coming forward to test those the best for that local council and its residents. There out, which we are happy about and for which we are plenty of examples. asked, but that ongoing uncertainty for another 18 months just takes us a little bit further in that uncertain Q89 Chair: Have you a library of interesting ideas world, where people do not necessarily make firm and innovations that are happening? decisions or the most advantageous decisions, because Councillor Loakes: We certainly do. they are not quite sure what is coming. We have a housing strategy to take us to 2015, but some of the Q90 Chair: Can we have one or two examples? decisions that will be made are not coming for another Councillor Loakes: I am sure we can—yes we can, I year. That climate of uncertainty is still quite notable. have had the nod.9
Q86 Chair: You raise the issue about the restrictions Q91 Simon Danczuk: Can you say a few words, on local authority borrowing, but the same restrictions Councillor, about how the place-based pot that the were there with the last Government and we had the LGA has been talking about might help to stimulate same arguments with them—certainly, I engaged in the housing market? those arguments at the time. The National Federation Councillor Loakes: I will have to provide you with a of ALMOs has now come out with a series of ideas separate note on that. That is not contained within my in which local authorities still remain involved in the brief. I do not want to confuse matters.10 ownership of the properties, but the ownership may be diluted into some form of co-op, with a long-term Q92 Simon Danczuk: One final question, John. You management arrangement. That could set local and your members must be over the moon— authority housing managed by ALMOs into a context delighted—about the announcements today. Are you where they could borrow for the long term, like a happy with the announcements the Government have housing association. How does the LGA view that sort made? of proposal? John Stewart: That is a leading question. Yes, we are Councillor Loakes: The LGA meets regularly and has very pleased, because the brake on mortgage a network of councils with ALMOs and it engages availability, or the brake that that causes on house with them on the agenda. The bottom line for the building, is very serious. I think that this can have a Local Government Association is, whatever models significant impact on house building. are coming forward and whatever the intellectual thinking is around these complex housing finance Q93 Simon Danczuk: Is there anything else that the issues is, we just really want to see spades in the Government could do that would make you and your ground, foundations laid and houses being built. We members even happier? have all got waiting lists with residents on. John Stewart: Yes, there is. If the National Planning Policy Framework—I know we are not here to talk Q87 Chair: Do you think these proposals on ALMOs about planning, but everything comes back to are a good idea, which the LGA ought to be selling planning—is diluted or if changes are made such that among its members as a potential way to get some planning permissions will not be available, that would more money? be a concern. If you have contributed to solving the Councillor Loakes: For those councils that have demand issue with the schemes announced today, ALMOs, yes, many are considering how to move their once that demand kicks in house builders will be able ALMOs forward. Many do not have ALMOs. Again, to gear up production, but if they cannot bring new it is a complex landscape, with opportunities, but it is sites on and cannot get new planning permissions, the about maximising those opportunities and not settling whole thing will fizzle out. The planning system has simply with what is on the table at the current time. to come in as well.
Q88 Chair: In terms of these complex options, Ian Q94 Chair: One point for John Stewart. There has Fletcher said quite reasonably a few comments ago been a traditional model of housing development in that some of the larger authorities might be able to get this country in the private house-building sector. Do their heads around these quite complicated deals, but you see your sector fundamentally changing if smaller authorities will often struggle to put them availability of mortgage supply does not come back together. How far does the LGA have a role in trying to the pre-2008 levels or, of course, if the Financial to disseminate good information and provide support, 9 See Ev 100 particularly to smaller councils, but also to larger 10 See Ev 100 Communities and Local Government Committee: Evidence Ev 21
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
Services Authority (FSA) regulates more strictly, or John Stewart: There is a long-term issue. I have whatever, which is quite likely to happen to some thought a lot about this. In a sense, the question is in degree? two parts. What sort of housing numbers do we need? John Stewart: When you say, “fundamentally The house builders will build for owner-occupiers, for changing”, I am not sure what you mean. Do you buy-to-let investors, for institutional investors, for mean the nature of the industry? RSLs and for councils. House builders will build for customers it is profitable to put up houses for. It may Q95 Chair: Would you simply build less of what you well be that in the future the composition of that have always built, or would you look to build for demand will shift compared with the past. It may be different customers in different ways? that, for example, there is a higher proportion of John Stewart: House builders will build for private rented than there was in the past. My real whomever comes along through the sales office door. worry is that there will be constraints on mortgage availability that will constrain the number of people Q96 Chair: Are you planning for a change and a who can become owner-occupiers, but they will not different way of doing things? be able to become tenants in another tenure, so there John Stewart: There is recognition that some of the will be an absolute shortage of housing. The less advisable, less desirable lending that went on in consequences of that for young people in particular the peak of the boom will not come back and therefore are clearly very serious. That is a major long-term the mortgage market will be more difficult issue that we should all be worried about. permanently. Peter Williams commented in the earlier It relates to an earlier question about what the session that 95% used to be the norm—between 82% Government could do to solve the housing crisis, and 98%, and 95% was the median, give or take one particularly in local communities. I have long felt that percentage point—and that was the way the housing the key to this is that many people in this country are market worked. If we can get back to that, it would hostile to housing; I understand that. If there is a be good. Does anyone want to get back to 100% or proposal in their community to build housing, they 110%? No, of course they do not; that is an will be opposed to that. If people could be made to undesirable situation to be in. If we do get mortgage realise that that has consequences, probably for their funding back—if we have 95% loan to value (LTVs) children or grandchildren, and they begin to see that, for first-time buyers in particular—I think that the they will realise that and will say, “Well, I’m not very situation will begin to calm down and we will get happy about the housing here, but if we don’t build supply up. enough housing my son or daughter, or my grandchildren, will never have a home.” There is a Q97 Chair: Do you not see a long-term change, very serious long-term issue there. where the percentage of people in this country who Chair: There is probably a fair amount of agreement own their own homes falls? Therefore if your industry with that. We will finish there. Thank you very much is going to carry on building in increasing numbers, it indeed, all of you. is going to have to find different ways of building for different customers. Ev 22 Communities and Local Government Committee: Evidence
Monday 28 November 2011
Members present: Mr Clive Betts (Chair)
Simon Danczuk James Morris David Heyes Mark Pawsey George Hollingbery Heather Wheeler ______
Examination of Witnesses
Witnesses: Nick Jopling, Executive Director of Property, Grainger plc, Paul Smee, Director-General, Council of Mortgage Lenders, and Alan Benson, Head of Housing, Greater London Authority, gave evidence.
Q98 Chair: Apologies for keeping you longer than situation where we have not delivered enough homes we had intended. I hope at least we have entertained to meet London’s need, backlog of need and the you while you have been waiting. Welcome and thank growing population of London. We are in the you for coming to our second evidence session in the worrying position at the moment where we seem to inquiry into the financing of new housing supply. For be slipping slightly backwards rather than forwards. the sake of our records, would just introduce yourselves and say the organisation that you Q100 Chair: Are the problems in London different represent? to the rest of this country or simply similar but more Alan Benson: Good afternoon. I am Alan Benson acute? from the Greater London Authority. Alan Benson: In terms of overall supply, they are Paul Smee: Paul Smee, Director-General of the similar but more acute. We have the same problem as Council of Mortgage Lenders. the rest of the country, but it is a good deal more acute Nick Jopling: Nick Jopling from Grainger plc. in London, which manifests itself in much higher levels of homelessness, much higher levels of Q99 Chair: Thank you very much for coming. You overcrowding and much greater affordability are all most welcome. Also, thank you for the written problems for the average population, who want to get evidence you have supplied to us so far. Just as a start on to the housing ladder. It is a more acute problem, to our discussions this afternoon, what do you think but London does transform to quite different is the extent, the scale, of the problems that are problems, rather than just being an acute situation of currently in housing supply, and what do you think the same problem as the rest of the country, when are the different impacts on the social housing sector you look at issues around the private rented sector, for and the private rented sector, which we ought to be example, in London, where the scale of the private addressing? rented sector is so large and it houses such a very Paul Smee: There is a general view that we ought differentiated group of people, compared to the to be having new build housing totalling around, say, majority of the rest of the country. In their situation, 200,000 to 240,000 new homes per annum. At you have a slightly different problem, rather than the present, we are producing housing in excess of same problem just greater in London. 100,000, perhaps up to 120,000, which is rather short of that target, which suggests that there will be a Q101 Simon Danczuk: How important is mortgage continuing constraint on supply, which will inevitably finance to new housing supply? The Home Builders affect demand and how it is satisfied. Federation was saying it is the most serious constraint. Nick Jopling: The shortfall, which is often written Is that right? Is mortgage finance the most important about under new home build and acquisition, and issue? first-time buyers is also now starting to draw attention Paul Smee: Clearly, there has been a reduction in the in the rental market, particularly in the South and amount of loans that have been made available since South East, so the private rented sector is becoming the financial events of 2008. There are now attempts an increasingly important stepping stone of tenure, if to address that. We would say that there is mortgage you like, if you use that terminology. It is a choice, as finance available. We are estimating that £137 billion well as a way of living, for an increasing number of will be lent over the course of this year, which is a the population, again particularly in London. considerable reduction from 2007, for example, when Alan Benson: I can only speak for London rather than £363 billion was lent. The question of the balance the national picture. Certainly, the Mayor has a target between supply and demand in causing that reduction to deliver just over 30,000 new homes a year in is more difficult to estimate. There are clearly London, which is very similar to the target of the regulatory constraints on banks from lending as they previous Mayor in his London plan. We made were doing before, and I suspect that there are also progress towards that target for the first 10 years of some demand constraints, with people feeling lack of this century. There has been now, in the last year, confidence in going into the housing market. slippage and we have actually seen a decline in new Nick Jopling: With regard to mortgage finance, again house building over the last year, 2010—11, when we it is the cost of sensible mortgage finance, and the had figures, which mirror the decline in the rest of the importance of mortgage finance in your question is country in the two years prior to that. We are in a the advocacy of sensible levels of mortgage for Communities and Local Government Committee: Evidence Ev 23
28 November 2011 Nick Jopling, Paul Smee and Alan Benson anyone. Much of the debate is around first-time buyers buyers in particular, in London, deal with the and their ability to be able to afford a deposit. The problems of accessing mortgages, and then the indemnity scheme addresses some of that, but setting Government announced its scheme on a national that aside, affordability, confidence and sentiment play housing strategy, so we want to look at that very such an important part. The housing market is not closely. We are talking to CLG about what we can do purely an investment play of investment markets; it is in London to work with that; if necessary, what would often down to sentiment. The mortgage market has an be most beneficial for Londoners to make the most of impact beyond the first-time buyer and the confidence that scheme and add on to it potentially? to move for people who are existing home owners wanting to change up or down. That cost of stamp Q104 Simon Danczuk: So there is no time scale. duty, arrangement fees and all of those around Alan Benson: Not at this point, no. mortgages all have an impact across the market generally. Q105 Mark Pawsey: We have already heard Alan Benson: I would say the market generally is reference to the importance of the first-time buyer. Mr affected. The harshest impacts are on first-time Smee, you mentioned that £137 billion of mortgage buyers, because of the deposit requirements for a finance went out in the last year, but my guess is that mortgage, which are much easier to acquire if you very little of that went to first-time buyers, because of have equity in the home or you have parents, or the need for big deposits. What has been the impact friends or family that can be a bank to lend you the of that on the supply of new housing over the last few money to purchase your home. Having said that—and years and months? the mortgage expert sat next to me can tell me if I am Paul Smee: Between 190,000 and 200,000 loans per right or wrong on this—as a percentage of overall annum are being made to first-time buyers, so there is house purchase price, the level of deposits required still finance available for them once they have got the now are not that dissimilar from the level that were necessary deposit. We have got the new build required throughout the period from the Second World indemnity scheme, which I think we are coming on War until the 1990s. It was only in more recent years to, which will deal with some of that. The fact that that we have seen very small deposit requirements there are perhaps half as many first-time buyers comparatively. What has changed is the gap or the getting finance as there were at the peak of the ratio between incomes and house prices. House prices housing boom will obviously make the market more are so high that a 25% deposit requirement for a house sluggish. There will be, for some builders, a question in London is a very large requirement indeed, whereas of whether they want to build particular types of a 25% deposit requirement in 1975 would not have property. been anything like the same requirement, but I am happy to be corrected by my mortgage expert on the Q106 Mark Pawsey: What effect has it had, though, left. on the types of property that are being brought Paul Smee: I would not correct you at all, Mr Benson. forward? I would add a slight gloss to it, which is to say that I Paul Smee: The evidence is that builders have tended think that those who have been most hit by the to build away from starter homes towards more increased deposit requirement have been those who expensive properties, which would typically be are in the position as first-time buyers, where bought by somebody moving up the housing ladder previously higher loan to value was more traditional, and using equity in their existing property to help in and where obviously it did rise steeply during the their purchase. course of the last decade. Q107 Mark Pawsey: I wonder if somebody else Q102 Simon Danczuk: Paul, do you think revival of could explain why the absence of the first-time buyer Right to Buy is going to soak up what little finance is is so important to the effect of the market. available now? Nick Jopling: I am not a house builder. I used the Paul Smee: No, I think the Right to Buy scheme can term earlier on about the stepping stones of tenure. be accommodated. There is a consultation coming out What I mean from that is the leaving of home into shortly, which will give us some more of the detail university, the sharing with friends and then perhaps about how it will operate. Lenders will want to look the sharing with a partner, while your relationship or at the properties that are being purchased to ensure your jobs settle down. Then that is the point, and a that those who are applying under the scheme can very sensible point, at which people consider afford the payments under their mortgages and do not first-time buying. That has pushed out from 32 to 37 get into financial difficulties with them. over a period of only four years. It is actually moving faster than the chronology, as it were, as the years Q103 Simon Danczuk: Alan, the people of London pass by, because of the credit crunch, because of the are eagerly awaiting the Mayoral bond and the lack of confidence, because of, in some cases, the lack Mayor’s mortgages. When will they come on stream? of the bank of mum and dad as well, because they are Alan Benson: We are pausing a moment and the people lending often on that deposit, and then into considering the impacts of what the Government has the more traditional home ownership percentage, announced. We are pausing to look before we make which still is the largest percentage in quantum. Once any formal announcements here. We were considering those dynamics start to move around, they have an the options for a Mayor’s mortgage or a Mayoral impact on the market elsewhere. That is why it is bond, looking at what we could do to help first-time important. Ev 24 Communities and Local Government Committee: Evidence
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
Q108 Mark Pawsey: What is the impact elsewhere? shortfall of new build construction. The sensible area Nick Jopling: The impact in particular is the would be to stimulate the supply side of stock. increased demand for rental stock. That is the major impact that we see as a business: the demand for Q113 Mark Pawsey: How would you do that? renters and rents rising accordingly. Supply and Nick Jopling: I actually think the mortgage indemnity demand works in the same way. was a good touch on the tiller. I am not a great one for government intervention into free markets, and that is Q109 Mark Pawsey: I wonder then, Mr Benson, is it what the housing market is, because you can be the important therefore to find some schemes to get these wrong side of the impact. Very often, they get elusive first-time buyers back in the market and, if so, unravelled as quickly as they have been put in. What what would you favour? was recommended last week was, because it is Alan Benson: It is important if you want to try to focused towards new build only and is not necessarily meet the aspirations of people in this country to go restricted only to first-time buyers—it is open to into home ownership to have some schemes to help anyone who can prove that they can only gather first-time buyers enter home ownership. Levels of together 5% of deposit—I would say that was a home ownership have flatlined from the mid-1990s. sensible touch on the tiller.
Q110 Mark Pawsey: Is that a problem? Q114 Mark Pawsey: Mr Smee, is this going to do Alan Benson: That is a very big policy question for the trick? politicians to decide, not for an officer like me to Paul Smee: I think it will make a contribution; I very determine. There is no appropriate or correct level of much hope that it will. We have got this imbalance of home ownership, neither in the UK or anywhere in supply and demand. There is a lot of evidence that Europe. Countries all work at different levels and very people who are currently in the rented sector are effectively at different levels, depending on a whole paying levels of rent that demonstrate that they could series of cultural and social phenomena. In London, afford a mortgage. They are in effect waiting to build we stopped seeing an increase in home ownership up their deposit, whilst paying their rent at the same from the mid-1990s and it has been declining time. This scheme will bring forward people who can significantly since the turn of the century. Now that quite safely be lent to at a high loan to value, bring pattern is being replicated in the rest of the country, so them on to the property ladder and allow them to meet London led the way. It is not just a UK phenomenon. their aspirations. Nobody is being forced into this scheme; this is something where we think people’s Q111 Mark Pawsey: Can we not argue that is a good aspirations can be met and, at the same time, it will thing, because it gives much more labour market contribute to a growth agenda, because it is being mobility? Why is it so important to have these focused on the new build sector, with the economic first-time buyers getting started on the housing ladder? consequences of that. Alan Benson: You are right in terms of labour mobility. There is evidence clearly that the private Q115 George Hollingbery: Returning to the new rented sector is the most mobile sector. It is the sector build indemnity, we met last week and we had a fairly that attracts the most economically dynamic people. robust discussion, I think, about some potential A large part of why London was economically problems with it. I worry about several things, but, dynamic over the last 10 years has been the growth of first, can you just flesh out for us how this scheme the private rented sector, which is the route for the works? How many years is the Government tied in vast majority of people, like myself, who came to and so on and so forth? London to seek employment. The private rented sector Paul Smee: The idea behind the scheme—some of the does that very effectively, but people have a desire details are still being worked out—is that when a new and an aspiration to go into home ownership, settle home is purchased by somebody on a high down and have roots. Home ownership itself produces loan-to-value mortgage, the builder will put 3.5% of a huge number of other benefits over and above the value of that house into an indemnity scheme for having a roof above your head, as a hedge against seven years. inflation, against pensions, against care costs later in life, etc. There are many financial reasons why people Q116 George Hollingbery: I made this point last like to get into home ownership, and yet there is a week and I will make it again. The builder is putting groundswell of opinion out there of people feeling money in, but they are putting money in that would they are locked out of home ownership who, a not be there if they were not just selling a house, generation ago, or even 10 or 15 years ago, would correct? have felt they have an expectation to be home owners. Paul Smee: That is correct.
Q112 Mark Pawsey: To all of you, given that it has Q117 George Hollingbery: It is not money they are not been happening over the last few years, what is finding from anywhere else; it is money that is the best way, in your view, to get these first-time generated by the profit they are turning. buyers into the market? Paul Smee: Yes; they are putting skin in the game in Nick Jopling: The view is I think we have to start effect for seven years. building. We have to recognise, and there are very few people who have not recognised, that we have a Q118 George Hollingbery: Are they? Communities and Local Government Committee: Evidence Ev 25
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
Paul Smee: Well, they are getting delayed profit, I to control valuations? Are they going to have the right would suggest to you, rather than actually putting to veto valuations and have their own valuer in each cash in. transaction? Paul Smee: Shall I start with answering those Q119 George Hollingbery: If the scheme unlocks a questions? Right, I think that the valuation issue is a sale, that money would not exist. very important one that is important to everybody in Paul Smee: Indeed, but they have to put the money this scheme, because we do not want just to see the into the sale and it is something that they can claim value of the indemnity going, in effect, into an back if the indemnity is not caused, if there is no increase in a new build premium. The Royal default and the property has not fallen by 3.5%. Institution of Chartered Surveyors (RICS) has guidelines on how these valuations should be done Q120 George Hollingbery: You understand what I and we will be looking to talk to them about how they am saying. can be adapted to the specific circumstances of the Paul Smee: I do understand. scheme. We are requiring that there will be, and this will be required by the Government, absolute Q121 George Hollingbery: The profit is not there to transparency about the prices at which comparable invest in the scheme if the property has not been sold, properties—for example, on a particular so Government’s unlocking a sale, which gives the development—are changing hands. There will be a property, which gives the builders money to put in. It mechanism by which information can be exchanged, is not money they have to find otherwise. so that will give a much higher level of confidence Paul Smee: Yes, I can see what you are saying. The that the price being taken is a reasonable one. I think way the scheme will work though is that the builder everybody involved in this scheme realises that the will put that money in; the Government will top that fact the Government is involved gives it a very high up with an additional guarantee up to 5.5%, the level of visibility, which has to be responded to. Government itself will not actually physically make the transfer of money. That allows the lender to put in Q125 George Hollingbery: Nick, you must be pretty a much higher loan to value, in confidence that he will chuffed. Nick and I know each other a little. You are not be affected by changes in the property price. More a big builder. You have a big ethical dimension to particularly, we believe that there will be a regulatory what you do, but you are going to be able to float acknowledgement of the way in which the scheme is these funds and deal with these funds much more being backed. At present in a new build property, if easily than others. You have got lots of experience in you are loaning at a very high loan to value, you have the financial transaction side of the market, so it is to put eight times as much capital to support that loan going to suit you down to the ground. Will it not as you would if you were lending at 75% to 80% LTV. knock other competitors out of the market? We believe that, with the guarantee and indemnity Nick Jopling: Well, it will not suit us, because we are arrangements in place, there will be a lower capital not a house builder. To be clear, we do not build requirement imposed by the regulator, and that that houses; we prepare land and then sell the land to the will enable the pot to be extended and shared round, house builders to build on, so it is a different so that more new build property can be purchased, expertise. I am going to have to really defer to Mr with the economic consequences. Smee about the mortgage impact. On the valuation thing, I think your point is very important actually Q122 George Hollingbery: How long are you in for about the 3.5%, and it not just being an extra bonus as a developer? for the house builder; I think it is a particularly Paul Smee: The scheme will be for seven years. important point. There will of course be elsewhere, on any site being sold, comparable evidence, as there is Q123 George Hollingbery: Does it work on shared- in any form of valuation. I would expect the lender ownership schemes? and the Government to have an RICS evaluation Paul Smee: No. From the point of view of the person backed by a professionally indemnified professional, purchasing the property, it is exactly like taking out who is going to ensure that exactly what you are an ordinary mortgage. worried about does not happen. Alan Benson: On the particular issue about the price, Q124 George Hollingbery: Here are a few questions we do worry about prices being added into the costs for everybody—just general thoughts on this. Are we for a developer, but as these are new builds confident that the assessment process will show specifically, they will be almost identical flats in the sufficient due diligence to stop these being junk loans? same block in London, or identical houses in the same You have said that you have confidence that people in road being sold, so it will be very easy to therefore the private rented sector can service a loan like this, spot if these new build houses are at differential prices but we need to be very careful—do we not?—that we for the ones with and without the mortgage-backed do not create new junk bonds. That’s one. Secondly, indemnity. I would have thought it would be is it not just a competitive advantage for major reasonably easy for the Government to check that. The builders who can create these funds or deal with these other questions you asked are a bit more difficult, funds very much more easily than an aggregation at about assessing the individual circumstances. We wait local level? Thirdly, if I was a house builder, I would to see a bit more information from the Government just stick 3.5% on my house price and that way it has about this indemnity scheme and how it will work, cost me absolutely nothing. How is Government going because the detail is worth looking at. Again, going Ev 26 Communities and Local Government Committee: Evidence
28 November 2011 Nick Jopling, Paul Smee and Alan Benson back earlier to the question about the Mayor on a case-by-case basis, it may be looked at that, if potentially getting involved in mortgage schemes, we these were being built and offered rent for a period of want to look at how the Government’s scheme works time, then maybe there would be no requirement to first and see how we can best work with that one. build section 106 affordable housing, general needs Paul Smee: Do you mind if I just add in two points? rent or intermediate housing alongside it initially, I got carried away on the valuation point. First is the perhaps, or at a stage. It is a debating point, and the price will be the price. It is very clear there can be no reason it is a debating point is because I talked at the other hidden discounts or anything to a purchase of beginning about the growing numbers of people who one of these properties. The second point, about the are renting. These are, in the world we live in, the smaller end of the market, is we have already had “inbetweenies”. These are the people who cannot some of the smaller lenders active in the mortgage afford to buy a home and they do not qualify for social market—some of the building societies—saying that housing, but they need to be housed. That goes they want to talk through how this could apply to without saying. By the fact that they cannot afford to them. You can envisage situations where smaller buy a home, I would argue that they just might be builders, with perhaps strong regional presences, are needing to have some form of home they can afford, talking to lenders with equally strong regional and therefore to be able to offer private rental on a presences, which gives a local flavour to the scheme, similar basis that the Americans offer, in multi-family which I think will work in favour of some of the housing in purpose-built blocks that are operated as points you have been making on the valuation issues. such, might really be the nirvana to get to, especially if we could fund it institutionally, rather than by Q126 Chair: George’s point is very interesting Government. though—what the prices that we are supposed to be monitoring for these deals are going to be—because Q130 Heather Wheeler: I was going to say that the advertised price on most new build schemes now brings me very nicely, thank you very much, on to my is not the price people are actually paying. There is next point. How do you feel that there is a way of always a bit of negotiation. Is there not a danger that getting these big institutional investors into the this scheme drives the price back up, so the builders market, by getting rid of commitments that other actually do make their 3.5%? normal builders would have to abide by? Paul Smee: That is the reason why we are, a), Nick Jopling: The question of how we get institutions involving the chartered surveyors and, b), insisting on into the residential market is something that has vexed absolute transparency. Not everybody who will be many people in the sector for a very long time. Those going into one of the properties, for example, will be obstacles have ranged from reputational: no Chairman somebody who is taking advantage of this scheme. of a pension fund—and when we are talking about There will be other people who have put forward a institutions, let us be clear, we are really talking about much more substantial deposit, so the transparency pension funds—wants to receive letters about the will give the confidence that a price being charged for service in a block or how a manager might be making this new build is realistic. decisions about how they operate that block. Those have largely gone away. I think they were political, Q127 Chair: Presumably, in the negotiations you because remember in the first case this was a Tory Act have had with the Treasury, has the issue come up of in 1989, which then had to be tested through 1997, whether the whole of this underwrite from but we then had from 1997 onwards very much a Government, this guarantee, counts as Government market that was growing and really the institutions debt? were not going to go into it then. We are in a very Paul Smee: I have left that to the Treasury, I am different market today, so that has gone away. afraid, Mr Betts. The significant barriers are scale, suitability of stock and yield. Those are long debates, each of them, and Q128 Chair: They have not raised it as an issue to maybe we can do them in detail, if you like. An you. institution wants to invest in scale; it is not interested Paul Smee: That has not been raised with me to date. in buying buy-to-let property. There is no stock for it to go and buy. There are no portfolios of rental stock Q129 Heather Wheeler: I am very keen on for it. There may be some distressed portfolio, but affordable housing and I am interested that there they are not interested in that, because there is often a seems to be, from the evidence that we have seen so reason those properties are distressed in the first place. far, a real gentlemen’s fight going on suggesting for Suitability of stock: we address that through building buy-to-let developments that the affordable housing purpose-built stock for rent. That is the multi-family element should be taken out of that. I do not see how housing US model. And then the yield. Yield has you can justify that, but perhaps your argument is that always been a challenge, because the cost of entry, it is about getting another tranche of buildings built against the rent and the net rent that comes off the and it deals with a blockage there somewhere. bottom, has always been too high. In particular in Perhaps, Mr Jopling, that might be something you London, the net yield is so small, so one has to deal would like to talk about. with the cost of entry, and that is the cost of Nick Jopling: Yes, you are referring directly to the construction and the land. Those are the two main suggestion that, if we were to be able to perhaps use constituents and that is what you have to address. The public land or to build buildings specifically for rent, cost of land is directly affected by the requirement for so not for sale—they are not available to purchase— building other types of housing on it as well. Communities and Local Government Committee: Evidence Ev 27
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
Q131 Heather Wheeler: You use that phrase and Mark Pawsey: We wish you well. you say it has this effect, but could you actually give us an example where you think investors have just Q134 Chair: Just coming back, the issue is we have said, “No, we cannot do it,” and have pulled up the land, and there is the public sector land you just drawbridge, particularly on the affordable housing mentioned; you have got developers like yourselves side of it? who can also manage properties in the longer term; Nick Jopling: Can I be clear that I do not want to go and we have got institutions with money that would down a route of saying we can only provide this like to take investment. The trick is how we can get without affordable housing, because that is almost a those together, is it not? What are you saying are the hypothetical suggestion, if you really wanted to turn key obstacles to achieving that? the production line up? I can give example of, say, a Nick Jopling: They are those three things—scale, big site that can deliver 600 units. If 200 of them were suitability of stock and yield—which means to be affordable, 200 were build-to-rent and 200 for build-to-let, rather than buy-to-let, is providing the sale, actually you could build the first two thirds, scale and it is also dealing with the suitability of stock. because there is such demand out there for social Therefore, we have to deal with the cost of entry and housing and for private rented. You have got to find a that is why we are interested. We and I think other way to be able to deliver those. The ones for sale can people in the sector for a long time have tried to find be built at phase three; they can be built later and a a way to bring institutions into this market of the developer can take that profit. You have to be able to public land initiatives or the partnership with public allow someone to be able to deliver the first piece as land to enable these types of properties to be built. well, at a commercially sensible level, to make a profit of some sort. We all know that delivering affordable Q135 Simon Danczuk: You were saying that there is housing—the house builders that have done it have potential for build-to-rent in the UK. That is a always done it at cost. potential solution to some of the housing problems that we have got. Q132 Mark Pawsey: Did I hear you rightly say that Nick Jopling: Build-to-rent in a social side and build- there were no reputational reasons why institutional for-private-rental, yes. I think we are at an absolute funds could not go into the private rented sector? If moment now when the opportunity is here for that is the case, surely yields are acceptable now, bringing the institutions into the market. given that rental values have been increasing largely because first-time buyers have not been able to buy. Q136 Simon Danczuk: You do a lot in Germany. What really is holding institutional funds back from What is the experience there in terms of institutional coming into the private rented sector? investment and the opportunity to do what we are Nick Jopling: There is nothing today for an talking about? institutional investor to buy. If you went to any of the Nick Jopling: The German market is very different major pension funds and they said they wanted to from the UK market. We do have a portfolio of 7,000 invest £300 million into the private rented sector, properties in Germany, but they are on our own there is nothing for them to buy. balance sheet, so we do not have an institutional investor or partner. They are all ours, as it were. Q133 Mark Pawsey: They would not be prepared to Institutional investment in the Germany property develop it; they could not work with a developer and market is actually less than one thinks. I am not an fund something through a developer. absolute expert on the German market, so I will be Nick Jopling: Core pension funds look at low-risk steady as far as I go. A lot of it is a very large private investments. Development and planning risk are both rented sector and it is a highly regulated sector. It is high risks, so they would want no development risk largely owned by metropolitans and regional and no planning risk. You need to take those risks out ownership and corporations that were created after the of the equation, and they are only interested War. There was a time when a number of institutional effectively in a stabilised asset—an asset that is full investment funds went into Germany in the mid-2000s of tenants, operating, providing a net income. They with the hope that they could take advantage of the would be able to put a value on that. arbitrage between the rental value and the open The exercise, and the one that was referred to in the market value, in a way of breaking those properties example, where Grainger had partnered with up and encouraging Germans to own their property. Bouygues, which is a construction company—not a That is not the German culture, on the whole, with the house builder but a construction company—to try to exception of one or two cities where there is a bit deal with that cost of entry, all four sites that we put more of that culture. That is a very flat income-driven forward are on public land. They are in the London regulated market, very similar to our own social Borough of Barking and Dagenham. They are at housing market actually, but not heavily institutionally Thames Gateway. They are in Maidstone. Those are invested into. public land sites where Bouygues has a development partnership to develop on that land, and then we have Q137 Simon Danczuk: David Lunts used to work at teamed up with them to effectively look after them the HCA, did he not? Is there still potential in the once they are built. The difficult bit is we now have HCA Private Rental Sector Initiative, in terms of to go and get institutional money to invest alongside London? How important is it? it. That is an exercise we are going through at the Alan Benson: I think the Private Rental Sector moment. Initiative has been formally terminated. What they are Ev 28 Communities and Local Government Committee: Evidence
28 November 2011 Nick Jopling, Paul Smee and Alan Benson looking at now is the HCA coming into London, and sector land released as possible. How significant do ourselves looking at how the model would work. I you think public sector land is in terms of trying to would disagree slightly with Nick perhaps on a couple solve this problem that we have in terms of housing of things, inevitably, being a person responsible for development and supply? the spatial planning in London. I think he is Nick Jopling: I think in the South East and in London completely right in terms of his analysis of what the it is a very significant opportunity. It will not be key problems and most of them seem resolvable. The suitable for every piece of public land. I think we problem around scale is resolvable; there are lots of perhaps went down a bit of a red herring about not developers in London and internationally that could having affordable housing in the private rented sector. come in. We have met many of them over the last few As I said, I have not come here to argue or to debate, years, who have come in and built the scale to let at really, to push or debate that. Really, we should all be scale, and do so in other countries. Their problem in focused on just cranking up the delivery rate because, terms of reputation and long-term management and as was said right at the beginning, those numbers are costs can be resolvable. They talk about working with compelling. a housing association, for example, as a management I gave another example about how we have partnered agent, or working with someone like Grainger, who with the MOD at Aldershot to deliver a very has a very good reputation. The reputation issue can significant number of houses. The Government still go away; the management ones can. What is very owns that; we have not bought it off them. We are not difficult to make go away is the yield question. How a land-banking company. That is an exercise where do they make the yield stack up? That is the absolute the Government has said, “We have a piece of land. crux, in my mind, of why institutional investment has We have a company out here and this is what they do. not got off the ground in the UK and that is the crux Partner up and bring us the maximum benefit, with of the discussion about whether it should be allowed the intention of delivering a significant number of to not have an affordable element, and whether it homes, as well as providing a—” should have free land, to be able to have underwritten rent guarantees, etc. There are various tweaks that are Q139 James Morris: That is an example of build other forms of subsidy. now, pay later, or is it similar? If you accept, as it is, that section 106 affordable Nick Jopling: No, what we are doing is we are housing requirements are a tax on the house partnered in that case. That is specifically where we building—if you did not have them, you could build are actually partnered with the Government, with the more homes—we have section 106 affordable housing MOD, or the Defence Infrastructure Organisation, requirements because of our desperate need for with the intention of maximising the value of the asset affordable housing. You would need a compelling that they hold today, which is a garrison site that needs reason for taking those affordable housing to get planning. It needs to be master-planned; it needs requirements off a particular type of housing to have a lot of infrastructure put into to make it work development. We do not have an affordable housing for Aldershot’s urban extension, as it were. That is all requirement for student housing, for example. If you our risk; we are paying for that. As the partner, that is build student housing, you do not also need to build our sweat equity and that is our real equity. The land, affordable housing, but there has yet to be a when it is ready for delivery to house builders, will compelling case made for why private rented housing be offered into the market for sale. We will take a should be exempt from the affordable housing small share of the receipt; the Government will get requirement. Given that the last research we did into the vast majority of it. what happens to market housing in London, which showed that two thirds of it goes into private rental Q140 James Morris: Any other views about the housing, we do not have a problem producing private importance of public sector land? rented housing, if we go for the market model, which Alan Benson: The potential there is obviously very, would give us the affordable housing requirement. very large. There is an enormous amount of public Although we would very much welcome and like to sector land, much of it becoming surplus to see build-to-let-type models come in, because of that requirements for those who own that land. The quality it would potentially give in London, we do not difficulty is there is a very large difference between think that that, in itself, is a compelling case in land owned, for example, by the HCA, by the London to move away from an affordable housing Regional Development Agencies as were, and in requirement. It is very difficult for the yield for an London by the Mayor, which is land owned for the institution to stack up, when they are competing with purpose of building housing regeneration; and land the dominant model of private renting, which is owned by the Ministry of Defence, the National somebody who owns one or two or has a small Health Service, local education authorities and all handful of properties, and puts in an awful lot of those others, which are responsible for something very spread equity, who in the end is reliant much more on different indeed. If you are the Ministry of Defence the long-term capital uplift of that property, not on the and you are required to replace your missiles, and are returns to capital on an annual basis. It is very hard to given the option instead of handing over some land at compete against that in financial terms, for the a less-than-best-cost deal to build some homes, that is institutions. not a compelling case to make to the Ministry of Defence. They would rightly say back to you—and I Q138 James Morris: The Government has made have had many conversations with them and many quite a big play about trying to get as much public other Government Departments over a number of Communities and Local Government Committee: Evidence Ev 29
28 November 2011 Nick Jopling, Paul Smee and Alan Benson years—that if you want to build housing, you should property management.” Those are the three bits to join put the money into the housing budget and pay the together. Those are the sorts of thoughts that people Ministry of Defence for that land. Their compelling are having. “Buy now, pay later” sounds as though it case is to sell the land for best return and reinvest in is the Government being legged over. That is not what what their job is to do, as defined by their Minister. it is supposed to be. This is about responsible and If the Government wants to bring land forward in proactive thinking about how to get to an objective in these Departments at less than best value, it needs to the best way, because everyone has a bit of asset that make the case very clearly, at the height of the Cabinet they can put into that to make it happen. perhaps and Prime Minister that this is a priority, which is why where it does seem to work, where this Q143 Chair: If the local authority will get value back happens, it is at local authority level, where you have from the land, it tends to assume it will get a lump a local authority leader and they can have a clear sum at some point, which tends to assume that the vision of what they want to see as their priority, which property would be sold. Is that not a problem when would be affordable housing. Not every local you might be actually looking for a long-term investor authority does, but when they do then they are willing to come in and keep the property for many years? to overturn the fact that you all do not purely seek Nick Jopling: It is a good point. If one was to say the best return on that land. land was worth 10% or 15% of the finished product, it can either be done by the institution buying it out at Q141 James Morris: On that point about local the end of the day and just buying into the whole, authorities, and it may be a quick question for Nick because you would structure it into a fund rather than as well, you talk about your defence initiative. Clearly, property by property. The worst thing one could do is local authorities are sitting on a high percentage of the to break up the actual building and sell 20% of the public sector land. Have you seen an appetite, if you units off. If the Canary Wharf tower sold off floors 16 like, for local authorities coming forward with land to 20 to anyone, you have then broken the investment and wanting to do interesting equity deals? Is that model. Your point is right: you do not want to something that has potential, do you think? crystallise it through a sale of individual units, but you Nick Jopling: We are partnered with the London can always value something for what it is worth and Borough of Hammersmith and we are doing sell a stake of it. It might be in shares rather than something in Haringey. This is a local, regional, in property. site-by-site agenda. You have to take each one as the most suitable way, and to be able to have the Q144 George Hollingbery: You are not saying this flexibility to understand where does one want to get could be hugely difficult politically, locally, but that to. If it is a buy now, pay now, you— you could de-risk the projects further by the planning authority granting permission on its own land for Q142 James Morris: It is about the effectiveness or something they consulted with locally, which people otherwise. want, which fits and which looks right, and have that Nick Jopling: Yes, on a deferred equity basis, let us ready with a neighbourhood development order, have say. What we mean by that is that a piece of land, as it ready to go. Is that something that we have seen? Is a car park or as an unused piece of council land, has it happening anywhere? Should it happen? no value today because a house builder is concerned Alan Benson: I cannot say I am aware of it happening about the market he would be selling into, the cost of anywhere yet; with the Government’s planning remuneration, the cost of putting infrastructure in, the reforms, it may well be our target in this area. This is cost of getting planning—the receipt for a council how the Government are looking to rethink the might be very unattractive. It says, “Why would we planning system. That kind of ready-to-go sell it now when the market is so low? These are our development proposition would be quite effective in crown jewels. Once we have sold them, they are taking all the planning risk out of it. gone.” There are suggestions and discussions, and George Hollingbery: It would be huge, would it not? Birmingham has started these, so it is not just It would make a huge difference. You could get local London-related. Their discussion is with a company buy-in for it, too. You can actually get it designed by called Evenbrook, where the suggestion is to say, local people for local people. How much better would “Actually, if one were to imagine that piece of land that be? with a hundred units built on it that were rented out, for example, and you get the splits, the net operating Q145 Mark Pawsey: Sticking with social affordable yield off that has a value. If it is 5%, it is 20 times housing, I have a couple of questions probably more multiple that. If it is 4%, it is 25 times multiple that.” targeted at Mr Benson, but what is the long-term In a very simple way, that is how the institutions value impact of the affordable rent model, particularly with commercial property. That is how they value their what may be happening in London? I wonder also if shopping centres; how they value their office blocks you could comment on the changes to housing benefit and the like. and how they might impact on housing associations’ If we could create something there and then say to the ability to gain finance. local authority, “You enabled this to happen, so you Alan Benson: The long-term impact of affordable have a share of this. You have a share of something rent: affordable rent does enable us to develop a lot that your partner has delivered and your partners have more homes with a lot less Government funding, delivered,” back to the Chairman’s point, “being built without a doubt. Government funding, instead of with money, the construction and the asset and being the lion’s share of the cost and grant of building Ev 30 Communities and Local Government Committee: Evidence
28 November 2011 Nick Jopling, Paul Smee and Alan Benson a new affordable rented home, becomes a very small house prices, is very supply-and-demand driven. It is proportion, and the rest of the money is brought in by very, very sensitive to price signals. the registered partner through the higher rents Actually, if you look at the flat signal and put a point borrowing against that and using their own resources, in of 80% of the median market rent, in every etc. It makes less money go an awful lot further for bedroom size in London and every benefit area in homes. The impact of course is that it does so by London, that falls within the lowest 10% in absolute having higher rents. You had this discussion with the price terms of what prices would be. So 80% of previous speakers about the impact of that on welfare median market rents is in the bottom 10%, the bottom benefits in the housing benefit system. decile, of actual rents that are charged. The only way Quite clearly, we had a lot of conversations ourselves you could find a home at that rent level, in any area in and an awful lot with CLG, the Treasury and DWP London, is to go to the really poor-quality affordable about how this programme would work and the homes. This way they are going to get a decent quality impacts. I do not think there is a turf war going on home with a decent landlord. It is actually a now or was a turf war going on before the programme reasonably affordable rent, looking at private rents. was settled, in terms of what the costs would be. A That was actually quite striking when I saw those particular concern for the Department for Work and figures. It is more affordable than people might think. Pensions was the amount of homes they would have to convert from the existing stock of social rent to Q148 Mark Pawsey: And the impact of the changes affordable rent to fund the programme, because each to the housing benefit system in terms of security and one of those would have a direct housing benefit income as far as housing associations are concerned. impact. Alan Benson: In terms of the interaction with affordable rent and the housing associations, we have Q146 Mark Pawsey: To go back, you think that the been very careful with the programme in London. We higher affordable rent will encourage more social have had a lot of negotiations and discussions with housing to be brought forward. To that extent, you the registered partners; we were very clear what we support the idea. wanted. It is that all the rents in the affordable rent Alan Benson: It will bring a lot more homes forward programme in London should work within the than would have been done otherwise in the old model Government’s existing caps that are coming in for with the same funding; that is absolutely the case. It local housing allowance and the proposed caps on the provides more homes. There is a key difference, I universal welfare cap. All the rents being charged in think, and this is something that Boris, I remember, London will be below LHA level, so they would not remarked upon; it certainly struck him. He was have been impacted by those caps anyway, for all concerned about the impact on benefits when we sizes of properties. talked to him, and the key difference between this and We wanted to make sure that all sizes of properties the early 1980s “Let the benefit take the strain” model, would still be affordable to tenants under the future when we moved to housing benefit rather than social caps that are being charged. This has meant they have house building, is that at least here, where the benefits had to suppress the rents down for the larger family are being paid into the sector, they are staying in the homes, which would have been the ones that were affordable housing sector, not going to private rented most impacted by the universal cap. The programme landlords. Therefore, they will be recycled for further we have had in London has an average affordable rent affordable housing development. There is a less of 65% of market rents, but quite a lot of the one negative impact on the housing benefit costs. and two-beds are towards the 80%, and most of the three-bed-plus home sizes, the larger family homes, Q147 Mark Pawsey: You do not subscribe to the are right down at the bottom level, very close to target view that the new affordable rent regime makes rents rents for social rented levels. unaffordable. Alan Benson: No, the Mayor does not subscribe to Q149 Mark Pawsey: One last question for Mr Smee: that view at all. An interesting thing: I had an opinion do you see that housing associations will be able to not too dissimilar to that when I originally looked at raise funds on the bond markets in future? the issue. The phrase “80% of median market rents” Paul Smee: Indeed, I do, because I think the bond sounds like something very unaffordable. markets are already providing quite a significant Interestingly, I could almost do a little chart now to proportion of their income. Some 37% of their capital try to show you because this is hard to explain. The needs were raised, compared to 5% some time ago. It graph of market rents, the curve of market rents, is is there. I cannot say on what terms the bond markets that there are very few at the bottom that are very, will be open and I suspect that they will be looking very cheap. There is an extraordinarily flat curve and for security of income as well, and that the changes then a very few at the top that are very, very to the rent systems proposed in the Welfare Reform expensive. At the top, you have Roman Abramovich Bill will cause some uncertainty until the pilot and his friends living at the top. We do not worry schemes are worked through and those impacts are about him. At the bottom, you have people who are understood. renting either from friends, from family, some tied accommodation or just really awful House in Multiple Q150 Mark Pawsey: Do you see that as a new sort Occupation (HMO)-type properties. That is the vast of finance that could potentially deliver new homes? majority of the bottom. In the middle, there is a very Paul Smee: I am sure that it is a source of finance. I flat curve because the private rented sector, unlike think the terms on which it is made available is Communities and Local Government Committee: Evidence Ev 31
28 November 2011 Nick Jopling, Paul Smee and Alan Benson something that I cannot speculate on at the moment, proposals when they actually are announced.1 I because that, of course, will depend on the level of think that would be helpful. Finally just one point: the demand. private rented sector has more people moving into it who probably want some security. Investors look for Q151 Chair: A couple of points: on REITs, do we long-term returns. Why do we not see longer-term expect the Government’s proposals, when they come, tenancies offered and taken up, or should we be to actually get them working in a way that we have looking to have a variety of tenancies? not seen any evidence of so far? Nick Jopling: That is a very relevant question. The Paul Smee: Possibly. answer I have often given to that question is: why Nick Jopling: I think what you are referring to would a landlord give a longer tenancy to a tenant if specifically are residential REITs or REITs for they were asking for a discount to have that tenancy residential. Again, the Government’s intention or agreement? That is what has traditionally been the indicated intention, listening and consulting around case. They say, “If we take it for three years, what the residential REIT agenda, alongside the changes will you knock off—20%?” Once you get into a point they have made to SDLT and to the stamp duty on the that there is no discount applying or there might even entry, particularly on these larger scales, could both be a premium, and somebody says, “Actually I am only be described as positive interventions, as it were, prepared to pay a little bit more or agree to what the to getting institutional money into this market. We uplifts will be over a period of time,” then I think hope on 6 December, which I think is the date that that a longer-term tenancy is something that landlords there will be an announcement about that, that some would welcome actually. I do not think there is any of the consulting has been listened to and then we resistance. It is a personal view as to why we do not may find ourselves being able to get some REITs. I see so many. There is nothing to stop landlords giving go back to the point: there are not, in the private longer tenancies now and, indeed, some people do sector, large tranches of investment-grade stock out give them. there. The mom-and-pop business dominates that Chair: Thank you all very much indeed for giving market. evidence to us.
Q152 Chair: I would be interested to have a note about your thoughts about the Government’s 1 See Evs 121, 123 Ev 32 Communities and Local Government Committee: Evidence
Monday 19 December 2011
Members present: Mr Clive Betts (Chair)
Heidi Alexander George Hollingbery Simon Danczuk Mark Pawsey Stephen Gilbert Heather Wheeler David Heyes ______
Examination of Witnesses
Witnesses: Councillor Paul Andrews, Member, Planning and Housing Commission, Association of Greater Manchester Authorities, Mayor Sir Steve Bullock, Housing Portfolio Holder, London Councils, David Edwards, Executive Director, Housing and Regeneration, Oxford City Council, and Chloe Fletcher, Policy Manager, National Federation of ALMOs, gave evidence.
Q153 Chair: Good afternoon. Welcome to our third them properly and efficiently both to manage their evidence session of the inquiry into the financing of assets more positively to help maintain their stock and new housing supply. Thank you for the written to deliver some new build, but unfortunately for some, evidence that you have given so far and for coming the debt cap being introduced at the same time as self- this afternoon. For the sake of our records, could you financing will limit the amount of new build that they begin by saying who you are and the organisation that will be able to deliver. The previous Government had you represent? It would be helpful, and we will just looked at increasing that debt cap to allow some extra move along from there. new build, and the coalition has currently decided not Sir Steve Bullock: Steve Bullock, representing to do that. To some, that will be a big barrier to London Councils. engaging in new build in the future. We would like to Chloe Fletcher: Chloe Fletcher, representing the see that reviewed with a view to allowing additional National Federation of Arm’s Length Management investment, based on the rents and a decent business Organisations. plan that shows that a well managed organisation such Councillor Paul Andrews: Councillor Paul Andrews, as an ALMO can deliver that return and deliver some Manchester City Council, representing AGMA. new build for that investment using the rental income. David Edwards: David Edwards from Oxford City We would like to see that. Council. We have done some work around new models if that debt cap will not move. For those ALMOs that are Q154 Chair: In the evidence that you have given us looking at a significant gap in their investment, we so far, there is quite a bit of reference to the reforms have developed three models that we would like to of the Housing Revenue Account, which was a policy see the Government support. Changing the ownership of the previous Government that is being implemented of the ALMO from 100% controlled by the local by this Government. It has generally got a reasonably authority to a shared company that the local authority good welcome from most housing organisations. How has a stake in but does not control any more would do you think it will help, if it will, to increase the allow the ALMO to borrow additional moneys amount of new housing that will be provided? privately, which would not count on the public sector May I say, right at the beginning, that if you feel that borrowing sheet. Therefore it would allow some you are in general agreement with something that has ALMOs to complete decent homes if that is what is been said before, you do not have to repeat it? If you necessary, maintain stock, do regeneration but also are clearly in disagreement, tell us so, otherwise we significantly add to the new build properties in the will probably move along with a general view that country. what has gone before is acceptable to you. Councillor Paul Andrews: Nothing to add. Sir Steve Bullock: Potentially, HRA is a very David Edwards: I would just add that, from an Oxford significant aid to local authorities beginning to secure perspective, where we welcome the HRA, the the additional housing to be built either directly or borrowing cap would still allow us to undertake some through partners. There are a number of questions development, but certainly if that was raised we would about how that will happen. To make it work in wish to take the opportunity to increase stock. London, we have had a report done for us that indicates that boroughs will need to work together, but Q155 Chair: Has anyone managed to quantify or also that it would be helpful if central Government look at what it might mean if authorities were able to looked at some of the issues, such as swapping the swap? Some authorities that have borrowed money headroom that it may create for us. Different boroughs that they may not use could give it to an authority will be in different positions, and if we all work with no capacity to borrow for new build. It might be together and are able to swap that around over time, easier in London than in the rest of the country. If we we may be able to secure even larger numbers of had a prudential limit rather than a more restrictive new supply. cap, what might that do to increase the supply? Chloe Fletcher: For the vast majority of councils, Sir Steve Bullock: The first thing we have to say is self-financing will be a very good deal and will allow that there are a lot of uncertainties around working Communities and Local Government Committee: Evidence Ev 33
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher these figures out and there is much more work to be that were immediately adjacent to each other—it done. We are estimating, potentially, £1 billion would be easier, but it would not have to be. borrowing headroom in London. I have to say that some of that will also have to be used for finishing Q158 George Hollingbery: Presumably, reducing off decent homes programmes. That will not all be housing benefit rates, LHOs and so on mean that there for new build, but a significant part of it will. having links between widely separated boroughs Again, that will vary depending on where individual might actually be quite useful, if you stop and think boroughs are with their programmes. I think that is a about it for a second. conservative estimate, but we don’t want to get carried Sir Steve Bullock: Yes, and certainly in London. It away with figures which prove not to be sustainable depends on the scale of the development, but if it was at this stage. a relatively small-scale development, you would be looking at issues around employment patterns and Q156 Chair: Has that been looked at by any whether you actually had residents who needed to be authority? relocated across the city. Probably, it would end up David Edwards: Yes, but because of the peculiarities being a much more complicated arrangement with of AGMA and the 10 district councils it is early days more than one borough involved—so that you were yet and we are still getting through the politics of this. able to get the nominations to the places that they Chloe Fletcher: We come at it from a slightly needed to work—but the principle would remain the different angle as London Councils are having to do same. more work on this. We would obviously have to do more work on this to firm up the numbers. We have Q159 George Hollingbery: This sounds to me as if looked at how much our ALMOs are developing at we could easily separate this out. We could separate the moment and then potentially what sort of numbers out where the housing is needed and who needs it of units they might be able to produce in future, given from the banking element. Is there any particular the sites that are there if the finance was available. At reason why you could not have a national pool of the moment we have 23 developing ALMOs across headroom? the country, roughly looking at possibly a Sir Steve Bullock: We have looked at it only in the development programme of between 50 to 100 context of the London boroughs, so I do not actually properties each. That is what they are aspiring to at know how the figures stack up outside London. That the moment. If all those 23 were enabled financially is partly because London has some very particular to do that, it would deliver up to 7,000 by 2015. If we housing issues—the land values in London are so then looked to the other 37 to join in, we would be dramatically different from elsewhere. I am not saying considering a longer time scale because they would that it would not work, but what we have looked at is need a lead-in period but you could look at up to an specific to London. additional 30,000 over the further five years, so another eight years. But you would obviously have to Q160 George Hollingbery: I will comment and just make sure that things were in place to support those perhaps invite a comment back: it sounds very ALMOs and local authorities to make them confident complicated. It seems to me rather like any financial to start a significant development programme. transaction—if you do it too small, you might end up eating up all the benefits in transaction costs. Is there Q157 George Hollingbery: This sounds extremely a danger of that? interesting and I get the vague outline but can I just Sir Steve Bullock: You would want to look at the give you a scenario and you could describe to me how scale. I am conscious that, drawing on my own this might work? Council A has no land but lots of authority, over the past seven or eight years we have borrowing headroom and council B—Lewisham—has learned huge amounts about big complex lots of spaces to build but little in funds. How would programmes. We were in phase 1 of Building Schools the agreement work? Who agrees to what? How does for the Future, so we have actually got capacity sovereignty transfer? I am not quite sure how this among our officers for doing relatively complicated works. programmes that involve a number of agencies. We Sir Steve Bullock: In that scenario, it is probably the could transfer that learning across fairly readily to other way around. Lewisham is a bit short on land. housing. Indeed, that is what I have tasked my people But in essence, what you would need to do is come with doing at the moment. to an agreement between the two boroughs that, effectively, you have a joint development in the Q161 George Hollingbery: Which brings me neatly borough that has the land, but with the funding from on to, probably, Mr Edwards. In Oxford, is this the borough that does not. You would then share the something that can work at your sort of scale, or nomination rights: you would have to apportion it, would you have to transfer this or use it with another even if the land and the money were not even—you conurbation close by or with another place with would work all of that through. appetite close by? We have actually got quite good at working together David Edwards: I think we would have to scale up, over the past decade. Certainly, in the past couple of you are right. We could not do it, particularly at the years under the financial pressures that we face, local local level. Also, if you look across areas and counties authorities have been developing very rapidly ways of with a similar distribution to Oxford—you have one working together, so it would not necessarily be an major urban conurbation—a lot of the other alien concept. It also would not have to be boroughs surrounding districts will be rural in character, and Ev 34 Communities and Local Government Committee: Evidence
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher therefore will not have capacity or, indeed, the the areas. However, I am not inundated with masses of appetite to promote major social housing, I am afraid. requests for Right to Buy, because people are having difficulties getting mortgages. Q162 George Hollingbery: Councillor Andrews, Chloe Fletcher: It is a cyclical thing. At the moment, presumably Manchester is looking at this. We visited we have very low levels across the country, because Manchester on a previous inquiry, and it felt like it of the economic situation. We also house some of the would be the ideal sort of place for this to work. Is most vulnerable families in the country, so I do not that true? think it will be a sizeable proportion. However, I share Councillor Paul Andrews: Yes, and within the my colleagues’ concern that were the discounts to be AGMA authority it probably would be. Just picking increased to a significant level, you would then find up your point around that national stuff—I think this other people attracted to making money through that would be similar to the housing subsidy account transaction, and we are quite mindful of that. Also, it which is what is being replaced—the danger with that, would possibly encourage families who are on the from our perspective, is that it would all be skew- edge as to whether they could sustainably afford it. It whiffed towards the south-east. There is no problem might encourage them to do it when it would perhaps with actually looking at something like that, so long be unwise to do it. It is about making sure that it is a as we have some guarantees and benefits—that it is sensible decision for that family. going to stay in the area where it is generated. Q165 Simon Danczuk: What action do you think the Q163 Simon Danczuk: I want to ask about Right to Government should take to ensure that Right to Buy Buy. Do you think a sizeable proportion of people contributes to the supply of new homes? move into council properties in anticipation of then David Edwards: Several things would help the taking up the Right to Buy in purchasing the council situation. First, the level of discount. If a very property? If yes, what proportion do you think do substantial discount is offered, as you have heard, this that? will potentially lead to people and third parties David Edwards: I do not believe that is the case, but looking to profit out of it. It would help if we could I believe very firmly—it was evidenced in Oxford last see the receipts returned to the local authority. We time we had significant Right to Buy discounts—that would need a significant proportion of those receipts people who had been there for some time, even if they because, in our context, for example, to provide a two could not raise the money for the mortgage or three-bedroom family house will cost us, the themselves, were assisted by friends and relatives or council, at least £300,000. The more we are left short, financial intermediaries to come in and secure the more we are not going to be able to finance or property at discount. This then revolved around, replace housing stock. usually into private letting again, and gave us very Also, it needs to be thought about in the context of significant problems. It is a major concern where I overall housing supply. We have major issues in terms come from. We have very high property values, but in of land supply and the ability to find alternative sites. fact wages are fairly low overall, so it is Midlands We actually find sites for housing associations to wages and London prices. There is a significant develop. The council is proactive in this. It is not left financial incentive for people to come in and use the just to the market or just to our housing association system if they are offered a major discount. partners. The Government might wish to consider alternatives. For example, a more graduated, shared Q164 Simon Danczuk: What do other people think equity approach over a number of years might about the possibility that some people are moving into forestall some of the more dramatic potential council properties in anticipation of using Right to profiteering. In other words, tenants or residents could Buy? purchase a proportion of the equity of the house over Sir Steve Bullock: In the demand that we are dealing time. Indeed, local authorities might have the right to with in most London boroughs, it is not a question of buy back at the end of the day at value, so we could people setting out their stall. We are housing people off the waiting list pretty much only if they are in recycle the unit. extreme housing need. It is not currently something Councillor Paul Andrews: I would go a bit further by that I would be concerned about. We are conscious suggesting that the local authority should get 100% of that a lot of the best stock went, anyway. Most of the the receipts under the Right to Buy. I am not totally stuff built in the last 10 years was built by housing opposed to Right to Buy; we just need to ensure that associations, not by the council. We are holding our everybody benefits. breath on this one. We are not sure that this is going to be a major issue for us. If it is, clearly it would be Q166 Simon Danczuk: So that you can replace of concern. stock? Councillor Paul Andrews: We are not inundated with Councillor Paul Andrews: Yes. masses of requests for Right to Buy. As you know, Chloe Fletcher: We support that. It is critical for the Manchester’s housing is basically handled by the self-finance business plan that you are able to retain registered providers and the ALMO. Of the registered receipts from assets that are sold at a discount in order providers that I deal with, one of their main concerns to maintain that business and to re-provide locally. is that a 50% discount on Right to Buy might The solution for re-providing locally will be different encourage a lot more people to apply for it. It is about in different areas of the country, but it is critical that losing a lot more stock than we are able to build in the decision is made locally. Communities and Local Government Committee: Evidence Ev 35
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
Q167 George Hollingbery: Just quickly on that very houses and the four-bedroom houses, and if it is not point, it seems to me that there is a danger that you the people who have been living in them for 40 years then just recycle money in higher value places. who are buying them, it is actually the children, who Actually what you very often need is money in lower then get the mortgage for the parents, and there is the value places. If the 100% gets recycled into Oxford opportunity at some point in the future to take it over. or Westminster or Chelsea, it does not get recycled That takes all the large, family-type houses out of the into Manchester. stock. Unless we get some sort of commitment or Chloe Fletcher: There are very high needs in those some way of actually replacing those larger family high value areas as well. We would support the idea houses, it will put the stock in even more difficult of a self-finance business plan being both a revenue positions. and a capital one. That would allow the best use of What I tended to find in the past is that it was not bits resources locally and a more positive asset of north Manchester that were sold; it was actually management programme. If you want to encourage lots of south Manchester. In my area we have four low cost home ownership as an option, there are ways four-bedroom houses on one estate that are social that could be found to do that other than increasing housing, because the rest have been bought over the the Right-to-Buy discounts and then recycling that years under Right to Buy. That does not mean that I locally. am opposed to it. It just means that we need to be a bit cleverer in how we replace the stock of houses that Q168 Simon Danczuk: Do you think there is a we are losing through Right to Buy. The new houses possibility that the Right to Buy could soak up the may also eventually come under Right to Buy, but we limited mortgage finance that is currently available out need that commitment to progress, otherwise you will there? Is that a worry? just end up with the stock in the city, which is not David Edwards: I think it will undoubtedly take up suitable. some of that. I do not know whether it will take up all of it. It is a very thin market, but also the number Q171 Stephen Gilbert: I am resisting the temptation of people buying is pretty low. It will certainly take to fire up the Quattro and go into Simon’s question capacity out, but how much is difficult to say. there. We have had some very mixed evidence on the introduction of affordable rents, and I think that you Q169 Simon Danczuk: You are among friends here, have all raised concerns about the impact that they so you can be completely honest. I get the impression will have on the future of house building. Can you that you are not overly enthusiastic about the Right to briefly explain what those concerns are, and, perhaps Buy. Do you see it as some sort of resurrection of more usefully, how it can be made a more sustainable Right to Buy and a sort of throwback to an ideology financing mechanism? of the 1980s? It might have been right then, but it is David Edwards: To make it more sustainable as a not right now— financing mechanism, it needs to be much more Heather Wheeler: Fire up the Quattro. graduated and applied to local markets. Starting at Simon Danczuk: Do you agree with that or not? 80% and saying that that is the level that we kick off Sir Steve Bullock: I certainly do not agree with it, or at and that there is not much flexibility presents us at least I would not express it in those terms. If the with significant problems. We gave you the figures in housing crisis that we had was not about supply, I terms of local housing allowance and where 80% would probably be quite relaxed about Right to Buy. leaves us. We recognise the potential need in some It is because the supply problem is so great that I am cases to raise more revenue from the system, but very nervous about taking stock out of a pool that is applying it this way makes it incredibly difficult. not big enough even as it stands. As a product of that, we also faced some difficult Chloe Fletcher: We are very concerned about the discussions with, for example, our housing association impact on the self-finance business plan. We are just partners. On the one hand, they respect and about to go into the self-financing future that we have understand the local market conditions, which mean all been waiting for, and if Right to Buy increases that 80% isn’t going to work for a lot of people whom dramatically because of the changes, I just think that we have a duty and an obligation to house. Yet, on that is very likely to damage those business plans and the other hand, their business model is being driven make it very difficult for councils and ALMOs to firmly in the other direction. That gives them major manage that. problems in terms of their relationships with us and David Edwards: I will just add that, the last time that in terms of looking ahead and financing for new Right to Buy came in, caps had to be introduced in development. So, for example, we have four housing certain areas, including Oxford, because the level of associations that we work with, firstly, in Oxford. discount was seen as excessive. We have some Only one of those has secured grant and it has a very experience to tell us what happened before. small programme. It is, frankly, finding it difficult to take tactical decisions about whether to maintain Q170 Simon Danczuk: Let us hear a northern social rents that reflect the economic circumstances of perspective on this. many of its tenants or, alternatively, whether to look Councillor Paul Andrews: I promised faithfully that to house others who can afford 80%. It is posing a I would not be political today. I am not opposed to real dilemma in terms of who are they there for. the idea of Right to Buy, but one of the difficulties for Councillor Paul Andrews: As a city, when this was me, especially from my part of the world, is that it introduced, we were asked to have a view of whether tends to be all the three-bedroom-and-parlour-type or not we were supportive of affordable rents. It was Ev 36 Communities and Local Government Committee: Evidence
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher felt by us that we should not actually dictate to the We are not as highly geared in the local authority registered providers in the area as to what we think sector as housing associations are, by a long shot. their view should be. What we basically did was leave David Edwards: I would just add one qualification on it up to the registered providers, through their own that, which is that it clearly depends on the type of business plans, to decide whether it actually stacked debt. There were a lot of concerns that were allayed up. One of the difficulties in our part of the world is in terms of going through the HRA reform. The offer the fact that it is not sustainable without some sort of through the Public Works Loan Board was made, and capital input from the providers and this is not I think that a lot of local authorities were concerned sustainable long term. about entering the debt market, about whether they Sir Steve Bullock: We are concerned that it may work had the right expertise and how they could calibrate for this period of time and deliver the level of risk. That will not be the same for all local authorities, properties we are talking about. Although until those but managing that debt, in particular at the current properties start to be let, we cannot be quite sure how time, is pretty critical. If you are talking to banks at that is going to work because asking people to take the moment, in terms of borrowing finance, I am them on at significantly higher rents than they would advised—I happen to be the chair of a housing have been doing a year ago may pose some issues. In association as well—that there are only four in the the longer term, we do not see how it is sustainable. It market and the terms are extremely tight. Therefore, is a very debt-hungry approach. RSLs are in different there is significant additional risk and potential for positions, but, certainly, some of them will now have failure. very high gearing. Certainly, in some of the informal conversations we are having, some of the larger RSLs Q174 Stephen Gilbert: I want to move on to the are saying, “Well, we can do it until 2015 but, beyond changes to housing benefit but quickly, in your then, we are going to have to find a very different experience, do you think your councils have the model.” expertise to manage the complex debt arrangements Chloe Fletcher: Unfortunately, ALMOs have been that the changes might lead to? disadvantaged in the current HCA investment round. David Edwards: I think we do, but I don’t believe The rules changed in terms of what is counted in their it’s universal. value-for-money assessments. Any borrowing that Councillor Paul Andrews: I think we do. they do on top of the grant received is now counted. Chloe Fletcher: I think that across the country it So they have not generally been very successful in varies. this round—a few of them have, but not generally. We Sir Steve Bullock: I think many of the London boroughs could, but we would also come back to this would like to see a change in those rules to allow working together—it is the areas of expertise—and if them the opportunity to get involved. Some of our one borough doesn’t, I’m sure we can come to members see affordable rent as a very good option for arrangements. part of their stock. For ALMOs to develop, we would also like to see local authorities being able to transfer Q175 Stephen Gilbert: Some people have suggested voids into the ALMO to help subsidise that delivery that the changes to housing benefit might affect the model. There is a potential for more affordable rent to ability of RPs and others to borrow. Is there any be done through the ALMO model if certain evidence of that that you can point to at the moment? regulations and bureaucracy were changed but, again, David Edwards: I can point to the fact that we are I do not think it is a long-term solution to all the having to factor this in to our business plans going housing issues. My members would like to continue forward as a council, and certainly as a housing to develop social housing alongside affordable rent, association, too, we are having to make additional and to have that as a mix-and-match option. provision for not only managing it but for seeing arrears increase. Q172 Stephen Gilbert: Do you have a comment on Steve’s point about it being quite a debt-hungry and Q176 Stephen Gilbert: Sorry David, what gearing-intensive mechanism? percentage arrears do you think there will be an Chloe Fletcher: Yes. Undoubtedly, it relies on voids increase from and to? in the stock being let at the new increased rents. It David Edwards: This is entirely speculative. We’re would also need a lot more investment from the just doing contingency planning, but we might see our ALMO land and borrowing. It is something that can arrears go up by 50%. be done a little bit more for the short term, but we Stephen Gilbert: From? need to look at a wider range of options for the David Edwards: From something like 2% to 3%— longer term. something of that order. Councillor Paul Andrews: Yes, it’s going to increase. Q173 Stephen Gilbert: On the debt issue, people were talking earlier about the debt cap. Do councils Q177 Stephen Gilbert: The arrears will increase? have an appetite to take on, with RPs and other Councillor Paul Andrews: Yes. partners, higher leverage in the market? Councillor Paul Andrews: Yes. Q178 Stephen Gilbert: In a similar order? Have you Chloe Fletcher: There is a significant amount of made any analysis of it? availability based on the rental income. It is Councillor Paul Andrews: The registered providers unfortunate that this debt cap artificially limits that. are doing their own analysis because each area of the Communities and Local Government Committee: Evidence Ev 37
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher city is different. There will be a cumulative impact Wigan is looking at sitting down with all the public across the city, but each of the registered providers bodies that own the land, bringing it all together and does a different one. asking, “How can this best suit all of us?” We have Chloe Fletcher: All my members are saying that also created the Manchester model, which will arrears will increase. I don’t have any details to hand, hopefully be rolled out across Greater Manchester. We but they are having to make bigger bad debt have gone into partnership with the pension fund and provisions within their self-financed business plans. identified five sites in Manchester. The council is Sir Steve Bullock: Again, we would agree with that. putting in the land, the pension fund is bringing in the I don’t have figures. We think that switching from money, and hopefully we will have 250 new builds on paying the rent directly to tenants is likely to that land. Ideas like that will progress things, but if exacerbate the problem. we are talking with partners about public land or buildings, it is fundamental that that is done in a Q179 Mark Pawsey: I wonder if I might ask you strategic way and not just by a fire sale. some questions about the Government’s initiative with regard to making public land available. I think, Mr Q183 Mark Pawsey: And are there any obstacles to Edwards, you said that shortage of land was one of public bodies making their land available? the big problems. Do you think that the Government’s Councillor Andrews: They need to be up for it—that incentives and direction to make public land available is the best way to describe it. will go any way to help solve the housing problem? David Edwards: I think they are very welcome, and Q184 Mark Pawsey: How can they be encouraged there is no doubt that there is significant potential in to be up for it? public land. I would also have to reflect that Councillor Andrews: Well, I usually find that when Governments have tried this one before, and getting grabbing them by the nuts, their hearts and minds public land brought forward has proved difficult. As a follow—[Laughter.] council, we have gone out and purchased land. We George Hollingbery: Is that an official position? work with developers to bring forward their own sites Councillor Andrews: It is easy to turn round and say so we are working proactively, and certainly we are that you are going to sit down with a lot of people working our own estate to the maximum. We referred and talk about how best you can cover everything, but in our paper to the fact that we have had a you have got to get them wanting to do that. disappointing experience working with a Government Chloe Fletcher: ALMOs have been quite good organisation in terms of their bringing forward a site, recently in ensuring that parcels of unused land within which is a strategic site in Oxford, for housing. They a council’s social housing estates have been properly have had it for 10 years, and we cannot get them to developed. They have been particularly useful in partner us and the HCA, which is very disappointing. grouping those disused garage sites or grassy areas on estates that attract antisocial behaviour and cause Q180 Mark Pawsey: You have done something on a problems in terms of management. They have actually joint venture on your own land. Can you tell us a bit provided very useful homes in the community and about that? concentrated on meeting specific housing needs such David Edwards: On our own site we have a big as large family units or wheelchair-accessible scheme at Barton of 800 homes. We set up a bungalows, or whatever the need might be locally. framework and a partnership with the Grosvenor Unfortunately, the barriers that I alluded to earlier in estate—Grosvenor Developments. We are providing terms of the HCA programme this time round will the planning, the expertise and the land. prevent a lot of that work from being done. The debt cap on the self-financed business plans will prevent Q181 Mark Pawsey: So, this was previously your councils from doing that directly. If those sorts of land? barriers were lifted, it would give an incentive to David Edwards: Yes. We have brought them on board councils to develop that particular land. Nobody else and shortened the procurement process so that they is particularly interested in it; it is locked away in are providing infrastructure and the technical a council estate. Housing associations have had the expertise. They will not actually build the homes opportunity for the past 20 years possibly to develop themselves; we will then bring in house builders to it, but nobody has wanted it because it is awkward, build out the phases and to ensure that we have a expensive and not in the right place for them. It makes high-quality development. Effectively, we have got a total sense, however, for the managers of those estates relationship with a master developer and funder for a to use that land more effectively. period of probably five to eight years. Sir Steve Bullock: Again, I think London has particular problems because of the high land values Q182 Mark Pawsey: May I ask the other witnesses that we are dealing with. I sit on the Homes and how you see the Government’s incentives to release Communities Agency London board, and we are public land having an effect in your areas? working closely with the London Mayor who has Councillor Andrews: If I may speak about the Wigan influence with a number of organisations that have big exercise that we are going through at the moment, it land holdings. We are conscious that there are can only be beneficial as long as it is done in a currently sites out there that are not being bought out strategic way. The worst possible scenario would be because the schemes are not viable. We are also to hold a fire sale of public land or public buildings focusing on trying to find innovative ways to get those without any sort of direction as to what is happening. schemes—where often the planning permission Ev 38 Communities and Local Government Committee: Evidence
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher already exists and the land is in public ownership— scheme and investment into new private rented actually built. I can see Heidi nodding because there housing. In your submission, you spoke a little about is one of those schemes in her constituency and she is it. Can you just tell us how that is progressing and constantly demanding to know how we are going to how close to actually seeing homes coming out of the sort it out. In the longer term, getting land released ground it is? will be important, but that is probably not the biggest Councillor Andrews: It’s a report going to the short-term constraint, at least in London. January executive.
Q185 Mark Pawsey: Each of you represent public Q189 Heidi Alexander: Can you tell us who the bodies that hold land, and presumably there are investors are in the scheme? occasions when development would be desirable but Councillor Andrews: Yes. It is the GM pension fund. the finance is not available. What do you think of the Build Now, Pay Later scheme, and do any of you Q190 Heidi Alexander: Okay. So the discussions recognise a site in your own areas where you could with them have gone well, if it is going to your use such a scheme to get land developed that executive in January. otherwise would not be developed? Councillor Andrews: We have an executive in Sir Steve Bullock: That is the kind of scheme that we January, and hopefully, if it gives us the approval—I will have to look at, and how they stack up in detail can never guarantee what the executive will decide— will be something that we need to work through. In we will then be going out on procurement. Once that principle, if we can find ways of sharing the risk and is in place, we will hopefully get a builder building getting some funding to begin schemes, we can break by November 2012. into that. I also have to say that there is competition for any land that is out there. You talk to any London Q191 Heidi Alexander: How many homes will that borough at the moment, and their education deliver? departments are desperately looking for sites for new Councillor Andrews: The pilot’s 250. primary schools. There are other challenges than simply getting hold of the land. Q192 Heidi Alexander: Is there interest in the Chloe Fletcher: Certainly some of my members have Greater Manchester area in rolling that pilot out already identified some sites where that would be further? very useful. Councillor Andrews: Since we have launched the pilot, there has been contact from other investors, who Q186 Mark Pawsey: So they would be quite happy are very interested in what we are doing around there. to see the land go to a private sector developer and let People basically want to see whether it works, so if, him do that and then get the proceeds as the houses within the other nine authorities, they see it working are sold. in Manchester, they are more than happy, through the Chloe Fletcher: For some sites, yes. AGMA set-up to pick up on it and run with it. Councillor Paul Andrews: We are not doing Build Now, Pay Later. What we are doing is an equity Q193 Heidi Alexander: What sorts of issues have scheme. We are giving up the land and letting people you had to address with your investor to come to an build on it, but we are then getting equity on the agreement about how to move forward? Did they see properties. potential pitfalls? Did they have concerns? David Edwards: Build Now, Pay Later is already well Councillor Andrews: We are more than happy to established. It was happening two or three years ago provide the technical report to the Committee, with and I was doing it when we went into recession. It is the detail, because, as you will appreciate, I deal with not new. It works and our relationship, say on the the big stuff. If you need a technical report and how Barton scheme, is that we, as a council, will not see it is happening, with all the potential pitfalls, if there any money out until houses are built and the developer are any, I am sure that we can provide that.1 secures a first return. There are no problems with that Chair: That would be helpful. at all. On the public sector land, some of the key issues have Q194 George Hollingbery: Just to add to that, when often not laid necessarily with the agency or the we were in Manchester, we had a dinner with the owner, but with the Treasury. Those issues are to do council and various other property developers. There with securing an adequate return or what the Treasury was some feeling around the table, I think the sees as the best return, rather than staying in some of Committee recalls, about the problems of procurement these schemes for the longer term. and EU rules on procurement and how much that was stopping everything happening in Manchester. If and Q187 Mark Pawsey: But would your success with when you address that report, I would want a little Build Now, Pay Later mean that you would section on this particular development, to see whether recommend it to other parts of the country that may it might be an issue. not have considered it? On the New Homes Bonus, your paper suggested that David Edwards: Absolutely. there were better ways of distributing it by calculating all payments at band D, rather than across the spectrum. Q188 Heidi Alexander: Councillor Andrews, I think Councillor Andrews: An average across the bands. that you just touched on something that I want to ask a couple of questions about, which is your equity 1 See Ev 131 Communities and Local Government Committee: Evidence Ev 39
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
Q195 George Hollingbery: That is an interesting ALMOs, and some interesting ideas. What do the idea, although there are issues with it. Clearly, there Government need to do—what action must they is 125% of council tax available at the bottom and, take—to get some movement on this? actually, if there is a limited marketplace for all sorts Chloe Fletcher: We do not need new legislation or of houses, you might as well finance the most anything; what we really need is CLG and the expensive ones that you can get built, so why would Treasury to engage in the detailed discussions with a you not aim to build lots and lots of four-bedroomed, couple of the councils that are very interested, with high-value, social houses, so that you can get two their ALMOs, in moving this forward. We need things bangs for your buck? I am not too worried about that, like Secretary of State approval for either the long although you may want to comment on it a little, but management contracts or the stock transfer, if tenants generally, to you first and then more generally across vote for that and that is the way they want to go under the panel, does the New Homes Bonus make you, as the new proposed model. We need Treasury to be a council, build more homes? Does it incentivise you? engaged in the discussions to ensure that it is off the Sir Steve Bullock: That’s almost a pure Catch-22, public sector accounts and that it is all done to their because I would not want to say that it did not, approval. because it is useful to have the money, but in my part of London, that is not what will decide whether we Q200 David Heyes: Are there any indications of get more houses built. We want to get as many homes Government interest along the lines that you describe? built as we can, so it simply does not work as an Chloe Fletcher: We have had some very warm incentive for us, because we do not need any greater discussions with DCLG and I know that one of our incentive. It will be an interesting question to pose to members, who wants to take this forward, has also some outer London boroughs that are very precious been discussing this with the HCA and CLG, so we about not having much building in their areas, are very optimistic at this stage, but we do need however. Treasury to engage in those discussions.
Q196 George Hollingbery: Councillor Andrews? Q201 David Heyes: That’s the problem, is it—lack Councillor Andrews: Maybe. It does not put us off of Treasury involvement? building new homes. Chloe Fletcher: At the moment. We have not been told that it is not interested; it is just that we are Q197 George Hollingbery: Do you make any waiting for a meeting. calculations based on it, saying, “Right, we better give the planning department a kick up the backside and Q202 Chair: Presumably, with the new models that get on with strategic planning, because we are going you are looking at—we have heard very interesting to need this cash because we have lost so much from ideas about that mock-up arrangement—in terms of central help.”? finance and what we were looking at before, about Councillor Andrews: No. moving the headroom around between different authorities, all that would be unnecessary if borrowing Q198 George Hollingbery: You do not think about by housing bodies was not counted against the PSBR it that way. No one plans that way. and was counted as a trading activity. Councillor Andrews: No. Chloe Fletcher: Yes. We would urge the Government David Edwards: I can give you a practical example to take the opportunity of self-financing to review how of where it works the other way. We have a site that council housing borrowing is classified in the the city council owns, just in the adjoining district— accounts. If you have the new, self-financed, ring- 4,000 homes. It was allocated for residential fenced, well managed business plans that are based on development. As soon as the regional spatial strategies rental income, we see that perfectly fitting into the were abolished, that site was taken out of planning. European definition of a trading activity rather than Now, 4,000 homes would mean an awful lot of new something that is dependent on taxation. homes bonus for an adjoining council, and it clearly Sir Steve Bullock: I agree. If you could shift the did not persuade them—and we desperately need Treasury, we would be delighted. those homes. Chair: That may be the final challenge that you are going to issue us this afternoon. Thank you all very Q199 David Heyes: Chloe Fletcher, at the beginning, much indeed for coming to give your evidence to us. you outlined the NFA’s proposals for new models for Ev 40 Communities and Local Government Committee: Evidence
Examination of Witnesses
Witnesses: Mark Butterworth, Director, Residential Landlords’ Association, and Nigel Terrington, Chief Executive, Paragon Group, gave evidence.
Q203 Chair: Welcome to our third evidence session. Nigel Terrington: Yes, very much so. We are in the Could you indicate at the beginning who you are and middle of a transformational stage in housing in the the organisation you represent for our records? UK. It probably started in the 1980s with a change in Nigel Terrington: I am Nigel Terrington, and I am the the outlook of Government policy and has then moved chief executive of Paragon Group. I have been chief on to social and demographic change as it has fed executive for the last 16 years, and we are the largest through to population movements, either immigration independent buy-to-let lender in the UK. I am also movements in or the way in which the population deputy chair of the Council of Mortgage Lenders, and wants to house itself today. That has been I sit on the Treasury’s home finance forum as well. compounded because of the credit crunch by the lack Mark Butterworth: I am Mark Butterworth, and I am of availability of finance for first-time buyers. I think director of the Residential Landlords Association and all of those components are set to continue for some a private landlord from Manchester. We have engaged time to come, so the current share of the housing stock in a lot of construction and delivery of properties over that the private rented sector holds, which is one in the years. I am responsible for policy at the RLA, and six properties across the UK, we see set to continue. we have had a recent report done by Professor Ball, I can see it comfortably going through 20% of the UK whose conclusions may well figure today. If anybody housing stock, which on an international basis does wishes to have a copy because they have not already not put it out of line, frankly, with many other been circulated with one, I have several with me. countries. Mark Butterworth: We have had a report done, and Q204 Chair: To what extent is the private rented the findings have really concerned us. We are sector in future going to contribute to the supply of concerned that there is going to be quite a lot of new housing? Have circumstances so changed that it disinvestment in the private rented sector because is not going to do that directly in future, or do you there is so little return. The costs keep going up and think possibilities are still there to be explored? the tax base for providing the property keeps going Nigel Terrington: The private rented sector and the up. Without some hope of capital gain, it is very funding thereof of new build construction has not difficult to justify investment in PRS property at the really been a particularly large component of that moment. We appreciate the actual costs of funds are market. From our experience at least, landlords tend high, but the increasing regulation costs and the to buy secondary market properties, rather than new increasing tax breaks make it more and more difficult build. So, of the financing going in, there is probably to provide accommodation there. an indirect benefit that comes through to that. I think We have concerns that the PRS has had a high level of the principal reason is that there is usually a new build supply and that has continued for the last three years, premium, and, as a consequence of that, landlords are because a lot of people have chosen not to sell, or are a little reluctant to want to pay 5% or more extra for unable to sell, at the prices they would realise, and the added benefits of the new build only to think that therefore, when prices rise, there might be a they could buy it as a cheaper or better value considerable amount of disinvestment. This is one of investment in the secondary market once it is a few the major findings of Professor Ball, which we were years old. So I think it is of limited benefit to the new concerned about, and he has independently assessed build construction market. this very much the same. Mark Butterworth: The private rented sector can One of his other findings is with the difficulties in the contribute very greatly with the division of smaller balance between the sectors, because you have a units and by providing infill development in existing social sector that is subsidised with building costs and areas. There is nobody better at doing that, and the with land, and a private rented sector that has a high very reason why they achieve the best value for tax take from it, so the seesaw is quite imbalanced at money conversions, provision of smaller subdivision the moment. As rents would gradually rise with of properties and provision of infill new build are as inflation, so the tax rise is going up. This has been a Nigel quite rightly says. big concern, and about £3.5 billion is taken out of the But we do have a role in enabling development. private rented sector every year in tax. We appreciate Where there is a development, particularly in a good it has to pay its way, but when owner-occupiers and residential area that is likely to let, very often social renters do not pay anything, the private rented landlords will help the development by providing sector is shouldering a large burden of the tax, to the some deposits, or have done in historical terms, that tune of around £1,000 per annum per tenancy, which allow a development to go ahead that might otherwise is something that really has not been realised much not have been viable. So if you have a fairly expensive before. plot in a reasonable location without some forward funding or some support from investors, those Q206 Heather Wheeler: I am interested in the buildings or developments may never have got off availability of mortgage finance and whether that has the ground. affected the private sector area; are they able to come into the market? Are mortgages out there for them? Q205 Chair: In general terms, are you assuming that Nigel Terrington: This is very much on our patch, in the demand for private renting will continue to grow that the availability of finance for landlords has been but that it will mainly grow from existing stock? heavily constrained because of the general conditions Communities and Local Government Committee: Evidence Ev 41
19 December 2011 Mark Butterworth and Nigel Terrington of the financial markets and the general availability of 0.5% now for many of those middle-ranking finance as a whole. Compared to where life was in businesses. 2007—that may not necessarily be a good benchmark; it may have been a little frothy perhaps—you can see Q208 Heather Wheeler: Do you feel that if there is lending today is around 70% lower than where it was going to be an influx of Right to Buys, it will constrain in 2007, and product availability itself is around 80% what you can do because there is only so much money lower than where it was, so in real terms, buy-to-let out there in the market? has had a good year. It is one of the only growing Mark Butterworth: Right to Buy is different, because sectors within the mortgage space, but it is actually a it is at a reduced valuation, so it would not be big percentage on a very low number. comparable to the private rented sector. Buy-to-let is The key aspect is that the lenders before 2007 in this very different. space were dominated by specialist lenders. It is a niche product, so it tends to play into their hands. So Q209 Heather Wheeler: I was really just thinking with organisations like our own, where we do not take about how much money there is available out there deposits and fund ourselves very prudently for 25 for people to borrow from. years at a time through the securitisation markets, Nigel Terrington: There is a general level of overnight, that access was denied. If there is one constraint. The banking sector as a whole is—to use single, most important funding route to support the the term that it uses—deleveraging. It is shrinking, mortgage market as a whole, including the private which literally means that there is less money rented sector, it is to enhance the availability of available. If it is rationed, it will be rationed at a securitisation funding. For far too long, it was higher price as a consequence. regarded as one of the causes of the credit crunch, Going back to your earlier point, it is important to which I think is very unfair on what the UK had done make it clear that the cost of finance to landlords has about that source of funding, whereas you see today gone up, but the cost of finance to banks and lenders that it is probably the single most important piece of has gone up commensurately. Today, if Lloyds bank finance that will be available to banks and lenders or Barclays were to issue an unsecured bond they generally to support the mortgage market into the would have to pay LIBOR plus 400 basis points. We future, and including, within that, the private rented did a deal recently—the first securitisation of buy-to- sector. It really is crucial. let loans since 2007, not only for us but for anyone in Mark Butterworth: I agree with that. One of the the UK—and it cost us LIBOR plus 275 basis points, things that generated so much growth in the private compared with maybe LIBOR plus 10 or 20 basis rented sector was the rise in value, and people would points four years earlier. The costs have gone up realise those profits or take out that investment to generally, and banks are also having to hold a lot more capital than they ever did before, so in order to reinvest in the PRS. That is not something that can generate a return—not necessarily a great one, but a happen now. We appreciate things are very different return—there is a cost to pass on to customers. in London from where they are in the rest of the country. With valuations, if you have the same property valued now from 2007, there is probably a Q210 Heather Wheeler: Are you not looking for money from alternative sources, and going into 30% drop, so a lot of landlords are very constrained partnership with pension funds or whatever? Could by high loan-to-values and therefore, the professional you not do it as a straight deal that way, so that they sector is unable to expand. are an equity partner in your group? There are more medium-sized landlords than the CLG Nigel Terrington: Equity is not the problem; debt is statistics show. There is quite a wide variation, but— the problem. We could have access to plenty of equity. the surveys found, and Professor Ball’s report, and the We are a public company and we have many pension numbers of larger landlords—with the costs of bank funds and insurance companies as our shareholders, finance having gone up, loans have gone from base and they have been ready suppliers of equity to us. rate to London Interbank Offered Rate (LIBOR), The world is short of debt, not only in our market but which effectively means twice the base rate payable in the banking sector as a whole, and not only in this at the moment. Margins have gone from 1.25% or country. That is because, a little bit like first-time 1.5% to 3%, 4% or 5%, so the cost of finance is very buyers are being required to have bigger deposits, high for that middle tier of larger private or smaller banks are being required to hold larger amounts of corporate landlords. That is a professional sector that equity. If we want to borrow from the banks or from really is completely constrained at the moment. the pension funds and insurance companies, they require larger amounts of equity. The availability of Q207 Heather Wheeler: Is that to do with the price the ability to leverage—borrow against your capital— that is available or is it to do with risk, which is why has gone down across the world. the price has gone up? Mark Butterworth: There is one large untapped Mark Butterworth: We have not even gone into the source of capital, which we and others have risk factor. The valuations have gone down mentioned to the Treasury, namely the money in considerably, so there is no equity to release to pension funds that could be invested via Self Invested generate deposits for new properties. As far as the cost Personal Pensions (SIPPs). If it were quite easily of that money is concerned, whereas you were paying constrained to cover any Treasury requirements, so 5% in total including base rate of 4% before, you are that a SIPP could only invest in one property to rent probably paying 5% on the top of the base rate of out, for example, which would then be let through a Ev 42 Communities and Local Government Committee: Evidence
19 December 2011 Mark Butterworth and Nigel Terrington letting agent, and the gearing rules were that it can capital values and higher rental values, why are people only be geared up to 50% so it would pass any not piling in to the rental sector? affordability test— Mark Butterworth: Because rents have not increased. They have decreased in real terms quite considerably Q211 George Hollingbery: Self-invested personal over the past three or four years because there has pensions? been quite a heavy increase in supply. If you go back Mark Butterworth: Yes. There is an awful lot of 10 years, the actual real return on rents has dipped money sat there on cash and deposit earning very quite considerably. little, and it could generate so much momentum in the private rented sector into the economy as a whole. Q215 Mark Pawsey: The actual amount of rent paid Every £1 that gets invested into property or has increased. We have had witnesses sit in front of construction generates a return of £3.50 for the economy. Okay, there are complaints, and people say us and say, because young people cannot get that there would be some tax loss. There would not mortgages any more, they are having to rent be, however, because there is currently no tax take; properties, and that is putting pressure on rental that money is largely sat there. If it were for a time- demand and rents are increasing. limited period, it would provide a boost to Mark Butterworth: But in many areas of the country construction, support jobs and provide more homes. It they have not increased much in three years, and they does not really matter where homes come into the have not kept up anywhere near inflation. If you think sector; if there are more available, they will move up that we have had inflation of 5% in the past year, there and down the ladder to go where the demand is. might have been 5% rent increases in London, but you certainly haven’t had that in the rest of the country. Q212 Mark Pawsey: We have seen the private You might have had 1% or 2%. That has been going rented sector grow, and I think one of you quoted that on for a while. it was up to 20%. There was a fear that, because of low rates of return, disinvestment was taking place Q216 Mark Pawsey: All right, but let me put it to and, therefore, there might be pressure on the size of you that capital values have fallen, so that in turn, the private rented sector. Mr Butterworth, you said the even if rents remain the same, if the capital value falls reason disinvestment was taking place was the lack of the yield improves. Why is that not enough for your capital gain. By implication, people up until now have members? been willing to accept a low rate of return because of Mark Butterworth: Because their capital is invested the possibility of capital gain. If we take away the capital gain element, which does not currently exist in in property that has depreciated in value, so they the market, what kind of rate of return do private haven’t got any further funds to be able to invest. landlords expect to achieve? Mark Butterworth: The calculations in the report Q217 Mark Pawsey: How about people considering indicate that we need a return of between 8% and 10% entering now? The yield must be much better today to generate a sustainable yield, to be able to run the than it would have been. property to a decent standard and to cover the Mark Butterworth: It is. increased tax take. If you have had a property for some time, there are no capital allowances for Q218 Mark Pawsey: Why are those people not depreciation. As the property wears out, after 10 years coming to the market as things stand? it is going to need quite a bit of refurbishment work. Mark Butterworth: Because it is perceived as a risky That comes as a capital cost, but you cannot claim it business, and there is uncertainty in the market. against income. Values are edging down, if anything, so people may If there isn’t a suitable return, property will be sitting it out and waiting. deteriorate, as it did after the war, because there was no money available to reinvest in it. So, you get a withdrawal of capital by lack of reinvestment, as well Q219 Mark Pawsey: The yields are continuing to go as any further investment. The tax take rises with the up at a fixed level of rent. tax—with the rental burden—in addition to the take Mark Butterworth: Not necessarily because costs are over recent years from SDLT, increased income tax going up so much more, so yields are being eroded. and increased VAT, which of course you cannot The costs of running a property keep going up, the reclaim. tax take keeps going up and there is more and more regulation coming in. If you think of inner city Q213 Mark Pawsey: Okay. That is an historical landlords: they have got selective licensing costs to problem, because capital values were higher. do, article 4 regulations, they have had a lot of Mark Butterworth: The tax take is increasing all the hangover from the Housing Act 2004, the costs of time. deposits impact heavily on running a business. Those margins are being squeezed all the way through, so Q214 Mark Pawsey: In the current climate, capital your actual return is very low and it is not having values are falling, but we know that, because of the sufficient impact on the yield. Just because rents are difficulty of getting hold of mortgages, rents are going up the odd per cent here or there, or a few per increasing, as there is more demand in the rental cent in London, that is not generating enough to cover sector. Why is there not sufficient return? With lower that loss of yield. Communities and Local Government Committee: Evidence Ev 43
19 December 2011 Mark Butterworth and Nigel Terrington
Q220 Mark Pawsey: So, do you see the size of the the Greater Manchester pension fund—into the private private rented sector shrinking over the next few rented sector. Why is that not good enough for others? years? Mark Butterworth: That is the conclusion of the Q224 David Heyes: Precisely. Evidence from report, and it is a very real concern and one we are various parties has suggested that the conditions are very worried about. Because looking at the number of there for large-scale institutional investment. From buy-to-let mortgages that have been taken out—and your evidence, I guess that you—both of you—are we can only guess at the amount of bank finance— more sceptical about the scope for that. there are about 300,000 properties that should not Nigel Terrington: I have some observations on a necessarily be in the private rented sector. The number of points, but, on the specific aspect there, I presumption that Professor Ball has come up with is am very sceptical that the institutional money has a that they may well be trapped, that they may be very big role to play. The housing market is very unwilling landlords but they are in the private rented fragmented and dominated by individuals who buy sector. property very much on a local basis. We will probably know from our own experience that, when buying in Q221 Mark Pawsey: They may be accidental one town, you can get things right in this part of the landlords. town compared with that part of the town. That is true Mark Butterworth: Yes, and if prices do rise, or as of landlords as well. age takes over they start to disinvest, then those The other aspect is, when you have a large properties may well be lost to the private rented institutional approach, you will have the fund sector. management structure. You will have corporate governance requirements and a localised network Q222 Chair: To come back to the tax point briefly. within which that property needs to be sourced, You mentioned SIPPs and the possibility there for managed and dealt with. So, by the time you load creating an environment that might encourage people all of those costs on, you have to compete with what to put their money into the private rented sector. You Professor Julie Rugg called the “sweat equity” of the also mentioned the idea of a private rented sector local landlord, which means that they do it for free. expansion scheme, but when we had the business They do not charge themselves the cost of managing expansion scheme previously, there was some that property. It is not an easy opportunity for criticism that it was very short-term focused and it did institutions to compete effectively, with the local not get long-term finance into the industry. Are you landlord doing it for nothing. worried that the same effect could result from the sort If you look at other countries, sometimes Germany of scheme you are proposing? gets pulled out of the hat and it is said, “Look, Mark Butterworth: There are more than 200,000 Germany is an institutional market.” What goes on SIPPs. If 25% of those SIPPs elected to make an there is very mis-stated. In Germany, the small, investment into a rented property, that would still be private landlord is four times the size of the 50,000 properties, which would be a significant institutional money that is in that market. Going back increase. It would also boost the market and help to to the pension point, the average age of the private generate more investment if stock was sold. It would landlord in Germany is very much in the pension get things moving and encourage house builders to category. They are very much at the older end of the build more if stock was being sold. The business spectrum. They are doing this because they are expansion scheme did not generate the figures that generating a yield and an income for their retirement were hoped for in 1989. There was a big depreciation and it seems a long-term and safe form of investment, in the market then, but it did have an effect. There particularly when trust in the City is at a low point. were enough units to make it very viable and it was a Do you really want to put your money into equities or useful contributor to the economy and the housing bonds at present? Or would you rather put it into stock. property, where you feel you can kick the tyres on the investment that you make? I am very much backing Q223 Chair: Have you any figures you could give us the idea that money should be allowed to be invested on your forecast of the effect of the measures you are via a SIPP or some form of pension wrapper. proposing in terms of taxation changes? Mark Butterworth: I would certainly be prepared to Q225 David Heyes: Or bonds? You mentioned pick up more figures on the number of SIPPs. bonds. Professor Ball has not gone into too great a detail with Nigel Terrington: Bonds backed by property, yes. this, but, anecdotally, a lot of people come to us and That is the same thing. I do not think that property say, “Why can’t we invest in this?” You get a lot of should be a viewed as a short-term investment. It inquiries where people say, “Why can we not invest should never be looked at as that. The typical in private rented property?” It is an anomaly. Other investment hold period that our customers have is countries can invest pension funds into rented stock. between 15 and 20 years per property. That is not Of course, there is a big move towards institutional unusual. It is expensive to get in, it is expensive to funds being able to get into private rented stock and get out and it is illiquid as an asset. Therefore, do not the Treasury is, indeed, making some dispensations in take a short-term view on things. I would be a little terms of REITs. That may allow some pension funds nervous about a rerun of the Business Expansion into private rented stock. With Manchester, previous Scheme that could suddenly see people investing in witnesses were happy to invest their council funds— the sector purely for a tax advantage, as they did back Ev 44 Communities and Local Government Committee: Evidence
19 December 2011 Mark Butterworth and Nigel Terrington in—whenever it was, the early 1990s—only for them Mark Butterworth: The most useful thing that could to exit at the first possible moment. It should be a happen would be roll-over relief for capital gains, so long-term game. if people were disinvesting they could move their Mark Butterworth: But that exit was generally into portfolios, they could update and they would not have the PRS, so the property very often stayed within the to lose so much of their investment through capital sector. gains tax. There is a bit of an anomaly, because Just one or two things on the institutional valuations have gone down, but very often there is investment—we have been going to the British still a capital gains tax bill. A lot of landlords do not Property Federation for 20 years, and of course it has have enough equity in their property to be able to sell many big members who have been very keen to get and pay the capital gains tax, so that is a major into, or to pick up, large-scale investment in problem. If they could reinvest that money, it would residential property, but it has never actually sort of allow many to perhaps update their portfolios. happened. Some figures—4.5% of properties in The other thing would be indexation of capital gains London were bought in 2006 by institutional relief. As you get a depreciation of property—as it investors, so it is only a small part of the market. goes down in value, as it is rented out over a period— The corporate part, as Nigel says about Germany, is it will require reinvestment. If you have the value of about the same ratio in England—about four to one a flat that was done 10 years ago and one now there of private landlords to corporate landlords. Yes, we is a difference between them. The difference between welcome investment from them, but it is not likely to them is the depreciation. That goes into profits, and is make much of a difference, and they would be more taxed as profit for the landlord currently, because he interested in London, where there is a much greater has no allowance for depreciation. It artificially boosts prospect of a capital return to boost their yields, than margins, and landlords get taxed on that, so some they would have in many other areas of the country restoration of that via capital gains taper relief would where property is perhaps needed at least as much. be a very useful addition to that. Chair: Thank you both very much indeed for coming Q226 David Heyes: What would need to happen to here this afternoon. make it more attractive?
Examination of Witnesses
Witnesses: David Orr, Chief Executive, National Housing Federation, Mark Henderson, Chief Executive, Home Group, Steve Binks, Group Director, Finance and IT, Place for People Group, and Waqar Ahmed, Group Director of Finance, London and Quadrant Group, gave evidence.
Q227 Chair: Good afternoon. Thank you very much Mark Henderson: I’ll start then, if I may. I think we for coming to our final evidence session before would be content with the process in that it is the only Christmas—someone had to be in this slot—on the game in town in terms of providing finance to provide financing of new housing supply. You are all most new affordable housing in the country. Therefore, I welcome. Could you, for our records, just indicate think the process was relatively sound. We have now who you are and the organisation you represent? signed with the HCA for a programme of circa 4,000 David Orr: David Orr, Chief Executive of the new homes, both in the north and in the south of the National Housing Federation. country. As earlier evidence givers have said, though, Waqar Ahmed: Waqar Ahmed, Finance Director for this process based on affordable rent is a debt-hungry London and Quadrant Housing Group. model. For us as an organisation, and I think across Steve Binks: Steve Binks, Finance Director for Places our sector, we are relatively well-geared—something for People. like 55% or 56% at the moment. This round will take us to mid-60s gearing. Potentially, we’ve got scope to Mark Henderson: I am Mark Henderson, Chief do one more round, but it is a self-limiting funding Executive of Home Group. cycle that I think we would find. Steve Binks: There’s no reason why it shouldn’t work. Q228 Chair: Thank you very much indeed for I agree with everything that has just been said, but it coming. As I said right at the beginning of the first lot does open up the opportunity maybe to expand the of witnesses, there are four witnesses and if you find model to get equity into the sector, which is something that one of your colleagues has said something that that we put into our submission. you are content with, there is no need to repeat it. Of Chair: We probably will come on to that bit later. course, if you disagree profoundly, then please do not Waqar Ahmed: We are content with the model. We hesitate to tell us. recognise that it provides additional grant funding to You have just signed new contracts with the Homes much-needed housing supply in London. It has and Communities Agency under the Affordable created some affordability issues for local authorities. Homes Programme. Could you just tell us whether What we’ve done is develop our own affordability test you were content with that process, and the position based on an average income for households in that you and your organisations are at in that regard? London, which has resulted in an average rent being Are there any particular issues arising out of that somewhere between 55% and 80%, averaging around which you think we should be aware of? 60% across London. That then means that we will Communities and Local Government Committee: Evidence Ev 45
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed have to raise more debt, become more commercial and attracting people down from the LHA rates. Do you take more outright sales risks, but that’s what we see that? expect to do. Steve Binks: I would agree with that. We’ve got a housing supply problem in the UK. We’ve got a Q229 Chair: In general terms—perhaps David, you particular problem in affordable and social housing can help us with this—do you expect that the supply, which is too small. I think the more you build Government’s aim to provide 170,000 affordable at subsidised or sub-market rents, the more possibility homes by 2015 will be realistic? Do you think it’s there is of people moving out of higher-rent areas, going to be delivered? then moving within a regulated sector, where rents are David Orr: I think it’s realistic. Ever since the regulated and generally lower than they are in the programme was announced, we’ve believed that it is marketplace. possible to deliver that number of new homes. The potential problems may be that a whole series of Q233 George Hollingbery: You can see that assumptions have had to be made about the terms working, you can believe that that is probably going under which the contracts have now been signed. If to be the case, so there can be a model here where we those assumptions are significantly varied—we may can get new housing and it does not have to cost us a want to discuss this further—that will make it more great deal more in housing benefit? We are not having difficult. For example, with the renegotiation of this change from grant to benefit. section 106 consents, there is a whole lot of delivery Waqar Ahmed: Although our experience is that the that is contingent on section 106 as part of that number of households that are deemed vulnerable or 170,000. There are other factors, such as the way it on low income is increasing in London, and therefore relates to the welfare reform agenda. Yes, it is that will potentially have an impact on housing absolutely possible to deliver 170,000 new homes, but benefit. there may be factors that will make that difficult to David Orr: This depends entirely on how these new do. They weren’t really part of the original thinking, properties are allocated and who they are allocated to. but will inevitably have an impact. Certainly, we have argued in the past that we need to have a much more varied housing market, with a much wider range of different rental options—near- Q230 Chair: Do you think that some of those market intermediate rent as well as social rent. The concerns will be bigger issues for smaller associations difficulty arises in this case if the affordable rent than for the larger associations that we’ve got here product—at some 80% of market rent—is overlaid today? with an allocations process that is designed for social David Orr: They will be concerns for everyone, to a rent. At the moment, the Government’s expectation greater or lesser extent. remains that a social rent allocation system will, in the main, be used. If that happens, then the housing Q231 George Hollingbery: I’d like to examine a benefit bill will go up. little further the geographical differences coming to, perhaps, some of the northern counties. Could you tell Q234 George Hollingbery: So what we are talking us how this works differently in different parts of the about is that, for this to work, you have to have a country? preference for those who can afford it. I know that Mark Henderson: I think it’s probably more that sounds daft, but the people coming down from inconsistent in the north. For example, an 80% the top had to be the people who get these new homes, affordable model will work in, say, central Newcastle, therefore—net, net—at the bottom of the market, there but 500 metres away, doesn’t work within that local is no additional social housing produced. Is that community. There are some significant roughly where we end up? inconsistencies. Again, we’ve applied the affordability David Orr: That is exactly the case. This model would test to look at its suitability in a local area. Again, by have worked better if we had been able to provide regions or by county areas, for example, in Cumbria, additional social rented homes as well as the to go to 80% of the market rent is almost a reduction affordable rent. We are now in an environment in in terms of the current rent that we charge, which is a which the affordable rent is the only game in town, reflection on the quality and nature of the private and to make it work, it leads to a net reduction in sector rented market in Cumbria. the number of socially rented homes. The potential Steve Binks: To some extent, it depends on the supply problem about that is that if the people who need of housing in the region. It works best in London, the social rent go into the higher rented stock, then that south and south-east, where market rents are much will have a long-term impact on housing benefit. The higher. I agree with Mark that there are areas where nature of the supply problem is such that my guess is the social and market rents are the same, and in those that, although in some markets it may work in the way areas, it clearly doesn’t work. It will produce a Steve was suggesting, overall my expectation is that differential result in different parts of the country. the housing benefit bill will indeed go up.
Q232 George Hollingbery: The Minister was telling Q235 George Hollingbery: But in any event, us last week, when we talked with him, that the impact because of the leverage issue we have just talked assessment suggests that there will only be a little about, there is a time limit on how much of this can extra finance required in housing benefit on the whole be done? to finance this model, because they are going to be David Orr: Absolutely. Ev 46 Communities and Local Government Committee: Evidence
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
Q236 Simon Danczuk: What effect do you think that and processing it—is about £90 million a year. That the move to paying housing benefit directly to tenants is £90 million of capacity that has been taken out to will have on housing associations’ ability to borrow? do something that is less efficient than the present Mark Henderson: There are probably a number of system. That just seems like a very strange use of implications of universal credit and direct payments. resources to us at a time when everyone is under very Certainly in terms of arrears and covering arrears, we considerable pressure. It is worth restating that this is are investing in a customer service centre to manage about a denial of choice to people. We have argued our arrears. We have some concerns about the ability that people should continue to have the choice to have to manage that in real time, particularly for our their rent paid direct to their landlord—not an customers who are changing employment type and imposition or an obligation on them, but to have that moving between different kinds of benefit on a fairly choice. Even just to do that would significantly reduce regular basis, and how we would be able to keep a future additional transaction costs. real-time assessment of any level of arrears. Would that suddenly manifest itself as 12 weeks in arrears, Q237 Simon Danczuk: You guys are the cream of with very little notice for people? The cost of covering the housing association sector. In a word, is moving the arrears and of then managing debt recovery, again, to direct payments good or bad? would be quite significant. We were estimating that Mark Henderson: A high 80% of our customers say even if debt increased by 2%, the cost of covering that they want to maintain a direct payment to the plus the management would cost our organisation landlord. circa £2 million. Then, I guess, there is the cost of our Simon Danczuk: So it is bad? borrowing and whether there were any impact on our Waqar Ahmed: Yes. ability to borrow or on the rates at which we would Steve Binks: Yes. borrow as a result of this knowledge of a lack of blue- David Orr: In a properly researched survey that we chip revenue coming into the business. did across the country, 95% of residents wanted to Steve Binks: It certainly does not make it any easier retain the ability to choose to have their rent paid or cheaper to borrow, but in the context of the amount direct. I think it is bad to take that choice away. that we borrow, and we currently have debts of £1.7 billion, our arrears would rise by probably the same Q238 Simon Danczuk: What other factors could as Mark’s—I guess, £2 million to £3 million. Our bad affect the security of borrowing for housing debts might be £0.5 million a year. So, in the context associations? of the totality of the business, it is something that we Steve Binks: We have to deliver on our returns. We ought to be able to manage. However, it will increase are a business, so we have to generate the revenues. our costs of managing—we will have to have extra We have to manage the business properly. There are staff to manage that process—so probably £0.5 external influences that we have to take account of. million to £1 million of cost increases, if you include We are seeing relatively low general interest rates, staff costs. But in the context of the amount of but—I think it was mentioned earlier—margins are borrowing, I think that we are confident that, while increasing considerably. We are all suffering from our costs will go up and therefore our surpluses will that. A whole host of economic factors are having an go down, we can manage the process. impact on us, but we have to manage the business as Waqar Ahmed: Just to add, we did a pilot 10 years well to make sure that we do so it effectively. ago in L&Q, looking at the impact of direct housing Waqar Ahmed: My take is that the sector is hugely benefit, and our experience was that arrears doubled. regarded by the investment community—very highly Doubling of arrears in L&Q would probably be about rated. Within that rating, some associations have £5 million or £6 million—a one-off hit, but, again, higher ratings than others. There is an enormous overall within our cash flows that could be appetite to lend. Lending conditions may be affected manageable, it can be argued. In addition to the by what is happening in Europe and the spreads of additional staff that would be required to actually investors, but that does not take away from the fact manage the process, we might be looking at a leakage that there is an appetite to lend. of quite a significant, but manageable, amount of capacity. I have had a conversation with our rating Q239 Simon Danczuk: Anything else, Mark? agencies and they view London differently. Their view Mark Henderson: I share those views entirely. It is is that the overall rating of well-managed housing seen as stable. associations in London could be protected, because there is huge demand for housing. Therefore, in the Q240 Mark Pawsey: Like Simon, I am going to event that arrears result in a potentially higher level flatter you. He has just described you as the cream, of evictions, they still see no increase in vacant but between you, you represent the biggest suppliers properties. Nevertheless, that is likely to have an of social housing in the UK. This is an inquiry about increase on spreads. So the net position is, it won’t the financing of new housing to buy. Who exactly affect borrowing capacity, but it is likely to increase provides the finance? Who do you guys go talk to borrowing costs. when you are looking to finance a new project? David Orr: There is going to be considerable demand Steve Binks: We go to four banks, principally, that on housing association capacity across the board for could be clearing banks who are lending to the sector. this and for other reasons. Our estimate of the We have bond issues on the stock market, where we combined additional transaction costs—nothing else, go to wholesale bond investors. We will go on a road just purely the transaction costs of getting the rent in show and sell to the bond investors. As a company, Communities and Local Government Committee: Evidence Ev 47
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed we have also got US and Japanese investors, where Q245 Mark Pawsey: So why aren’t we building we have had road shows and sold private placement affordable houses if the money is there? stock to those sorts of people. We also have a retail Steve Binks: Because, at the moment, affordable and bond, where we have sold our bond paper to the social housing production depend on a level of grant general public through a bond issue we did earlier this subsidy— year. So we have a very wide base of debt investors. We have been seeking in the past few years, along Q246 Mark Pawsey: So what we have established is with our colleagues in the sector, to widen and deepen that the availability of finance from the sources that that base. you regularly use is not the problem right now. David Orr: That is overstating it. Q241 Mark Pawsey: Are you all going to the same Mark Pawsey: That is the message that I am getting. sources? David Orr: I think it is overstating it. The traditional Waqar Ahmed: Historically, we have always raised source of providing funding for new housing finance mainly from the banking sector, but that has association borrowing was bank debt. That is much now diminished, because banks are unable to lend more constrained and much more difficult to come by. long-term. We see ourselves as a long-term There has been a move towards the capital markets, investment. Therefore, more recently our approach particularly through bond financing. That has been has been debt capital markets. Two years ago, we successful and there is still appetite among issued a bond for £300 million. We were four times institutional investors, because housing associations oversubscribed in the first hour of trading, are an extremely safe bet. The issues are about the demonstrating an enormous appetite for lending. We potential capacity in housing associations to secure do not plan to go anywhere else until those that new borrowing, even in the capital markets. We opportunities exhaust themselves. If they do, we will do not at this stage know how deep the well of look at private placement and other initiatives that potential investors is. At present, housing associations Steve has described. are as good a place to invest money as anywhere else David Orr: It is certainly true that the history of in the market. housing associations has been bank debt. As other witnesses have said, that is much more difficult to Waqar Ahmed: Can I just add that there are some come by. The terms of it—not just the financial constraints? Those constraints are existing covenants terms—and the times have significantly changed. with lenders. The main constraint is a gearing More and more housing associations are accessing the covenant. Moving to affordable rent will push up capital markets, and there has been considerable gearing, but gearing can only remain within certain enthusiasm for housing association bonds. How far covenants, and that creates issues with existing that will go, I do not know. There has been a lot of lenders. We are using our capacity. In our case, we talk about institutional investment. Certainly, for have 10,000 homes currently in the development standard bonds, there has been considerable pipeline. We have more than £1 billion committed to institutional appetite for that. development. We are using that capacity. Mark Henderson: I agree. I have one final comment on bank lending, which has been historically very Q247 Mark Pawsey: If you could overcome some of favourable for our sector. It is clearly now becoming the other hurdles, the message is that the financing is much more short-term money rather than longer-term not the biggest problem right now. opportunity. Steve Binks: If you can make the projects pay and generate a decent rate of return, which at the moment Q242 Mark Pawsey: If you are all going to the same depends on being able to charge affordable rents, and sources, it is part of the problem. You are all trying if you can have some Government grant going in, and to compete with one another for a limited amount of the company that is borrowing is not approaching resource. Is that a problem? gearing constraints, then the answer to your question Steve Binks: I do not think that we have an issue at is yes. the moment. As Waqar said, there is a considerable depth of investor appetite to invest in affordable social Q248 George Hollingbery: I am intrigued by this. If housing in the UK. Investors see us as a safe haven, in that is the case, why can we not build any housing effect. We have got very strong and stable cash flows. anywhere at any time? The answer is because there is effectively a very different situation of under- Q243 Mark Pawsey: So there is no shortage of cash? leveraged assets in the housing associations. They are No shortage of money available? That is the message worth an awful lot more than they are leveraged, and I am getting from you. therefore they have not reached their borrowing Waqar Ahmed: I suggest there is probably a ceiling covenants, and won’t. To put it another way, you were on how much investors would be prepared to invest also talking about the lack of grant being an issue, but in the social housing sector. that is just subsidy. In other words, it is sharing the risk with the Government. The Government take the Q244 Mark Pawsey: Have we reached that yet, or is large part of the risk in hand. What we are saying is there still capacity out there that you guys can go and that housing associations are not terribly risky at the access if you have projects that are attractive? moment because they do not have a lot of leverage on Waqar Ahmed: In our case, I believe those the books against the capital value of their assets. opportunities are out there, but there will be fewer. Correct? Ev 48 Communities and Local Government Committee: Evidence
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
Steve Binks: It depends which housing association that into equity and invest it in our own model and you look at. that is precisely what we have been doing. Ever since George Hollingbery: But some do and are we have been around, we have always generated high approaching that level. surpluses—around £60 million a year—and every Steve Binks: Yes, we are. We have relatively high penny gets invested in development. gearing. We have been a very active developer over the last 10 to 15 years and so, if you look at the sector Q254 George Hollingbery: Have you managed to as a whole, our gearing levels are relatively high find a way of sharing some equity-type risks with compared with the average. other partners despite Government difficulties over equity shares? Can you describe that for me? Q249 George Hollingbery: So, this takes us very Waqar Ahmed: We believe that in order to secure neatly into equity, does it not? That is where we can successful development, it will require cross-subsidy attract people who want a higher rate of return for a not just from our own resources but from sale. We are greater risk profile. That also raises all sorts of prepared to take sales risk, but there is a limit to how difficult issues, such as governance. Your status is not- much sales risk we can take on our balance sheet. We for-profit. Where do funds flow in difficult times and have done some very large-scale developments with so on? Tell us a little more about the equity model. some of the main house builders—Taylor Wimpey, Steve Binks: There are two versions of the equity Barratts, Countryside—in and around London where model. The one that we have been pursuing for some we not only share construction risk and sales risk, but time goes along these lines. If you increase rents we jointly put in equity. At the end of the day, our either across the whole of our rental portfolio or share of the returns will enable us to subsidise the implement the affordable rented model across a affordable. proportion of our rental portfolio it is possible to create a return sufficient to attract equity investment Q255 George Hollingbery: Do you recommend that into the sector. When I say a return sufficient to attract to other housing associations? equity investment in—I am talking about the sorts of Waqar Ahmed: I would recommend that model to returns that one of the previous witnesses housing associations that can take that level of risk. mentioned—it is around 8%. From talking to In order to take that level of risk, they need to have investors, we know that if you can deliver 8%, they strong balance sheets and be generating strong consider us to be relatively low risk and a defensive surpluses themselves. stock in effect would be created. You could issue equity into the market and use the proceeds of that Q256 George Hollingbery: So what is it in those equity to build affordable or social housing. instances? Waqar Ahmed: The size of the partnerships that we Q250 George Hollingbery: Are we talking about have done range from developments of around 800 the Government? homes to ones of about 4,000 homes. The partnerships Steve Binks: In effect, this would be a sale of the are usually in excess of £100 million. interests in the company and you would end up with shareholders owning the company as a whole. Q257 George Hollingbery: So, not something for a smaller housing association? Q251 George Hollingbery: What you are saying is David Orr: I think probably not. What we are getting that it would no longer be not-for-profit. into here is a discussion about pretty fundamental Steve Binks: It would be a for-profit company. potential change. It is occasioned by the need to build new homes and the lack of supply that there is in Q252 George Hollingbery: It would be a floated the market and people trying to explore all possible vehicle on the stock market? avenues. I think it’s absolutely right that we should be Steve Binks: Yes. having this kind of discussion, and that we should be Waqar Ahmed: We would prefer to preserve our exploring all options. There are some quite important social values and our social mission. Our view is that inhibitors. Moving from an industrial and provident equity has a role. That role is a risk and reward around society to being a publicly owned company is not an development. We have done a number of deals with easy thing to do. There are major regulatory inhibitors house builders jointly to procure and develop large- that stop that happening. I think that a number of scale development in London. We are happy to work housing associations who have explored some of this with local authorities and share equity models around territory are trying to make some kind of assessment land. From a finance perspective, we would see purely of the relationship between the short-term financial equity and no additional value as more expensive than impact that comes from selling equity, and the what we can currently borrow in the capital markets. potential long-term change that that makes to Therefore, our preference would be to exhaust our governance, and the potential for people to take value options in the capital markets first. out of the organisation as well as putting it in. So these are pretty fundamental questions. Q253 George Hollingbery: Is that something that As you say, this is not a game for small organisations you would contemplate if you wanted to raise more to play, although I think that smaller organisations capital? also have the potential to look at smaller-scale, local Waqar Ahmed: It would be. One of the reasons why joint ventures with local developers and sometimes we aim to generate significant surpluses is to convert with local authorities, which try to stretch the way Communities and Local Government Committee: Evidence Ev 49
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed they are able to use the assets they have at their occasions to address that issue. Certainly, if one of disposal. I think that we need a more encouraging your recommendations was that that should be done, environment—both in terms of the HCA and the that would be very helpful. regulatory environment—to try to ensure that that happens. I think that there are offers that we could Q261 George Hollingbery: That was what I was make to smaller housing associations that would allow going to say. So you would make a particular them to use assets that they have more effectively than recommendation to us that that is something that is the case at present. needs sorting and that the Government need to issue Your previous witnesses were talking about how to get a position? institutional investment into the private rented sector. I Mark Henderson: Getting some clarity about the think that there is a realistic possibility of housing treatment of that grant is essential. From my associations bringing institutional investment into experience in other walks of life, something like very significant institutions to provide a market rent regional selective assistance was, in effect, a grant product, and to help stimulate new supply of market given to a business after delivering the outcomes, or rent, so that we are talking about housing associations on the basis of three years. That grant was then written expanding the range of things that they do—not off for that business and no repayment was required, replacing the things that they do, but adding to the provided those outcomes were met. That kind of range of things that they do, in an attempt to respond treatment—in terms of grant going into housing to the housing market failures at present. associations, and some clarity about that—may be a solution in terms of Right to Buy and how that Q258 George Hollingbery: We had someone before forward grant could be used as equity, for example, who was talking about the sorts of products that I and whether you could leverage against it could also think that you are referring to. It seems to be a very be clarified at that time. interesting area. The governance issue is certainly a Waqar Ahmed: Our view is that there is more value knotty one. What about the whole issue of in the latent capacity that sits within housing Government grant and its place on the balance sheet? associations, whether that is converging target rents, Steve Binks: My view of Government grant, I guess, the existing rent formula, to affordable rents, or is that it is the Government’s equity in these greater freedoms on asset management. That value companies, and at the moment it is earning no rate of could be captured and put into a social equity fund return because it is there to keep rents at a particular which should then be invested in additional growth. level. The grant has been paid, it has been invested in George Hollingbery: Very useful. bricks and mortar that will be there for some time— let us say 100 years—so it has been spent, and we Q262 Chair: There are one or two other ways in would say wisely spent. which more resources may be brought into the sector. However, there is a need to examine the status of Steve Binks, you have been involved with retail Government grant on RSLs’ balance sheets. We would bonds. Has that been successful? Do you think it will argue that that grant, in effect, could be turned into spread throughout the sector? some form of equity and then sold on, in the way Steve Binks: It is a form of debt finance across retail that I suggested that we would raise equity within our bonds. So it is another form of debt, but it has been companies. Again, that would require the creation of successful for us. We went out with a relatively small a return for investors, but that’s what we would do issue, or ambitions for a relatively small issue of £25 with it. million to £50 million. That was our initial asking and we were surprised—almost overwhelmed—by the Q259 George Hollingbery: Why would you not demand. We ended up raising £140 million in two leverage it? weeks from people who would invest money with us Steve Binks: We would leverage it, but the issue for for five and a half years, put it into an ISA at—I think housing associations at the moment is that some of the interest rate was 5%. We also sold quite a lot to the larger ones are getting fairly highly geared, wealth managers and brokers. So I think there is an because they have been developing quite a lot for a opportunity to develop that market, certainly for long time. The affordable rented model will, over ourselves, and we will be back in that market in the time, increase our gearing more rapidly, because we near future, but also for the wider housing association are borrowing, in effect, 80% of the cost of a unit movement. There is an appetite out there from people every time we build one and at some stage you run who want to put money into ISAs—ordinary people out of borrowing capacity. who have £5,000 or £6,000 to invest and put into something that is being spent perhaps in their local Q260 George Hollingbery: I understand that. area. There are lots of ways in which this could be Perhaps I am misunderstanding the status of used to generate some sort of involvement in your Government debt, effectively, on the balance sheet. Is local community and your local housing association it primary? Is it the first call? and we would see retail bonds as being ideal for that. David Orr: The most important problem here is that there is no settled view of the status of that embedded Q263 Chair: Are you looking at this? social housing grant, and until we have a settled view Mark Henderson: Yes. We will be looking at a bond about that, it will be very difficult to come to a issue in pursuit of our development portfolio I guess coherent view about how best we can make use of over the next 12 to 18 months as an organisation. It is it. We have invited the Government on a number of but one of the things that we need to look at in terms Ev 50 Communities and Local Government Committee: Evidence
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed of bringing finance into the development market. It is Q265 Chair: To go back to the point that David Orr also beyond bonds. It is about the utilisation of public was making earlier, the cost of the benefit bill will land and strategic partnership and joint venturing. It depend on whether you are getting simply more is about stock rationalisation. It is about bringing affordable housing or affordable housing at the together a whole range of things to increase our ability expense of some social rented housing. Your model to provide affordable homes. actually depends on that, doesn’t it? Waqar Ahmed: We are looking at raising additional Steve Binks: It does, and we recognise that there will finance. We will be going back to market probably in be a small reduction of 10% for this purpose of social the next six months, but we believe there is sufficient housing in our company, but it is re-provided by space in a 20-year or 40-year end of yield curve and affordable housing, and the reduction in social therefore our preference is to pay for them to get long- housing is equally matched by an increase in term finance. Longer term, we may consider it, but affordable housing. Overall, we reckon that we could increase the supply of housing through this model by not immediately. about 3,000 units in the next five years, in our company alone, by using that £500 million to reinvest Q264 Chair: Coming to REITs, again, Mr Binks, you in housing. We have constructed this because we are have an idea for a scheme that might involve REITs. interested in increasing the supply of housing overall, REITs are an idea that has been around for so long and we are looking to the medium to longer term and without actually happening in housing. Have the are trying to construct a number of models that would Government ticked the right boxes in terms of their work with or without a grant in the future, depending consultation document? on whether it is available. So, that’s what we have Steve Binks: We think they have. We think that the been doing. legislation that we now anticipate will come forward in the Finance Bill in March will have all the right Q266 Chair: David, you put forward the idea of a indicators in it. The proposals are to remove the entry housing investment fund. Do you want to say a bit fee and to change some of the terms and conditions. about that? We think that there will be some interest in setting David Orr: We are trying to explore different ways of real estate investment trusts, from a private sector being able to aggregate the capacity that there is, perspective and we believe there is something for the either among investors or in housing associations, and affordable sector as well. We have constructed a create something big. We think that the proposals in model. We have been talking with DCLG and with the Finance Bill about REITs create the potential for the Treasury about how it might work,2 and we have housing associations to become significant players and constructed a model that, based on the affordable to attract that larger scale institutional investment. housing model, we believe could raise up to £500 If I might just say this: there is an underlying issue million for our company alone to invest in affordable here, which is that we are all agreed, I think, that we housing. need subsidised housing in the economy. The market The way it works is that Places for People would set will not provide, and clearly is not providing, for up a company, which would become a real estate everyone. The question in all of this is: what is the investment trust. Places for People would effectively mechanism by which you provide subsidised housing? sell assets into the real estate investment trust, and There are a whole range of them. We have talked at those assets would be rented out at affordable rent various times about land, capital subsidy and revenue levels. That creates the 8% return I was talking about subsidy. I hope that we continue to understand that earlier, which we believe is sufficient to attract there are occasions when capital subsidy is much more cost-effective to the public purse, and that we institutional investors into the market so that we could should not just assume that capital subsidy will go. float that company for we think about £0.5 billion. Having said that, I think we have to explore all other Then that £500 million would flow back, as in effect possibilities, and the idea of a housing investment the purchase price, into the registered social landlord fund, that’s really what it’s about. It is trying to bring for them to reinvest in affordable housing. We have together the aggregate strength that there is in the not bottomed all the details yet. We have finalised our sector and among potential investors to create a new model, and we are about to talk to the Treasury about fund, supported by Government, that is able to be this early in the new year—we are arranging a visit to invested in new homes. get the Treasury comfortable with the idea. But it does depend on affordable rents and being able to create Q267 Chair: And that might help smaller that return for investors. associations. 2 On the 10 February 2012, Mr Binks wrote: I met with Chris David Orr: Absolutely. We were talking about bond Jackson who is Head of Housing Policy at HM Treasury on finance earlier, and the Housing Finance Corporation 10 January to outline our proposals. I am in the process of is able to act as an aggregator, giving smaller housing arranging a meeting between The Tenant Services Authority associations access to the capital markets. We need to (TSA), the Homes and Communities Agency (HCA) and Chris at HM Treasury so that we can facilitate a round table find other mechanisms of that kind, which allow discussion between all the parties who may have an interest smaller housing associations to make a contribution. in the development of a REIT. I expect this meeting to take place in March which will coincide with the publication of the Finance Bill. We anticipate that the Finance bill will Q268 Simon Danczuk: David, are you confident that contain the amendments to legislation which will facilitate a one-for-one replacement of additional homes sold Social Housing REIT. under right to buy can be achieved? Communities and Local Government Committee: Evidence Ev 51
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
David Orr: Well, it’s a commitment from the the biggest capital receipts to go into whatever that Government, so I should say, “Yes, of course I am,” particular local authority wanted to do. Sometimes, but we have yet to see the financial modelling in detail the opportunity to bring forward the more marginal that allows us to be absolutely confident about it. sites is missed. From the modelling that we have done, at the scale We currently have a joint venture with Galliford Try that the Government are talking about, it looks like a and Gateshead Council, and we are looking at 19 sites big stretch to us. Again, it is worth pointing out that over a 12 to 15-year period, which allows the higher- one-for-one replacement is not the same as like-for- value land to be used without the receipt or the profit like, because we would be selling social rented homes being taken out of that in the early years—that being and replacing them with near market rented homes. recycled through as future land being brought to market. Then, various trigger points will allow the Q269 Simon Danczuk: That’s a good point. value of the land to funnel back into the joint ventures Mark, you have put some proposals forward in terms of the local authority. I think that it is about having of right to buy in the registered provider sector. Do that more strategic long-term view, rather than you want to say a few words about that? dropping a site on a market for the highest possible Mark Henderson: It goes back to the earlier question value. I think that there is more that we can sweat out about the treatment of former grants but, if there is a of it. way of smoothing out that former grant, we believe that if the Treasury was in some respects to relinquish Q272 Mark Pawsey: Are these schemes local that, it could be used as a deposit, as an equity stake authority-owned land then? What about other that the individual customer had in their home. One Government Departments? Do you have any of the biggest hurdles that certainly our customer base experience of bringing land forward from other has is in raising 10%, 15% or 20% of the value, so if bodies? Anybody? that was treated as equity by the bank and allowed to David Orr: There is no doubt that the land currently be used as a deposit for their home, they would then in public ownership is there and would be able to take out a straightforward mortgage product. That sustain that level of new building, but it is difficult to receipt would then come back to the housing get it. There has been a long history of Government association—ourselves in that particular interest. saying that they want to ensure that that publicly Then, and there are two caveats to this, provided that owned land becomes available, but, inevitably, we are then able to build on a one-for-one basis and individual Departments have their own views about within the local community in conjunction, perhaps, the value of that land and either what they want to use with the local authority working on where this new the land for or what they want to use the value of the housing might be provided, that could open a land for. Squaring that circle is quite difficult. There significant gap and genuinely provide a two-for-one— is lots of land owned by the Ministry of Defence or one privately owned and one new, affordable home— the health service, but it does not just sit there with utilising this former grant, which requires those Departments not having any view about it. clarification, but is not actually being sweated by Moving from the commitment in principle to making either HMT or RPs at the moment. that land available to the actual delivery of it is a very important piece of work that is not yet finalised. Q270 Simon Danczuk: Are Government listening to that? Are you talking to them? Q273 Mark Pawsey: We had a memorable quote Mark Henderson: We have only very recently started from an earlier witness about how to go about doing talking with CLG, and I think that they now want to that. Do you subscribe to the same theory? look at doing some of the numbers to see how that David Orr: Broadly! stacks up. I think that one thing that we would Waqar Ahmed: In London, our view is that the certainly appreciate is clarity about the former grant preferential partner seems to be the private sector, that would allow us to take it to the next step, to which is fine, but we believe that we should be at least model that through and, perhaps, potentially look at considered a preferential partner, because we share the some pilot local authority areas where we could see same social values and are able to invest every penny whether it actually works and how it might be that we generate from profit back into the implemented. development of land. There is a site in which we are currently involved in London, but not as the Q271 Mark Pawsey: May I conclude with a question preferential partner, and that site is unlikely to be on land? The Government believe that there is developed because it does not generate a sufficient sufficient land available for 50,000 new homes to be return for the investor, but if we were the principal built on redundant Government land. In your partner in that development it would have already experience, is that a reasonable figure and are the been on the ground today, because we would operate Government doing enough to make that land available a lower margin. to you? David Orr: There are one or two quite important Mark Henderson: There are probably a couple of political issues here. There is land owned by public things that I would say on that. The first is on how bodies that has previously been purchased, or at least that land is brought to the market and then used to be accounted for, at quite a high value. If that land is sold developed. Again, from previous experience as chief at its present market value, it will crystallise a loss. executive of a local authority, public land tended to That is a problem at present, because no one wants be the most—the greatest value land was then sold for these losses to be crystallised. Ev 52 Communities and Local Government Committee: Evidence
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
Q274 Mark Pawsey: So it is a valuation issue. Chair: Thank you very much indeed for having the David Orr: There is a valuation problem. These are last slot before Christmas and thank you for coming just the boring, mundane details of turning the to give evidence. I want to take this opportunity to political commitment into the delivery. wish you all the best for Christmas and the New Year. Communities and Local Government Committee: Evidence Ev 53
Monday 30 January 2012
Members present: Mr Clive Betts (Chair)
Bob Blackman George Hollingbery Simon Danczuk James Morris Bill Esterson Mark Pawsey Stephen Gilbert Heather Wheeler David Heyes ______
Examination of Witnesses
Witnesses: Sean Oldfield, Chief Executive, Castle Trust, Graeme Moran, Managing Director (Portfolio & Acquisitions), Assettrust, David Toplas, Chief Executive, Mill Group, and Peter Mahoney, Chief Executive Officer, R55 Group, gave evidence.
Q275 Chair: Good afternoon. Welcome to the fourth Graeme Moran: We have two products. The first one and final session of our inquiry into the financing of is a shared ownership version of right to buy, which new housing supply. Could I just begin by apologising is aimed at helping social rented tenants get on and for the fact we are a little bit sparse of Members of meet their home ownership aspirations and purchase the Committee? There are other things happening in their existing social rented home. The reason we think the House at which the Whips require attendance, and that has potential is there are circa 4 million social some of our colleagues have had to leave. They may rented households; of those, there are about 920,000 or may not return at some point, depending on how households who could afford to buy a share of their well behaved they have been in the meantime. For the home with a discount as proposed under our scheme. sake of our records, could you just say who you are If we were to see a 4% conversion rate of those and the organisation you represent? 920,000, you could potentially release £3.2 billion to Sean Oldfield: Sean Oldfield, Chief Executive, £3.5 billion of historic, locked-up grant and other Castle Trust.1 capital out of the existing social housing sector to Graeme Moran: Graeme Moran, Managing Director, invest in new supply. Assettrust. In terms of the number of stakeholders who are David Toplas: David Toplas, Chief Executive and antithetical towards right to buy, we think our product shareholder of Mill Group. is saying, “We are helping people meet their home Peter Mahoney: Peter Mahoney, Chief Executive, ownership aspiration, but we are not losing social R55 Group. housing stock; we are actually adding to it.” There is a one-for-one and a like-for-like replacement of a social rented tenancy. We think that certainly meets any Q276 Chair: We are obviously trying to identify new gripes that someone like the Defend Council Housing sources of funding for improving the housing situation lobby might have against it. In terms of the practical in this country and new ways of delivering housing in application for the customer, we think there is real a variety of forms. We have, and have had over the potential there because we actually have a mortgage years, many ideas about how this can be achieved, in place that can go up to 100% loan to value to and probably far fewer successes. The models that you support a customer on a low or moderate income to are proposing are different from each other in many achieve that purchase. That is why we think it is respects. Why do you think your particular model is realistic and realisable. likely to work and why is it not working now? We have some traction; we have a number of partners Sean Oldfield: Our research on thousands of on board that are already beginning to explore our households indicates that 50% of those people looking product and rolling it out and piloting it. One of the to buy a home would like to use the Castle Trust barriers that we have had today is that many people product, a partnership mortgage. We think that is a who are providers within the social housing sector very large target market because, when you exclude have probably been quite overwhelmed with the large the people that we would not lend to, it ends up being series of changes to the social housing market and the about 1 million households that would like to use our consequences of welfare reform. Therefore, they just product. 1 million households in the scheme of the have not had the time and capacity to pay attention to UK mortgage market is a very large market; it is about new forms of interesting finance, although we have 9% of the UK mortgage market. That is the sheer level seen that change over the last few months. of customer demand; they are trying to bridge the David Toplas: Perhaps slightly briefer: co-investment stark divide between renting and home ownership is seeking to bring long-term investment money to with a mortgage. I think some of the solutions here people so that they can buy homes through today are very much here to bridge that stark divide. co-investment in the mainstream housing market. We I will leave it to you. think that this new model will be able to generate anything up to £30 billion over the next five years, 1 Castle Trust is not yet open for business and has applied for but not yet received authorisation by the FSA to undertake supported by mainstream, large institutions. It will regulated investment activities. provide a critical difference to homeowners, house Ev 54 Communities and Local Government Committee: Evidence
30 January 2012 Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney builders and the Government, whilst creating a new concern and possibly even the cause itself. Why investment asset class within residential. The principal should these products be a success when they are issue in terms of its future is that it needs to actually untested at the moment? start, so we are seeking a focus on support for Sean Oldfield: Being long-established does not innovation and for piloting. necessarily mean something is the best solution, and I Peter Mahoney: Our model is effectively in two parts. think the financial crisis in fact points towards that It is a funding solution and also a modular housing being the case. What three of us here are offering, I solution. The funding solution is very much a believe, is something that provides customers with a lease-backed funding solution where it is directly real choice in the spectrum between renting and targeting housing associations and local authorities ownership with a mortgage. Ownership with a who are providing modular housing that is responding mortgage is a very risky thing to do; most people do to local housing needs, but it also comes fully funded. not appreciate that the risk attached to an individual Effectively, the housing association or local authority house is a similar financial risk to that of the FTSE would provide us with land. We would work with 100 index. When you then go and take a large them, understanding their housing needs and the needs mortgage against that, you are taking out a very large of the Housing Department, and together a solution is amount of financial risk on your own home. Being developed. Then, depending on whether it is a low able to de-risk your own home is a very important cost, for a low-income area and rents are challenged, way in which to manage your financial future. effectively the lease then extends or shortens Certainly, the partnership mortgage is a very simple according to that. product, and I would be very happy to explain it to A longer lease will allow a lower income to spread you because it does not take very long at all. the costs a lot further and therefore allow the same quality to be achieved, rather than it being a low cost Q279 Bill Esterson: Before you carry on, I suppose area and therefore a lower cost solution. It is the point is that there are shared ownership products— effectively bringing a housing product together with a if you want to use the word “products”—that have funding package. In terms of how that is funded, it is been around a long time, so it is not a new not debt funded, it is not reliant upon social housing development. I think the idea is that the Government grant; it is purely funded by pension funds and life would stand behind these products. Is that right? insurance funds that are looking for long-term, stable, Sean Oldfield: Not the case, no. low-risk solutions. Social housing and Government- backed housing benefit support and so on are ideally Q280 Bill Esterson: So Government support is not matched to that. needed for these? Graeme Moran: Certainly, our intention is we are Q277 Chair: Just before I pass it on, I have just a going to be applying a standard shared ownership last point. Is this money in place? Have you actually lease, which has been approved and regulated for raised money for other schemes before as an many years, and that is what we will be offering to organisation or are you really starting off at first base the customer to buy into. I think the track record of on this? shared ownership, certainly on repossession rates and Peter Mahoney: In this space, we have not raised default rates, compares very favourably with ordinary funds. The reason we have not is there is an sales on the open market to first-time buyers. What abundance of funds out there in pension funds we are offering the customer is to buy in through a allocated. Aviva, for example, did the Derwent deal. very rigorous eligibility and assessment process, They have £240 billion of funds under management, almost identical to what happens in the regulated £8.5 billion of their own, which they are looking to sector, which is driving default rates of no more than allocate to this sector. That is a similar kind of 0.38% and, probably, people in mortgage arrears for lease-based structure, so we will work with them on more than three months of 0.49% or 0.42%, which the development side. In terms of whether we have is very good performance compared with traditional raised funds before, we have not raised funds as such; well-organised mortgages. We are not in any way we have historically targeted urban regeneration trying to serve a sub-prime sector. There will be very companies such as in Derby, Leicester and Stoke. rigorous tenant eligibility and assessment criteria. There we have used funds from private banks, so it We do expect on our product that goes out that there was straightforward development funding. Generally would be a 25% discount offered outside of the equity in higher risk areas we would de-risk it, and then that is already within a property, so there is some level prepare it more for the traditional debt funding to of grant. What we are expecting that to do, though, is come in afterwards. turn the average value of a social rented property on its existing use social housing value from £35,000 into Q278 Bill Esterson: I understood what you said, £85,000, which means you could do a one-for-one and Peter, and I understood what was written about your like-for-like replacement of social rented. Our view is organisation. I am afraid I cannot say the same about that we are helping someone responsibly to buy a the other three organisations, and that is a concern for share of their home, so we are helping customers who me. I heard terms like “interesting finance” models can afford to buy a property, thereby releasing value and “innovation”. There is not necessarily anything that can be recycled to help people who are more wrong in those, but we are just coming through a needy on waiting lists; we think that is an efficient use financial crisis, where the increasing risk in complex of public-grant funding in the future with historic financial products was one of the big causes of grant. Communities and Local Government Committee: Evidence Ev 55
30 January 2012 Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney
Q281 Bill Esterson: Before we come to David, I would be sufficient to see more people come to these think it was your organisation, Sean, in your new models? submission, that made the point about Government David Toplas: Absolutely. I think you underestimate support. the power of the politicians’ statements. We would Sean Oldfield: Yes, Castle Trust requires no taxpayer welcome support for this whole area of co-investment, support. whether coming through shared ownership or shared equity models, in preference perhaps to suggesting Q282 Bill Esterson: You said you believe the people should go on to buying houseboats. Government should make clear its strong support. Sean Oldfield: For private sector solutions in the Q284 Stephen Gilbert: Can I ask about individuals’ shared equity, shared ownership space. Such support, risk profiles when they use your products? Obviously, not the financial support, does provide a very real we have heard a lot over recent months and years impetus to the ongoing growth of such solutions. about indebtedness. Using your product, what is the Bill Esterson: David. typical exposure against their home in terms of the David Toplas: Co-investment is in fact a very simple percentage that they will be taking up? What is the joint purchase arrangement between a rich institution range that your products work from? that has money and just seeks an income flow, and an David Toplas: We see co-investment working in any individual who wants to own a home and has a modest balance between 0% and 100%, but typically starting amount of cash. Therefore, buying a property together off with a consumer putting perhaps 5% down and the makes a lot of sense without any other mortgages or institution funding the balance of that, again without anything of that sort being involved. That is the mortgages. Of course, that has the fundamental benefit essence of our arrangement. We have done a that we have two investments being made in one considerable amount of market research and property and, therefore, the consumer is not at risk of demonstrated from that that consumers get it; they can negative equity. He is not responsible for the financial see how it will work very well for them to facilitate investment and a minimum sum, as he would be in a their move away from the rented sector, its mortgage situation. Therefore, if property prices do uncertainties and inability to personalise your home, fall, as could easily happen over the next few years, towards a long-term arrangement in co-investment or, they will lose a little bit of money on the money they put in, just as the institution will lose the same indeed, if they wished, to go and purchase out in due percentage. course. Graeme Moran: We would be anticipating most You asked about Government support, and we do not customers to be spending no more than 32% of their see that this model requires Government support in gross income on housing costs. The product is the long-term sense. What we are saying is that appraised, pre-marketed and sold very much in line innovation, particularly at these times, is a tough thing with the affordability criteria assessment currently set to achieve, and that Government has been asking for by DCLG, and implemented and overseen by the innovation to come out to the housing market and for Homes and Communities Agency and Tenant Services new models to come forward, yet has done precious Authority. We think it is a very responsible product in little, if not anything, to actually encourage those to that sense. The other main protection to really flourish and be seen through the critical pilot stage. reinforce is that there is an assessment done by the Ultimately, each of our businesses here is constrained registered provider, there is an assessment done by us by an inability to demonstrate that they have actually and by the mortgage lender and, what is more, got off the ground. That is a role we see as quite post-sale that customer remains managed and looked important for Government to focus on: the market after by a registered provider. In many ways we would initiation and marketing support for innovation to argue that the asset is being sweated, turned over and come forward, in much the same way that worked for best efficiency, but the customer is not Government has chosen to support mortgage lenders being sweated. to encourage them to lend at higher loan to values Sean Oldfield: A customer with a partnership through the new build indemnity scheme. Why does mortgage needs a 20% deposit or more and that, Government not come forward and help to encourage combined with our shared equity, means that their risk investors to come forward, perhaps just for the first of arrears or repossessions is reduced by about a third; pilots, and then let those models come forward, be their risk of negative equity is reduced by one-half; assessed, and demonstrate their track record and so on and, obviously, it reduces the risk to rising interest through that? rates by at least one quarter as well. The risk of Bill Esterson: Do you have anything to add? negative equity, arrears and repossessions is Peter Mahoney: No. No comment. something that I think is particularly appreciated by people here today who live outside London. Q283 Stephen Gilbert: Coming back to that then, do Peter Mahoney: Our model does not really deal you see that support that the Government could offer, directly with individual homeowners. It is very much as declaratory support, as a statement? In your funding for housing associations or local authorities evidence, you said, “If cash is not available, the state in terms of bringing sites forward. can have a significant influence in gaining traction for new models by declaring publicly that it can see merit Q285 Stephen Gilbert: Can I just ask then what the in the concept.” I know the Housing Minister is very catch is? What is the risk in your products? You are powerful, but do you think a statement from him bringing in other co-investment partners or institutions Ev 56 Communities and Local Government Committee: Evidence
30 January 2012 Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney and sharing the risk; you are minimising the on, whilst actually taking away their share of the individual’s potential of default. There must be risk in capital gain, as we all hope it will be. There are a the system somewhere, so where does it lie in each of number of benefits coming forward into a package the models? that makes a new proposition. Graeme Moran: I think the key risk under our model Graeme Moran: I think it is worth arguing that the is where we are quite often asking a tenant to give up affordable home ownership market seems to be a lifetime tenancy and move into home ownership. developing quite strongly, not just as an initial sale That is the risk. You have to apply very responsible but onward selling. You are buying into a product that controls over that decision to buy, because people are does have a marketable resale value and opportunity giving up a huge amount of security in a lifetime because there is so much demand, because no one can tenancy, but we think we have managed that risk. The get into the outright market. other risk probably for us in terms of how this product develops is probably for some of the social housing Q286 Bill Esterson: I just wonder if there is a providers, because if it can release a sufficient amount balance here between how people treat their home: of capital, the risk for them is they may be pushed to whether they treat it as somewhere to live, as a home, only being able to reinvest that in new supply and in or an asset to be traded and for money to be made out line with the new affordable rent model. This does of it. I wonder what your views are on that analysis. pose some different and perhaps increasing risk for Sean Oldfield: When you just take on external debt associations, and, from our point of view, some of the you are actually treating it much more like an feedback we have had from the registered provider investment, because you are leveraged up and you are partners we are working with is that they would like hoping very strongly that it rises. If it goes down just a bit more flexibility over what they can reinvest any a little bit, your equity gets reduced by the leverage assets that they manage into. This may include empty effect of having a mortgage. Having an equity homes, regeneration schemes and some open market buffer—be it shared equity, shared ownership, shared ownership schemes, which involve less sales co-tenancy or co-investment—is a way to reduce your risk. financial risk on your own home and reduce the Sean Oldfield: David Miles in his speech in Yorkshire investment part of the decision that you make when last November talked about the benefits to households you buy a home. There is a place to live and there is and society more generally of having households issue an investment, and those two decisions are bundled equity in essence to external parties. When a company together right now. We are helping people to have less issues equity, it becomes less risky; when a company exposure to their own home. issues debt, it becomes more risky, and if you think Graeme Moran: We do not necessarily anticipate or about a household, today it can only issue debt. There see any change in behaviour or attitudes towards the is a significant risk reduction in the system by issuing management of an asset of an existing tenant who has more equity and, of course, if you consider the options a lifetime tenancy and is converting into home against whether you issue debt or equity as a ownership. We have had some anecdotal feedback that household, if your house performs very well or the some people might prefer to get into home ownership company performs very well, equity is more now because, although there are attendant risks, there expensive. I think that is the very simple position after seems to be an increasing risk that lifetime tenancies you have gone and issued equity in your own home. may not be lifetime tenancies forever. So, maybe David Toplas: For those seeking a home to live in purchasing into a home ownership gives people the on a long-term basis rather than a short-term rental guarantee of security that they have always arrangement, we have already talked about the lack of traditionally associated with social rented tenancy. negative equity, which is a very large difference. David Toplas: It is a very interesting question you Equally, the cost of actual occupation we see very raise, and the essence of the answer is that people much falling between rental and servicing mortgage buy and seek homes; they do not, day one, seek an products—at, say, a 90% level—so it is investment in the property they happen to live in. If it market-driven, and it would obviously change over happens that it goes up in value, that is great and time to reflect that. Enabling a consumer to plug into nobody complains, but that is not the driver for the an arrangement over a long term actually protects purchase. They are looking for the ability to them from arbitrary price rises—as landlords can personalise, to create their own space and to put down impose as their tenancy is coming to an end—or, their own roots in a community, each of which indeed, the uncertainties of interest rate rises, which co-investment is focused on and typically are things must be coming down the line to us some time. that the private rented sector, whether in large-scale Therefore, diving into the desire from institutions for build to rent or the ordinary buy-to-let investor long-term RPI-linked income flows would provide product, does not give people. That is one of the main that solution. reasons why the CML studies continue to underline a There are other facets of risk, obviously, to which high level of desirability in the public to actually own Graeme has alluded. You can get into a home their own property. ownership situation. There our co-investment model Peter Mahoney: Our model really concerns the social actually provides another exit route of simply selling rented side, so we are not really concerned with out to us, the investors—we represent the investors— shared ownership or shared equity, but in terms of as a very easy way of actually enabling somebody to what David says about opening up the market and move on to a different property as suits their needs, giving people that choice, they are perfectly valid purchasing in the normal way with a mortgage and so products. But as I say, our main focus is really on the Communities and Local Government Committee: Evidence Ev 57
30 January 2012 Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney funding of housing associations and local authorities think that house building in properties is a constraint in bringing land forward. on our model; we are talking perhaps 25,000 units per annum. That is within the capacity of the Q287 Bill Esterson: The other question is: how homebuilders to build, particularly as for every one would you all do this on a larger scale? they build to sell through co-investment, they can Sean Oldfield: We are planning to do this on a build another one for open market sale. Clearly, relatively large scale; we have our investment secured co-investment is also driven into the existing property already, and when we launch we will be operating market, existing-built properties, as consumers make with large commercial partners on the distribution of their choices as to the sorts of properties they wish to both the investment products and the mortgage. live in. So, on each scale we think that is fine. In terms Graeme Moran: I have probably already discussed of deliverability of the proposition, we see this as a the potential scalability of our scheme, so I do not generic model that would adopted by others to offer think we are lacking in any ambition in that. I do large-scale activity. Each major institution may have not think we have necessarily overstated the potential. their own co-investment offering in due course. Clearly, we see there would be a slow move to the Peter Mahoney: Our model is rapidly scalable and it number of customers who would want to buy their does not really require just our organisation to do it. own home, and that will take a period of marketing, It is a traditional property lease that has been but we think it could scale up to substantial scales amended; it responds to the TSA and what you can and, as I say, a minimum probably of £3.5 billion do from a regulatory point of view; it brings together released from the sector. That is obviously helping the housing associations with the pension funds. Just as customer, but more importantly the second benefit of an example of the appetite for pension funds for this our scheme is to release money to engineer new route, the Moat housing association bond that was supply. issued some months back was 185% oversubscribed David Toplas: We see the potential for co-investment by investors, so there is a clear appetite for this kind rather larger than the sort of figures that have just been of Government-backed housing association social mentioned, in the sense that institutions currently housing income. On the housing association side, we invest a reasonable amount of money in the just simply need a supply of land; bring the two commercial property market. About £315 billion is together and it is pure, straightforward development invested in UK commercial property and only about funding like any other development funding. £4 billion in residential today, despite the fact that the residential market in the UK is about eight times the Q288 Chair: Do you have any reassurance that, if size of the commercial property market. Just from that you were to give the local authority a deal of this kind, simple analysis, if institutions could find a way to it would not count as Government borrowing? invest and to actually get the attractive income flows Peter Mahoney: It is a lease, so with respect to a that are available from the residential market, we are housing association it is generally off-balance-sheet strongly convinced, and have had some discussions funding and it is not really affecting current loan endorsed by investors, that that potential of about gearing ratios or anything like that. It is purely the £30 billion over five years is realistic. local authority entering into a lease, like they would To access it, it has to start with a successful pilot that any other, so it is not technically borrowing. They are demonstrates that it works. We know there are effectively entering into a landlord and tenant consumers out there; we estimate that anything from relationship. 40,000 to 80,000 people per annum would be there; Chair: Okay. Thank you very much indeed for that is £10 billion to £20 billion per annum in terms coming to give evidence to us this afternoon and for of consumer demand. We think that investors will take the written evidence you have provided. That is really some time to get up to that sort of scale. We do not helpful to our deliberations.
Examination of Witnesses
Witnesses: Pat Ritchie, Chief Executive, and Richard Hill, Deputy Chief Executive, Homes and Communities Agency (HCA), gave evidence.
Q289 Chair: Good afternoon, and welcome, both of Affordable Homes Programme, the 150,000 homes, as you, to our evidence session on the financing of new it was. I think you have now just been volunteered, housing supply. Thank you for the evidence you have from the Minister’s statements, into providing provided to us in writing. Just for the sake of our 170,000. Are you absolutely certain that is records, could you indicate who you are and the deliverable? Are you having any problems or do you organisation that you represent? anticipate any problems? Pat Ritchie: I am Pat Ritchie; I am Chief Executive Pat Ritchie: We are on track to do our contribution to of the HCA. the 170,000 homes that will be delivered across the Richard Hill: I am Richard Hill; I am Deputy Chief Spending Review period. The contribution we will Executive of the HCA. make will be through the Affordable Homes Programme and through our property and regeneration Q290 Chair: Thank you very much indeed for budget, and one or two other bits of investment, but coming. Clearly, your mission in life is to deliver the the bulk of the work will be through the Affordable Ev 58 Communities and Local Government Committee: Evidence
30 January 2012 Pat Ritchie and Richard Hill
Homes Programme. We are confident that we have Q295 Chair: I take it that you have signed up been able to agree a robust set of contracts with registered providers but the boroughs are probably not providers; we have 103 providers now in contract and completely on board in some cases. I just want to go we have committed, through those contracts, £1.6 on to the other parts of the country before I ask billion of the £1.8 billion investment through the colleagues to come in. There are parts of the country Affordable Homes Programme. We have yet to sign where the market rents are basically no different from up local authorities, but that will be next year, once social rents and, therefore, building properties and the housing revenue changes are in play. We are on letting them at market rents does not bring any more track, as we expected to be, to deliver on 35,000 money in. How do you make the Programme work in completions this year, and starts are on track in the those areas? new programme. Pat Ritchie: The Programme has a good spread across all parts of the country, so the investment is spread Q291 Chair: There have been a number of issues across each different local authority area. In some parts of the country where rents are lower, raised by various organisations, not least local associations have worked closely with local authorities, regarding their concerns about some of the authorities, for example, to put land into contracts and problems that might arise. I understand that some into projects in order to make sure that the overall London boroughs, such as Hackney and Newham, contracts stack up. We have seen that across some of have been arguing very strongly that at least a those areas where rents are lower and where the proportion of the properties should be at social rent market is more challenged; there has been a greater levels, and that the affordable rents are just so high degree of innovation and working locally to bring that they would exclude many people from being able forward contracts. Build costs are also lower in some to live in those properties. How are you going to deal parts of the country, and that has been reflected in the with that particular issue? way that the contracts have panned out across the Pat Ritchie: In London, as with other parts of the whole of England. country, we have been working through to sign up Richard Hill: If you look at the proportion of the associations on the contracted arrangements that I Programme in London, the old Programme was 27% described. Within London we have looked at and the new Programme is 27% of build in London. cross-subsidy from different parts of the programme Also, if you look at the other regions, the percentages to support rent levels that reflect the market across the now are not that different from what we were doing city. We have also looked at working with associations in the 2008Ð11 Programme. What you have not seen to deliver a range of size of homes within London that is a shift from low-value areas to high-value areas, for reflects the housing need within the city. exactly the reason Pat described in terms of people Richard Hill: If you look at the rent levels in London being willing to put land and other forms of financing that we have agreed in the contracts we have signed, in to make sure that they can keep developing. they are about 60% of market rent. If you look in other regions, we get closer to the up-to-80% level Q296 Simon Danczuk: To what extent will the that we had the flexibility to use. The reason for that community infrastructure levy impact upon the is straightforwardly to make sure that we were able to delivery of housing through planning obligations, do provide homes, particularly three-bedroom homes in you think? London, that were affordable under the regime and Richard Hill: Section 106 has been a big driver of did not hit any of the benefit cap restrictions that affordable housing over the last few years. I think in currently operate. 2010Ð11 about 29,000 homes were delivered through section 106. Clearly, any changes in the section 106 Q292 Chair: Have you resolved your differences regime have a potential to impact on delivery of with Hackney and Newham? affordable housing. The core question is the impact Pat Ritchie: We have contracts across most London on viabilities, and clearly what has happened as the boroughs. Some London boroughs have decided that market has changed over the last three to four years they do not want to participate in the model, but my is the number of affordable homes generated through understanding is there will be investment going into section 106 arrangements generally has moved up and Hackney and Newham through the contracts in down, so there is a potential impact. We have been London. doing a couple of things: we have been working nationally with HBF and NHBC and the Local Government Association to try to agree a framework Q293 Chair: So the answer is no. looking at viability, both at a plan level and at a site Pat Ritchie: No, we have resolved those issues level, to try to help people understand the context of through the contracted arrangements with providers. that. Our local teams work with individual local authorities’ teams to make sure we can deliver viable Q294 Chair: So you bypassed the local authorities? schemes on section 106 sites and that they deliver an Pat Ritchie: The boroughs have been involved in the affordable housing contribution. discussions on the contracts in London, and there has been consultation with each of the London boroughs Q297 Simon Danczuk: Have you done any to help prioritise those projects that are included in modelling in terms of the impact of the changes to the four-year contracts that we have signed up through section 106 and the introduction of the levy? What the Programme. reduction do you think will occur? Communities and Local Government Committee: Evidence Ev 59
30 January 2012 Pat Ritchie and Richard Hill
Richard Hill: It is very difficult to say; it does depend community? There are cases in Cornwall of perfectly on market movements. In the numbers Pat talked brilliant homes being brought forward, but because about at the start, towards the 170,000, we have there is a section 106 on it, tying it to a local use, only looked at the risk that there is associated with section two or so lenders will be in the market to offer those 106 delivery on the new Programme, and there are people funding. Is there a role for the Agency to be some section 106 delivered units in that new out there working with lenders to try to explain some Programme, but we think they are at a level where that of this? risk can be mitigated if levels fluctuate up and down. Richard Hill: We talk to lenders quite a lot, particularly on shared ownership and shared equity Q298 Simon Danczuk: Have you made any because, clearly, one of the things that historically predictions in terms of the impact? lenders have been concerned about—and it probably Richard Hill: No, I think it is very difficult to predict, is an issue that came up in your last session—is the but we have looked at mitigating the risk where we complexity of lease arrangements and whether they can on section 106 delivery as part of the new were willing to lend against shared ownership and Programme. shared equity. We have been in the market for shared ownership and shared equity for a long time, so I think Q299 Simon Danczuk: Re-opening section 106 we do understand those issues. agreements was something that the Government said The issue with section 106 is, if the local authority should happen; why do you think that is? insists on arrangements within the section 106 that the Pat Ritchie: A number of section 106 agreements that lenders think are too bespoke and too restrictive in were negotiated before 2010 are now stalled—those terms of people who can access those properties, they sites are stalled. We have been working with local become reluctant to lend on that development because authorities to look at ways in which they can they do not have what they see as a reasonable renegotiate those sites to still deliver housing on the fallback position. I am not saying that this is ground but reflect the changes in the market. Our role something that is straightforward to resolve, but we has been to support those negotiations and that have done some work in Cornwall and other places. development at a local level through our enabling role, We sat down with lenders and local authorities to try and really to help the local authorities work through to agree something that looks like a standard set of to get a scheme that is viable and deliverable on the terms that lenders can deal with and at the same time ground in the current market. speaks to some of those local issues. What is very difficult to do is invent a new section 106 arrangement Q300 Simon Danczuk: Just for my understanding, each time and expect lenders to think it is these were negotiated when times were presumably mortgageable on each and every occasion. thought to be good in terms of the commitments of section 106 money. Now the Government are saying Q303 David Heyes: The Tenant Services Authority we should change that; why would you give that ends in just a few weeks’ time, and their regulatory advantage to developers? Why would you allow them function will be taken into the HCA. We have looked that? That is the market, isn’t it? If that is what they at this previously and we understand that there are agreed at the time, why be so helpful to them when protocols in place to protect the independence of that times are not so good? Is that not the risk they take? role, but we still wonder, in the context we have been Pat Ritchie: The alternative in a number of sites talking about today, whether there are still some risks across the country is that they are just not delivered, in this. For example, is it appropriate that your because they cannot deliver some of the section 106 Director of Regulation will be reporting to you, given requirements within the current market and because the responsibilities that you have for investment in of the changes in the viability of each site. delivery of the Affordable Homes Programme? Simon Danczuk: The profitability for the developer, Pat Ritchie: I am the Accounting Officer for all of the you mean? functions of the HCA and, when we take over Pat Ritchie: Yes—the viability, I think, of the way in regulation in April, I will be Accounting Officer which this would stack up when sales may be slower responsible for regulation along with all of the other and prices may be lower than anticipated. Therefore, functions of the Agency. The way in which we we have looked at each individual scheme to try to manage regulation will be that any decisions about support local authorities who still want to bring regulation are not made by the HCA Board but by the forward supply to look at the ways in which those Regulation Committee. I will not be directly involved individual projects can be renegotiated to reflect the in any of those individual decisions in relation to market. regulation, but my role will be to make sure that regulation is properly managed, properly resourced, Q301 Simon Danczuk: But it is about ensuring the that any risks associated with regulation are managed, developer makes a profit, is it? and that regulation is properly governed from an Pat Ritchie: It is about ensuring that they continue to Accounting Officer point of view. We have done a lot invest in sites and that, at a local level, local of work in identifying, through the protocol that you authorities are able to bring forward stalled sites. mentioned, the role of the Accounting Officer, the role of the Board and the role of the Regulation Q302 Stephen Gilbert: Staying on section 106s, Committee. I think that dual role of the Accounting banks do not really understand them, do they? What Officer is manageable within the system that we have kind of engagement do you have with the lending set up. Ev 60 Communities and Local Government Committee: Evidence
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Q304 David Heyes: You mentioned getting the at the heart of the affordable rent model. We think resourcing right, and the scale of the regulatory some of the ways in which associations have worked capacity is going to reduced compared with the with strategic partners to bring land and to align other capacity of the TSA. Is that wise at a time when forms of investment, like Regional Growth Funds and housing association gearing ratios are going to Growing Places infrastructure funding, to bring substantially increase? forward investment are some of the ingredients of Pat Ritchie: The capacity in regulation will be what a future funding regime should look like. focused on the redefined role of regulation, which is really around economic regulation. The focus of the Q307 Chair: We went to the Netherlands as a HCA responsibility for regulation will be on making Committee the other week and had a look at their sure that associations are governed properly, that there funding arrangements. They certainly manage to is value for money in the way that they operate, and build, on a per capita basis, quite a lot more social that they are financially viable in order to ensure that housing or rented housing than we do. Have you investors in the sector are able to invest in a properly looked at the basically self-financing model that their regulated sector. The focus will be on economic housing associations have, where there is no regulation, with less of a role than the TSA had on Government subsidy at all? Do you see that as the sort tenant regulation. That will be a backstop role and of arrangement that we might end up with in this only come into force where there is evidence of country? serious detriment. Richard Hill: My understanding of the Dutch model is not desperately full, but my understanding is that Q305 David Heyes: The question is whether it is the Government agreed at one point to write off grant wise to reduce regulatory capacity at a time when the and effectively convert that to equity. My housing associations are getting into new areas, doing understanding is that there have been occasions where things in different ways and, potentially, risks are that has been revisited, partly because development greater. has not been as fast as the Government in the Pat Ritchie: The areas of capacity that have been Netherlands wanted. The issue in terms of doing that protected in the changes that the TSA has gone is if you convert grant to equity, you potentially through are those that are focused on that new role of loosen some of the gearing constraints that Pat was economic regulation. The reductions in capacity talking about in reference to what you might get to in reflect the lesser role in things like tenant regulation 2015. Clearly, there are some organisations for which and some of the other broader roles that the TSA have. that would be an advantage, but gearing historically I am confident that the team that transferred over, who has not been a constraint on the sector; it has been are geared towards that economic regulation role, cash to service debt that has been the key issue in have sufficient resources to be able to support the making this work. sector through the current economic climate. If you were to convert grant to equity, there are certainly three issues you would need to address. First, Q306 Chair: On the affordable rent model that is the Government make a return on grant invested in now at the heart of your Programme, quite a lot of properties at the moment through the Recycled Capital evidence is coming to us saying, “Okay, it might work Grant Fund—about £250 million a year flows back to for a time, but eventually if it is reliant upon the sector in terms of disposals. Secondly, investors converting more properties to affordable rent to would look for a return on that equity, and if that generate the income, at some point it runs out of return was around 8%, you would have a financing steam.” Have you started to give any thought as to issue to resolve. Thirdly, and most importantly, there what might happen and what the driving policy might is the issue of principle; you would be moving be post-2015 to ensure that we are still building homes organisations from not-for-profit status to potentially to rent? for-profit status, which I do not think is allowed for Pat Ritchie: In the affordable rent model, we only in the legislation at the moment. Regardless of that, I funded a proportion of the bids that we had through think it is a big question politically. Moving from the bidding process. Whilst for some organisations the grant to equity, I think does potentially relax the affordable rent model pushes their gearing up quite constraint on gearing, but it does run you up into a high and they may not be able to repeat the contracts list of other quite fundamental questions that you that they have now, there is evidence that, in some would need to address before you made that choice. parts of the sector, there still remains a fair amount of capacity that could be used through a model similar Q308 Chair: Are you beginning to have that to affordable rent that has Government investment discussion and conversation about where we might alongside borrowing of the association in using its be? assets. There is some capacity around that model Richard Hill: It is raised in conversation with us by rolling forward. associations who have constraints on gearing on a In terms of giving some thought to the future models reasonably regular basis, and we have that of investment, we have been doing some work with conversation with the Department as well. DCLG, whose real responsibility it is to look at the Chair: We had better ask the Minister about that future funding of housing supply, to look at different when he gives evidence. ways in which you can look at blended finance— whether or not you can have a mixture of using assets Q309 James Morris: Just on the subject of public and gearing alongside Government finance, which is land, the Government have stated that they want to Communities and Local Government Committee: Evidence Ev 61
30 January 2012 Pat Ritchie and Richard Hill get as much public land released as possible for new that would need to be taken into account in some of house building and are trying to take a those that are particularly geared for employment use. cross-departmental view in trying to get departments to release it. I just wonder what your role is in terms Q314 James Morris: Generally speaking, do you of trying to make that happen and the extent to which think Government departments and local authorities you think central Government is being receptive to it are receptive to the message that we should be and, equally, local authorities. releasing more public land for housing? Pat Ritchie: For the first time, last year, we published Pat Ritchie: Yes. our land disposal strategy for all HCA land, and we intend to revisit and publish the next version of that Q315 James Morris: Or is it patchy? Is it variable alongside the budget later on this year. We are leading across Government? the way in a number of ways in how you might Pat Ritchie: I think local authorities, by and large, structure land to bring forward housing supply. We are reasonably receptive; there may be some variation have been doing work with Government departments across the country. Each of the major departments that to identify sites that they have and looking at ways in we have been working with is now publishing their which they may then package up or de-risk those sites. own land disposal strategy, and we are moving on to Really, we are providing technical advice and viability work with some of the smaller departments like the support on prioritising sites and on their disposal. We Home Office, Ministry of Justice, Crown Estates and have supported a number of different departments to others to look at how they may bring forward land for bring forward sites—for example, the MOD site in development for housing. Aldershot, where it has recently been agreed that Grainger would bring forward investment there. Q316 Simon Danczuk: Since the Private Rental Sector Initiative—PRSI—was dropped, what steps has Q310 James Morris: When you say “support”, what the HCA taken to encourage large financial do you mean? institutions to invest in housing? Pat Ritchie: We provide technical advice and we Richard Hill: In terms of the private rental sector provide support to tender. For example, developers specifically, we have seen our role as to do three can use our Delivery Partner Panel, which has already things. Firstly, through the PRSI, we spent quite a lot been procured, to bring forward investment in sites, of time talking to large, institutional investors, such as but we do not have direct responsibility for delivery Aviva and Barclays Capital, and also developers like of those sites and bringing them to market. That rests Grainger about the barriers to entry into the private with each of the individual departments. Our role is rental sector. What that did do was encourage a technical advice. conversation with Government about some of the barriers like SDLT on bulk purchases. I think you Q311 James Morris: Can you make suggestions to have heard evidence from Grainger and others in the departments? course of this inquiry about where they now are on Pat Ritchie: Yes. investment in the PRS. Secondly, we made our own equity investment in the private rental sector with Q312 James Morris: As in, “We think this is a site Berkeley Homes as part of the Kickstart programme. which you ought to be considering for disposal.” Can That covers 13 sites across London and the South East you be that proactive? for about 500 units, and that was an example of how Pat Ritchie: Yes, we have been very proactive in you could get PRS investment to move and is clearly working with departments to look at their portfolio— an investment we will carry forward with the GLA which projects they should bring forward, which are post-April. viable, what sort of investment might be required—or The third role we have is to use public sector land to bring forward land for development, alongside our where possible to encourage a variety of outcomes, own. That is overseen by a Cabinet committee, and one of which is build for PRS development. We have each of the departmental leads for each of the sites a number of sites that will be in our land disposal in is responsible to that committee for progress on their March where we will specifically market to the PRS. strategy, which each of the departments has published. We have one currently out in the market at the moment, which is Spencer’s Park in Q313 James Morris: Just on that, you also have a Hemel Hempstead. We will still be looking to achieve custodianship role around the disposal of Regional value on that site, but we are saying we will be Development Agency assets. Does that open up any prepared to defer the return for a longer period, take possibility for additional public land for housing in some of the rental during that period, and look for the assessment you have made of those assets under capital return further down the line. It does give you your stewardship? value on a discounted cash flow basis, but it gives Pat Ritchie: Some of the sites in the former RDA people the opportunity for a PRS investment on public portfolio are mixed use and housing was already land. Those are the three things that we are doing to planned for those sites, and we are working through support PRS investment. the stewardship model to bring those forward for development. Some, however, have had investment Q317 Simon Danczuk: Then, just briefly: David and are particularly geared for employment use, and Toplas said earlier that commercial property there would need to be a change of use. There are investment was £315 billion and residential was issues around European investment and other issues £4 billion. What is your estimate of the sort of private Ev 62 Communities and Local Government Committee: Evidence
30 January 2012 Pat Ritchie and Richard Hill
financial institutional investment that we are going to Richard Hill: If you are asking for a figure over the see over the next 12 months to two years? next 12 months, I would be perhaps slightly less Richard Hill: In the private rental sector? It is very ambitious than those numbers you quoted to me. difficult to know. I think the main constraint, and Nick Pat Ritchie: Just to add a little bit to what Richard Jopling of Grainger talked about this when he gave said, we are working with a number of local evidence earlier in the Committee’s inquiry, is now authorities, such as Manchester and Leeds. In fact, in perhaps not yields, as it has been for a period of time, Manchester we have recently announced a fund using but just the availability of property portfolios in which the Greater Manchester Pension Fund to support the people can buy into the market. That is unlikely to development of private rented sector homes on both shift. city council land and our other land as part of a joint deal. We have been having conversations with a Q318 Simon Danczuk: Are you doing anything to number of other cities, because I think this has to be stimulate or encourage that? done at a reasonable critical mass to make it attractive Richard Hill: We are around the use of land and other to investment. things that I just talked about. Chair: Thank you both very much indeed for coming to give evidence this afternoon. Q319 Simon Danczuk: You are not making any predictions or anything?
Examination of Witness
Witness: Rt Hon Grant Shapps MP, Minister for Housing and Local Government, Department for Communities and Local Government, gave evidence.
Q320 Chair: Minister, you are most welcome, as build more homes unless you have a planning system always, to our Committee. It is the final evidence that reacts faster. Even if it was not making any session of our inquiry into the financing of new different decisions, just being quicker would be a huge housing supply. The supply of sufficient homes in this help to let the market, developers and communities country has been a complete failure. Before you see know where they are. We hope to have it reformed that as a personal attack on you and your period in the both to be faster and also more efficient. job, I am talking about several decades; we simply Secondly, plans like the right to buy will put another have not built enough homes in this country to meet 100,000 homes in the hands of social tenants who our needs. want to own their council home, but critically we will If we assume that household formation runs at about be using that money to build another 100,000 homes. 250,000 per year, that is the number of new homes we There are the 100,000 homes that we wish to build on ought to be building. Over recent times, social house Government land, which is a project that is moving building for rent or affordable house building has been along very fast, and perhaps we will talk about that around 40,000 to 50,000, and the private sector has later. I think that is very important in terms of never built more than 150,000 homes on a regular releasing more land, and, of course, there is the basis, which only adds up 200,000. There is a gap mortgage indemnity scheme, with which we hope to then. How are we going to meet that gap to make sure help 100,000 people buy properties and make sure we get enough homes built in the future? that, as well as building them, people can afford to Grant Shapps: First of all, thank you very much for buy them as well. The answer is there are 100 having me here in person. I know when I provided different ways. Those are just four of them, and I think written evidence to you it was before the Housing by radically changing our approach, we can bridge Strategy, so there were some things that have this gap between housing demand and housing supply. obviously become updated in the meantime. Secondly, I entirely agree with the premise of your question; I Q321 Chair: Unless the Government is prepared to do not think we have been building enough homes in see a rise in the building of social rent or affordable this country for a very long time and there has been a rented housing, the private sector building for home structural deficit in the number of homes built. There ownership is going to have to deliver significantly are many reasons for that, including allowing house more than 150,000 homes per year. Is it simply that prices to run wildly out of control—doubling in the funding reforms alone are going to enable them to space of 10 years and becoming six or seven times produce 200,000 homes? Historically they have failed people’s average income, and more, in different parts even when house prices were a lot more affordable of the country. This means that they are out of reach for people than they are now. in many areas. Grant Shapps: The gap might not be quite as big as To answer your question as to how we meet that gap you are suggesting. Last year, there were 60,000-plus between the two, it is manifold, and the Housing affordable homes built in this country. By the way, I Strategy lists over 100 different ways in which we am just about to confirm numbers, but even on the intend to fix the gap. Perhaps I will not go into all of provisional figures from December there were nearly those in answer to your question, but let me just 160,000 properties for which councils were given highlight four. First of all, we think that planning money for the New Homes Bonus for homes built. In reform is a big, important slug of this. You cannot the vast majority of those cases, apart from the smaller Communities and Local Government Committee: Evidence Ev 63
30 January 2012 Rt Hon Grant Shapps MP number that were empty homes being brought back Chair: We will stick with affordable rents for the into use, they were new homes being built. The time being. statistics are interesting, but of course those are English numbers as well. You have to be really careful Q324 Simon Danczuk: Do you think that the with this debate about housing numbers, because no affordable rent model in its current form has a one makes the distinction between whether they are limited lifespan? talking about UK figures, English figures, England Grant Shapps: Regardless of what happens and and Wales, or England and Northern Ireland. Actually, regardless of which Government is in power, I believe when you throw in housing starts, housing that we will never go back to the days—and here is completions or the net difference between the two, my future prediction—of the old-fashioned model of these figures very quickly become confused. only one offer in the socially rented sector, which will To answer your question: yes, I think we need radical be the one that says you are either in a market house reform. Planning is a big part of that, but we are not or you are in a house that is amazingly subsidised sitting on our laurels. We have the Get Britain by everybody else. That is the old-fashioned way of Building fund, which across the UK is nearly £500 million and in England alone £420 million; that building social housing. I do not think we will go back is going to help unlock some of those sites. The to those days; I think that there will always be a Growing Places fund is another £500 million, which hybrid in between. will help to unlock strategic sites that maybe need a I cannot tell you, even if we were to win the next bridge over a stream or something to build whatever election, precisely how that would operate again it happens to be. I think the answer to your question subject to a 2015Ð20 spending review. The balance is: no, it is not just planning reform; there are lots of sheets of housing associations and what they can bear other things we need to do, including not piling on will obviously be an important part of this. What I can costs to the developers, which I think had become a tell you is this: we said we would develop 150,000 habit, if I may say so, that was completely counter- affordable homes, many of which will be through the productive and led to the lowest house building since Affordable Rent programme rather than the old social the 1920s. If you keep saying to developers, “Oh, and one. We then upped it to 170,000 and have put the by the way, whilst you are building these homes, we vast majority of those contracts in place; we are also expect you to deliver X, Y, Z in addition,” then confident now of delivering 170,000. You have unsurprisingly you get to the point where it is just probably just had evidence from the HCA and quizzed unsustainable for them to build the homes. I have been them on this. We have seen that there is excess trying to loosen the load on developers in order for appetite from housing associations unfulfilled by that them to get the homes built, and there is a original programme of £1.8 billion, and the right-to- commitment in the last Budget to make sure that we buy receipts being used for another 100,000 affordable are not loading on new bureaucracy and red tape. rent homes is a direct response to the fact that we Indeed, we are cutting it by 2015. believe that, if we could fund enough for another 100,000 homes through affordable rent, the market is Q322 Chair: With the 100 measures on which you there to do it. I am pretty confident there is more of cannot go into detail, for obvious reasons— this to come; I cannot predict what will happen in the Grant Shapps: I am happy to. next Parliament. Chair: I believe you that they are there, but is the Strategy of itself, as it is now, sufficient to deliver the Q325 Simon Danczuk: Just for my benefit, how will 250,000 new homes? they be allocated? How will you determine who lives Grant Shapps: I will want to be keeping a very close in the affordable rent properties? eye on it, and I have not set the figure of 250,000 you Grant Shapps: It will still be under the normal have. The last study I saw suggested 232,000 a year allocation system; councils will still be running their was the correct figure. One thing we know about this own waiting lists. is these predictions are hellishly difficult to make, always incorrect in the final analysis and much has changed. For example, this particular Government Q326 Simon Danczuk: Those that are still living in takes the view that we should be reducing net social rented properties will be determined in the same immigration figures from outside Europe—still 60% way. Is there a need to build more social rented homes of immigration. I remember the previous Government alongside the affordable rented homes then? issued a projection that by 2016, 70,000 homes a year Grant Shapps: It is worth reminding the Committee would be being built for people who do not yet live that this does not affect anybody who is under an in this country. If we are successful with policy A, existing tenancy at all. The other thing to say is there limiting migration from outside Europe, then policy is a very large social house build programme going B, how many housing builds you need to make, will on right now; it is costing £2.3 billion until 2015 and change your numbers even further. the Affordable Rent programme has received all the publicity, but we are actually still building social Q323 Chair: We probably will not get tempted down homes just as we always did. Again, you were asking the immigration road just at present. what will happen in the future: I think there will Grant Shapps: It is an important part of the total, always be a need for subsidised social house building isn’t it? It just shows the unpredictability of projecting in this country, but again I cannot quite predict what these things. the model will be in another Parliament. Ev 64 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP
Q327 Simon Danczuk: Could I take a minute to proper housing ladder, and we are fools as a nation, paint a picture? This is my synopsis of the situation both the working population—which includes people that we are moving towards in terms of housing. We in social housing, who fund all of this stuff through have rich, wealthy people in private ownership; they their taxes—and the people who end up trapped in have inherited wealth, inherited properties and this system, to think that you can house everybody everybody is well-off. We have what is fashionably through a system that has seen the housing waiting called the squeezed middle: the middle-classes, list double over a 13-year period. That is mortgaged, owner-occupiers who are already on the unsustainable and that was with £13 billion of ladder. Then we have other working people who expenditure on social housing; it kind of proves that cannot get on the housing ladder and people are not you could spend any amount and still not build lending to them. They are in the affordable rented enough of this social housing to satisfy demand. properties that you were talking about, or they will be; Secondly, it is not fair on the taxpayers, who will some of them are in the private rented sector. Then come from all sectors of society, to pay for a system the final group that we have is the poorer people, and that subsidises housing at a level above what people perhaps some might describe them as an underclass, require. Do you know what the average council rent who are living in the social rented sector or private is this year in the country? It is £67 a week, and there rented sector that is not very attractive. That is the will be millions of people living at £67 a week rental impression I get of the housing strategy that you were on very nice properties paid for by their taxes, of pushing: these different strata of people. The poorest course, but also everyone else’s. They will be rightly are in that bottom class. Is that a fair characteristic of saying, “I am paying the market rent. Why am I your model of homes? subsidising the rent of someone who is in a very nice Grant Shapps: Not at all. You have a vivid position and could afford a little bit more?” This gives imagination and a view of housing in all its forms that us a product between the two. is completely different from mine. I represent 9,000 or 10,000 council house tenants and then several Q329 Heather Wheeler: I am interested in the thousand more in social accommodation through changes between section 106 agreements and CILs housing associations, and I absolutely do not and how that might affect the number of new social recognise the description that you use. Frankly, I think houses being built. I am also interested in whether in referring to people who happen to be in social housing effect it has a real problem with Universal Credit and as an underclass would be offensive to them, and I the potential for rent arrears to build up; I am setting know that would not be what you would intend. It is the scene there. Do you actually think that the changes certainly not my view of the world either. What I see to CIL will have a big effect on section 106 and will when I knock on their doors is a bunch of very hard- in effect maybe ask people to renegotiate previous working people who are keen to strive and do the best section 106s, so you will not actually get the number by their family. Many of them, I am sure, would be of affordable houses built? attracted to buying their own home under the Grant Shapps: There is a whole complex strand of rejuvenated right to buy. different elements to your question, as you would acknowledge. The exact interaction between CIL, Q328 Simon Danczuk: The point I am making, section 106, the provision of social housing and the Minister, is that your housing strategy is creating those Universal Credit is, of course, something that we are different strata, where you have a differentiation very busily modelling. between those in the social rented sector, those in CIL was introduced by the previous Government in affordable rented properties, and they fall into those the Housing and Regeneration Act 2008 as a way of broad sociological groups. giving a bit more certainty to developers about the Grant Shapps: I would characterise it exactly the manner in which they will be expected to contribute opposite way round. The system since the war has to local provision of local infrastructure. I actually been that, if you are a social tenant, you will be paying think it is a very sensible idea; it was largely based on a smaller percentage of a market rent. In my the experience in places like Milton Keynes, where constituency, it is about 40% of the market rent. In they were using the roof tax, and I welcome the idea many places in London it will be lower, and in the that a developer should be able to look up the price country as a whole it is about 65% of the market rent. list and go, “Okay, if I am going to build in your In between that and the market rent there is precisely patch, this is what I am going to pay.” From that point nothing. The definitions between being a social tenant of view, there is a bit of certainty that does not exist and being a market tenant at the moment are through the negotiation on section 106. As you know, enormous. in the Housing Strategy now I have been pretty keen The way I characterise my housing policy changes is to make sure that section 106s are realistic because I to create additional levels in here, where we have the believe that, rather than having 40% of housing built affordable rent product at up to 80% of the market, in an imaginary never-to-be-built development of 200 which by the way averages at well below 80%—in homes, it would be better to have 20% social housing London, it is 67% of the market, for example—and built in a real development that actually goes ahead. through that programme enable people not to be on If these changes to section 106 and CIL help to deliver these two distinct ends of the market but somewhere that, that is great. in between as well. I think that is great; it actually As regards the Universal Credit, as you know we are says there is more of a housing ladder—people like to very carefully and cautiously modelling the impact of talk about the housing ladder. This actually creates a a number of different things. I know Universal Credit Communities and Local Government Committee: Evidence Ev 65
30 January 2012 Rt Hon Grant Shapps MP meets with some cross-party support; everyone about to see a historic settlement on the housing believes that it is important to be able to allow people revenue account for example, so I do not want to rule to not get trapped into benefits and work their way things out forever but I am not yet there. back into a job or to more hours if they are already in a job. One of the great criticisms is the cliff edge that Q332 David Heyes: We have been looking at the you reach, where it just does not pay to work, and it situation in the Netherlands, and quite a few years is not the person on welfare’s fault—this is the fault ago, they faced this same issue. The result was that of the system and we must fix it. their accumulated debt was written off and housing If I accept that, then despite my own concerns, which associations are now completely financially are very real, about making sure that landlords know independent of Government. Could you envisage that that they are going to get the income in order to have ever happening? the security of projecting their 30-year rent, I think I Grant Shapps: Everything is possible, but right have to and do—and I have spoken to the Committee now—and the Committee might welcome this—we about this before—genuinely believe, and believe in, have had the Localism Act 2011, with all of those the concept that we need to pay that money direct to housing measures; the Housing Strategy, outlining my the tenants so that they can manage their own 100-plus ideas; and I am very shortly going to make finances, and it feels like a pay cheque and they can some further announcements on progress. You won’t work back into a job more easily. There is that whole have to wait very long for that—in fact a matter of side of the Universal Credit interacting with these hours, just to tantalise you. things. Yours is a very big question and I am not sure David Heyes: You big tease. that I have done it justice, but suffice to say on the Grant Shapps: I do try. I do not want to then get on Universal Credit side we are very carefully setting up to things that we have not even worked through yet. I trials. I think you have met with Lord Freud on this am being upfront in saying we have not. subject. Have you spoken to him? Have you had some evidence? Q333 David Heyes: What about the possibility of a Heather Wheeler: Yes, some time ago we did. housing investment fund run by housing associations? Grant Shapps: Some time ago, okay. I am treating Grant Shapps: I am all in favour. I know you have that very carefully indeed and making sure the whole had evidence about people saying there should be a thing fits together in the end. national housing bank, and people suggest that sometimes. I am not convinced by that argument at Q330 David Heyes: A number of the witnesses to all. I think the banking system in this country needs this inquiry have raised with us the issue of the to work for all industries and sectors. Then there is potential benefits of a write-off of the historic housing separately the idea of a national housing investment association grant debt; it is a huge amount. There has group, which I am very attracted to, and my officials been a lot of speculation about your intentions in this have and will work with organisations who want to respect. It is maybe a chance today for you to clear it bring those types of things about. I have no objection up for us. to people pooling their resources. Grant Shapps: Sure. There is nothing immediate that I am about to spring on you, for the first thing, not Q334 David Heyes: The Government is pretty fond today or over the next few days. There is a lot of talk of pilot projects. Do you think this is a potential about whether the historic debt could be written off to candidate for a pilot? registered landlords, but we work here in the context Grant Shapps: I do not have a pilot that I am about of national budgets that are all about reducing debts to announce. I think that all of these ideas are good or deficits. If you just say, “We’ll write this off and and we will look at them closely. My typical meeting not worry about it,” then that money will not come with a third party on this will go something along the into the coffers one day when it is due back, and we lines of, “We’ve got this great new idea; we’d like to use that money all the time. Within the Department, come and talk to you about it.” They will come and we fund more house building because that money talk to me about it, and I will say, “What is it that we comes back in. The argument that is made is: if you can do as a Government? What do you need to make left it with the bodies that are there and they could this work?” and they will say, “Nothing. That’s the take it off their balance sheets, they could then brilliant thing about the plan,” and I will say, “Great. leverage their balance sheets and build more. Why are you here? Go and do it.” Actually, most of I have to say, we have tested this several times over the time there is not really a blockage. If there is and in different ways and put those arguments through the there is something Government could do, are not balance sheets, and I have had my officials work on doing, and it does not cost us a fortune, then come it. I am not entirely satisfied that would be the upshot. and talk to me, but most of the time my message out There is a definite issue to negotiate with the wider there to housing associations and to councils is, “We deficit in the Treasury. To put you out of your misery, are giving you all these flexibilities. Go and use there is nothing immediate you are about to hear from them.” me on this front. Q335 Chair: Coming back to the Netherlands, which Q331 David Heyes: So that is not a yes, but it is not David referred to, it is interesting there that they have a no. had the historic write-off of the grant to housing Grant Shapps: Who can rule things out forever? I am associations. When we asked the HCA about the a great fan of innovation in housing finance. You are affordable rent model running out of steam after 2015, Ev 66 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP the synopsis of what they said was that they did not chair of housing in Birmingham, a Conservative see it completely running out of steam, but they saw authority that actually is building council houses at some housing associations begin to run out of the present. What they were saying to us when we paid a ability to leverage in more finance. Those associations visit there was, “Well, if we had the prudential rules would now start to raise the issue of grant write-off in for housing as we do for other aspects of borrowing as a possible way forward to give them that capacity. in local government, we could carry on building Isn’t that going to increasingly become the case over council housing, but the extra cap the Government the years, and isn’t this going to become a more and have brought in at a lower level means that we only more real challenge that Government is going to have just have enough ability to carry on with the future to address at some point? maintenance programmes we need and, effectively, Grant Shapps: You are absolutely right to say that, our new house building is going to have to come to after 2015 and probably before that, we need to give an end.” Is that not rather disappointing and should them an indication of where they will be headed, but we be having another look at that situation? you are tempting me into trying to write policy that is Grant Shapps: First of all, on the Housing Revenue not written, budgets that are not written and spending Account, it is a £19 billion settlement of debt, and I reviews that just have not been created yet. If the want to pay tribute to the many former Housing lesson of the last couple of years or more shows us Ministers whom I shadowed, who got this process anything, it is to expect the completely unexpected. under way, in particular the last one, John Healey, who The truth is that we have budgets and plans in place up until 2015, and even those are quite difficult to did a lot to push this along. I am very pleased that we predict, so I am rather hesitant at trying to give you a are nearly at the point of settlement on that, and I housing budget for 2015 to 2020 today. think it will be an enormous benefit to councils and particularly to their tenants, who have suffered from Q336 Chair: Of course. Nevertheless, Governments this tenant tax for far too long. The predictability with have limited lives; they do have to look ahead. Just which their authorities will be able to manage their coming back to the Netherlands, what was interesting affairs over the next 30 years will be hugely welcome. in the point that David made was that you have a Part of that is that every authority will have on situation there that they do not think is perfect, but average 15% more to do as they like. Authorities are where you have no subsidy at all going into the in different positions, and this will of course be provision of social, affordable rented accommodation, reflected by the amount of debt that they will take on. but ultimately the Government stand behind all the Some may just say, “Well, we are just going to borrowing associations do. It does not count as improve the homes. Where they are already of a Government borrowing—they stand behind it—and it decent standard, we are going to go even further.” reduces the cost of the borrowing so that they are able Others will say, “Actually, we can use some of this to to make an affordable housing programme work. I just build,” and I can foresee a significant amount of either wondered if there is any look across to our other council house building or council house building in neighbours to see whether there are lessons that can partnership, where they put their land in, which be learnt from them. happens in some places, and work with a registered Grant Shapps: I am sure there are. I have been to provider. places where they have no concept of a social house To cut to your question in detail, again it is a bit like at all; it just does not exist. Hammarby, I think, was the writing off of historic debt. In essence, this is a one of the examples of where I asked, “Which of these plea for more borrowing, and more borrowing means homes are being built as social?” and they just do not more debt. As we know from our neighbours to the know what you are talking about. What they do is just west and the east—in Ireland, France and many other pay people’s rent or assist people in paying the rent— countries besides—if you get your debt to an effectively housing benefit—and build homes unsustainable level, the markets spot it and you get normally. I really admire this Committee’s enthusiasm hammered for it. We are very hesitant lest we lose for the next tranche of housing reform. There was I sight of the big national goal of getting the deficit thinking we had delivered quite a lot of it in the last under control and having a convincing plan in place couple of years and were indicating quite a lot ahead to do that. through the Housing Strategy and that side of things. I am afraid I cannot provide any more light on the The answer is no, for the time being, but I will keep next round; it is something that I will now start to turn this under review. It is not that I am unsympathetic my attention to. I will always be happy to come back to the concept. Fortunately, at the moment there is to the Committee in the next year or two to talk to something else that a local authority can do, and a you about our plans going forward. I hope I will have large authority like Birmingham, of course, has a large an opportunity to do that. amount of land that for various reasons it sits on. I have mentioned public sector land before—the Q337 Chair: Just back to the here and now and some 100,000 that we are releasing from the various of the issues that are around, there is the very different Government departments. That does not welcome reform of the HRA, which I think has include the huge amount of land that local authorities widespread cross-party support and major support in will have from various different previous enterprises local government. It is going to be a big step forward that they can bring into use. They can involve the to reforming housing finance in this country. The only housing associations and/or the private sector to do slight downside was drawn to our attention by the that. Communities and Local Government Committee: Evidence Ev 67
30 January 2012 Rt Hon Grant Shapps MP
Q338 Bob Blackman: I apologise if you answered to make sure that they provide the best possible this before I came in, but there are large numbers of service to their tenants. local authorities, particularly in London—the Of course there are further possibilities, and I should authority, not the housing association—that have say, in answer to the kind of flexibility questions I was historic housing debt dating back from the 1960s or getting earlier, I have not ruled out the possibility of 1970s. They are paying off not only interest and future stock transfers. The HRA does not bring to an capital on those, but often the properties have either end future transfers taking place. We have seen many transferred to alternative providers or they have been in years gone past, but they have to be demonstrated demolished and replaced but the debt still remains to be good value for money for the taxpayer and, with the local authority. I have heard the suggestion obviously, they have to be voted on by the tenants, so that large elements of this debt will be written off for most importantly, they have to be satisfied that that those local authorities. would make sense for them. Grant Shapps: On the HRA? The last thing I should say on this subject is that the Bob Blackman: On the HRA debt and, indeed, individual authorities are able to borrow from the possibly on their general fund as well, if the general Public Works Loan Board at an unbelievably brilliant fund was bearing this debt. Can you just clarify what is the exact position? interest rate—Government lending, basically; it is a Grant Shapps: The HRA settlement, as most people fantastic interest rate. Some of them, when they know, is a horrendously complex piece of work, thought that was not going to be the case, were going which was why I have put on record my gratefulness out to the private sector, and I know when my local to my predecessors who started to tackle this issue. authority discovered they did not need to do that and The simple answer is I will need to write back to you could borrow from the PWLB, the saving was with detail in terms of how much historic debt has probably £2 million-plus a year in interest. been written off in different places, and what the deal was in each individual location. I just do not have that Q341 Chair: Finally, to see if we can find one way off the top of my head. forward that might allow a bit of flexibility, the National Federation of ALMOs has produced some Q339 Bob Blackman: I understand if you do not models for how ALMOs might be turned into either have that, but it would also be very helpful for this ownership co-operatives, with no more than one-third Committee to know what constraints there will be on local authority stakeholding, involving workers and what those authorities can then do. Do they have to tenants, importantly, in their ownership, or a use that money for development of housing? I think management cooperative, where there would be a that will be very welcome because it will mean that long-term management agreement for that ALMO to there will be house building where there probably has manage the properties and its finances. I know not been. Alternatively, of course, if they have discussions have been taking place with your officials complete freedom to do with that money what they and others about this model working and perhaps not wish, some unexpected things could happen. being constrained by the cap, because it will be Grant Shapps: I can confirm it is not part of the outside a wholly local authority ownership. Is that general fund, so the housing account stays separate, something you would be interested in exploring? unlike in almost all other areas of local government. Grant Shapps: This could be the so-called CoCo We have previously discussed the un-ringfencing; this model in particular. Again, actually, I like all this is not the case in the housing accounts. They need to innovation. Colleagues in the House sometimes come carry on spending that on their stock. to me with a chief executive or housing boards and put these ideas to me. I am always keen to explore Q340 Chair: Two other possible ways forward have them. Some of them stack up and some of them do been put to us. One is that local authorities will have not. They all have the same test, which is: number different positions in terms of their headroom; some one, is it good value for the public purse; and number may have more headroom than they need or want to two, are the tenants going to be better off? Are they use, and others may not have enough. Is it possible going to get better quality housing and more say over that there could be pooling arrangements or swap their housing? I am very keen to promote the interests, arrangements between local authorities to use each or allow tenants to, on all of these things. They are other’s borrowing capacity? Would that be the sort of always subject to tenants being happy and voting on thing the Government would be minded to support? it, and I think it is absolutely right it should be that Grant Shapps: No, not in that sense. I do not rule out way. more innovation and creative ways of their working together. I think that would be welcome, particularly where there is a geographic alliance. This is a Q342 Simon Danczuk: Another policy resurrected settlement that has taken many years and a piece of from the 1980s is the right to buy. I just wanted to primary legislation to work out. I have looked through explore the difference between one-for-one all the figures and the percentages available to each replacement against like-for-like. The Government is authority, and although there is movement it is not talking about one-for-one replacement. There is a that some authorities only have 2% more and some difference between that and like-for-like, isn’t there? have 25% or something. There is not that much of a Grant Shapps: Yes. Let’s be completely up front: one range in there. I think the average is 15%. I am is an affordable rent home and one is a social rent satisfied that authorities can work within those means home. Ev 68 Communities and Local Government Committee: Evidence
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Q343 Simon Danczuk: So we will be creating more Q347 James Morris: One of the challenges, which affordable rent homes, and the stock of social rented you will no doubt grant, is that we need to stimulate properties will be going down. Is that right? more supply in the private rented sector. As Grant Shapps: Yes. Let’s get these figures in affordability for homes becomes more stretched, it proportion. There are 2.5 million homes to which this looks like more people are considering private rented policy will apply. 1.9 million of them are council; 0.6 accommodation as an option. To what extent do you million of them are those with reserved right to buy see institutional investors playing more of a role? I but are now held through large-scale voluntary think we have a very low amount of our private rented transfers by RSLs. Of those 2.5 million homes, this stock held by institutional investors compared with policy looks to take 100,000 of them over a period of other European countries. What kind of role do you time and undertake the right to buy. This is unlikely see for institutional investors in trying to stimulate to decimate the stock of social housing. By the way, supply in this important sector? as I mentioned earlier, we are building quite a lot of Grant Shapps: I think it is an important role and you social houses, landlord houses for rent, in the old are absolutely right about the numbers. Something traditional way, right now. The stock right now is like 71% of the private rented sector are, essentially, actually increasing not decreasing. private individuals who have from a bedroom up to a few properties but often not more. These are not, Q344 Simon Danczuk: In terms of the right to buy, generally speaking, institutional investors. The has any modelling been done around the impact it will numbers vary, but I have seen estimates as low as have on the availability of mortgage finance? 1% institutional investment. There is a whole range of Grant Shapps: I have been talking to the mortgage problems. A surprising amount of it just seems to be lenders on this, as obviously a key part of right to buy what happens in this country and nothing more. There is making sure that there is a market there for the is almost an institutional non-investment policy; it is mortgagers. Because we are looking to increase just not the way the housing market works here. We discounts and caps fairly dramatically, value for are trying to break down those barriers, so in last money is there for the tenant and it also makes it a year’s Budget the Chancellor made changes to the good prospect, by and large, for the lender, because way that stamp duty is handled to mean that you are not at a disadvantage as an institutional investor when immediately they have equity in the home of the likes you make purchases. At the same time, we have also that they could probably only dream of with a very signalled technical changes to Real Estate Investment large deposit from a buyer in other cases. I think this Trusts—REITs—and the way they are handled. I think has been broadly welcomed and, of course, until we the deadline to deliver on those technical changes is issue the details, they will not confirm that, and that this year’s Budget. is to be expected. I have appointed Sir Adrian Montague, who is there to work out what else needs to be done to move the Q345 Simon Danczuk: Do they think it will affect institutions into this field. I think there have been the availability of mortgages to other people? some early signs of progress, actually, with some of Grant Shapps: I hope that is not the case. Again, the potential private institutions, such as the likes of predicting the future is really tough, but I noticed, Aviva, starting to register their interest in a way that looking at some figures last week, that a year ago, we have never seen before. There has been a real rush there were only 2,500 mortgage products out there, in to do that. I am hopeful, but I do not want to over-egg rough numbers; this time this year there are 3,160, I the chances of half of the supply coming from think. It says to me that the market has loosened a institutional investors in five years’ time. I think it is little bit. With what is going on in Europe and the going to be a more gradual process than that. instability in the global economy, who knows? In a year’s time, I could be sitting here saying it is the Q348 James Morris: What do you think are some of opposite, but right now I think there is a realistic the key barriers, though, to achieving this? projection that says 100,000 extra mortgages under Grant Shapps: Honestly, there is a belief among right to buy should not knock out a market that, after institutions when you talk to them that property is all, is several hundreds of thousands of mortgages difficult and complex: “Management is traditionally overall. 10% of the rent, so we are not sure about this as well. It is just not an area we are in.” Conversely, they are Q346 Simon Danczuk: Would you further the completely into the commercial property side, which extension of right to buy to housing associations? is odd. I just hope they are starting to realise—and, as Grant Shapps: I would love to do it, if I am blunt. I say, there are some early signs in the registrations The trouble is, again back to Government debt, if we that have been going on to take part in this—that were to do that, these are housing associations who actually there is a great, very stable market here that have gone out, borrowed the money or taken some the registered providers have understood, because they subsidy from us and built the things, have a 30-year know they get a brilliant, potential, steady income income projection, and would quite rightly turn over a period of time. I think we need to convince around to the Minister and say, “We are happy to sell them of all those things, but I stand by what I said this house. Now you need to pay us per home that is before: I think there is an institutional belief against sold for the privilege.” Guess what? We do not have institutional investment in this country, and that is the money. what I am trying to break. Communities and Local Government Committee: Evidence Ev 69
30 January 2012 Rt Hon Grant Shapps MP
Q349 James Morris: When do you expect Adrian to is now lower than it was at the height of the house come back with his report? price boom in 2007. That is a good thing. Grant Shapps: He is going to call for evidence in To answer your question, I believe in supporting the next month or so. He will report back to me by mobility at every different level, from things like the summer. HomeSwap Direct—which I am immensely proud of, as for the very first time in this country social tenants Q350 Mark Pawsey: Minster, I had a question about can swap their homes across the entire sector and see REITs, which you have just referred to, so I wonder every single available swap, which is fantastic for if I might ask you a broader question about the mobility—through to, for example, foot-on-ladder structure of our housing market more generally. We schemes, right-to-buy schemes, bridging the gap with currently have 66% owner occupation, 16% private the affordable rent model, up to 80% of the market. rented sector and 18% in the affordable residential People are able to save to buy through things like sector. Is that desirable? Is it the right mix? Does that Firstbuy market housing. I just want the whole thing meet people’s aspiration? Does it give sufficient to be as flexible as possible. mobility on a market? That is the first question. Secondly, what do you think is the effect of the Q351 Mark Pawsey: And owner occupiers? Do Government’s current policies and changing that mix accept that the stalling in the market means that many over time? You have said it is difficult to predict the people may wish to move but currently cannot? future, but there must be an impact on the measures Grant Shapps: That is true too, although stability in that are being brought forward. the marketplace is quite helpful to people. What Grant Shapps: I would go further. It is almost would cause real problems in today’s market is a impossible to predict the future. I do not think, as a massive drop in house prices. Some people say, Government and as a Housing Minister, it is my job “House prices doubled in 10 years; just let them drop to have a model in mind of precisely how many homes in a year. That would sort it out.” It would not. A lot should fall into these different categories. I do not of people would be in negative equity; people would think there is any need for us to do that, and I do be unable to move. People who have borrowed on not have a percentage for the private rented sector, or their house to start businesses would potentially be in affordable rent or whatever. What I do think is it is trouble. I do not think that is the answer. On the other very important to support people’s aspirations. Even hand, I do not want to see rampant house price after a deep recession, which we now know is deeper inflation putting homes out of reach of people in their than we had thought it was—and the economy is twenties and thirties, which caused this problem in the struggling in common with all of those across Europe first place. Stability is the absolute key. The mortgage and many around the world—the amazing thing is that indemnity scheme will enable 100,000 people to get we still see a huge appetite to own your own home. mortgages with only a 5% deposit. That means that The surveys still indicate that is where people want rather than saving, say, on average, a £40,000 deposit, to be. you will have to save £10,000. That is going to help The responsibility of the Housing Minister is to try to a lot of people get that foot on the ladder as well. It meet the aspirations of the population. I want to put is a question of working at all these different levels. people in a position where they can afford their housing, and I would turn to what I mentioned right at Q352 Chair: One very specific point on REITs: it is the beginning in response to the Chairman’s opening certainly clearly an idea that everyone enthusiastically question, which is if you live in a world where house says is a good thing in principle but has never really prices continuously go up faster than people’s worked. The draft proposals for the 2012 Finance Bill earnings, it stands to reason that eventually you make are being considered, which generally have received it impossible for people to reach those aspirations. It a welcome from the industry, but the British Property is dangerously close to making it impossible for Federation has drawn two specific problems to our people to be able to rent their homes either, let alone attention: first, the investment trading issue, which purchase them. This is a dangerous situation that I constrains what a REIT can do; and secondly, the fact have constantly warned against—not without some that it has to be listed, which might stop the creation risk, because every time you say it someone says, of some smaller RIETs. I wondered whether the “This is outrageous; you are trying to suppress the Government were listening to those concerns and nation’s assets, its housing.” My answer is we have to might want to give some consideration to them with be able to house the next generation and this a view to getting this thing up and running. generation. Grant Shapps: First of all, I read the transcript from I have been happy to see not too much happening the BPF, so I was aware of their concerns and their by way of house price movements since I have been evidence to the Committee. Secondly, because this is Housing Minister, and for a little while before that as a subject of the 2012 Budget, I fear that it is probably well, because it means that affordability starts to come more in the Chancellor’s domain than mine, and he back into line. Without any fuss or bother, Halifax will not thank me for speculating about it. have been publishing their monthly surveys. I caught the last one, which said that mortgage affordability is Q353 Chair: Right, but no doubt you will have a at its best level for 14 years. That has come about word with him to draw his attention to the concerns because house prices have not moved too much. It raised? means that more people can afford a mortgage, Grant Shapps: I am sure his officials are already all because the percentage that you pay on your mortgage over it. Ev 70 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP
Q354 Stephen Gilbert: Minister, I think you tried to the ability to do Build Now, Pay Later; in doing so, talk about the public land disposal a couple of times you can enhance the value of the land for the public already. I just wondered if you could give us an purse. It is just one of these win-win-wins. overview of where we are at the moment. Grant Shapps: The Prime Minster announced his Q358 Stephen Gilbert: Local authorities have a ambition to see 100,000 properties built on public huge amount of land of their own. Is the Department sector land. The Government owns huge amounts of of Housing cajoling them to release it? land that it does not use. That was back in the spring; Grant Shapps: Yes, and thank you for giving me the I worked on it over the summer. I held a Star Chamber opportunity to say to local authorities that there is not with Francis Maude when we came back in that much benefit in hanging on to the land. I have September, and made very good progress there and been very, very clear with, for example, the Homes widened it to more departments. The upshot is we are and Communities Agency since I have been Housing getting quite close: we are perhaps at 80,000 or so at Minister that Her Majesty holds no stock in how much the moment, and there is still much more work to do. HM land we have in this country. We would rather I suppose I would describe it as being ahead of where have the nation housed than stockpiles of land that are we thought it might be by this stage. not required for any immediate purpose and will not be for 20 years, but we just keep it there. There has Q355 Stephen Gilbert: Ahead of the curve—with been a horrible hoarding of this land. I have been very announcements imminently on sites? clear with the HCA: “Get the land disposed.” Grant Shapps: I shall endeavour to keep you posted Oftentimes that means disposing it to the local on all of this. Yes, part of the transparency agenda is authority, sometimes with an endowment, sometimes to let people know what the Government are doing with a promise that they will sell it. I pass the message and the HCA and four major landholding departments on to the local authorities: “Use the land productively; have already published their land release strategies let’s get people housed on it.” detailing sites they will be releasing. I will also want to issue some sort of list to show people some of the Q359 Mark Pawsey: Minister, you referred earlier key sites we will be looking to unlock and where we to the New Build Indemnity Scheme as meeting the have got to as soon as we are there. aspirations of those who want to get on to the housing ladder. This is a scheme where the builder puts in Q356 Stephen Gilbert: Can you talk us through the 3.5%. Valuation is not an exact science: you can look Build Now, Pay Later model of how it is going to be at two or three properties and get different valuations. financed? Obviously, some of the land that the What is to prevent the builder just bunging 3.5% on Ministry of Defence might have will have been in the to the sale price of the property and using that as his CSR for disposal by the Department at best value. guarantee? Quite clearly, if it is going to now be used for housing instead, is there a loss to revenue over the CSR Grant Shapps: Very clever people in my Department period? and the Treasury try to model these things all the time. Grant Shapps: The point about Build Now, Pay Later There is always an argument about whether you have is if you have still sites that are going nowhere, and a somehow diverted the market from what it was going developer—several developers—saying, “We can to do in the first place and so on and so forth. We are build this site out, and we can give you the receipt satisfied because it is still a competitive market out when the houses are sold,” it seems to me to be an there, number one. There is a report out today, by the obvious one. The Prime Minister and I are very way, that says in most of the country—although this enthusiastic about Build Now, Pay Later. It has the excludes London—it is actually a buyers’ market right common-sense element to it: the department is not now: seven out of 10 people said it was a buyers’ going to be able to get a receipt at all because nothing market. With those points in mind, we do not think is going to happen on that land in any case up till that the market will be particularly distorted by this. 2015. If it is a question of reprofiling, of course we Let us not forget you still require a deposit: these are should be alert to that. It will not always be possible, not 100% or 120% mortgages or some craziness. The but it is certainly something we should look at. I am house builder has to put in the 3.5%; the Government very keen on it. There is a first example of Build Now, then backs this with a 5.5% guarantee. The Pay Later happening right now in Hemel Hempstead. Government’s guarantee is only activated when the I am pleased to say it is not just a policy builders’ contribution has been used. Everyone is kind announcement, but one happening as well. of in this together and we will have to make it work together. I do not see a big bubble in homes that are Q357 Stephen Gilbert: That is the market value for offered under this particular mortgage product. the land that the developer would pay after the A final comment on this: traditionally, there was a completion of the building project? premium on new-build houses and flats. That Grant Shapps: Yes, and you can sometimes get good premium disappeared in the recession and has not value through things like Build Now, Pay Later, come back. I am not sure there should be a because, as you can imagine, this is popular with premium—I do not know; it is up to the market—but developers strapped for cash or cash flow. You can I would have thought that a new build is not potentially build up quite a degree of interest from necessarily worth less than a previously enjoyed developers who may not have otherwise put their property, which it is at the moment. If there were a name into the hat for that piece of land, because of distortion, it might just be to correct a market Communities and Local Government Committee: Evidence Ev 71
30 January 2012 Rt Hon Grant Shapps MP perception about new builds, which is that they are ownership. We have heard and received information somehow worse than second-hand homes. about very novel ways of private equity coming into shared ownership, and there have been Government Q360 Mark Pawsey: This is a Government schemes, but it has never taken up more than about guarantee backing the scheme. That then takes away 100,000 properties in the country, rolling, because some risk from the lender. We received some evidence people then go on to sell them or what have you. In from one of our witnesses that, where such a scheme Scotland they have a very keen model on it. I was had applied elsewhere, it encouraged lenders to be wondering whether you thought that there was a rather more risky than they might otherwise have marketplace for the Government to up the ante about been. How do you counter that? how much it might put into low-cost home Grant Shapps: Since the housing crash, we have not ownership—sharing ownership—or whether this is seen an appetite for risky lending at all in this market. the time for private equity to come along? Quite the opposite: the problem is the pendulum has Grant Shapps: I really like shared equity and shared swung too far. It was mad that we ever had 100% and ownership products. I am forever going to building 120% mortgages; it is also crazy that we had 75% sites where I am proudly shown the shared ownership lending for a long time and it was very hard to get models in operation. They certainly do exist and can past that. It has ebbed higher now, but the pendulum be quite popular. The downside is they can be quite swung too far. There is a very lending-averse complicated for the consumer, in as much as you still atmosphere out there at the moment. end up paying a rent for the bit that you do not own, Secondly, the Financial Services Authority published but then that rent can often be equivalent to paying the their Mortgage Market Review proposals for whole mortgage, especially when we have particularly consultation in December. The final proposals are historically low mortgage rates. These products suffer expected later this year. While that review will not a little bit through complexity, but as a generic come in immediately, the upshot is it makes very clear approach I like the idea of people being able to the direction of restriction. At the earlier stages of this, staircase up and down out of the level of ownership before they amended some of the things, I spoke out that they have, et cetera. quite strongly to say I was concerned about some of We have to face the fact that in this country we have their proposed measures, because it would have a particular desire to own the home we live in. Even restricted further lending in an already incredibly if the mortgage company really owns them, we are restricted marketplace. They moderated their still quite happy with that situation as a national proposals and came up with a set that look reasonable. mentality towards it. However, I welcome all the The truth is, it is very restricted out there. On top of schemes; there is a lot of innovation and I am sure the Mortgage Market Review, there is also draft EU there is more space. Again, I read some of the direction on credit agreements. The chances of this evidence you have had, and there are some very becoming a risky, uncontrolled marketplace again are interesting ideas coming down the track that I will negligible, but can I repeat my own advice never to back to the hilt, assuming they do not require predict too much into the future? taxpayer subsidy.
Q361 Mark Pawsey: We can agree that there is not Q363 Heather Wheeler: On the basis of taxpayer enough lending taking place, and presumably your subsidy, though, do you think you can up grant levels? Department measures the amount of lending that is Grant Shapps: I do not have anything up my sleeve taking place. Do you think there is any value in having right now in terms of investment. We have put £4.5 a target for that? billion into affordable housing: all different types of Grant Shapps: No; especially in a market like schemes, which included social house building, some mortgage lending, you need to let the market get on of which will have included shared equity schemes as with it. We are obviously keen with regard to people well. It is not that we are not backing it; I just do not who want to borrow, and who have perfectly good have any more money to back it any further right now. incomes. Some people have wrongly suggested that the mortgage indemnity scheme will somehow Q364 Chair: Just to come full circle, we talked at encourage people who cannot afford mortgages to get the beginning about how we increase substantially the on the housing ladder. That will not happen, in my number of homes we build in this country. We are view, simply for the reason that the criteria for lending trying to look at ways that probably are not traditional are the same strict criteria that are here now, plus ways of doing that, as a Committee. There are ideas possibly in the future with the MMR on top of it, and around, like the community land trust, co-operatives, it is a very risk-averse market. All we are saying is that might add something. Last week, we went to the people who have perfectly good incomes that can Netherlands and we went to what was called a self- service the level of monthly repayment still are not build scheme. I have to say, before I went I expected necessarily people who can save up an entire year’s to see people get out of their office suits, put their after-tax salary in order to get on the housing ladder. wellies on and start laying bricks. But it was not: it We are trying to bridge that gap rather than stoke the was a scheme where local authorities laid out quite a market or create some false target for mortgage large area of public land and put it into plots. It was lending. then put in at a price, and individuals came along and said, “We will buy that plot at that price.” They then Q362 Heather Wheeler: That brings me very neatly actually contracted to build their own home: it could on to what I want to ask you about, low-cost home have been a flat pack off a transporter from Germany, Ev 72 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP which we saw, or it could be a local architect who will be in a position to fund all of that out of savings. designed one, or a local builder who came and built a What they are likely to have to do is apply for a loan standard property. We were told that was how they or a series of loans, because if you buy the land, it built several hundred houses on the site in Almere, at may take you two years to build your house. In the prices around €50,000 less than the same property in meantime, you have to live somewhere else. There are the commercial sector. I just wonder whether this is a a lot of potential constraints here. The other big new idea, potentially, you might have a look at, consideration, when you look at what they are doing and the Government might have a look at, and maybe in Almere—which is an excellent initiative—is that you do not have to do a lot about it except indicate this is a relatively large area of land where you can some level of interest and support. put up almost what you want, within certain small Grant Shapps: Absolutely. I immediately knew you constraints. I can imagine local authority planners in were talking about Almere, and I absolutely love this this country tearing out what hair they have left on model. The Government has committed to this model the basis of this. in the housing strategy. The draft National Planning Heather Wheeler: They would have a hissy fit. Policy Framework talks about this model. We either Bob Blackman: I wonder if you have dealt with the call it self-build or custom build. The reason I was two constraints of how such things could be financed keen to have two names is that self-build does exactly and what could be done to ensure people are not what you were pointing at: you imagine people artificially constrained through the planning system? coming along with their dungarees on and a toolkit. It Grant Shapps: First of all, you are absolutely right on is often that people just want to drive the project and both these points. On the first point about that have an architect, and what have you, which is why difficulty of the bridging loan or the finance, what is we added custom build to it as well—hopefully it will really interesting is, if you look at the percentage of become memorable in time, once it gets going. Not default amongst self-builders, it is a fraction of the only that, I have also found a fund of £30 million to ordinary market. This is a good marketplace. You are put to custom build, self-build, in a circulating fund right that there are complications in terms of to help people get underway with this project as well. landownership and the rest of it, which is precisely With the Government land work that we have been why I have set up this £30 million fund; that is exactly talking about, and the councils as well, and through the point of it. You have just outlined it far better than things like the National Policy Planning Framework, I explained it earlier. I am on the case with that. It is we are very keen and are driving this forward. We a circulating fund: we will get the money back, but it want to see that Dutch example all across the country. means that we can help people realise these I will be saying more about this in the coming weeks aspirations and overcome those problems where the and months. market is not quite working right at the moment, and I should also mention that at the beginning—January we want to see it pick up the gap in the longer term. or February last year—I asked the National Self Build You are absolutely right on the planning front as well. Association to do work on exactly this front and tell It will not have gone unnoticed that this Government me where the blockages were. They set up four has been desperately trying to shift the approach of different work streams, which were things like the planning system, sometimes even planning housing, finance, planning and availability of land and officers, through the NPPF document— so on. They reported back to me in spring/summer last uncontroversial it has not been—which is absolutely year, and I have been undertaking fixing the problems guided on the principle of just letting go a little bit, that were preventing it from going ahead. and allowing communities to develop as they want to. Finally, our self- or custom-build market is at a By the way, if you wanted a UK example of this—I fraction of what it is in comparable countries, from know you probably prefer the overseas trip—in Holland to France to Germany to America to Australia Bristol a piece of land has been taken and what I and many others—an absolute fraction—yet it would describe as a community right to build has got accounted for 13,000 houses built last year, and it under way. It is a community land trust. They have makes self-build, or custom build, the nation’s biggest done a very similar thing there. I just want to release builder. We want to double that marketplace in the the innovation and desire we have in people to go out next 10 years: that is the aspiration we have put in and do this. We have the community right to build; place. As you heard from that stream of consciousness we will be setting up a hub to help promote it and and policy, we have been doing quite a lot, including help people do this. Oftentimes this can be anywhere: putting some money behind it. Did I come across as it can be rural or urban. If it is in a rural area, for enthusiastic about it, by the way? I just want to make example, the community might come together and sure you understand this is absolutely Government decide to have a community right to build: that is the policy. whole community coming together and saying, “We have this spot of land; we are going to buy it and set Q365 Bob Blackman: I was one of those also some development criteria”. Those criteria might be, enthused by the idea; I think everyone on the “You cannot build more than two or three storeys” or Committee is probably enthused by it. However, “It must be this”—but not too in-depth—as at Almere, immediately there are two barriers that struck me, so they will create the real innovation we are looking because the whole basis works on the principle that for through these partially serviced plots, because they you buy the land, put planning permission in, and get will get together and do it. The beauty of the planning permission if you need it. You then engage community right to build is that the area can go ahead an architect or builder. There are very few people who and vote the planning permission themselves to build Communities and Local Government Committee: Evidence Ev 73
30 January 2012 Rt Hon Grant Shapps MP this new neighbourhood, essentially. It is a really the National Planning Policy Framework, which will exciting plan. shortly become official, rather than draft, and we are Of course, it is dangerous, as I have discovered in this going to make sure we are making a very big play of job, to generalise about what everywhere is like. I can these aspects. I hope the message goes out through take you to all sorts of parts of the country—you have Committees like yours. I am sure planning officers probably seen many of them yourself—where there around the country will be avidly reading the are vast sections of land, sometimes, that people are transcript from your Committees, and they will be desperate for you to come and develop. This is a very instructed by that. As I mentioned, with things like good model in those cases as well, and some of them community right to build—which could be custom are in urban areas. I have seen potential for some of build in some cases—there will be things like a hub these things in the middle of London. that will come from the Localism Act legislation; there is the £30 million that, as you say, is out there Q366 Chair: Finally, Minister—we do not want to but people do not know about yet, but that is because detain you any longer—this is an idea that I think we have not launched the fund. There is a lot more everyone was surprised by initially, and then could see that we are going to be doing. We will absolutely great benefit in. Clearly, it has not necessarily got into make sure we have people who are recognisable and the consciousness of local authorities and other areas known championing this whole concept of self-build around the country where this potential exists. I just or custom build as well. There is enormous potential. wondered what the Government could do to promote I am excited that you got to see it for yourself as well. it and give people an indication of what might be Chair: On that point of considerable agreement, achieved and what has been achieved in the name of perhaps we will end the session. Thank you very it already. much indeed for coming, Minister. Grant Shapps: We now have this huge opportunity, because we have passed the Localism Act, we have Ev 74 Communities and Local Government Committee: Evidence
Written evidence
Written submission from the Institute for Public Policy Research
I am writing to formally submit IPPR’s recent report “Build Now or Pay Later?” for consideration as part of the Communities and Local Government Committee’s inquiry into housing supply.
The starting point for our research was the challenge of meeting the demand for new homes in the context of severe constraints on the public finances. Unless we find a way to finance new supply the gulf between the homes we need and the homes we’ve got will grow dangerously wide. Against this backdrop, the report briefly outlines the powerful economic case for increasing housing supply—and considers whether current government policy is up to the challenge.
The main focus of the report is an exploration of three new ideas for financing additional housing, in light of the current economic context: First, we consider the prospects for institutional investment in residential property in the UK. Our analysis emphasises the prospective investor’s perspective. We hone in on the heart of the problem: housing looks low-yield and high-hassle to potential investors. But we then we ask if these obstacles are surmountable, concluding that, with careful product design, they may well be for domestic insurance and pension funds. We then argue that it is local authority pension funds that offer the best prospect. Second, developing our thinking on the role of local authorities further, we argue that they should release their public land to developers in return for an equity stake in development; hold auctions to secure private land for new homes; and adopt a “use it or lose it” approach to privately held land fit for housing, including through the use of more time-limited planning permissions. We suggest also that local authorities need to make the most of the house-building opportunities that housing revenue account (HRA) reform offers. Thirdly, we make the case for the recapitalisation, over time, of government expenditure on housing. We describe the dramatic shift that has occurred over the past 40 years away from capital investment in bricks and mortar towards personal subsidy through housing benefit (HB) and then consider how it might gradually be reversed. We suggest integrating housing policy across government, enabling a more deliberate focus on delivering this change. We explore the possibility of introducing a stepped taper to HB and creating a framework for hybrid social-private landlords in order to get more out of the private rented sector, where HB has at times looked like a landlord-enrichment scheme. And we float the idea of localising decision-making responsibility for all housing spend, giving local authorities more of an incentive to keep rents and HB bills down in their area and invest more in new-build.
The report also suggests two other possibilities that we think merit further exploration, and on which IPPR is now undertaking further work: — We advocate the expansion of the new Green Investment Bank into a fully-fledged National Investment Bank and contend that one of the types of infrastructure it should fund should be new housing. This would mean that the state’s resources could be used to enable the private sector to borrow cheaply to build new homes, inverting the operating principles of the private finance initiative. — We urge that serious thought be given to reforming the UK’s development industry. Getting land to market is of little use if developers would rather sit on it than develop. We argue we need to find ways of introducing competitive pressures into the industry to incentivise actual development, rather than mere land acquisition.
To conclude, we find that Britain finds itself in a “catch-22” situation, with low growth, low supply, low finance and low confidence, despite low interest rates. There is clearly no one silver bullet that will break this deadlock; our aim has been to provide food for thought as the government considers its housing strategy. We are clear that this strategy must offer more than a recapitulation of what has been done already, while not resting too heavily on the single proposition of the release of government land.
We would be very happy to provide additional briefing or to discuss these issues further with you or Committee members. November 2011 Communities and Local Government Committee: Evidence Ev 75
Written submission from the Cambridge Centre for Housing and Planning Research Summary — This supplementary submission sets out a response on a number of issues. — There needs to be clarity as to the future prioritisation of more limited housing grant and the future availability of Housing Benefit and its capacity to “take the strain” in housing policy terms. — The state does have a role in lending and investment not least in terms of helping creating markets and building market confidence. The state has made significant “investments” in housing as it has in other industries. Given housing is both a consumption and an investment good there is considerable locked in value and the potential of this now needs to be properly explored. — Support in kind is important but currently the mechanisms in place have been put into question. It is important that we have clarity going forward as to their use and impact. — Institutional finance is already in place in housing via housing associations. There is clear potential to go further both with respect to that sector and in relation to private renting though here it is unlikely to dominate. Investor requirements have to be properly understood and met to secure this desirable outcome. — Private finance for housing associations has been one of the most significant success stories in this area. The market is now under pressure for a number of reasons and government policy changes have created a degree of uncertainty. It is important to re-stabilise this market. — The new arrangements for local authorities should create a capacity to fund new development and this is to be welcomed. It is unlikely to replace existing funding capacity.
The Submission 1. This is a supplementary submission by the Cambridge Centre for Housing and Planning Research (CCHPR) following our initial submission with LSE and the University of Sheffield. CCHPR is one of the longer established research centres in the UK specialising in housing and planning issues. The Centre has long experience in work around housing finance and housing supply (see our website for further details (http://www.cchpr.landecon.cam.ac.uk/). 2. This is an important Inquiry posing fundamental questions as to the capacity of the government and public and private sectors to meet the nation’s housing needs. With cutbacks in government expenditure and reductions in housing supply and mortgage finance alongside the continuing growth in the number of people and households there are real challenges to the continued health of both the economy and society in the UK. 3. The Committee asks a number of questions and in this supplementary memorandum we seek to provide responses:
(a) Making best use of limited capital and revenue subsidy in terms of stimulating supply This raises considerable challenges. In many respects funds should go to the areas where unmet demand and need is highest—but these tend to be the most expensive so the subsidy applied produces fewer homes. At the same time the potential to lever in additional resources through borrowing or equity investment is greater in higher priced areas because the risks are lower and the returns are higher. One option would be to focus funds on regeneration areas where the market is very weak and on the infrastructure for residential development in higher demand areas. In this way it would support areas where the market is either very weak or where the impact of modest subsidy would be greatest in terms of triggering a supply response. There has been a long standing debate in the UK about what is the most effective sort of subsidy. We can distinguish capital subsidy, revenue subsidy and personal subsidy. Capital subsidy covers the costs of development above and beyond what might be met through rents or mortgage payments by means of a capital grant. An alternative is to pay a revenue grant to cover borrowing that was raised to pay for the development. Up front capital grants are preferred over revenue grants because they are less vulnerable to political change. An alternative is to supplement any capital or revenue subsidy with personal subsidy. This is the route the government has chosen. It is clear that DWP wishes to curb the rising £21 billion housing benefit bill and this tension now sits at the heart of housing policy. It impacts upon the decisions of providers, funders and investors. It is important to secure some clarity as to the future course of housing benefit and the willingness of DWP to “take the strain”.
(b) The role of the state in terms of lending and investment as distinct from grant It is clear that for the most part the housing market should function as a market and be based on private sector activity whether as individuals or companies. The state can assist that market to meet the demands of households—not least by easing tax requirements/providing tax reliefs, eg, capital gains tax, as part of its policy stance. Setting aside direct state funding via the different types of subsidies, the state also has a role with respect to lending and investment, first through the rate setting via the BoE and the general management of the economy. Second, the state can play a significant role in creating market confidence and activity through lending and investment—ie, advancing funds which are repaid with or without an uplift reflecting the Ev 76 Communities and Local Government Committee: Evidence
performance of the underlying asset or the organisation to which those funds were advanced. Currently the government is proposing a “build now, pay later” scheme whereby public land is developed by private builders and the land cost will be repaid on sale. This has some merit though it should not be without “strings” including ensuring at least that part of the development is for affordable housing. It also funds equity loans for house purchasers through housing associations. These funds are repaid to the association with uplift according to the HPI. Though there is the potential to repay this to government that is only done if the funds raised are not re- used for housing development within three years. So uplift is achieved and it feeds back into the housing programme. This is sensible. Both help the market and providers/supply. The question partly is the opportunity cost of using that explicit/implicit investment elsewhere and with better returns. There is no evidence to suggest that this evaluation takes place. Currently there is a live debate about the £40bn of government grant which has been made to housing associations over the decades to help fund development. This sits as a repayable charge on housing association balance sheets. With the reduction in new grant funding some large associations have been exploring whether this grant could be written off so that it increases the balance sheet capacity of housing associations. Alternatively some have asked if it could become an equity investment though this raises the question of how big the premium might be and how this is paid for on top of the current costs/profit structure. It would imply higher rents. At present the costs of raising equity are probably higher than raising debt. Some associations are moving towards being fully leveraged within current borrowing terms and thus need to find new ways of raising funds, eg, the recent Places for People unsecured retail bond issuance. Given that all developing associations will be increasing their leverage in order to raise finance for development alongside the new affordable housing regime this exploration is important. It is one possible solution for a group of associations rather than a solution for the sector as a whole. It also raises a range of governance/constitutional issues including the public/private status of housing associations, whether and how the equity investor has any say in the running of the business, how that equity might be traded and whether this could lead to conventional mergers and takeovers? None of these issues have been resolved to date. Overall, this suggests that although we are moving towards a greater role for lending and investment, equity might only be a partial solution.
(c) The role of support in kind This is important and has grown in significance as access to grant funding has declined. The rise in the role of Section 106 agreements whereby developers agree to provide free or discounted land in exchange for development rights on the remainder of the site is a case in point and this was discussed in our initial submission. Support in kind is however vulnerable in that it only works in so far that the mechanism in question is operating. Section 106 development slowed in the downturn and thus associations reliant upon this found their development programmes stalled. Moreover because it is in kind it rests on the “random” distribution of those opportunities rather than providing funding directly where it might be needed most. Guarantees have been a neglected part of the UK housing system. The current Mortgagee Protection clause used in shared ownership to protect lenders to the borrower from losses in the event of default has a number of weaknesses which have not been resolved despite protracted debate between the FSA, CML and the NHF with the consequence that mortgages for shared owners are less readily available. Similarly mortgage guarantees provided by local authorities to underpin higher loan-to-value lending by mortgage lenders have fallen into disuse reflecting lenders’ concerns about the terms under which they were offered. In other countries state or private mortgage guarantees are used to encourage lenders to offer higher LTV loans to first time buyers. This is a common solution but it is one that does not currently exist in the UK. There are a number of technical reasons for this—mainly surrounding the credit standing of the mortgage guarantee insurance providers. The state could provide this cover as is the case in a number of countries. The barriers are many and varied—the absence of strongly resourced MIG insurers, misunderstanding about the cost and use of Local Authority guarantees and the tensions between the EU CRD legislation and the current SO mortgagee protection clause. All of these could be sorted out if government took a lead in the process.
(d) The availability of long term private finance from institutions There is a tension in the UK mortgage market between its reliance on short term savings instruments to bring money in and lending on longer term mortgage products. This mismatch has been managed over the years but the tensions have increased since the downturn and not least because the FSA is now requiring firms to give much closer attention to liquidity and basis and interest rate risk. This tension has led some to focus on the possible role of pension funds which have long term liabilities in the form of pensions and need long term assets to match them. Given that housing prices and rents move roughly in line with RPI/wages there is a good fit. However pension funds have shown no real appetite to invest in residential real estate beyond being active buyers of housing association bond issuance. Recently there appears to be renewed interest in investing in residential real estate though it has been slow to crystallise into actual new funding. The barriers appear to be many and varied but include lack of experience and the mixed characteristics of residential real estate—a mix of gilt (stable) and equities (volatile) characteristics which is hard to position, the absence of daily pricing measures, periodic limited liquidity and reputational risks. There are a number of current explorations into the barriers and the committee should consider the progress being made and what could be done to expedite this. Communities and Local Government Committee: Evidence Ev 77
If institutional investors wish to invest in residential property, then it makes sense to do so by holding a diversified range of bonds issued by different landlords—there is no particular virtue in institutional investors like pension funds actually owning property directly and as noted above institutions do already hold HA paper. The barriers to entry for new large scale private landlords are high—it is difficult to acquire a portfolio which is simultaneously sufficiently diversified but also spatially concentrated (for economies of scale in management), and to do so within the short time frame required by investors. In this regard it can be argued that the most practicable means of creating large scale, long term, institutional landlords in the private rented sector may be to encourage housing associations to expand into market renting, since they already exist, are of a viable scale, and have the necessary expertise. The key issue here would be to develop regulation to ensure that any cross-subsidisation is from private to public rather than the other way around. A further strand in this is the linking of shared equity with institutional finance. There are a number of public and private shared equity schemes in place which assist first time buyers. Ultimately if the provider of the shared equity is government or the property provider—builder, local authority or housing association there will be balance sheet constraints. There is potential for Institutions to buy up performing loans books and thus allowing the original funder to recycle its funds into more activity. Builders have over £1 billion of shared equity loans on their books and housing associations will have an even larger sum. There is some evidence that institutions are wiling to explore this potential and it would be helpful if this was taken further.
(e) Increasing private finance for housing associations and ALMOS Higher rents will support more borrowing but potentially will change the role of the sector. A number of changes have been made in terms of borrowing rules which have eased the raising of private finance including for example the use of security trustees, taking account of first tranche sales for shared ownership, and allowing sales and disposals to be taken into account—all these have increased the capacity to raise finance but they are modest. Some large associations have secured credit ratings to widen their appeal in the funding markets and others have formed borrowing clubs which allow small associations to bundle together their funding requirements. At the same time the number of lenders of debt to the sector has been shrinking reflecting changes in financial markets and mergers. Much of the back book of private finance for housing associations is loss making for lenders—loan terms granted in the highly competitive market evident up to 2008 were extremely fine with the upshot that as funding costs have risen the returns on these loans are far lower than the current cost of funds. This loss making is hardly conducive to expanding loan books and indeed this has meant a number of lenders have now looked to reasons to re-price loans. This is a new and unfortunate tension between lenders and HA/ALMO borrowers.
(f) Reform of the Council Housing Revenue Account system and more funding for housing supply The principle of HRA reform is to redistribute existing debt among local authorities with retained stock so that each local authority has the maximum amount of debt that its income stream will support. In these circumstances, local authorities will not have any room for manoeuvre to increase funding until they have either increased their rental stream (which they cannot increase by more than the government’s annual guideline without carrying the cost of any additional Housing Benefit), or reduced their debt, either by diverting income to do so or by selling assets. The ability to reduce debt, particularly by asset disposals, is not distributed equally across local authorities, and there is no guarantee that those authorities with the greatest capacity to dispose of assets will either be in the greatest need of reinvestment in adding to stock, or necessarily be willing to do so. Due to past quirks in the subsidy system, a number of local authorities have less actual debt than their allocated debt ceilings, and so could borrow more immediately, if they had the income stream to support additional debt. The number of such authorities is not known. DCLG collect the necessary data from the subsidy returns, and it would be helpful in estimating the scale of this capacity if this data were published. November 2011
Written submission from the Building & Social Housing Foundation Executive Summary — BSHF welcomes the opportunity to submit evidence to the Select Committee on this important and timely issue. The UK’s historic and growing undersupply of housing has a substantial impact on the country. — The current government, like the last, is publicly committed to a vision for significantly increased housing supply, and is implementing a variety of policies, which are designed to deliver new homes. However, critics suggest that these changes are insufficient to deal with the scale of the problem. Ev 78 Communities and Local Government Committee: Evidence
— The following strategic objectives would work together to overcome many of the substantial barriers to delivering sufficient housing: — Build new places. — Enhance delivery of land. — Ensure that an appropriate range of finance is available to support development. — Maximise the use of the existing building stock. — There are a number of specific policy changes within each of these four areas, which could support an increase in housing supply. These include: — Local authorities should create revolving funds to support infrastructure development and, where relevant, land purchases. — Local authorities should prioritise having a senior role within the organisation with responsibility for inward investment and the securing of the common wealth of the area. — Government should seek to develop mechanisms that would allow local communities to capture some of the planning gain. — Government should investigate the barriers to adequate finance being available for a diverse range of housing models. — Government should investigate new mechanisms for helping potential first-time buyers in building up a sufficient deposit. — HM Treasury should move to the internationally accepted “general government” system of classifying public sector debt. — Detailed assessment of the different mechanisms used across Europe would provide greater insight into the options available in the UK.
About BSHF The Building and Social Housing Foundation (BSHF) is an independent housing research charity committed to ensuring that everyone has access to decent and affordable housing, and holds Special Consultative Status with the United Nations Economic and Social Council. Since 1994 BSHF has organised an annual series of Consultations at St George’s House, Windsor Castle, bringing together diverse groups of experts for in-depth discussion and consideration of an important housing issue. Earlier in the summer a Consultation was held on housing supply and the findings have been published as More Homes and Better Places: Solutions to address the scale of housing need.1 This submission is based on this report and on original research that BSHF has been involved in.
Introduction The UK’s historic and growing undersupply of housing has a substantial impact on the country: it affects individual households, who struggle to find housing that fits their needs at a price they can afford; it affects the wider economy, creating a drag on growth and hindering labour mobility; and it affects society, worsening inequality and amplifying the challenges of demographic change.2 This undersupply of housing is a longstanding problem, which has been exacerbated by the financial crisis of 2007–08. The structural problems—such as those related to land and planning, opposition to development, and the operation of the construction industry—have been compounded by increased restrictions on finance and mortgage availability. An inquiry into the delivery of new homes by the Select Committee is, therefore, very timely. The current government, like the last, is publicly committed to a vision for significantly increased housing supply, and is implementing a variety of policies across different aspects of housing supply. However, critics suggest that these changes are insufficient to deal with the scale of the problem. Significant, but achievable, change is necessary if the country is to get the housing it needs. At present, however, there is an absence of clearly articulated strategic objectives, to provide a coherent framework within which individual policies can be developed, to contribute to the overall vision of greater supply. The following strategic objectives would work together to overcome many of the substantial barriers to delivering sufficient housing. — Build new places. Local authorities should take a leading role in assembling land and parcelling it out to a range of suppliers, to increase competition amongst firms and between different models of development. 1 Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing need, http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994–15C5-F4C0–99170AE24B5B0A84 2 ibid. Communities and Local Government Committee: Evidence Ev 79
— Enhance delivery of land. Those who own or control land that is suitable for housing need to be encouraged to bring it forward for prompt development, at values that will secure appropriate quality. Government policies, regulations and taxation structures create certain patterns of incentives, which may or may not support the prompt development of land. These rules and their consequent incentives should be aligned to ensure that they provide the maximum possible incentive for development. — Ensure that an appropriate range of finance is available to support development. Following the global financial crisis, there has been a fundamental change to the financing of housing supply and purchase, in addition to short-term credit constraints. Government and the housing sector need to ensure that these changes are adapted to, so that housing supply is not inhibited, and that funding is available for the infrastructure needed to boost growth, and cope with climate change. — Maximise the use of the existing building stock. The existing stock of buildings, including empty homes and some commercial properties, represents a potential source of additional housing. Where possible this should be brought into use to help to meet housing needs. BSHF considers that the specific policy responses outlined below must form part of a coherent strategy if they are to deliver the new homes that are required in the UK.
1. How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms 1.1 Since the early 1990s successive governments in the UK have relied on revenue subsidies such as Housing Benefit to “take the strain” of housing policy. Whilst the economy is strong it can appear relatively easy to rely on revenue subsidies that can be covered by healthy tax receipts. However, such a system inevitably comes under pressure in times of economic constriction, when upward pressures on claimant numbers are likely to coincide with downward pressure on government spending. 1.2 Expenditure on Housing Benefit continues to rise and is likely to continue to increase, despite government measures to control it.3 Evidence suggests that expenditure on Housing Benefit has increased primarily for two reasons. Since the start of the recent recession, the increase in expenditure is largely due to rising numbers of working age claimants. Prior to the recession the increase in expenditure on Housing Benefit was due to rising rents. The longer term trend towards higher rents suggests that the sustainability of the support can be best ensured by adopting policies that seek to restrain increases in housing costs (including rents). This is unlikely to be resolved without serious attention to the supply side of the housing system, ensuring more homes are developed to suppress increases in housing costs. 1.3 Therefore, securing the long term financial sustainability of support with housing is closely linked to the need to increase housing supply. It may be necessary to rebalance capital and revenue subsidies, to provide greater investment in the development of a long-term social housing asset. It may now be time for supply side “bricks and mortar” subsidies to take more of the strain to ensure that housing support is financially sustainable in the long term. A particular emphasis on increasing the provision of social housing at below market rents in areas of high demand could have a real impact on the long-term sustainability of support with housing costs. 1.4 Focusing on the supply side and increasing the delivery of new homes includes options beyond a simple return to substantial levels of grant funding for new build housing. The answer to question two below begins to highlight the variety of types of support that can be provided to finance new housing supply.
2. What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them 2.1 The state has an important role to play in supporting the delivery of new housing supply, which goes beyond simple direct capital and revenue subsidies. Lending and investment in different forms provide alternative options, which could be developed further alongside a range of other state actions. 2.2 Research by Housing Europe has identified eleven different mechanisms being used to finance social housing in different European countries, including interest rate subsidies, tax-privileged private investment, and Government secured private investment.4 Detailed assessment of the different mechanisms used across Europe would provide greater insight into the options available in the UK. For example:5 — In France, tax-free household savings schemes finance non-market loans to social housing providers alongside state and local subsidies, tax incentives and other loans. Land is often provided by local authorities. — In Germany, the federal government has withdrawn from direct supply support and shifted towards demand side subsidies. Municipalities develop their own programmes and housing companies are private entities, with a variety of shareholders. Private investment in social housing is promoted via tax concessions. 3 Pattison, B and Vine, J (2011) Housing Benefit Claimant Numbers and the Labour Market: Modelling and analysis, http://www.bshf.org/published-information/publication.cfm?thePubID=4E36E822–15C5-F4C0–9910CF24FAAC301E 4 CECODHAS Housing Europe (2010) Financing Social Housing after the Economic Crisis, Table 1, page 15, http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=7AD1065F-15C5-F4C0–99BAE15289421527 5 These examples are taken from: Financing Social Housing after the Economic Crisis. Ev 80 Communities and Local Government Committee: Evidence
— In Sweden, corporate tax exempt municipal housing companies have always been financed by capital market loans, which were sometimes backed by municipal guarantees and central government grants. In the past, interest rate subsidies were provided by the central government, but these have ceased. 2.3 These examples show some other options and highlight the importance of assessing the full range of interventions available to support housing supply. The key is identifying which options can be combined to finance additional supply, and more specifically affordable housing, in different locations and contexts within the UK.
3. What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening 3.1 Local authorities should create local ventures for large-scale strategic sites, taking title of land, promoting, granting planning permission, putting in infrastructure and parcelling out the serviced land. Such local ventures should be led by local authorities, but would typically require participation from other stakeholders such as land owners. 3.2 A local venture of this nature would be able to pull together a range of stakeholders with a financial interest in a development. Within its structure it could integrate planning, investment and development functions, and would have the ability to draw in the appropriate skills. This technique would generally not suit smaller sites, but could be appropriate for both substantial extensions to settlements and new settlements. 3.3 By undertaking activities related to planning permission, site assembly and the installation of infrastructure, the risk to developers would be substantially reduced. Reducing the risks for developers could allow a wider variety of development models to emerge. 3.4 A group of partners coming together to take a longer-term interest in the site would help to draw benefits into the community over a longer period. The involvement of local authorities would help to ensure democratic accountability to local communities, and would also be vital to ensure statutory functions such as planning could be properly integrated. 3.5 An effective public-private partnership supported the developed of a new settlement near Amersfoort in The Netherlands. A Joint Development Company was set up, with the Council and five private companies as shareholders. The companies included both those that had invested in land locally and those that had previously had positive involvement in Amersfoort. This Joint Development Company then raised €750 million from BNG (the Dutch municipal bank) repayable over 15 years, which then financed the infrastructure and other upfront cost.6 3.6 Local authorities should create revolving funds to support infrastructure development and, where relevant, land purchases. By taking a leading role in creating such funds, local authorities could draw in other sources of finance, such as from private companies. Local authorities’ aims would be well-aligned to use these funds in a counter-cyclical fashion, supporting local economies and building infrastructure at times when other construction work is slower, acting to support growth where there is market failure and to pump prime markets until confidence, and private sector growth and investment returns. Local authorities could also create loan guarantee schemes to support community-based housing solutions who may struggle to gain access to finance. 3.7 A key barrier to local authorities undertaking these kinds of role is the skills and capacity at a strategic level. Local authorities should prioritise having a senior role within the organisation with responsibility for inward investment and the securing of the common wealth of the area. In some authorities this role will already exist, in others it will need to be created or developed. In the past, this role would often have been handled by the Borough Valuer or economic development departments, working with the chief planning officer and engineer. Much of the country’s post-war reconstruction and early town centre redevelopments were managed by these three key people within local authorities. The chief planning officer role in local authorities is not, at present, a statutory post. It has been argued that remedying this situation would help to raise its status within authorities. Specifically, it would help to ensure that planning is more effectively integrated in corporate, operational and policy decisions of the local authority. 3.8 All chief officers should be required to take a broad view of common value, and be able to look beyond the narrow outcome of maximising cash returns from individual actions such a land sales, to ones that create long-term capital and social value in communities. 3.9 Placing this role within local authorities is vital, as authorities are uniquely well positioned to look at common assets and the physical realm. This should look to incorporate physical assets (such as land and property) and social capital. Chief officers should also have responsibility for communicating with other executive officers and councillors: it should be a corporate priority for the council itself to understand what the community’s assets are and to develop their community leadership role around this understanding. 3.10 In the longer term, stronger local authorities that are better able to draw investment into their areas will benefit central government, as they will make fewer calls on the central purse. Efficient local authorities should 6 Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing need, http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994–15C5-F4C0–99170AE24B5B0A84 Communities and Local Government Committee: Evidence Ev 81
be able to develop local investment plans that maximise the use of public, community and private finance and assets, and thus ensure that calls on central government funds are calls of last resort. 3.11 Central government can make other changes that support local communities in delivering new supply. A different type of support can be provided through mechanisms to capture planning gain. Government should seek to develop mechanisms that would allow local communities to capture some of the planning gain, the increase in the value of land that occurs when planning permission is granted. Capturing some of the gain for the benefit of the community has the potential to contribute to supply, in part because it may lower opposition to planning permission, if the existing community can see that the local area will gain some of the benefit. 3.12 The government has announced that a land auction mechanism will be piloted, which is one possible mechanism for capturing planning gain. Details of this pilot have not been announced, but there are a number of different methods for capturing more of the planning gain. 3.13 Some planning gain captured in this way may be useful in establishing revolving funds for the creation of infrastructure, etc. More generally, if a local authority has acquired land through a land auction process, it may seek to establish models like the local ventures described above, to undertake infrastructure works and parcelling out of the land. 3.14 Some models used in mainland Europe could be considered in the UK. These typically rely less on taxation or levies and instead on a mix of equity investment in infrastructure by municipal banks and constraining the value of land received by landowners and developers, either to an agreed multiple of existing use value, or a fixed percentage of outturn sales value. These have advantages of certainty for landowners, represent a fair but not exploitative uplift in value, and might be preferable, as being less complex, with lower transaction costs and less vulnerable to avoidance strategies, than taxation.
4. How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening 4.1 Accessing long-term private finance is an important part of supporting the delivery of more new homes in both the private and social rented sectors. However, the availability of multiple sources of smaller amounts of finance is also important, as is the need to ensure that first-time buyers have access to suitable finance. 4.2 Government should investigate the barriers to adequate finance being available for a diverse range of housing models. A number of alternative housing models already exist in the UK or play a significant role in the housing systems of other countries. These may be able to play a more substantial role if they are given the right type of support or have barriers to their development removed. These models include: — Sweat equity, where people contribute their time and effort towards providing their own housing instead of financial equity. — Community land trusts, which seek to provide long term affordable housing for a particular community. — Self build, where individuals take a leading role in the design and/or building of their housing. — Housing co-operatives, which jointly own and democratically manage housing stock. 4.3 These housing models, and others like them, account for only a fraction of the housing stock in the UK, unlike some other countries in Europe or North America where they are much larger, both in terms of total numbers and as proportions of the stock. There is the potential in the UK for many more residents to be attracted by the opportunity to develop long-term affordable housing in sustainable local communities. Building up the necessary social and financial capital to develop these models takes significant amounts of time and effort, and they are unlikely therefore to contribute large amounts of new stock in the near future. However, in the longer term, they have the potential to play a far more significant role. In the past this has often led to these models being marginalised and institutional barriers have made it difficult for them to increase. 4.4 It is important to ensure that those developing housing using innovative models can access finance. It may be appropriate for special lines of credit to be made available for co-operative and self-help housing, which occurs in other countries, for example through the German Federal Bank. 4.5 Some of these models can have wider social and economic benefits. Self-help housing schemes that train NEETs (young people not in employment education or training) to bring empty properties back into use can develop their skills, improving their employment prospects, at the same time as delivering much-needed housing.7 4.6 There is evidence that housing supply is linked to the number of transactions in the housing market.8 Government should investigate new mechanisms for helping potential first-time buyers in building up a sufficient deposit. The tightening of mortgage market restrictions means that obtaining a deposit is now 7 Pattison, B, Strutt, J and Vine, J (2011) Self-Help Housing: Supporting locally driven housing solutions, http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=2F9EC046–15C5-F4C0–991896202739F469 8 Meen, G (2003) Regional Housing Supply Elasticities in England, http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/media/8/E/Geoff%20Meen.pdf Ev 82 Communities and Local Government Committee: Evidence
perceived by consumers to be the major barrier to property purchase.9 This perception is supported by the fact that between the first quarter of 2007 and the same period in 2011 the median first-time buyer deposit as a proportion of income rose from 41% to 87%.10 Whilst approaches that increase households’ access to debt by loosening lending conditions are not desirable, ones that achieve it whilst making the borrowing safer are potentially sound. 4.7 For example, the government could ensure that any home meeting A, B or C on its energy performance certificate would be eligible for an additional loan from the Green Investment Bank; this might be able to act effectively as a deposit, with the repayments being affordable due to the savings on energy bills. (This might be structured over an extended period, and could range from, say, £5,000 for a C-rated home to £10,000 and £20,000 for B- and A-rated properties respectively.) By providing additional finance, a loan from the Green Investment Bank would assist with the deposit requirement, whilst also incentivising green homes. 4.8 Local authorities could create loan guarantee funds that support first-time buyers. Some local authorities are already developing this type of approach. In Germany, self-builders can access low interest loans of up to €50,000 from the government to help them build eco homes.11 Government should also be considering measures such as Local Asset Backed Investment Vehicles and the issue of infrastructure bonds that are repayable after around 20 years from the uplift in land values as a result of new infrastructure and related development.
5. How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply 5.1 Whilst we do not have detailed information in response to this question, we note that some housing associations (typically smaller ones) have relatively unencumbered assets. Further research is required to assess whether it is the case that some of these housing associations have the desire but not the skills and expertise to sweat those assets.
6. How the reform of the council Housing Revenue Account (HRA) system might enable more funding to be made available for housing supply 6.1 The reform of the HRA is a welcome step but more can be done to release funding for local authorities to increase housing supply. HM Treasury should move to the internationally accepted “general government” system of classifying public sector finance. The current public sector net cash requirement (PSNCR) system of classifying debt (previously known as the public sector borrowing requirement, or PSBR) is an implicit form of regulation, as it brings local authority borrowing for council housing within the public sector debt calculation and therefore requires tighter control by the centre. 6.2 Moving to the internationally accepted General Government Financial Deficit (GGFD) standard would remove local authorities’ trading activities, such as housing, from the national debt, significantly increasing their freedom to borrow against their housing assets to increase supply. 6.3 Although local authorities’ housing departments in England are to gain some freedom in their accounting in April 2012, this will be accompanied by the introduction of a cap on housing borrowing. The proposed change in the accounting standard would permit this cap to be relaxed, with prudent borrowing and asset management becoming the governing control focus for local authorities. 6.4 This move would also have the advantage of removing the risk that the debt of Registered Providers (such as housing associations) may become part of the national debt. At present housing associations are regarded for accounting purposes to be private bodies. However, because the state has a relatively high degree of control over housing associations it is possible that at some point the Office for National Statistics will revisit that classification and insist that they be considered as public sector for accounting purposes.
7. How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term 7.1 The introduction of Affordable Rent has split opinion within the housing sector. Until the programme has been running for several years it will be difficult to make an objective assessment of its impact. It is vital that the programme is carefully monitored from its outset. This monitoring will need to consider the impact of the programme on a number of different levels, including the numbers of new homes being built, the quality, size and location of these homes, the longer term impact of the programme on housing supply and the impact on the revenue subsidy bill. October 2011
9 Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing need, http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994–15C5-F4C0–99170AE24B5B0A84 10 ibid. 11 ibid. Communities and Local Government Committee: Evidence Ev 83
Written submission from Shelter I. Summary 1. Shelter welcomes the committee’s decision to hold an inquiry into the financing of new housing supply, particularly the sections of the review that address the urgent need to secure funding for the delivery of truly affordable new homes. 2. As the leading housing charity, campaigning across all tenures to bring an end to homelessness and bad housing, we draw on the experience of our front-line advice and support services in the development of our policy and research expertise. Our clients face a large number of problems, including shortages of social rented housing; spiralling costs and poor conditions in the private rented sector; unattainable or unsustainable homeownership; and difficulties maintaining mortgage repayments. Ultimately these are all a symptoms of a critical lack of homes. A key factor behind this shortage is the lack of sufficient finance to support development, particularly in relation to truly affordable and stable housing. 3. Shelter is very pleased to see the Communities and Local Government Select Committee tackle the issue of housing finance, which is fundamental to the long term health of our housing market. It requires long term solutions and greater cross party consensus on the best ways forward. As a result, Shelter believes the Committee is uniquely placed to provide innovation, guidance and, most importantly, leadership to government, parliamentarians, civil servants and the wider housing sector on this issue of critical importance. We hope we can contribute to a set of recommendations that will help to shape a cross party debate and foster agreement about the way to achieve the increase in housing numbers, particularly affordable housing, that all of the major parties have called for. 4. This submission outlines some ideas, financial and otherwise, that may help to boost the delivery of affordable housing, including effective use of public land, the role of the planning system, incentives to promote institutional investment in the housing market, and non-grant financial tools such as investment guarantees. 5. However, it is unlikely that any one measure on its own can unlock the stalled housing delivery system and boost supply to the levels that are needed. Some of the ideas outlined below will work best, or indeed may only work, in combination. Shelter believes that new approaches to both land and finance will be required. Increasing the supply of either land or finance in isolation will not work: additional land supplied without finance will not be developed, and additional finance without land will simply inflate prices. 6. Shelter warmly welcomes the recent commitments made by the Prime Minister and Chancellor to increase levels of housing supply, and their recognition of the stimulus effect housing development can have on the economy. And Shelter similarly welcomes the Government’s commitment to making the planning system “increase significantly the delivery of new homes”.12 7. However, we have also made it clear that sufficient government investment is essential to delivering enough affordable homes. We were very disappointed to see that funding for new affordable housing was cut by over 60% in the last Comprehensive Spending Review, which made housing the biggest loser in a particularly tough spending round. 8. Reforms to the national Housing Revenue Account (HRA) subsidy system do offer potential for some councils to utilise revenues from their housing stock for new investment, provided they are allowed to do so. Shelter believes that all surpluses raised from housing stock, whether in rent or sales, should be ring-fenced for housing delivery and upkeep. We await with interest further details on how the HRA reforms will work in light of recent announcements on reviving the Right to Buy, but are pleased that the government has pledged that Right to Buy receipts will go to finance new supply.
II. Evidence How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms 9. Supply across all tenures has not kept pace with growing demand for many years and has fallen to a historic low following the recent credit crunch. It shows little sign of increasing to the levels we require as we move out of recession. 10. With economic projections looking increasingly uncertain and growth falling behind the government’s own projections, investment in house building provides an opportunity for the government to stimulate economic growth. Each additional new home built creates 1.5 jobs in the construction sector as well as additional employment through supply chains linkages and the economic multiplier of construction compares favourably to other high value sectors.13 Given the significant capacity available within the sector it is extremely unlikely that additional public investment would displace private sector investment.14 12 DCLG, Draft National Planning Policy Framework, page 30. 13 The Construction sector has an economic output multiplier of £2.09 for every £1 of additional construction demand. This compared to £1.70 for both the manufacturing of medical and precision and banking and finance (ONS Input-Output Analysis 2002 Edition). 14 Investment in housing and its contribution to economic growth, FTI Consulting, October 2011. Ev 84 Communities and Local Government Committee: Evidence
11. House building also has beneficial effects on the supply side of the economy that could help raise the long term growth rate of the national economy including: (i) avoiding long term unemployment among construction workers (and particularly youth unemployment) which would result in people becoming increasingly isolated from the labour market,15 and (ii) improving labour mobility, with 5.6 million people reporting that housing costs prior to the recession had affected their ability to move for work. Of these, 2.4 million were aged 18 to 34.16 12. In order to realise these supply side benefits it is essential that any proposals for housing supply are firmly rooted in a proper assessment of the need for new homes. Local authorities and local communities must understand and respond to the need for new homes ensure that a shortage of affordable housing does not constrain the economic recovery in those parts of the country where need is most acute. 13. Shelter welcomes the government’s commitment to delivering new homes and the important cross party recognition of the stimulus effect this can have on the economy. During his Conservative party conference speech the Chancellor, pointed out that the delivery of 100,000 new homes could provide up to 200,000 jobs,17 whilst the Shadow Chancellor, spoke about the role the delivery of 25,000 new homes could play in stimulating the economy.18 14. It should be recognised that previous approaches to house building have focused on the quantity of units delivered, sometimes to the detriment of quality. New homes in the UK are now among the smallest in Europe and frequently fail to meet even basic assessments of design quality.19 All new homes should be built to last as long as the successful typologies of previous centuries, with excellent standards for internal and external space, environmental efficiency and design.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them 15. Overall public spending on housing has tended to remain at much the same proportion of total government expenditure over recent decades. But the balance within that expenditure has shifted over time from capital (or affordable housing supply subsidies) to revenue expenditure (in the form of housing benefit). Steadily rising rents compared to wages have driven the housing benefit bill upwards, while the chronic shortage of affordable homes is a testament to the under funding of supply by successive governments. 16. The last Comprehensive Spending Review cut capital grants dramatically. While Shelter believes this situation must be reversed, we also recognise that there could be a useful role for state lending in addition to grant funding. 17. Borrowing has always been key to residential development. The future rental payments and capital growth associated with new housing provide an income stream and asset base against which the cost of housing developments can be secured, making house building a good bet for lenders. Yet financial markets are currently failing to provide enough capital to supply the homes we need: in this context there is a strong case for state lending to replace private investors. And even in more normal market conditions, the public lending is a cheaper source of finance than private banks or markets. 18. A “National Housing Investment Bank” could attract investment funds and provide loans for the construction of low-cost housing.20 In European countries such banks have proved effective at leveraging public funds to channel private finance into both house building and improvements to the existing stock, a model that RICS have called on to be replicated in the UK.21 The government has partially adopted this approach through its Green Investment Bank: we would urge the committee to consider whether this model could usefully be expanded to include financing house building as well as green infrastructure. 19. Affordable housing is self-financing over the longer term, which is why much of the existing council stock is now debt-free. As original construction debts are paid down, it is right to ring-fence the proceeds for further housing investment. This maximises the long term efficiency of public investment, by providing new genuinely affordable homes that can enable more households to cover their own housing cost independently, reducing the need for employers (via wages) or the taxpayer (via Housing Benefit) to fund increasing rents. 20. Nonetheless, while the wider housing market remains unaffordable for so many households, there will always be a need for capital grant to support affordable supply. The appropriate balance between grant and borrowing will vary according to market conditions over time and across different schemes. For housing to be truly affordable for the long term it will need sufficient grant to keep the debt burden at a level that can maintain rents at or below what is affordable to people on low incomes. 15 In July 2011 there were 63,000 unemployed construction workers, over double the pre-recessionary level (DWP Claimant Count, ONS). 16 The Human Cost, Shelter (2010). 17 Rt Hon George Osbourne MP, Chancellor of the Exchequer, 3 October 2011, Conservative Party Conference. 18 Rt Hon Ed Balls MP, Shadow Chancellor of the Exchequer, 26 September 2011, Labour Party Conference. 19 CABE Housing Audits 200507. 20 BSHF, The Future of Housing: Rethinking the UK housing system for the twenty-first century , 2009. 21 Balchin, P. and Rhoden, M. Housing Policy: An Introduction, fourth edition, page 40, Oxford, Routledge, 2002. Communities and Local Government Committee: Evidence Ev 85
What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening 21. In addition to direct public investment, there is a range of tools that governments can use to channel investment into housing supply. Some of these, such as planning gain, are well established, others could be put to greater use. Outlined below are a number of key areas where public sector action could help to stimulate housing delivery, which we would suggest the committee considers.
Local Plans 22. Planning has long been the most significant indirect form of public support for affordable housing. At its best, the planning system successfully channels investment into affordable housing by setting out clear, strong policies that affordable housing is a fundamental requirement, without which planning permission will not be granted. This mechanism works by sending a clear message to the market, which translates the requirement for affordable homes into lower land prices. But this only works if the market believes the policy will be enforced. If such policies are weakened, or perceived to be weakening, the market will quickly adjust land prices upward to absorb the extra profit that might be made from more private and less affordable development. Higher land prices make development more expensive and homes less affordable, and mean more subsidy is needed to deliver affordable housing. 23. Therefore reform of the planning system needs to ensure strong policies on affordable housing provision are in enshrined in Local Plans. This is especially true since, following the abolition of Regional Spatial Strategies, Local Plans and their associated policies will be the sole mechanism through which affordable housing is planned for. 24. Affordable housing should not be treated as a residual requirement but as a fundamental aspect of sustainable development. We are therefore concerned by the references to development viability in the draft National Planning Policy Framework22. These imply that land owners and developers could argue for affordable housing to be excluded from a site in order to achieve profit margins of a level that is “acceptable” to them. Allowing landowners to present requirements for affordable housing as threatening viability risks pushing land prices up further.
Planning gain 25. Over half of all affordable homes are currently delivered on planning gain sites, even since the economic downturn (the figure was 56% in 2009/10, down from 62%23). The value of the planning system’s support for new affordable homes is in excess of £2bn per annum. It is therefore essential that the reformed planning system continues to provide effective support for the delivery of affordable homes—and we are concerned that the draft NPPF may undermine this support. 26. To help local planning authorities secure the required level of affordable homes through S106 agreements, the NPPF should include a policy presumption that Local Plans contain both a numerical requirement for affordable housing and a percentage of units that should be provided in any market led housing scheme. This would not impose specific targets, but would require a simple public statement of local authorities’ policies. 27. To preserve the real value of the planning system’s investment, the NPPF must emphasise more strongly that affordable housing should be provided on-site and only exceptionally be provided off site or commuted. The provision of affordable housing on-site as part of market-led developments remains a critically important supply of land for affordable housing, and an important factor in creating inclusive and mixed neighbourhoods. 28. Where off-site provision is justified, the total amount of off-site provision required should be much clearer than “a financial contribution of broadly equivalent value”24 as the draft states. For example, if the affordable housing requirement in a Local Plan was 40% then, on a site of 60 homes, the on-site provision requirement would be 24 affordable homes. However, if the affordable homes were to be provided off-site, 40 affordable homes would be required, as this equates to 40% of the combined total of 100 homes on both the sites, when the original 60 are all market housing. 29. It is also essential that local planning authorities ensure that their Community Infrastructure Levy (CIL) charging schedules support the levels of affordable housing required in their development plans. As indicated by the Minister in the committee stage of the Localism Bill, there should be a very clear statement in the Framework that the CIL should not prejudice affordable housing.
Public land 30. It is often asserted that surplus public land is a vast potential source of new housing. Different parts of the public sector do hold considerable land assets, and in general it must be sensible to bring them into use wherever possible, and Shelter welcomes attempts to speed up their release. But surplus public land has a long 22 DCLG, Draft National Planning Policy Framework, paragraphs 39 to 43. 23 DCLG HSSA data. 24 DCLG, Draft National Planning Policy Framework, page 31. Ev 86 Communities and Local Government Committee: Evidence
history of failing to deliver on the promises made for it. Much of it is not in the right places, has contamination costs associated with it, or is otherwise under utilised for a good reason. 31. More importantly, public authorities are under legal obligations and financial pressure to secure best consideration for any assets disposed of in order to maximise investment in the services they provide—not to finance housing delivery. Health authorities, for example, need new and different incentives if they are to release land for development cheaply rather than maximise returns to fund health budgets. It also remains the case that there almost no holding cost of land—whether for public or private owners. There is therefore little that can be done to tip the balance of incentives in favour of rapid development when the option of later release at greater value exists. 32. These divergent incentives and financial pressures often preclude using public land to improve the fundamentals of development economics, leaving schemes on public land in the same position as commercial developments. 33. Releasing public land on a delayed payment basis, as under the “Build now, pay later” scheme announced in the 2011 Budget, may help to speed delivery of development schemes by reducing the upfront costs to developers and sharing some of the risk between public and private sectors. Just as with conventional land sales, there is an urgent need to ensure that such sites deliver sufficient quantities and proportions of truly affordable housing, and that the need to secure capital receipts for public land does not undermine this goal. Where appropriate, public authorities should also retain equity stakes in developments, to preserve a degree of control over future use and give the public a share in future value gains. 34. More effectively, local authorities regularly release land to housing associations at below market rates, in order to subsidise affordable housing delivery. However, it remains to be seen whether this straightforward means of supporting housing finance will survive the current squeeze on council finances and the cuts in affordable housing grants. Where local authorities provide subsidised land for development by housing associations or other providers, this should be predicated on securing positive housing outcomes—particularly provision of affordable homes. 35. An alternative approach is for public authorities to retain ownership of land and develop it in directly or in partnership. This may not constitute the “release of public land”, but it can provide genuine additionality. Direct development on public land ensures that the assets themselves, and the uplift in value that quality development brings, are retained for public benefit. Publicly developed housing can then be used by local authorities to meet their own, locally determined, housing priorities—whether for social, intermediate or private homes.
Investment guarantees 36. Government guarantees are an under-utilised tool. Where markets need to achieve scale before they can operate effectively, guarantees could help to give early investors the confidence to invest.25 The major barrier to the use of guarantees is often held to be Treasury accounting rules requiring 100% cover for any government guaranteed investment. Maintaining sufficient cover to adequately cover reasonable assessment of risk, rather than full theoretical exposure, could enable more use of public guarantees, and provide a powerful new tool for supporting development finance. 37. The promise of large scale institutional investment in private rented housing is one area that guarantees could be used for. Despite the strong capital growth residential property has delivered over the long term, this market has simply not materialised. One argument is that intervention is needed to help the market reach the scale it needs to be self sustaining. Investment guarantees would be the obvious policy instrument to achieve this.
How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening 38. Pension funds and other institutional investors have long been cited as a potential source of investment in rented housing, and the government has recognised the need for greater institutional investment into the private rental market.26 These measures would be welcome, but deeper market reforms will be needed to tip the balance of returns in favour of investment in long term income rather than speculative investment in capital growth. 39. 71% of private rented stock is owned by individuals, and over three quarters of landlords only have one property.27 Their income from rent is taxed as investment rather than trading income, restricting growth.28 Landlords operating to professional standards should be treated as professionals by the tax system and offered the same level of encouragement to grow as other small businesses, while being equally subject to effective regulation. 25 JRF, 2011: http://www.jrf.org.uk/sites/files/jrf/families-aspirations-good-housing.pdf 26 Budget 2011; British Property Federation. 27 Julie Rugg and David Rhodes, The Private Rented Sector: its contribution and potential, University of York, 2008. 28 JRF and Shelter Private Renting: A New Settlement—A Commission on Standards and Supply, 2002. Communities and Local Government Committee: Evidence Ev 87
40. Large scale institutional investment in housing supply would clearly be welcome, if it can provide additional sources of financing for high quality homes, but we should not expect a revolution in housing finance to come from this source. Even in countries with much larger private rented sectors and significant institutional investment in housing, it remains the case that the bulk of landlords are small scale investors, and particularly individuals, much as in the UK. The exception is Switzerland, where institutions are required by law to invest in property—and even there institutions only hold 23% of the privately rented stock.29 Finally, there is no guarantee that large scale landlords will provide better services to tenants than smaller ones. As with any source of housing finance it is also critical that additional funds are channelled to new supply, and do not simply go towards inflating asset prices.
How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply
41. To date the revenue and capital receipts from council housing have not been sufficiently ring-fenced and this is part of the reason why local affordable housing has been significantly underfunded, both in terms of supply and upkeep. The national council housing finance system has prevented all the rents collected by local authorities being reinvested in the maintenance and management of housing stock, undermining the viability of the local affordable housing.30
42. Reform of the Housing Revenue Account (HRA) offers the opportunity to address this longstanding problem. According to PricewaterhouseCoopers the reforms: “will put councils in control of their housing assets—which are forecast to generate more than £300 billion of rental income over the next 30 years”. They add that: “Efficient operation of the HRA could lead to the build up of some £50 billion of new investment resources across the country, over 30 years (£25 billion in today’s money). Councils can now look at their housing as a real asset capable of generating additional investment resources”.31
43. In 2009 the Local Government Association estimated that if the system is reformed, up to 80,000 to 90,000 additional affordable homes could be built by councils over five years, which would also deliver approximately £35 billion additional investment to the English economy. Over a 10 year period, it estimated that 139,000 new homes could be built.32
44. Shelter therefore welcomes the government’s intention to dismantle the current Housing Revenue Account Subsidy System. We also believe strongly that the local ring-fence on councils’ Housing Revenue Accounts should be maintained and strengthened, to allow all revenue and capital receipts to be reinvested in maintaining existing council stock and building significant numbers of affordable homes in the areas where these are most needed. We have argued previously for the removal of “notional debt” from the national housing subsidy system altogether. Failing this, it is essential that councils be enabled to use what surplus they can generate within their HRAs to support new affordable housing provision.
45. Government rules have also prevented 75% of the receipts from the Right to Buy from being reinvested in building replacement stock or maintaining the housing that remains. Between 2004 and October 2009, revenue from Right to Buy receipts in England has totalled £6.2 billion, with £4.7 billion going to the Treasury for general spending.33 This has deprived local authorities of vital funds that could have been used help fund the supply of new affordable housing.
46. Shelter cautiously welcomes the recent suggestions from the Prime Minister that any new funds derived from the Right to Buy sales will be reinvested in properties available for “low rents for families that are currently stuck on the waiting lists”.34 However, we do have concerns regarding the definition of affordable housing that the government is using, as discussed below, as well as the more detailed financial arrangements underpinning the revived Right to Buy. We await further details from DCLG on the exact details of the new arrangements and the impact this will have on local authority and housing association financial models.
Local authority borrowing
47. An obvious barrier to direct public housing development is that it requires short term capital investment, which is currently in short supply. Borrowing to invest in housing supply is a way of meeting people’s housing needs, but it is also a prudent use of money. Affordable homes, unlike practically all other public assets, carry both an asset value and a predictable, long term income stream in the form of rents. Historically rental income on public housing has more than covered the cost of debt service, management and maintenance, which is why the national Housing Revenue Account Subsidy System now returns a surplus to the Treasury of around £2 billion per year.35 29 Kath Scanlon and Ben Kochan (eds), LSE (2011): Towards a sustainable private rented sector: the lessons from other countries. 30 Shelter (October 2009) Shelter’s response to the CLG’s consultation—Reform of council housing finance. 31 PwC and Smith Institute (2011): Making the most of HRA reform. 32 Local Government Association (June 2009) Local housing—local solutions: the case for self-determination. 33 Local Government Association (June 2009) Local housing—local solutions: the case for self-determination, p 15. 34 Rt Hon Dvid Cameron MP, Prime Minister, 5 October 2011, Conservative Party Conference. 35 PwC and Smith Institute (2011): Making the most of HRA reform. Ev 88 Communities and Local Government Committee: Evidence
48. Local authority housing represents a large (and largely unencumbered) asset, giving local authorities the ability to raise finance at very low margins.36 Yet currently, public sector housing debt is included in the definition of public debt,37 and therefore subject to deficit reduction targets. The ability of councils and other public bodies to finance new house building could be improved by adopting the General Government Financial Deficit (GGFD) accounting rules followed by other European Union countries, which would give such borrowing the same accounting treatment as borrowing by housing associations.38
49. We understand that the Chartered Institute of Public Finance and Accounting is confident that, were councils freed to borrow on their housing assets, the provisions for prudential borrowing would continue to ensure that borrowing levels would remain sustainable.
How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term
50. The move to allow landlords to charge up to 80% of market rates as part of the “Affordable Rent” model is a concern for Shelter. In areas with high market rents, particularly London, 80% market rent would represent a significant increase on existing rents in the social sector. Such a significant rise could result in a system where “Affordable Rented” properties are out of the reach of many local residents.
51. Such significant increases in rents will almost certainly push up the housing benefit bill, as more tenants will need more state support in paying their rent. This could result in more and more tenants being caught in a benefit trap, and potentially jeopardise the use of any expected savings on the housing benefit bill to support capital investment in new homes.
52. If the new system is to deliver effective financing for new homes, it will need a suitable working definition of affordable housing to be in place. The existing definition, contained in Planning Policy Statement 3 (PPS3),39 defines affordability as “a cost low enough for [households] to afford, determined with regard to local incomes and local house prices”. The draft NPPF defines affordable housing40 as housing where “eligibility is determined with regard to local incomes and local house prices”. This is a nuanced but very important change. It could result in a bizarre scenario in which new homes are considered affordable if eligibility for them is determined by household’s income, even if the rents they are offered at remain unaffordable to the very same households.
53. In this scenario, the “Affordable Rent” regime may not be capable of funding homes that people can actually access or keep. The fact that the new “Affordable Rent” model will also be applied to existing units which come up for re-let is likely to result in a significant decrease in the availability of social housing at truly affordable rent levels in areas with acute levels of need.
54. Even if these problems can be overcome, there are very real dangers that the new model will not prove sustainable over the medium to long term. Housing associations have stretched their balance sheets significantly to deliver under the model, and are unlikely to be able to stretch them further in future. By taking on more debt some associations are coming close to the limit of their banking covenants, and doubt whether they would be able to participate in any second round of Affordable Rent after 2015, particularly if housing continues to receive low levels of grant funding.41
55. Some associations have put forward alternative models for financing development in a low grant environment. Ultimately, like the Affordable Rent model, these rely on increasing association borrowing on the back of higher rental incomes. With incomes falling, unemployment remaining high, and a growing crisis of affordability across all tenures it is difficult to see any approach based on ever increasing rent levels as anything other than an unsustainable rise in the housing benefit bill.
56. In conclusion, the need for new approaches to increase the supply of affordable housing finance is more urgent than ever. Despite challenging fiscal and market conditions there are alternative approaches to housing finance that merit investigation. Shelter warmly welcomes the committee’s inquiry into this crucial matter, and we would be glad to assist in any way that we can. October 2011
36 APSE (2009) A new generation of council housing: an analysis of need, opportunity, vision and skills. 37 The Public Sector Net Cash Requirement. 38 Shelter (October 2009) Shelter’s response to the CLG’s consultation—Reform of council housing finance. 39 In Annex B. 40 In its glossary. 41 Round Two, Inside Housing 16 August 2011. Communities and Local Government Committee: Evidence Ev 89
Written submission from the Home Builders Federation The Home Builders Federation (HBF) is the principal trade association representing the interests of private home builders in England and Wales. Our membership, which includes companies ranging from major national firms, through regional companies to smaller local firms, is responsible for more than 80% of the new homes built every year.
Summary — Private home builders account for a large majority of new housing supply. The inadequate supply of mortgage finance, especially high LTV loans, is by far the biggest constraint on new home sales and housing supply. Once effective housing demand begins to recover, development finance could hold back the industry’s expansion. — The Affordable Rent model should make every pound of subsidy go further, but cuts in total grant funding will work in the opposite direction. However significant numbers of Affordable Housing units are delivered with nil grant from private housing sites through S106 agreements. In these cases, a sizeable private subsidy is provided out of the development and land value. National and local authority regulatory demands often squeeze the supply of Affordable Housing. — The public sector controls between a quarter and a third of potential residential land. The industry welcomes the coalition government’s programme to dispose of surplus public sector land, and especially the “build now pay later” scheme given current financing constraints. — High land values, created by shortages of permissioned residential land, and the cumulative regulatory cost burden, mean it is very difficult to achieve (a) an adequate development profit margin and (b) a residual land value to persuade land owners to sell and (c) an acceptable institutional yield. The answer to the housing supply crisis is to increase permissioned land supply and to reduce the regulatory burden on all housing, and not to provide favourable treatment—eg subsidised public land or waivers of Affordable Housing requirements—for one type of provider within one tenure (ie institutional investors in the PRS). — We are unable to judge yet whether the Affordable Rent model will be sustainable in the medium to longer term.
Introductory Comments Private home builders have for many years accounted for the vast majority of new home building, whether sales to private owner-occupiers or investors, or Affordable Housing delivery on private housing sites through S106 planning obligations agreements. Since the downturn in 2007, the social housing share of total completions has increased. HCA funding was increased to maintain Affordable Housing output, whereas completions for private buyers have fallen sharply. However once more normal market conditions return we would expect to revert to the pre-recession situation. Because private home builders normally account for the bulk of new home production, any discussion about meeting the country’s housing requirements must focus primarily on removing constraints to private home building. At present, by far the most serious constraint on private housing completions is the shortage of mortgage finance, especially the absence of higher loan-to-value mortgages for buyers with very limited equity (whether first-time buyers or existing home owners whose equity has been eroded by the fall in house prices). Most of the Committee’s questions are about public funding, and are therefore relevant to Affordable Housing delivery, whether by private home builders or directly by registered providers (RPs). An important issue, not covered in the questions, is development finance for the private sector. There are no statistics available, so we can only make general comments. Most of the major home builders have refinanced and are now on a sound financial footing. However, funding is very restricted for many SMEs in the sector who often rely on project-based bank funding. Some SMEs have decided to eliminate debt altogether. The key question for the future is whether development finance availability will expand, and whether homes builders will be prepared to increase gearing, once housing demand begins to pick up. If funding remains restricted, this could restrict the industry’s ability to meet expanding demand.
How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms The Affordable Rent model should make every pound of public funding go further in terms of numbers of homes provided, but cuts in funding will act in the opposite direction. However a large number of Affordable Housing units are delivered annually with nil grant through S106 agreements on private housing sites. Public subsidy is not the only relevant consideration. Because most S106 Affordable Housing delivery is nil grant, there is a considerable private subsidy provided out of the development value or land value. For example, on a site of 100 units, at an average market sale price of £150,000, with the local authority requiring 30% to Ev 90 Communities and Local Government Committee: Evidence
be Affordable Housing, then if the RP pays the developer £80,000 per Affordable unit, there is a £2.1 million private subsidy. (Note these numbers are for illustration only.) This raises a further important issue. The viability of many housing sites is seriously challenged outside the highest priced markets. The cumulative regulatory demands made on development value by central government, local authorities and various public agencies and private utilities, have become a major cost burden. The higher these demands other than Affordable Housing, the less land value subsidy there will be left over for Affordable Housing, and so the more Affordable Housing delivery will be squeezed. In effect, demands such as zero carbon, or onerous education demands in local tariffs or S106 agreements or CILs, or high levels of public open space, will be at the expense of Affordable Housing provision. There is only so much private land value subsidy available to cover regulatory demands.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them No comment.
What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening The 2008 OFT report on homebuilding concluded that the public sector controls between a quarter and a third of potential residential land. Therefore the public sector has a potentially very significant role to play in promoting home building. The industry welcomes the coalition government’s programme to dispose of surplus public sector land. The “build now pay later” scheme will be especially beneficial because the private sector is capital constrained. However the industry’s ability to expand production on public sector sites will be held back by the shortage of mortgage finance—if companies do not have customers able to buy, they cannot build. Also public land, like any land, requires planning permission before home builders can build. Therefore the NPPF will be critical to whether increased disposal of public sector land leads to a significant increase in new home production. As the mortgage market begins to improve, public land should be able to provide an increasingly important contribution to total housing production, whether through outright sale or schemes such as “build now pay later”.
How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening A great deal of work has gone into trying to get long-term institutional finance into the private rented sector with very little success so far. The HCA did a lot of work and most of the larger home builders have had discussions with institutions, advisors, the HCA, etc. New homes are clearly likely to be the primary source of housing for institutional investment. From the private home builders’ perspective, the reason for this failure is quite clear: on most sites it is not possible to (a) generate an acceptable development margin, and (b) generate a residual land value sufficient to persuade a land owner to sell, and (c) produce an institutional yield. If a. or b. is not met, no production can take place. If c. is not met, the institution will not invest. There are two fundamental problems. First there is the high price of land, caused primarily because the planning system controls supply so tightly. The price of residential land is largely set by home prices in the owner-occupier market. Second, the regulatory burden on new homes (Affordable Housing, other S106 demands, CIL, zero carbon, Flood and Water Management Act provisions, public open space demands, etc.) increases the cost of development very significantly. High land prices and high regulatory costs mean institutional yields cannot be achieved from most new housing. However we should note that we do not believe these two fundamental barriers should be removed solely for institutional investors in the private rented sector, for example by waiving Affordable Housing requirements or by offering discounted public sector land. High land prices due to permissioned land shortages and high regulatory costs are barriers to all home building. It would very undesirable—and indeed quite wrong—to remove them for one type of provider in one tenure. The solutions are (a) to allow a significant and sustained increase in the supply of permissioned land for housing, and (b) reduce the cumulative regulatory burden on home building, as promised in last year’s Spending Review.
How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply No comment. Communities and Local Government Committee: Evidence Ev 91
How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply No comment.
How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term This question is probably best answered by RPs. A number of larger private home builders bid successfully for grant funding under the most recent Affordable Housing programme, so clearly they believed the Affordable Rent model could be made to work and deliver housing supply. An important test will be the nil grant offers RPs make to private developers for S106 Affordable Housing units compared with the size of offers under the old programme. HBF is not yet able to answer this question. October 2011
Written submission from the Local Government Association The Local Government Association 1. The Local Government Association (LGA) is here to support, promote and improve local government. We will fight local government’s corner and support councils through challenging times by making the case for greater devolution, helping councils tackle their challenges and assisting them to deliver better value for money services. www.local.gov.uk. 2. This response has been agreed by the LGA’s Environment and Housing Programme Board. The Environment and Housing Programme Board has responsibility for LGA activity in the area of the sustainability of the environment, including issues of planning, waste and housing.
Summary 3. Housing circumstances are very different in different areas of the country and, consequently, the solutions have to be finely tuned at the local level. It is clear that no one-size fits all national policy is going to solve the issue of housing supply. To be effective, the solutions to the crisis in housing supply need to be based on local understanding of housing markets, local economic drivers and pressures, access to and need for jobs, infrastructure and services to support new housing development. 4. Councils are keen to contribute to meeting housing supply both through council building schemes and via their leading role in leading and facilitating partnerships, de-risking sites and providing land or support in kind—so often crucial in making development viable. Councils are also working, with the LGA, investors and financial institutions to investigate innovative models and new sources of long term finance. 5. Councils could however do more if they were provided with: — Genuine self financing. We welcome recent moves by the government towards a devolved finance system for council housing. However, the system will not be genuinely self financing unless councils can keep proceeds from the sale of council housing and centrally imposed caps on housing finance borrowing are removed. — We need a reversal on the Treasury’s position on creaming off of forecast growth of Business Rate yield for 2013–14 and 2014–15. — Support to meet infrastructure needs which often act as a block on new housing developments. — A level playing field with Housing Associations. Currently local government borrowing is counted against the national debt; this is disadvantageous to councils when applying for funding to increase housing locally.
How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms 6. In the context of reduced resources how available capital and revenue public subsidy is deployed and accessed is critical in meeting housing needs at a local level. Councils have demonstrated through that they are keen and capable of contributing directly to increasing supply, through the huge take up from the local authority new build programme, and can often do so more efficiently than Housing Associations. 7. Councils are constrained however by the current financial rules which mean that local authority borrowing is considered as government debt and therefore often scores lower on value for money grounds. This is despite that fact that the level of central government grant received by local authorities for each home built is at a lower level in general than that received by housing associations when compared on a like for like grant unit cost basis. For example: — Across England this difference is around £10,000 per home between the National Affordable Housing Programme and that of the Local Authority New Build. Ev 92 Communities and Local Government Committee: Evidence
— Put another way £1m of HCA grant would buy an extra two, typically larger homes from a council than if the funding was directed at housing associations. — In some regions the difference is stark; for example in London councils’ unit cost is as much as £35,000 less than that of housing associations. 8. Establishing a level playing field between local authorities and housing associations, allowing them to access mainstream funding for house building on the same basis as housing associations and private developers, rather than making them bid for separate pots of funding is key to ensuring limited funding achieves maximum results for local areas. Portsmouth City Council is positive about the potential to develop affordable housing. Portsmouth applied under the Local Authority New Build Programme to build new social housing using HCA funding combined with other streams such as prudential borrowing, partnership funding and land sold through a newly created special purpose company, Portsmouth Social Housing (PSH). Apart from this development the council has bid to the HCA with a private finance initiative (PFI) for the development of an additional 700 homes—200 of which would be for sale on a commercial basis. The council recognises the need for private homes for sale alongside social and affordable housing to meet demand and ensure balanced communities. 9. We should also not forget the subsidy that is already locked in the system. It is crucial that councils and other providers are supported to make best use of existing assets which in the absence of other streams of public funding will become ever more important. 10. Councils have been funding capital projects by capital receipts from the sale of spare land and assets for many years. The amount of receipts generated by public sector bodies has fallen significantly in recent years due to a reduction in values caused by the recession and reluctance to part with assets at historically low prices during an economic downturn (down from £4 billion in 2007–08 to £1.46 billion in 2010–11). However, collaboration between public sector partners is likely to increase the supply of excess assets in future which could release land and investment for housing projects (£1.7 billion receipts are forecast for 2011–12). LOCAL AUTHORITY CAPITAL RECEIPTS 2010Ð11 2011Ð12 Year 2006Ð07 2007Ð08 2008Ð09 2009Ð10 (provisional) (forecast) Receipts 3,671 3,992 1,353 1,427 1,463 1,734 (£m) http://www.communities.gov.uk/documents/statistics/xls/2013297.xls 11. The public estate is currently fragmented in terms of ownership and location. Capital investment is similarly fragmented across different public sector agencies. This needs to change so that we can join up assets and investment around places to save money and deliver better value to the taxpayer. Councils are best placed to lead this process, which could also release additional land for housing and investment in infrastructure. 12. Central government needs to take every opportunity to devolve funding and control to local level and remove constraints on councils engaging in financial and commercial activity to allow them to maximise the effective use of assets and attract investment.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them 13. State lending and investment needs to be targeted to address the infrastructure needs of the nation. Councils already approve over 80% of the planning applications for new housing that come their way. However, there are hundreds of thousands of planning permissions that have yet to be developed across the country (85,000 in the East Midlands alone). It is therefore crucial that the government focuses on lending and investment measures to help turn existing permissions into new homes with supporting infrastructure as well as changes to the planning system that may allow more permissions to be granted in the future. Together with Cambridgeshire County Council, the district councils of Cambridgeshire have set up a joint development control committee for the Cambridge fringes to make decisions on planning applications for major developments which straddle their boundaries. This committee has already given approval for over 5,500 new homes. Cambridge City Council and South Cambridgeshire District Council have plans for thousands of new homes on the fringes of Cambridge and have set clear policies to make this happen. The Council’s strong commitment to affordable housing has been underpinned by working with the Homes & Communities Agency and Cambridgeshire Partnerships Ltd on the “Cambridge Challenge” which has provided access to substantial funding, enabling developers to move forward despite the recession. Support from Cambridgeshire Horizons, the local delivery vehicle, has also been vital. 14. Investing in our nation’s infrastructure is central to increasing the supply of housing by making development viable for both developers and communities. Public opposition to development is the top barrier Communities and Local Government Committee: Evidence Ev 93
identified by councillors; LGA research has demonstrated that the provision of infrastructure and services to support development has an overwhelming impact on the desirability of development to residents. 15. The challenge quite clearly is large; the scale of investment required to meet the country’s infrastructure needs has been credibly estimated to be at least £500 billion by 2020. The question is therefore how we maximise the amount of money available through lending and investment as well as grant funding. The central issue here is that there is not a single public sector balance sheet, but a collection of balance sheets of varying strength. Policy should be framed in a way that puts that variety to work in the most effective way. Crucially this means mobilising investment from across available resources rather than tailoring investment to the capacity of the most overextended balance sheet. 16. The LGA has put forward proposals to government in our document Funding and Planning for Infrastructure which would provide support for infrastructure needed to unlock development sites and support new housing supply. In brief we propose that: (A) We need to rethink the way investment is funded and planned through bringing together different funding streams into one place-based pot. (B) This model needs to be complemented by planning and management of development based on local economies. This will require: — A joined up approach to investment in nationally significant infrastructure networks that is based on the needs of local economies, understands their impacts at local level, and provides certainty for decision making at local level. — Aligning planning and investment decisions at the right economic level by encouraging councils to plan and coordinate infrastructure delivery at the level which reflects the functional local economy. — Removing unnecessary bureaucracy and prescription in the planning system will allow local people and their directly elected representatives to plan effectively for the development of their area. The National Planning Policy Framework (NPPF) moves away from complex and sometimes contradictory national policy and swathes of guidance to focus on key principles. This approach will support councils to develop strong local plans which reflect local needs and priorities.
What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening 17. Councils understand the importance of increasing housing delivery to meet the needs of hard pressed local communities and of working across boundaries to plan for housing. Councillors overwhelmingly take a proactive and positive attitude towards development locally; a LGA survey shows that 80% of the councillors surveyed agreed that their local authority area needs new housing. 18. The LGA/CLG Housing Commission Housing Shortages: what Councils can do was “impressed by entrepreneurial skills we have seen displayed by today’s councils”. Councils are increasingly leading the way to support appropriate housing growth by “de-risking” sites and providing support. In some cases this takes place in the form of direct subsidy from council sources but often councils provide support “in kind”. 19. For example, the Housing Commission found examples of Councils supporting new supply in the following ways: — Providing Council owned land (which can be developed and/or used as equity). Powers under the 1972 Local Government Act Section 123 provide councils with powers to dispose of land in any manner they wished were helpfully extended in 2003 which provided a general consent thereby removing the requirement for Local Authorities to seek specific approval from the Secretary of State for a wide range of disposals at less than best consideration. We agree with the government that local authorities are best placed to determine what best consideration means and would like to see all remaining requirements to seek ministerial consent removed. — Local arrangements bring together the different players, often comprising major developers and house builders, housing associations and a variety of public, private and voluntary and community sector organisations. Councils often play an important role leading and facilitating these partnerships. Often this involves dedicated work with local communities to ensure development is viable is both economic and community terms. — Councils can play a central role in site assembly and acquisition, sometimes including use of Compulsory Purchase Orders and General Vesting Designations. In some cases Councils provide their own land (which can be developed and/or used as equity). — Councils also take a supporting role; deploying expertise to provide legal and technical support along with local knowledge. This can for example include the production of Master plans for major sites. — Increasingly councils are looking to models such as Local Asset Backed Vehicles to use their assets— most commonly land—to attract private investment. Ev 94 Communities and Local Government Committee: Evidence
20. However, the absence of a level playing field as referred to in our answer to question 1 can sometimes discourage collaboration between housing associations and councils. Basingstoke and Deane Borough Council worked in partnership with Sentinel Housing and the community to regenerate a housing area at Oakridge. The success of the scheme was down to a number of key points: — The council being willing to put in the land for free into the scheme. — Sentinel Housing and the council responding to the wishes of existing residents by changing the development proposals. — Ensuring high quality design was paramount. — Involving tenants in the design and operation of the community centre and making sure it was the first thing to be built. — Keeping residents informed. The scheme provided a significant increase in the number of homes provided; a mix of sizes and people queuing up for a chance to be allocated a home there. Hackney’s flagship scheme—Dalston Square development—is a partnership between the London Development Agency, Transport for London, Barratt Homes and the Council. The scheme will deliver 600 new homes, a new train station, bus interchange, a library, retail and commercial units set within a large landscaped public square. The Council’s role in the partnership was to provide land at nil value to facilitate the development and to assist with de-risking the financial viability of the project. The Council also performed the role of ring master co-ordinating the partners and leading stakeholder engagement to promote the benefits of the scheme and manage residents concerns. Blaby District Council has joined forces with Lloyds TSB to help first-time buyers onto the housing ladder. The Local Lend a Hand scheme, will enable first-time buyers to purchase a home with a deposit of just 5%. As part of the scheme the Council will help people who can afford mortgage repayments, but not a large deposit, to secure a house by guaranteeing up to 20% of the total value of the mortgage taken out with Lloyds TSB. Leicestershire County Council has committed all of its New Homes Bonus received in 2011–12 to support the building of rural affordable homes. In 2011–12 the Council is using its funding to boost the number of affordable homes available to rent or for shared ownership schemes in villages, so families and young people are not forced to move out by high prices. Local housing associations have put together schemes but have been unable to proceed as there are “funding gaps” in their proposals. The Council’s New Homes Bonus funds are being used to fill these gaps. Working in partnership with the Housing Associations developing the schemes the county council is proposing, in 2011–12, to support: 12 affordable homes in Sapcote, with £332,000 earmarked from the county council and £100,000 from Blaby District Council, affordable homes in Somerby, with £188,000 from the county council and £87,000 from Melton Borough Council.
How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply 21. Several banks and other financial institutions have begun to explore alternate and innovative forms of long term finance with individual councils, groups of councils and the LGA. 22. The LGA is undertaking detailed work with councils, financial institutions and others to explore the viability of a number of innovative models to bring new long term finance into the sector. This includes: — Development of a financing institution owned and run by the local government sector which would issue bonds on behalf of all participating councils. We think this has the potential to deploy the sector’s considerable financial strength to good effect and will manage risk in a collective manner. — The option for councils to come together to cooperate over bond issues. 23. The LGA is commissioning specialist advice to refine all potential options. We think there is potential for the development of a new model that would bring long term private finance from large financial institutions forward and would be pleased to provide the Committee with a progress report in due course. 24. It is also crucial that councils are able to capture the economic benefits of development locally; this is central in supporting long-term investment in local areas and meeting housing needs. The Local Government Resource Review’s proposals for re-localisation of business rates could be an important step in this direction, provided that councils are able to retain all of the proceeds of growth. 25. When the Local Government Resource Review was launched, it was intended to offer better incentives for local authorities to promote economic growth in their areas by enabling them to benefit financially from Communities and Local Government Committee: Evidence Ev 95
that growth. However, what has since emerged in the detailed technical consultation on the proposals is a presumption that, in 2013–14 and 2014–15, the Treasury will cream off a predetermined level of forecast growth. Local authorities could only benefit financially from growth over and beyond the government’s forecast. 26. The government’s proposals to take away the first slice of growth are therefore doubly disadvantageous to local government. Firstly, they allow the Treasury, rather than councils, the benefit of a major slice of business rate revenue. Secondly, they give the government the benefit of extra yield attributable to higher than forecast inflation, without any recompense for local authorities which now face funding cuts that are, in consequence, larger in real terms that the 28% figure set out in the Spending Review.
How the reform of the council Housing Revenue Account (HRA) system might enable more funding to be made available for housing supply 27. Government’s aim for the new local system of housing finance is to give councils freedom to be innovative and ambitious in how they manage, maintain and improve the existing stock and to invest in new homes. Self financing should mean that councils can keep all of the rents from social housing to invest directly back into local housing stock. 28. However, powers in the localism bill to allow the Secretary of State to impose limits on councils’ housing finance borrowing threaten investment in social housing and prevent true self financing. The sector already has a well-established and effective approach to managing borrowing—the Prudential Code. Local Government has a strong track record of prudent financial management, a strongly positive net worth, and a manageable, low level of debt. As such, this provision is unnecessary, and fundamentally in opposition to the principles of self-financing. Councils with less than 10% of their housing stock below the decent homes standard will be unable to finance necessary improvements themselves, as the Government expects, if they can only borrow enough to finance the HRA buyout. 29. If Councils were to have the cap removed and follow the principles of the Prudential Code, this would enable many councils to borrow to build additional housing, which in turn would help to kick start the economy. 30. Councils should be given financial freedoms that allow them to operate and plan their operations on an equal basis to Housing Associations. Again, this would help kick start the economy. 31. The government has recently announced proposals to increase discount for tenants to buy their homes under the Right to Buy (RTB) scheme. Unless councils are able to retain the receipts from RTB, the new system of self financing will be undermined as councils will not have sufficient resources to invest in replacement or new housing homes. 32. The most cost effective way of ensuring that funding raised from RTB sales supports replacement homes where they are needed is by allowing councils to keep the full receipt of the sale to reinvest in housing locally. This will allow councils to pay off the debt associated with the property and provide additional funding for housing investment plans. This will: — Allow councils to plan long term for improvements to stock and increases in housing supply. — Provide the flexibility for councils to respond to the short term needs of their communities; for example through new build schemes making use of pockets of public land and redevelopment sites that would not be unlocked through any other means. 33. The alternative; national pooling and redistribution of receipts will involve wasteful collection and bidding rounds—delaying the use of the funding and reducing the amount available for investment. It runs counter to the principles of localism and decentralisation which underpin the government’s reform of the Housing Revenue Account (HRA) and threatens to de-rail the strides taken towards self financing by the government. 34. In addition, allowing councils to determine the level of the discount in their areas will maximise the amount of money raised by the scheme by ensuring that discounts are based on an understanding of local housing markets and what is affordable for tenants wishing to buy their homes. Determining discounts at national level will not enable to scheme to be tailored to local conditions.
How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term 35. We are pleased that the government has included the possibility for local authorities to introduce affordable rents should they wish to. Council landlords have able to bid for the affordable homes programme, something the LGA has been campaigning for. As detailed in our previous comments the public borrowing rules currently place councils at a disadvantage compared with a housing association as a private sector entity whose borrowing doesn’t count to the public sector. 36. It is too early in the life of the scheme to draw fixed conclusions; however we are keen to investigate further with Councils and Housing Associations the investment and sustainability of the scheme and the Ev 96 Communities and Local Government Committee: Evidence
variable impact across localities. For example; in some areas the margin between 80% rent and social housing rent is slim which may mean the potential for additional income is limited. October 2011
Supplementary written submission from the Local Government Association This paper has been prepared at the request of the CLG Select Committee, following the LGA’s oral evidence session delivered by Cllr Clyde Loakes (21 November 2011) in his capacity as Vice-Chair of the LGA’s Environment and Housing Board.
1. Best Practice in Development—Local Authority Case Studies Councils understand the importance of increasing housing delivery to meet the needs of hard pressed local communities and of working across boundaries to plan for housing. Councillors overwhelmingly take a proactive and positive attitude towards development locally—an LGA survey showed that 80% of the councillors surveyed agreed that their local authority area needs new housing. Councils have to balance the economic, social, and environmental priorities of their area, ensuring that all opportunities for sustainable development which fulfil such criteria can be taken forward. A number of prominent case studies were included within the LGA’s written evidence to the Select Committee. In addition, further examples of innovative and sustainable development can be found below:
Wiltshire The Council is developing the concept of “total community place”, with strong local leadership through an inclusive Cabinet and inclusive Area Boards. The aim is to have a single community plan for Wiltshire built on the bottom-up picture—including data on levels of housing demand and Parish Plans—for each community area. The main challenge is to remove the barriers to local-scale rural housing developments. Local budgets will allow Area Boards to spend on infrastructure and environmental improvements and to meet local priorities. Local trusts already exist and there may be scope for them to take on affordable housing as well as providing other services to the local community. Local communities will be given more influence over the location, management and allocations of housing schemes. However, it will be necessary to consider whether sustainability also needs to be redefined: it is not simply about moving people into urban areas; it is about protecting the viability and sustainability of rural communities and developing them as living, vibrant places.
Leeds The Council in Leeds is promoting an urban eco settlement in Aire Valley to deliver some 12,000 new homes, provide low carbon retrofit measures to 8,000 existing homes and deliver 40,000 new jobs. Leading this programme, senior councillors and directors have already established strong governance arrangements with the key stakeholders in the area through a joint public/private sector board. By promoting strong and open partnerships the council retains the strategic lead on developing this sustainable new district for the city. It also ensures that through these partnerships, projects will be deliverable and commercially attractive. The local democratic leadership—through local councillors and MPs—is also important in engaging local communities to shape the changes. Each area has a masterplan agreed by the public sector, the private sector and the local community.
Greenwich Greenwich Council has used strong political leadership and corporate commitment to deliver new affordable housing, as part of its wider regeneration and anti-poverty strategy, as well as pursuing the Council’s own new build schemes. It has established close relationships with a number of preferred development partners, with one of the largest housing investment programmes in the UK including over £250 million grant allocated to housing associations for 2008–11. The Council uses planning powers and public sector investment in infrastructure to secure high design quality, well integrated, tenure-blind and mixed income communities. Its Unitary Development Plan has included intermediate affordable housing (secured through Section 106 agreements) and lettings plans are ensuring a healthy mix of household types and child ages to build balanced and cohesive communities. At Greenwich Millennium Village, for example, the primary school and health centre were opened at an early stage in the development, providing social infrastructure from the start and supporting links between new residents and the existing wider neighbourhood.
Sheffield Sheffield has in place close partnership working on area regeneration between Housing and Planning teams. As part of the Housing Market Renewal programme, a Planning team has worked hand in hand with locally based regeneration teams to ensure a co-ordinated council approach to designing and delivery of physical change in neighbourhoods. By working together through all stages of policy making, planning and delivering housing and place projects, time and money has been saved on agreeing design and specifications and securing Communities and Local Government Committee: Evidence Ev 97
scheme approvals. Most importantly the council has had a single voice in its work with new housing developers, local businesses, service providers and other social landlords, helping to set out the city’s requirements clearly and therefore making it an easier place for them to invest. The “Developer Manual” which brings together housing and planning guidance for new homes has been shortlisted for an RTPI award and recognized by the Planning Advisory Service as best practice. And the council’s Designer Panel has provided focused expertise on property and place design.
South Holland South Holland District Council formed a housing company—wholly owned without development partners— to build new homes (to supplement the 22 homes it had built in recent years). The Leader of the Council, Cllr Gary Porter, chairs the Board, which consists of Councillors, Officers and a nominee from the South Holland Tenants’ Group. The Council had acquired the necessary permission to manage the Company’s houses, with the latter retaining ownership. By October 2008, the company had become the South Holland Local Housing Community Interest Company, which includes an asset lock and trades as South Holland Homes. In March 2009, the Homes and Communities Agency awarded the company Social Housing Grant. The Council worked with the LGA and other councils to ensure that the HCA had a practical funding agreement which allowed rapid construction and the first social rented homes were completed by September 2010.
Croydon Croydon Urban Regeneration Vehicle (CCURV) is an innovative partnership between Croydon Council and John Laing Plc established in November 2008 to deliver regeneration within the Borough. CCURV brings together core skills from each partner—Croydon supplies the land (initially four town centre sites) and local knowledge, while John Laing commits to matching Council investment with equity; it brings its development, management skills and expertise, both in-house and externally sourced. The result is a partnership which should ensure that over the next 25 years major developments meet Council requirements to maximise asset value, and are consistent with its vision for the regeneration of the Borough. Projects include a hub which brings together many of Croydon’s public sector services and provides mixed housing/commercial schemes. CCURV’s innovative structure as the first Local Asset Backed Vehicle of its kind provides shared control between the public and private sectors; the nature of this long term partnership means that barriers created by the recession can be more easily overcome. Without CCURV, planning consents for key regenerative schemes—including the new public services hub and new community facilities in Waddon as well as the masterplan for College Green—could not have progressed.
Birmingham The Birmingham Municipal Housing Trust (BMHT) model for the delivery of mixed tenure homes aims to make the provision of market homes attractive to the contractor and to achieve an appropriate balance of risk and reward between the council and the contractor. The key elements of the model are: — no land purchase up front; — planning already secured by BMHT; — design risk and costs already met by BMHT; and — use of BMHT house types by developer. The model was market tested with developers, whose response was extremely positive, and is now being delivered successfully on the ground. Under the model a Design and Build contract for constructing the affordable housing is linked to an associated Development Agreement for the market homes. The Council’s land is licensed to the developer who constructs and markets the remaining market homes within three years. There is only one land transaction at the end of the process, thus avoiding double Stamp Duty/Land Tax liability. The Council defers its land receipt until the point of sale with an agreed minimum plot value and overage conditions. Any unsold plot or house returns to the ownership of the Council. Developers are able to customise the inside of their market homes as they choose. This typically includes furnishings, appliances and en-suites. In this model it is the space standards that represent the main difference, with up to 30% larger homes than some standard market house types.
Manchester Manchester City Council is making the best use of its assets by building homes for older people within existing local communities on spare land to free up under-occupied high demand family accommodation. Working closely with tenants who have two or more spare bedrooms in their current home, the Council is building 32 council bungalows in the north of the city. A design competition was held to identify a suitable architect and developer partnership. Manchester is proud to be building Code Level 4 for Sustainable Homes while incorporating innovation in design for older people, including assistive technology and the City’s stringent Design for Access 2 and Lifetime Homes standards, supporting continued independent living for an ageing population. The use of marginal infill sites that are not currently attractive to the private sector will see redundant parcels of land, often the subject of anti-social behaviour, brought into use. Use of the City’s streamlined Contractor Frameworks in the procurement process will deliver not only efficient build costs but Ev 98 Communities and Local Government Committee: Evidence
employment and training initiatives for the local community, connecting people to work opportunities—a key aim of the Community Strategy.
Liverpool Liverpool city council is using the LIFE model which identifies four roles for Housing Associations: — Lead in an area. — Influence what happens in the area or part of it. — Follow—collaborate in delivering the direction set by others. — Exit an area. LIFE’s purpose is to facilitate the delivery of Neighbourhood Renewal by generating bespoke solutions to meet the different challenges posed by individual neighbourhoods, particularly in restructuring Liverpool’s failing Inner Core housing markets. It is a collaborative, rather than a competitive approach. Working closely with the council, housing associations contribute to the overall regeneration and management strategies and agree targets. They partner with Lead Developers set up in each Housing Renewal Area. The model has achieved rationalisation of housing association stock within the inner core housing markets that has allowed the council and lead developer partners to work more effectively to bring forward new mixed tenure housing/ neighbourhoods.
Redditch Redditch Co-operative Homes is a partnership between Redditch Borough Council, five neighbourhood Co- operatives and Accord Housing Association. Through Redditch Co-operative Homes, five neighbourhood housing cooperatives have been developed in the borough with a total of 285 properties in five Co-Ops, who buy services from Redditch Cooperative Homes. The neighbourhood co-operatives have been pioneering Green solutions to housing by working with other co-operatives to find innovative housing solutions. Cllr Bill Hartnett from Redditch Borough Council said: “It’s been a story of great success. Initially councillors were sceptical about cooperative housing, myself included, and we had to be convinced that it was going to work. But now all the political parties in Redditch support it, and I am one of its greatest advocates. We are proud that it has delivered so many of the things that people in Redditch wanted.”
2. Reform of the Council Housing Finance System The Committee also asked how councils would deal with mounting debt. The LGA strongly supports the government’s moves towards a devolved finance system for council housing. The opportunity that self-financing brings for councils to run their own housing stock independently is good news for tenants and local taxpayers. Under the new system however, housing authorities will be required to manage a total of £29.5 billion debt within long term business plans spanning 30 years. To manage these businesses effectively, councils will need the freedom and flexibility over investment decisions and control over their housing assets. However, there are three key areas which will restrict councils’ ability to improve their housing stock and invest in new supply and which run contrary to the principles of self-financing. The first of these issues is the cap imposed on the amount each council can borrow for their housing business. There is no clear rationale for capping councils’ borrowing for housing purposes when no such restriction applies to borrowing for other purposes. Unlike central government in the past, Councils have a strong record of sound financial management. They adhere to CIPFA’s prudential code which has proved to be an effective approach to managing borrowing. The cap will effectively switch off a significant stream of funding that could be available to build the homes that the government has agreed we need. Secondly, the principles of self-financing would logically mean that when a council house is sold, the money from that sale should be reinvested locally to meet local housing needs. However, currently councils must hand over 75% of the income from Right to Buy to the Treasury. Government’s proposals to reinvigorate the Right to Buy scheme make it more important than ever for the money to be retained locally. If they are not, councils will be presiding over a fast dwindling level of council housing and will not have sufficient resources to invest in replacement homes. The forthcoming consultation provides an opportunity for government to ensure that proceeds from the sale of council homes are used most effectively to support new housing. Allowing councils to retain the full receipts from sales would mean that the money could go directly into development projects and new home construction. In addition, the Localism Act gives the Secretary of State the power to reopen the settlement and buy- out figure at a later date. This causes uncertainty about levels of debt and seriously constrains long term business planning. Communities and Local Government Committee: Evidence Ev 99
3. Evidence Substantiating the Fact that it is Cheaper for Local Authorities to Build New Build Properties, when Compared to Housing Associations Evidence collected by the LGA’s Housing Commission,42 chaired by Lord Best, demonstrates that it is £10k cheaper for local authorities to build new build properties, compared to the costs for Housing Associations. The average cost per property (in England) if built by a Housing Association is £73,000, while for a local authority it is £63,887.
4. Innovative Best Practice See case studies listed under item one. As well as promoting councils at a national level, the LGA is also offering a comprehensive package of support for councils and councillors across the country to improve their performance in housing. This includes: LGA Support Briefings: We are producing a series of briefings on the questions that councils need to be asking to respond to the major changes that are taking place in the housing sector. The briefings will explore the practical implications of the reforms, and provide advice as to how to capitalise on the opportunities and mitigate the risks. They are available on the LGA’s website www.local.gov.uk Master Classes: Throughout March 2012, we will be hosting a series of interactive housing and planning development classes to equip councils with the knowledge and skills needed to respond to the changes, and provide them with practical tools and techniques to support them in their engagement with local people and external partners. For more information on these events, please visit www.local.gov.uk/events Sector Led Support Peer Challenge: Peer Challenge is a flexible support service, co-ordinated by the LGA, whereby an external team of officers and members act as “critical friends”, bringing valuable expertise and learning from elsewhere to review and challenge a particular aspect of the local authority and enable them to continue to improve their performance, without adding to your budget pressures. Since 2007, almost 70% of councils have benefited from Peer Challenge. We offer a free corporate Peer Challenge for every local authority, a free child safeguarding peer review and a fully subsidised planning Peer Challenge. We also offer a housing Peer Challenges (including strategic housing). Peer Support: Peer Support is a free, five-day member led support programme to assist any council undergoing a change of control. The LGA is also expanding its network of peers from across the country to include business, the voluntary sector and other parts of the public sector. Online Tools Knowledge Hub: Knowledge Hub is a new online platform that helps councils to build professional networks and connections with peers and experts in their fields, thus helping you to drive self- regulation and improvement. It creates a single place to share ideas, knowledge and information across the sector. Knowledge Hub is also linked to other media platforms, and allows councils to manage their flow of information, meaning that they don’t miss out on valuable learning and experience. For more information on Knowledge Hub, please visit www.local.gov.uk/knowledgehub LG Inform: LG Inform prototype enables councils to look for and understand their own local authority performance, and compare it to other similar or contrasting local authorities. It helps councils to understand service productivity, identify potential good practice and access data on key areas of interest. They will also be able to create and print individually tailored reports based on data that is of interest to them. For more information on LG Inform, please visit www.local.gov.uk/ about-lginform
5. The LGA’s Proposal for a Single Capital Pot to Help Provide Support for Infrastructure and New Housing The LGA’s single pot proposal is detailed within the report Funding and Planning for Infrastructure.43 The coalition Government committed itself soon after its election to a significant devolution of powers and funding to local authorities. It has already acted to remove some of the barriers to genuinely local decision- making, including the derisking of some grants and the abolition of Comprehensive Area Assessments. The LGA’s work on place based budgets has set out the case for decentralising funding in a dramatic way, using locally determined governance arrangements to make public services more local both in the way funding is allocated, and decisions about services are made and accounted for. For infrastructure investment, this points to a place based approach giving councils flexibility about how and when they use the capital funding allocated to them through the creation of a real single capital pot with the 42 Available at http://www.lga.gov.uk/lga/core/page.do?pageId=15281845, see page 46 43 Available at http://www.lga.gov.uk/lga/aio/13757366 Ev 100 Communities and Local Government Committee: Evidence
ability to conduct investment appraisal, re-profile, and account for spending all fully localised. Bringing together different funding streams into one pot, under the control of local councils would result in: — more efficient targeting of capital funding where it is most needed; — efficiency savings in administering investment, streamlining or removing resource intensive bidding and reporting processes; — a common appraisal methodology to assist in prioritisation of funding to address local priorities and that adequately reflects wider social and environmental benefits; and — more confidence and certainty over long term funding essential to attracting private sector investment. The Regional Growth Fund represents a step in this direction. The “single pot” nature of the fund is a welcome development, as is the government’s aim of placing the funding in the hands of the new Local Enterprise partnerships to manage. The fund is, of course, small—the original £1.4 billion was supplemented by a further £1 billion in the Autumn Statement, but it is expected to remain significantly over subscribed. It also will be important to ensure that the fund’s reliance on bidding does not become a new mechanism for control and produce new barriers to combining money from different sources. The LGA would encourage the Committee to indicate support for a single capital pot in its final report on financing the new housing supply, to in turn encourage DCLG to engage with the local government sector further on the subject. December 2011
Further supplementary written evidence from the Local Government Association Summary 1. On 12 March 2012, the Government announced the details of its policy to reinvigorate the Right to Buy scheme and provide one for one replacement homes. This note sets out the initial LGA response and suggestions for reviewing the policy in future.
LGA Position 2. The LGA had argued for councils to have discretion over the discount rate to ensure it could take account of local housing market conditions and ensure the scheme could deliver sufficient funding for replacement homes. At the heart of our thinking is a strong message that local is best; that councils are best placed to make decisions about how they spend money they raise locally. Self-financing will, for the first time, give councils the freedom they need to be innovative and ambitious in how they manage, maintain and improve the existing stock, and to invest in new homes. 3. These principles should apply to the selling of council housing under Right to Buy. Local authorities, as bodies accountable to tenants and local people are much better placed than central government to understand the needs of their tenants, those waiting for a council home and their local housing market. As such the Right to Buy policy should: (a) ensure councils are able to set the discount at an appropriate level dependant on local market conditions, build costs and demand for Right to Buy properties; and (b) keep 100% of receipts from Right to Buy sales locally to be retained and reinvested in housing locally. By doing this, councils would also be able to develop local partnership arrangements with Housing Associations to make the most of local assets, expertise and resources. 4. However, the LGA is concerned that the way in which the policy is to be will have a serious impact on council housing businesses and the reduction in council housing stock which could result in some areas. 5. The single centralised right-to-buy cap of £75,000 fails to take into account local housing demand and the cost of building new homes. This means that in some areas receipts will be insufficient to build replacement homes and consequently some areas in need of more affordable homes may actually be left with fewer. It is clear that this will not result in one for one replacement in all areas. Through consultation with councils it is clear to the LGA that different models would produce optimal levels of demand for right to buy and receipts for re-supply in different areas. This reinforces the argument that councils are best placed to set the discount locally. 6. In addition, the flat national discount rate delivers poor value for public money at a time when we should be squeezing maximum value from every pound because in some places discounts will be higher than needed to generate additional sales. 7. The LGA had also argued that councils should be allowed to retain the full receipt of Right to Buy sales for reinvestment in housing locally. The Government has confirmed that councils will be able to retain receipts from sales, but only on the condition that receipts will be used to fund no more than 30% of the costs of building a new home. In practice that will make it difficult for many councils to retain receipts to reinvest locally because of constraints on alternative sources of funding, like land or borrowing. Communities and Local Government Committee: Evidence Ev 101
8. Even under the local retention model a certain proportion of the receipts will go to government. The self- financing settlement contains an assumption about how much the government expected to receive from sales in the current spending review period under the old system (under which it received 75% of receipts). This assumed income will be maintained under the new system which means councils will only be able to keep receipts over and above this commitment. The increased discounts means a higher number of discounts are required before this threshold is reached, so it will be some time before councils have access to receipts with which to fund replacement homes. 9. The Government was being urged to allow local places to decide Right to Buy discounts themselves, which hasn’t transpired. This approach would have tackled the concerns that some areas now may end up with fewer affordable homes than before.
Proposed Actions 10. In light of the Government’s announcement on Right to Buy, the LGA proposes that government commit to reviewing the discount in April 2013. Due to the varying impact this policy will have in councils across the country, this would provide an opportunity to review how the Right to Buy policy is meeting the Government’s objectives and if a more cost effective and locally relevant discount may be more appropriate. 11. The LGA would also like to see that the criteria “agreement” required for councils to retain receipts is light-touch, does not require burdensome monitoring or reporting and allows councils reasonable timescales to reinvest receipts. This will help to ensure that local retention of receipts is a localist policy and not an additional burden on councils in disguise. 12. Finally, the LGA will argue that newly built properties should be automatically exempt from pooling arrangements rather than requiring councils to apply for exemption. March 2012
Written submission from the British Property Federation Summary (i) There are essentially two ways in which private sector investment is made in housing; people either investing individually, or via institutional investors, such as pension funds. (ii) The ambition of the BPF’s members and successive governments has been to encourage some of the £2.4 trillion that institutions such as pension and life funds invest in shares and bonds and property into residential property for rent. Specifically a lot of effort has focused on the 5% of that market (£120 billion) that is currently invested in commercial property, and diverting some of it into purpose-built “build-to-let” residential accommodation. (iii) What has stopped build-to-let investment is predominantly the size and nature of returns that are generated from private rented sector property, and how this is perceived by institutional investors to compare with commercial property. (iv) Yields on private rented sector property, however, have been improving as rents rise whilst house purchase prices remain stable or fall. To further make the returns on private renting compare favourably with commercial property Government has also introduced policy reforms to the stamp duty land tax (SDLT) bulk purchase regime, and consulted on changes to the rules on Real Estate Investment Trusts (REITs). Public land is also starting to be made available to support build-to-let schemes. A recent £150 million fund launched by Grainger Plc and the French conglomerate, Bouygues, will use land from the Public Land Initiative and is currently testing the market for institutions willing to invest. (v) The main policy barrier that remains is how build-to-let developments are treated by the planning system, with a lack of clarity about what is defined as subsidy under PPS3 and therefore a lack of flexibility on planning obligations. (vi) As well as private sector pension funds, public sector pension funds are starting to contemplate investing in local housing. Local council pension schemes in Manchester and Ealing are reportedly considering this. Trustees in the past have raised concerns about it conflicting with their duty to maximise returns for scheme pensioners. (vii) Private sector investment is also trickling into the social rented sector with institutions such as Aviva providing funds to buy social rented stock, and similarly Asset Trust buying shared ownership stock from housing associations. Whilst such investment does not add to stock per se it frees up capital in housing associations, allowing them to invest in more housing. Such deals are likely to become more commonplace and we have urged HM Treasury to extend the new bulk purchase rules on SDLT to portfolio sales of shared- ownership stock. Ev 102 Communities and Local Government Committee: Evidence
(viii) There are other innovative investors who are seeking to channel institutional investment into supporting people with aspirations of home ownership who are unable to meet lenders’ demands for a deposit. (ix) Over the past decade, significant amounts of individual investment has been made in housing via the buy-to-let market. This has helped the private rented sector to grow to meet demand and has had a positive impact on the quality of stock in the sector, but has not added as much new housing supply. (x) A threat to the future growth of buy-to-let lending looms in the shape of the EU Mortgage Credit Directive, but otherwise lending to buy-to-let is slowly recovering. (xi) We believe more buy-to-let investment should be channeled into building new homes using tax incentives in “housing zones”, designated by local authorities, and approved by HM Treasury. (xii) Smaller sums of “retail money” (individuals’ investment) has also been invested in the housing association sector. During the summer of 2011 Places for People raised £140 million via a retail bond issued on the London Stock Exchange.
The British Property Federation (BPF) 1. The BPF is the trade association for the property investment sector. In the context of residential our members include most of the larger companies and institutions investing in the private rented sector, long leasehold investors, sector specialists such as student accommodation investors, some of the larger developer housing associations, and smaller private landlords, plus the industries that support them.
Introduction 2. In this submission we have focused on our areas of specialism and interest, specifically the raising of private sector investment for housing. This inevitably means discussing some of the barriers and support Government can provide to overcome these, but we have not looked at the grant regime or changes to it and have therefore not answered all the questions posed by the Committee. 3. The mismatch between supply and demand for housing is well-rehearsed and therefore not repeated here, save to stress that with the increasing difficulty faced by first-time buyers to purchase their own home, coupled with rationing of social rented homes, means private renting is in more demand.
Private Sector Investment in Rented Housing 4. The private sector is a significant source of funding for the housing sector. Traditionally, the vast majority of this has been in the form of loans, either for home purchase, or to assist with development of new housing association stock, the latter sometimes direct loans, or raised via the bond market. Institutional equity investment in housing, on the other hand, has not been a significant contributor of funding for many years. There are admittedly a handful of companies that invest in mainly market rented sector housing, and a small number of fund managers, but the predominant way that equity has found its way into housing investment has been via the buy-to-let market, which itself has been supported by significant lending over the past decade. 5. With lending severely restricted during the credit crunch and likely to remain constrained for some years to come, and public funds for housing also reduced, more attention has been focused on alternative sources of funding for housing. Much of the rest of this paper highlights some of the schemes and models we are aware of. These can be complex in their design, but it is worth stressing that ultimately their focus is simple, to encourage the general public to invest some of their savings in housing, either them making that decision themselves as investors, or via the managers of their pension and life assurance funds.
Institutional Investment 6. A significant source of potential and relatively untapped investment in housing is the funds that our large pension and life funds in UK allocate to finance future pensions and life assurance payouts. Most of such money currently ends up being invested in shares and bonds and about 5% (of the £2.4 trillion) in property (£120 billion), but nearly of all of that is invested in commercial property. 7. There are private organisations that invest in housing, but they are not pension or life funds. Two of the biggest are Grainger Plc and Wellcome Trust. The former is an FT250 company that invests in the private rented sector. The latter is also investing in the PRS as part of its wider investment strategy to generate funding for its charitable health and science research activities. 8. Much of the stock that existing investors hold was acquired, rather than built specifically for renting out. For example, Terrace Hill, a property plc acquired a large portfolio of stock from the Nationwide Building Society some years ago. Some of the Wellcome Trust’s stock was acquired from British Land. More recently, the private sector housing in the Olympic Village was acquired by Delancey and the Qatari Diar to be held as a portfolio of private rented stock. Communities and Local Government Committee: Evidence Ev 103
9. The desire of the sector and ambition of successive Governments has been to unlock some of the £120 billion that is currently invested in commercial property and divert it to residential, but with the specific aim of most of that investment going into new housing stock, this has coined the phrase “build-to-let”.
Build-to-let 10. Build-to-let is about using pension fund investment to deliver purpose build rental accommodation. Predominantly this has focused on private rented sector flats. 11. Scale is important for the large private sector pension fund managers, who tend to allocate investment in tranches of hundred millions or even billions and one significant issue in achieving a successful build-to-let model has been where such stock would come from? 12. The most significant issue stopping build-to-let, however, has been the nature of residential returns. Although investment in residential property tends to generate very good returns, most of such returns in the modern PRS have come from house price inflation, rather than rental income. Even although residential rents have grown, expressed as a yield of the purchase price, they tend to generate low income returns. Pension funds tend to want to invest in property for its different qualities vis-à-vis shares or bonds, providing a good mix of income and capital return, which commercial property tends to provide. The low yield from residential property therefore tends to be a strong factor in dissuading pension funds aimed at commercial property investment from contemplating investment in residential property. 13. To overcome this, the HCA pursued its Private Rented Sector Initiative under the last Government. It offered encouragement to the sector to come forward with build-to-let schemes, but as the credit crunch bore down on Government finances it could not offer direct financial support, with just one scheme getting off the ground, which was to support stalled building projects by the Berkeley Group and was supported with Kickstart funding—see below. Taken from HCA website Since launching PRSI, we have encouraged organisations to work together in developing propositions of scale; and have used our links with private developers to identify a potential pipeline of housing schemes ripe for investment. The first deal—to deliver 555 new rental homes—was signed with the Berkeley Group in August 2010 and a number of other developers and investors are currently working together to establish funds. PRSI has ceased as an HCA initiative but we are now supporting local authorities to bring forward private rental funds within their areas and are helping broker relations between public land owners and private rental investors. Our brokerage role has helped the ODA with its marketing of the Olympic Village to investors. 14. Most of the ingredients are now in place if build-to-let is to be success: 15. The private rented market is continuing to face strong demand, rents are rising when house prices are static and thus yields are better. 16. The Government has offered its support, amending the stamp duty land tax (SDLT) rules on the bulk purchase of residential property so that an investor buying stock would now face a rate of SDLT calculated on the mean value of property in a portfolio, rather than its aggregate value. Amendments consulted on over the summer on the REIT rules would also be broadly helpful to the residential sector. 17. There also seems an increasing keenness on the part of organisations such as the HCA, GLA and local authorities to make public sector land available to support such schemes, although there is variance amongst the latter. 18. The only main policy barrier that remains is how build-to-let developments are treated by the planning system. At present build-to-let is treated very much like any other private sector housing for planning obligation purposes, even although a house builder will disinvest as soon as the homes are built, whereas an investor may be sinking capital into such homes for five, 10 or even 20 years. To try and support our sector’s need to make the yield attractive to institutional investors, some local authorities have seemed willing to be more flexible on planning obligations, but the lack of clarity in PPS3 over the recycling of subsidy is unhelpful in making that happen. Local authorities have also been willing to contemplate putting land into such ventures on a profit sharing basis. 19. In the past few weeks there has been an exciting development in progress towards build-to-let with Grainger plc and Bouygues Development announcing a fund, which will be supported by the Public Land Initiative and invest about £150 million, see below. The organisations involved seem confident this will deliver the returns institutions are seeking. Grainger plc press release—Bouygues Development and Grainger partner up to seed new build to let residential investment fund Bouygues Development Ltd. (“Bouygues”), part of Bouygues Group, one of the world’s leading construction and services group, and Grainger plc (“Grainger”), the UK’s largest listed residential landlord, today announce the creation of and their co-investment in a new Build-To-Let Fund (“the Ev 104 Communities and Local Government Committee: Evidence
Bouygues & Grainger Fund” or “the Fund”). The Fund will provide institutional investors with the opportunity to invest in scale into the Private Rented Sector (“PRS”) which to date has been relatively inaccessible. The Fund is unique in that it has a dedicated portfolio of purpose built PRS development sites in London and South East of England. The development sites are expected to provide over 1,000 residential assets on completion. The assets will be developed and built out by Bouygues in phases over circa three and a half years, with construction expected to begin in Q1 2012 and the first units expected to complete in Q4 2013. Bouygues will manage the investment and construction process, while Grainger will undertake the operation of the portfolio after completion, including property management, lettings, facility management, and fund and asset management. The Fund benefits from an exclusive pipeline of projects developed by Bouygues Development, and offers investors the opportunity to acquire the sites at cost, which will enable the Fund to deliver superior returns. The Fund aims to provide an attractive coupon based return over the development and investment stages, and a return based on capital appreciation. The Fund has been created with an eight year life, with an option to extend it by up to three years. Bouygues and Grainger will co-invest into the Fund upfront, and seek additional equity investment from institutional investors, totalling up to £150 million. The Bouygues & Grainger Fund is primarily designed to capitalise on the appetite of UK and overseas investors to put long term money directly into residential property in London and the South East. The Fund is also strongly aligned with the UK Government’s plans to increase the number of new homes being built, and the Housing Minister’s public land initiative.
20. Besides institutional investment coming from big private sector pension/life fund managers, such as Aviva, Legal & General, Prudential, etc. the other source of institutional investment that could provide funds would be public sector pension funds.
21. The idea that local authority pension funds for example, could be investing in local housing, has been mooted. From our engagement with such funds in the past the response has been that the first duty of pension fund trustees is to gain the best investment returns for their pensioners and thus whilst supporting local housing might be desirable from a social standpoint, it could conflict with the duty of trustees, unless of course local housing was generating an appropriate return.
22. It is therefore interesting that a couple of local authority pension funds are reported as being advanced in plans to invest in local housing, in Manchester (below) and Ealing. Reported in Inside Housing, 17 June 2011 Manchester Council is considering using institutional investment to fund new private rented housing. The authority is in talks with a pension fund which serves local councils, believed to be the Greater Manchester Pension Fund, to invest in the scheme. The deal would be a first for the sector in that the pension fund would provide start-up capital and take on development risk, rather than buying a stake in existing properties. The council would contribute land, while the pension fund would meet development costs. Both the council and the fund will take an equity stake in the developments. The council is also talking to the Homes and Communities Agency about contributing sites and with housing associations, particularly Manchester-based Great Places, about managing the homes. The property manager has to put up a rental guarantee or take a lease on the development for a period. The homes would be built by a contractor on a design and build contract. Paul Beardmore, Manchester Council’s director of housing, said: “We want to get housing development going again and provide homes for lower income working people across the city and give them a choice of living in different neighbourhoods.” Mr Bearmore said the model would allow the council to avoid borrowing constraints. The first scheme is likely to be let at market rents but others could be mixed tenure. Mr Beardmore said he did not yet know how many homes could be built and would not be drawn on the expected returns or level of investment. Discussions are still ongoing but he hoped to have governance and commercial arrangements finalised within six months and start on site in around 12 months.
Private Sector Investment in Social Housing
23. Whilst the significant focus of our sector has been on attracting the institutional investment that is normally allocated to other property investment, particularly commercial property investment, one or two organisations have been trying to look at attracting the broad sweep of pension fund money that is invested in “alternative assets”. With shares and bonds both performing poorly there is increasing appetite amongst pension Communities and Local Government Committee: Evidence Ev 105
funds to find other assets that deliver much the same returns and risk as bonds. It is early days, but at least one private sector pension fund manager has started to invest in social housing, because it delivers a steady index-linked income return—see below. Derwent Living press release—Derwent Living partners with Aviva Investors in £45 million stock transfer In a landmark move, and a first ever for the UK housing sector, Aviva Investors has agreed a £45 million deal to fund the transfer of 839 properties from Home Group to East Midlands housing provider Derwent Living. An additional 296 Home Group properties are also being transferred to Derwent Living with the funding being provided by Clydesdale Bank and The Royal Bank of Scotland. The total funding for both of the deals amounts to £55 million for the transfer of 1,135 social properties to the Derby-based provider from housing association Home Group which is rationalising stock outside its key area in the north east. The transfer will bring Derwent Living’s stock total to around 15,000 properties—making it one of the largest housing associations in the Midlands. The funding was provided by the Aviva Investors REaLM Social Housing Fund which is part of the asset manager’s Return Enhancing and Liability Matching (REaLM®) strategy which aims to address the current underfunding issue being experienced by UK pension schemes by hedging against inflation risks and generating returns in excess of liabilities.
24. Asset Trust is another private investor who has for some time now been investing in affordable housing, predominantly buying the shared ownership stock off housing associations. The similarity is that whilst both the Aviva and Asset Trust investment does not add to new stock per se, by freeing up housing association capital it allows those organisations to invest in new build elsewhere. We have therefore been making the case to HM Treasury to extend the SDLT bulk purchase regime to shared ownership housing, which it does not at present.
Other Models
25. Thus far our evidence has predominantly focused on rented accommodation, which is built for that purpose, but there are investors who are seeking to attract private institutional investment into supporting home ownership. Mill Group, for example, have a co-investment model, which seeks to support homeowners who cannot afford a deposit on a home. Their model is summarised below. Mill Group’s Co-investment Rationale Co-investment will be initially offered to first time buyers of good credit standing, who may not have the substantial deposit savings which are now required to obtain a mortgage. The co-investment product brings passive investors together with co-owners who occupy the property as their own home. The co-owner agrees to pay an occupation charge on the part they do not own, as well as assume responsibility for repairs, maintenance and insurance. Capital appreciation is shared between the investor and the co-owner who occupies the property, essentially in proportion to their cash investment. After some years the co-owner may wish to buy out the investor’s share or move on, to buy another property, but otherwise provides a long term income flow to investors, who may sell this income flow at any time. Homes are bought by co-owners in the open marketplace.
Buy-to-let
26. Probably the most significant source of private sector investment in housing over the past decade has come from small investors buying standalone property, either with their own funds or often supported by a buy-to-let mortgage.
27. This investment has substantially increased the size of the private rented sector, at a time when demand has also increased significantly, but has not made such a powerful contribution to new build stock.
28. Indicators suggest there has been a sustained recovery in buy-to-let lending during 2011—see below— although activity remains well below peak and a significant amount of new lending is remortgaging, rather than new loans. State of the Buy-to-Let Market — The number and value of outstanding buy-to-let mortgages continued to grow. At the end of the second quarter, 1.34 million buy-to-let mortgages, worth £154.5 billion, were outstanding, up from 1.26 million, worth £148.8 billion at the end of the same period in 2010. — Although the latest quarter’s increase is significant, the market is currently running at around one third of the levels seen at the peak of lending in 2007. Ev 106 Communities and Local Government Committee: Evidence
— For the first time since 2008, arrears rates for buy-to-let mortgages are lower than in the owner-occupied sector. In the second quarter, all buy-to-let cases where loans were over three months in arrears (including those under control of a receiver of rent) were, at 28,100 or 2.09% of the total, 0.05 percentage points lower than in the owner-occupied sector. Repossessions in the buy-to-let sector increased by 9%, from 1,700 in the first quarter, to 1,900 in the second. — Moneyfacts states that a year ago there were 295 buy-to-let mortgages available. In September 2011 the figure was 481. — There were £10.4 billion of buy-to-let loans in 2010, up 22% on 2009. 29. There are three further observations we would make about the buy-to-let sector: 30. The EU Mortgage Credit Directive currently passing through its legislative stages in Europe could cause significant damage to the UK buy-to-let sector. As drafted, UK borrowers using buy-to-let loans would have to show as part of the lending approval process that they can meet their loan commitments from their income that excludes rent derived from their property investments. This would have significant consequences for the amount of new buy-to-let lending. 31. No Government has really sought to channel what is significant investment in housing coming from buy- to-let. For example, we have suggested creating “Housing Zones”, offering tax incentives to investors in new build. These would have to be designated by local authorities to stop building in the wrong place, and be approved by HM Treasury to keep costs under control, but could help force more buy-to-let funds into new build. A capital gain tax relief for example might be the best incentive as many investors are disappointed the current capital gains tax regime, with a flat 28%, makes no distinction between long-term investors and property speculators. 32. Little of individuals’ money (so-called retail funds) currently goes into collective investment schemes that are investing in property. Part of the problem is that small investors like to be able to buy and sell when they wish. That is difficult in a collective scheme, where most cash will be tied up in buildings that cannot be instantly bought and sold. The way around that is to invest in companies or Real Estate Investment Trusts (REIT) that invest in housing. The original design of the REIT regime in the UK was not particularly conducive to residential investment and better for commercial property investment, but there are proposals which HM Treasury are pursuing which will make the REIT regime better for the residential sector. The other challenge in convincing the public to invest in housing via a property company or REIT is a cultural one—that they get a “share” rather than a “property” they can feel and touch. If the European Mortgage Credit Directive passes unamended, however, that might create demand for more collective investment schemes in housing as buy-to- let lending becomes constrained. 33. An amount of individual investment has also found its way into the housing association sector via a London Stock Exchange retail bond as below illustrates. London Stock Exchange announcement—27/6/11 Places for People, one of the UK’s largest housing associations, is the first non financial borrower launching a retail bond on the Order book for Retail Bonds from 27/06/11. With the benefit of a senior unsecured guarantee from the main asset owning business in the group, the issuer, Places for People Capital Markets plc, is offering a bond with a fixed rate of 5% and a maturity of five years and six months. This issue is designed to be eligible for ISAs and SIPPs. The bonds are tradable in denominations of £100, after an initial minimum investment of £2,000. Evolution Securities Limited has been appointed as Lead Manager and Authorised Distributor. October 2011
Supplementary written submission from the British Property Federation INQUIRY INTO FINANCING OF NEW HOUSING SUPPLY—ADDITIONAL WRITTEN EVIDENCE ON REITS AND PROJECTION OF THE NUMBER OF HOMES THAT BUILD-TO-LET COULD DELIVER I am grateful for this opportunity to explore further a couple of points that arose in my recent oral evidence to the Committee. As you know at that time an announcement on reform of the Real Estate Investment Trust regime was pending the Autumn Statement and I can now comment more fully on the measures that were contained in the HM Treasury Statement of 6 December.
REIT Reform Generally as I explained to the Committee, the further reform of the REIT regime is to be welcomed and takes us further towards a regime that supports residential investment, but there are a few issues that remain outstanding and will continue to create uncertainty for investors, who otherwise would use a REIT structure. Communities and Local Government Committee: Evidence Ev 107
Summarising first the reforms planned for the next Finance Bill, I will focus only on those that are what HM Treasury terms “barriers to entry”—an appropriate description in relation to residential investment.
The entry charge paid by a company joining the regime is to be abolished Having an entry charge made some sense in the context of the first wave of commercial property companies that converted to REIT status, as part of that conversion process allowed some companies to escape embedded capital gains tax liabilities on their balance sheets. A conversion charge was therefore a sensible quid-pro-quo. However, there are hardly any residential property companies of significant size and virtually none with significant capital gains tax liabilities. Most residential REITs would be formed, rather than conversions from existing companies. The entry charge has therefore been a significant barrier to entry—a payment in effect for no benefit.
The requirement for a REIT to be listed on a recognised stock exchange is to be relaxed Again this was no barrier to most of those REITs that exist, because they were already property companies listed on the Official List of the London Stock Exchange. For a residential fund being formed, however, a full listing involves costs which are very difficult to justify. Relaxing the rules to allow AIM or equivalent listing is a significant step forward. At a relatively detailed level, the way in which the draft legislation proposes to implement the relaxation has the unexpected effect of imposing a new requirement that there be regular active trading in the shares of a REIT. We hope this is unintended and consider that it could present real problems for new REITs, so we have indicated to officials how it can be avoided.
The diverse ownership requirement a REIT has to meet is being reduced Current REIT rules require what is called a diverse ownership test to be met, by reference to an adaptation of the complex tax law “non-close company” rules (which effectively test whether a company is controlled by five or fewer persons). The test must be met immediately on entry into the REIT regime and on an ongoing basis. It also treats a pension fund or financial institution as a single person, ignoring the diverse ownership of that fund or institution, limiting the ability of such organisations to launch new REITs. Two changes are proposed to these rules. First, new REITs will have a grace period of three years before having to satisfy it. This change is very welcome, but could be made significantly more helpful if the grace period also applied to the reformed listing requirement mentioned above: there is little sense in requiring a new REIT which is allowed to be closely owned initially to be listed during that initial period. Secondly, a modification of the rules will treat the test as satisfied if the reason it would not otherwise be satisfied is the presence of “institutional investors” among the REIT’s shareholders. This change, too, is very welcome, but its effectiveness will depend on what qualifies as an “institutional investor”. The definition currently proposed includes a range of entities including pension funds, life companies and sovereign wealth funds. Unfortunately, it does not include housing associations, charities, financial institutions or UK and overseas listed property companies. Excluding some of the most obvious organisations likely to be able to contribute substantial residential stock and residential management expertise will inevitably reduce the effectiveness of this measure in terms of encouraging the emergence of residential REITs. We hope the government will think again.
What Remains to be Done? Although the current proposed reforms mark significant progress in reforming the REIT regime to support residential investment, there are other reforms that we believe are essential if we are ever to see a significant number of residential REITS. The two most important issues relate to the way the traditional tax distinction between “trading” and “investment” activities applies in the REIT context, and the scope for using the REIT structure without the compliance burden of a listing. A property portfolio can only fall within the tax-exempt ring-fence of the REIT rules if it is amounts to an “investment” business in tax terms. Very broadly, that means that the REIT acquires property with a primary interest in the rental income it generates, rather than with a view to making a quick profit on sale. It is often a source of difficulty for businesses that the tax rules operate by reference to a clear differentiation between activities that fall on one side of a line or on the other, whereas commercial reality often involves operating in a big grey area that spans that line. All property investment businesses—whether commercial or residential—are ultimately about giving investors a total return that comprises income and capital growth. Every property investment business will buy and sell assets from time to time, and will hope to make a profit when it does so. However, there is a structural tendency in the UK residential context to rely to a greater extent on regular asset sales than is generally the case in commercial property investment businesses. The reason for that tendency is that the net income return delivered by UK residential property represents a smaller proportion of the total return than is the case in the commercial property context. Specific technical “trading” concerns can also arise in the context of residential shared ownership leases and right to buy properties. Ev 108 Communities and Local Government Committee: Evidence
Residential property investment businesses are therefore generally quite sensitive to the operation of the investment/trading test. The industry has consistently asked government to consider providing a greater degree of clarity and certainty around the operation of that test specifically in the context of and for the purposes of the UK REIT rules. This should not be objectionable in principle: the REIT rules already deem certain transactions (disposals within three years of substantial capital expenditure) to be “trading” transactions for the purposes of the REIT rules; and a “white list” or “safe harbour” approach is already adopted in the authorised funds context for example, to provide business with certainty that particular types of activity will be treated as investment rather than trading. However, the response has so far been unsympathetic, for reasons that have not really been explained. If residential REITs are to become a reality, it is very important that government engage more constructively with industry to explore how greater clarity and certainty can be given, in appropriate cases, as to when the trading/investment test can be regarded as satisfied. We are confident that a way forward can be found which would help deliver residential REITs without creating material revenue risk to the Exchequer. In other countries with REITs a further evolution of their regimes has been the creation of private REITs that are unlisted. The rationale for only allowing listed REITs in the UK is understandable, which is that listing provides a degree of protection for investors, which unlisted REITs would not. However, because most residential REITs would be started from scratch and therefore be smaller than existing commercial property REITs there is an argument that allowing unlisted REITs would particularly be beneficial to the residential sector.
A Projection of the Number of Homes that Build-to-let could Deliver Current institutional investment in the residential sector is estimated at £4.33 billion by IPD, which excludes the student accommodation sector. As set out in our original evidence about £2.4 trillion is invested by the UK’s pension and life funds in all investment assets (shares, bonds, property, etc), and as a comparator the commercial property sector has about £120 billion of institutional funds invested in it. Even if just 5% of that figure (£6 billion) were invested in residential property it would make a significant contribution to housing delivery. It is, however, very difficult to project with any accuracy the question the Committee poses. For example, as Government policy acknowledges, an important factor will be access to land. At present there appears good impetus behind getting the Homes and Communities Agency to support build-to-let on an equity share basis, by contributing central Government land, but until March of next year (2012) we will not know the extent of that commitment, and even then probably not for the period stretching to 2015, and the HCA has no control over local authority land, which is far more abundant. As explained in oral evidence how build-to-let is treated for planning obligation purposes will also have a bearing on delivery. At present, it is treated by most local authorities as the same as units for sale, and there is nothing in national planning guidance which differentiates between the two. I hope I explained why that may be construed as unequal, given the sums and period that investors would be sinking capital into build-to- let vis-a-vis traditional house building for sale. One or two local authorities are starting to recognise the value of long term private investment, but more should be encouraged to think about how to treat build-to-let as part of the planning obligation process. I hope this further note is helpful, and we remain very willing to provide further information to the Committee if required. December 2011
Written submission from the Chartered Institute of Housing Introduction 1. CIH welcomes the opportunity to respond to the Department for Communities and Local Government Select Committee Inquiry on the financing of new housing supply given the Government’s recognition of the chronic under supply of housing and the commitment for housing development to kick start the economy. 2. CIH is the professional body for people involved in housing and communities, with over 22,000 members across the UK and Asian Pacific. We are a registered charity and not-for-profit organisation. Our vision is to be the first point of contact for—and the credible voice of—anyone involved or interested in housing. We exist to maximise the contribution that housing professionals make to the wellbeing of communities. 3. We have a wealth of information and expertise at our disposal and access to members working to deliver housing opportunities across the UK. We regularly contribute to a wide range of debates on housing supply and demand, including those on the new homes bonus, housing revenue account, affordable rent models, national planning policy framework, welfare reform, and mortgage reviews amongst others. 4. We welcome the government’s recognition of the chronic lack of supply of housing and this is noted. The country faces a growing housing crisis. New households are continuing to form, despite a housing shortage Communities and Local Government Committee: Evidence Ev 109
and as a nation, we are building fewer homes than in 1923. Yet, developers have land banks and planning permissions average an 80% success rate. 5. Increasing the levels of house building to meet current and future need nationally and locally as emphasised in the National Planning Policy Framework, through the encouragement of mixed and balanced communities is supported. The planning system has a vital role in ensuring that homes are built, that a proportion of housing is affordable and that supported and specialist housing is available. 6. Yet extraneous pressures compound planning, housing and investment issues. The recession, lack of access to finance for developers and lack of access to credit for house buyers has created both an affordability issue and hampered the supply of new homes, resulting in a reduction in the number of conversions of planning permissions to full development, and subsequently, new housing developments being built. 7. We have actively supported and called for the need for more adequate investment in the housing market across the continuum of social/affordable and market housing, however, the range of options need to be suitable to market conditions in local areas and a one size all approach is therefore unlikely to suit. Tweaking around the edges of investment in new housing supply will not work. 8. Reforms to welfare, housing benefit, planning, social housing regulation and investment; coupled with the general economic climate, rising inflation and debt re-pricing cost uncertainty; will all mean a pressure on landlords to develop their own approaches to the way they manage their businesses, services and assets 9. These changes to the operating environment for housing associations (HA) and local authorities (LA) in the provision of new housing are widespread and enormous in scale forcing an emphasis on competition and innovation in both maintaining existing provision and in the understanding of what future investment in housing may need to look like.
General Summary 10. The submission argues that: — Current supply is less than half the house building needed to meet new demand, quite apart from dealing with the current backlog of almost 8% of households in various forms of housing need. We need a house-building programme sufficient to the size and scale of the current problem just to keep up, let alone clear a backlog of need or prepare for future generational need. — Capacity within the sector is very stretched; it would be wrong to assume that current capacity, with limited direct subsidy, can be stretched significantly to further increase output. — Current policies will result in both new build and parts of the existing stock being used in a new role of providing housing at “Affordable rents”; this inevitably means fewer houses being available to meet the greatest needs at “social” rents, unless ways are found to encourage new provision here too. — Current policies carry considerable risks, of various kinds, both for individual providers and for the sector as a whole. A one size all approach to accessing investment is not suitable due to the different size, type and portfolio of properties in existence. — Adequate, innovative and flexible investment in the housing sector is needed. This may be coupled with a increasing emphasis on the provision of government security in the investment market for to enable the provision of further social housing through alternative investment models. — Put somewhat simply, a catch 22 situation exists in market housing provision; maintaining investor confidence in delivery is vital to increase the supply of new market housing; providing properties are built in locations and of the right size, scale and type to suit local market conditions. However, difficulties remain in accessing mortgage finance especially for first time buyers where average deposit levels are beyond the reach of many and high house prices relative to earnings affect other potential movers. Innovation in the mortgage market is needed and the range of products on offer need to be sustainable for investors as well as suitable for households. The lack of building, lack of moving and lack of confidence in the sector needs to be rectified in order to increase the supply of the right homes in the right places. . — As an additional point, it is important for the Committee to bear in mind the “housing market” should be seen as a continuum encompassing both affordable and social housing as well as market housing. Affordable and social housing should not be seen as properties outside of the housing market. By simply looking at price or market signals can leave large parts of the market un-catered for. 11. Given limitations of space, the remainder of the CIH submission concentrates on issues of new supply in the social sector. 12. As background to the questions it has posed, it is important that the Committee bears in mind the current and expected future demand for housing, and hence the volume of new supply (both market and social) that is required. Ev 110 Communities and Local Government Committee: Evidence
Current backlog of housing need 13. The scale of need for new housing is demonstrated by the government’s own assessments. First, there is a backlog of outstanding need which has grown to about 1.9 million (or over 8% of) households. This assessment, published in November 2010, is based on the position in 2009. It projected that increasing supply and other factors would gradually reduce the backlog by 2020, but that it would still remain at historically high levels (see Figure 1). Figure 1 Projected changes in levels and types of housing need in England to 2021 Type of Need Profile over Projection Period 10.00% 9.00% 8.00% 7.00% Unsuitable 6.00% Overcrowded Concealed 5.00% Sharing 4.00% Rental Affordy
% of households 3.00% Mortgage Diff 2.00% 1.00% 0.00%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year
Source: Bramley et al (2010) Estimating Housing Need, figure 7.8. London: DCLG. 14. Reconsideration of the assumptions in this 2010 report and how these relate to current conditions would suggest that the forecast of an easing backlog is now much less likely to apply, because of the likelihood that the market will not recover rapidly and that the rented sector will grow little in gross terms (ie most growth will be from changes in tenure in the existing housing stock, not from new provision).
Projected future demand 15. To the assessed backlog at any one time has to be added the expected levels of new demand arising from population growth and other factors. The number of households in England is currently projected to grow to 27.5 million in 2033, an increase of 5.8 million (27%) over 2008.44 This means that, if the projections prove correct, 232,000 new houses will be required per year. Of this, just over three-fifths is driven by natural population growth (ie fertility and life-expectancy levels), with net migration accounting for just under two- fifths.
Overall housing need 16. Analysts caution against the simplistic calculation of removing the backlog within a given period (say 10 years), nevertheless it can be seen that the housing minister’s recently expressed aim of building around 200,000 units per year will fall short of meeting new needs and do nothing to clear the backlog. Yet even this may be an optimistic assessment of what can be achieved, given current starts in all sectors of only 98,000 per year.45 These figures illustrate the scale of the problem and the reasons for so much stress within the housing market. Understanding supply and demand at the local level is vital; having robust Strategic Housing Market Assessments locally will be critical to this. Local authorities will need to take local decisions using local resources where they arise. Yet without sufficient regional collaboration, understanding and making provision for overall housing need which may operate larger than simply the local area, will be vital.
The Role of Public Subsidy and Other Funding Sources in New Housing Supply 17. The Committee’s questions revolve around the fundamental issues about how new housing is paid for. In the social sector, the basic options are: — rents from both new and existing tenants; — other income, eg from sales, or from surpluses/reserves, or by savings in operating costs; 44 DCLG (2010) Household Projections, 2008 to 2033, England. 45 DCLG live table 213. Communities and Local Government Committee: Evidence Ev 111
— part sales, ie making greater use of shared ownership, where costs are shared with the buyer; — raising outside capital, eg by borrowing; — direct subsidy—either capital, eg social housing grant to housing associations, or revenue, eg until April 2012 the housing revenue account (HRA) subsidy paid to local authorities; — use of free or reduced-cost land from public authorities, or securing free land or other amenities through section 106 agreements; and — indirect subsidy through housing benefit (HB), allowing rents to be higher but (with various important provisos) still affordable. 18. Clearly, all forms of public subsidy are under pressure, with grants to housing associations (HAs) only likely to average 15% of costs under the “Affordable rent” programme, and HRA subsidy disappearing completely next year. Government policy is therefore to shift the balance of funding for new housing away from direct subsidy towards all the other sources by: — encouraging HAs and local authorities to raise rents and to provide more shared ownership units where capital requirements are lower; — putting pressure on HAs and LAs to raise funds through sales, put surpluses/reserves into new build and free new resources through greater operating efficiency; — obliging HAs to raise as much as they can through borrowing and other forms of external finance; — asking public agencies to free-up land; and — allowing housing benefit to “take the strain” of increased rents.
Issues About Current Policy 19. These policy shifts all have consequences; some are listed briefly below. 20. Raising rents makes housing less affordable to those in need and they are more likely to need to HB. This affects especially those in work and on incomes too low to be able to buy, a group whose numbers have grown considerably because of the difficulties of accessing owner-occupation. 21. Part sales through shared ownership clearly have a role but suffer from a number of handicaps such as the often narrow gap between the costs of shared and full ownership, unfamiliarity by buyers, etc. Past governments have not succeeded in raising levels of shared ownership much above 100,000 nationally at any one time (given that units eventually move out of shared and into full ownership). 22. Property sales must be to bodies outside the sector if they are to produce new resources, as the market value of a property is greater than the tenanted value of social housing. But this reduces the supply of housing at social rents, even if it increases the supply of low-cost private homes. There are also issues around the skills needed for managing disposals in this way and around the restrictions of the TSA on disposals. In the case of the new right to buy (RTB) initiative, the major doubt is the ability of the market to take up the target level of sales (100,000 over three years) given that currently less than 3,000 are sold under RTB annually and pushing up discounts to attract sales reduces the available receipt. There are also concerns about how the funding will be redistributed to areas with greatest needs and whether like for like sales and replacement will occur. These issues are further compounded by a genuine risk that RTB sales will be hampered by the lack of mortgage access across the board and the need for a high rate of discount in order for households to gain access to mortgages due to the rate of deposits needed. So the key issues with this scheme are around expectations and demand—there is a lack of demand for ex-social stock, a lack of potential owner occupiers and a likelihood that homes could end up as buy to let with all the local issues/problems that brings. RTB also causes multiple management and market issues in the longer term 23. Surpluses and reserves are not idle funds or “unused capacity” but are used to fund investment in the stock and in communities, if they are not used to fund new homes. However, there will be issues about housing association’s gearing, and whether they are as astute with borrowing as they could be. There is an expectation on housing associations and providers to make surpluses and have financial capacity, but there are limits to that capacity. These other priorities are likely to suffer—a key issue given that, for example, the social housing sector has to retrofit nearly 4 million homes to meet government targets to reduce carbon emissions. 24. Operating costs have been reduced by many organisations and more savings could undoubtedly be achieved. However, landlords need to be very careful about the impact on services to current tenants. Also, as CIH has shown in its work—including the report “Is Big Really Best”?46—mergers and other ways to drive down costs do not always work. Our forthcoming report “Is Big Best2”47 (CIH) illustrates the range of pressures driving associations to be more efficient. 25. Borrowing is constrained by lending covenants attached to existing loans. Lenders are looking to raise rates on existing loans, and have already made clear they will look for opportunities to do so. 46 CIH, 2005, Is Big Really Best? http://www.cih.org/policy/IsBigBest.pdf 47 CIH, forthcoming, “Is Big Best 2”. Ev 112 Communities and Local Government Committee: Evidence
26. Using public land is a good option but LAs (for example) may want to ensure it is used for social rented units to meet the greatest need—this clashes with government policy. 27. Dependency on housing benefit carries the obvious risks of pushing up the HB budget and takes place at a time when eligibility for HB is being reduced; also, many people want to avoid being on HB as it complicates their earnings if they are in low-paid jobs. 28. The major concern about the combination of current policies is that they are very likely to reduce the supply of housing at social rents and/or make it less accessible because of the changes in HB. This obviously means that the position for those in greatest need gets worse not better, even if other slightly less needy groups get some benefit. 29. CIL and S106 arrangements48—one thing that the construction industry has made very clear is that there will be no revival in house building unless there is potential for a profit.49 In times of economic volatility the viability of any substantial development is very hard to establish but it is clear that direct public benefits— such as contributions to social housing, new or improved infrastructure, design quality—do come under great pressure as the perceived “balancing factors” in many viability calculations. And yet successive Governments have made it clear that such factors are essential to the achievement of sustainable development through the introduction of Section 106 arrangements and the Community Infrastructure Levy (CIL). 30. Attracting and encouraging essential capital to fund infrastructure projects will require a step change in the way risk is managed both for investors, the housing sector and Government. The substantiation and negotiation of public benefits is a significant cost to the public purse at a time when skills and resources are being lost in the public sector. So there is a mutual benefit in simplicity and transparency which can help to build joint working more readily. With CIL there-is an up-front and public calculation of costs and because of that there is a fair chance that such costs can be off-set against the purchase cost of the land ie helping to keep schemes viable. As CIL is an optional arrangement for local authorities, although it seems to have widespread support, house builders cannot rely on the benefits from its certainty in all locations. 31. Government is currently consulting on CIL revisions50 just 18 months after the first charging procedures were introduced. The value of CIL’s certainty can however easily be undermined if the arrangements are subject to review too frequently. Stability is needed to encourage adoption. In a similar vein, the British Property Federation (BPF) called for some stability in the tax regime applying to the re-use of brownfield land, a sustainability practice that the Government has indicated that it wishes to support. 32. It may transpire that a consequence of CIL changes might be, for instance, an alteration to the present balance between the on-site and off-site provision of affordable housing. Safeguards will be needed to protect affordable housing delivery. In turn such a change could have funding consequences that the Committee ought to be aware of but cannot anticipate. 33. Efficiency—Registered providers need to focus on effective use of stock and capital investment portfolios, which will require the improvement of management information tools in order to understand assets and the importance and effectiveness of capital. When building new properties, the risks include voids and a trade-off between new build and community investment in other activities. These must be managed and the efficiencies between products and outputs carefully negotiated. 34. Direct investment in the housing sector in affordable housing could serve as a measure to boost the economy overall; a multiplier effect would be attained that every pound spent would create additional economic output. This measure would have the effect of increasing employment in the building construction industry and related supply chains, enable the use of land which has planning permission but remains undeveloped and increase confidence in further investment in both the sector and economy overall. This would lead to an increase in the supply of new properties in order for supply and affordability issues to be addressed.
The Role of Grant Funding and Possible State Lending or Investment 35. These issues raise the overall question of the role of state assistance for capital finance for new build, whether as grant or in some other potential form. As can be seen from the above, the role of state capital funding is essentially to get the right balance between the different funding sources to achieve the objective of making new housing affordable to those on low incomes or on benefits: insufficient support for capital investment creates the problems just described. 36. That said, many in the sector assume that capital grants will never return to previous levels and indeed may disappear completely. However, this implies a future in which rents in the social sector inexorably increase in real terms, and/or in which there are regular sales outside the sector. Either of these threatens the future of the sector in terms of its ability to meet the greatest needs. There are two levels of risk to be balanced here. One is for the individual organisation which faces a new range of risks—greater capital exposure, more uncertainty about income (because of the likely effects of the HB changes), less cushion in the form of state support. The other is for the sector as a whole, since what “works” for individual organisations in the short 48 We acknowledge the input from our partner in the “Planning for Housing Network” the Royal Town Planning Institute in consideration of our response on CIL and S106. 49 DCLG, 2010 “The house building industry: Promoting recovery in housing supply”, DCLG London. 50 DCLG, 2011, http://www.communities.gov.uk/publications/planningandbuilding/cilreformconsultation. Communities and Local Government Committee: Evidence Ev 113
term carries risks for the role of the sector in meeting housing need, its future reputation, the recruitment and motivation of staff, and a range of other longer-term factors.51 CIH is keen to stress the importance of the provision of a wide range of options rather than expecting a “one size fits all approach” to housing investment and supply to work. 37. The funding outlook requires the housing sector to review long term investment strategies; reductions in grant funding mean the sector will have to be more aware of and responsive to value for money especially as the new regulatory environment will place an increasing emphasis on efficiency through economic regulation. The shift away from direct payments to landlords may result in funders re-rating the sector, restricting supply and leading to pressure on balance sheets. Potentially this could also lead to rent increases payable by existing tenants as lenders and the sector cope with a different financial operating environment and pressure on the terms by which equity could be provided to the landlord. 38. The Committee asks about state lending or investment but the difficult about this is that it will still count as public borrowing. If, for example, social housing grant were a repayable subsidy, then the repayments would have to be factored into the cost of the project, even though the grant itself would eventually be recyclable. 39. There is considerable discussion within the sector of making use of the potential borrowing capacity not currently available because of the historic grant which “sits on” housing associations’ books as a liability in the event of disposal, but one which is most unlikely to be called on (except in predictable circumstances such as sales of individual units, when it can in any case be “recycled” within the housing association). The difficulty about this is that existing lenders will have already factored in the existence of this “comfort factor” in making their original loans: they are likely to want to re-price the loans in the event of it being used to raise other finance. 40. We are aware of a number of other options touted as a possible way of increasing the supply of housing; including the provision of market rental housing by registered providers to meet demand for those priced out of the market. This may see private developers and investors seeking registered provider status to deliver affordable rent, which offers a higher rate of return than socially rented homes. We may also see a new deal therefore on the legal status of registered providers notwithstanding the maintenance of charitable status and the subsidy model. Others would prefer to review the tax breaks on offer to incentivise or promote new build developments.
The Role of Public Sector Support in Kind 41. The provision of free (or cheap) land can reduce costs, but various factors have to be considered: — Land currently in public ownership and potentially surplus to requirements is obviously in limited supply, and is not necessarily in suitable places to develop housing. Attractive surplus land may already have been used, leaving only less attractive or difficult to develop sites. — Local authorities mainly now have land associated with existing estates. Most will want to (and should) consult with tenants before releasing it. Tenants may have strong views on who the developer should be (or not be) and the type of development and rent levels. Often, and understandably, they will want some benefit for existing residents in terms of opportunities to move to bigger/smaller properties, etc. The prospect of “Affordable Rent” developments may therefore be an obstacle. — Under the Government’s “Build now, Pay later”52 scheme house builders pay for land only once they have started work on the new homes, which reduces a significant obstacle in the construction process early on. In October 2011, the Government reiterated the commitment to use public land for housing supply under this scheme, announcing the release of available government land across the country. 42. The current efforts to release land are certainly worthwhile, but the limitations need to be borne in mind. 43. The provision of security in order for longer term investment models to be made available might be one option worth pursuing. Guarantees by a public authority may reduce the cost of borrowing or help to facilitate it in cases where it might not otherwise take place, but of course have a time-cost in terms of negotiations and agreements with public agencies. In themselves they should not count as notional “expenditure” by the authority, but accountants will want to make assessments as to the extent of the risk of the guarantees being called in; clearly the risk would be greater if several were held by one authority, and would need to be accounted for as a liability.
The Role of Long-Term Private Finance, Especially From Institutions 44. There is an expectation that local authorities will need to invest in new forms of finance as a result of housing revenue account changes. New mortgage products may be made available which offer longer-term 51 See the report Tough Choices: Different perspectives on the long-term risks facing the social housing sector by Ipsos MORI (2011). It highlights government policy change and budget uncertainty as the greatest of the risks over which organisations have little control. 52 Grant Shapps offers “Build Now, Pay Later” deal to developers, DCLG press release, 30 March 2011: www.communities.gov.uk/news/corporate/1876832 Ev 114 Communities and Local Government Committee: Evidence
stability to potential movers within the housing market and to the housing sector in terms of the bonds or other finance products that are accessible to them. 45. There appears an appetite towards getting pension funds to invest in rented housing, whether private or social as long term investment vehicles. This has been on the agenda for a number of years but has as yet, not borne fruit. What is clear, is this could help provide stable and long term funding at an affordable cost. We are also aware of numerous local authorities thinking more strategically about how they use their own pension funds to invest in their own housing in order to generate a return. Again the risk appetite for this would be known and quantifiable to those investing pension funds. 46. There is a risk for social landlords that in becoming too dependent on private finance to bridge the gap on reduced public capital funding, their finances become stretched and ability to provide new affordable homes beyond 2015 will be compromised. 47. It will be important for the debate to shift away from debt finance to something else—many developing housing associations will get close to their lending covenants rather sooner than planned because of affordable rent, so a desire to use bonds or other investment vehicles is growing. Longer-term loans funding property throughout its life should be available. We are aware that unsecured lending is an option being considered by some, however, unsecured lending is difficult to administer and by the very nature of it, more expensive to service than other sources. Consequently, we would urge caution here and are clear that it may not be the answer to the sector’s long term financial stability and indeed may jeopardise the viability of both individual organisations and those in group structures. 48. The drive for increased efficiencies in everyday spending is also having an impact on the overall response and approach to prudent investment. It is not clear whether the housing sector could increase reserves simply by being more efficient. Delivering huge efficiencies is operationally difficult to achieve in any sector, including the private sector.
Can housing associations and ALMOs access more private finance? Housing associations 49. There is a strong sense in the sector that housing providers will move from government finance to more private finance on the capital markets through bonds, rather than through traditional lenders. However, the conversation on funding is somewhat dominated by the larger housing associations. This view presents risks for smaller housing associations for whom lending portfolios and risk appetite will be considerably different. The Committee should note that different housing associations have different financial models so a one size fits all approach will not work for everyone; size matters in terms of funding options especially to access bonds. 50. Potential changes53 to the use of Real Estate Investment Trusts (REITs) could see housing associations becoming interested in exploring the potential of the model to increase the supply of affordable homes, as it creates easier access to equity capital markets and an opportunity for balance sheets to work harder
ALMOs 51. The potential for ALMOs to raise private finance was recently considered in a report by the National Federation of ALMOs to which ConsultCIH contributed. Essentially, the approaches explored would all require ALMOs to be reconstituted so that their majority ownership passes from the LA to tenants. While this would of course depend on the willingness of tenants to take on a bigger role, the report (Building on the potential of ALMOs to invest in local communities) pointed out that most ALMOs now have extensive tenant involvement, and at this stage many might contemplate taking on the extra responsibilities of being the majority shareholders. If such a reconfiguration of the ALMO were accepted by the LA and by tenants, it could pave the way for one of three new models: — Model 1—A long-term management contract—based on the ALMO model having a 35-year contract and on the local authority having one-third rather than sole ownership of council properties. — Model 2—A long-term management contract including transfer of some vacant properties or land— similar to Model 1 but with some limited transfer. — Model 3—Transfer to a Community and Council owned organisation (CoCo)—a fundamental change to the ALMO’s constitution which transfers ownership to the community, but on a different basis to a current stock transfer. Unlike conventional stock transfer, the CoCo would retain a financial relationship with the council through a covenant to meet the council’s interest and repayment obligations on its HRA loans. 52. These models, particular the “CoCo”, have potential to give access to private finance and the NFA held discussions with lenders in developing them. They all take account and build upon the potential represented by council housing finance reform. 53 Knocking down barriers, 21 October 2010, www.insidehousing.co.uk/ihistory.aspx?storycode=6518537 Communities and Local Government Committee: Evidence Ev 115
The Potential Arising From Reform of Council Housing Finance 53. Council housing finance reform makes the fundamental change of giving LAs full control of their revenue finance and ending the “pooling” of revenue at national level through the HRA subsidy system. It has been made possible, in part, because this system has recently moved into surplus. Were this surplus to be “left” in the system when the transition takes place in April 2012, it would of course create considerable potential for new investment by local authorities, both in new build and in their existing stock/estates. However, neither this government nor the previous one was willing to allow this, and the debt burden on LAs has been increased to reflect the “loss” of future surpluses to the Exchequer. 54. A further constraint is that the level of debt in each LA will be “capped” at a certain amount when the new system comes into operation. Therefore, unlike HAs, LAs will be unable to borrow to the full “prudential” extent justified by their rental incomes. 55. Nevertheless, LAs will have some extra borrowing/investment potential for new build, although the extent of it will depend on various factors including: — the limit set by government in each case; — the capacity to raise rents (broadly, the extent to which the LA has unused potential to raise rents within current rents policy; some authorities are already at or near to this limit); and — the demands from the existing stock and tenants, eg to complete decent homes funding, start to make the stock more energy-efficient, and deal with tenants’ priorities such as environmental and security improvements, etc. 56. The outcome is likely to be some limited capacity to build, which will probably be higher than recent historic rates (which were only 2–300 per year) but not exceed the levels achieved in the last two years with HCA grant funding (of 1–2,000 per year). 57. There are suggestions that some local authorities may look to revive options appraisals as they try to off load stock once the HRA settlements have been determined. This would lead to new stock transfer organisations and the receipts reused for regeneration and new build programmes. 58. CIH has long made the case that council housing borrowing should not count against the main measure of central government debt, thus freeing councils to borrow prudentially in the same way as housing associations. This case was recently made again, with CIH input, by four councils but earlier this year was rejected by HM Treasury.54
How effective will the “Affordable Rent” scheme be in increasing supply? 59. To provide the homes people need, an increase in supply is vital. The HCA is expecting to deliver around 80,000 out of 170,000 new properties via affordable rent by 2015. Landlords will have to consider that rents set higher than social rents give an opportunity for reinvestment and may more closely match demand with supply in different areas. However, conversions to the affordable rent scheme will not help much with covering the cost of developments unless and only to a degree, it they are operating in high value areas. A recent L&Q report on Affordable Rent suggests that it “will absorb large amounts of the housing association sector’s financial capacity”,55 affecting the sector’s ability to participate in future policy initiatives and make their stock work efficiently and effectively for them. This is of considerable concern given the current emphasis on promoting this product. 60. Affordable rent has changed the housing association sector’s financial forecast; the sector is now more dependent on sales and disposals to the open market than previously. Debt will go up considerably, so gearing ratios will rise which affects investor confidence. Local authorities will play a key part in getting the right homes in the right places, taking opportunities of capacity and maximising outputs. However, providers will need to be aware of and plan for, benefit reform and LHA changes as this will impact on supply; in areas with high rental values, the affordable rent model may still not be an option for many households. Should interest rates rise, this could challenge assumptions about the overall cost of development, which again, would impact supply and the viability of schemes.
Conclusions 61. It is without doubt, that new homes are badly needed in the right places at the right prices to suit local circumstances. However, the planning, investment and regulation responses have until now not been as robust and substantial as to meet the current backlog of housing need or future demand. Managing investment risks and developing commercially viable solutions across the whole of the housing market will be vital if the country is to build enough housing to support current and projected future demand. October 2011
54 Westminster Council (2011) The Case for Borrowing for Investment in Housing. 55 L&Q/PWC (2011) Where next? Housing after 2015. Ev 116 Communities and Local Government Committee: Evidence
Written submission from Grainger plc Grainger PLC Established in Newcastle upon Tyne in 1912, Grainger is the UK’s largest listed residential property owner, manager and developer, and has a substantial business operation in Germany. Grainger directly owns £2.4 billion of residential property assets and has over £3 billion of residential property assets under management. Grainger owns or manages over 40,000 properties in the UK and Germany. Grainger’s business, focused solely in the residential property sector, ranges from ownership, property management, fund and asset management, development to refurbishment. Grainger is also a leading provider of equity release products through its subsidiary brand, Bridgewater Equity Release. Grainger is a co-investor in and the fund and asset manager of the UK’s largest private rented sector residential investment fund, G:res, which has approximately £400 million of residential assets in UK. Grainger is a constituent of the FTSE 250 index on the London Stock Exchange. Grainger is also a constituent of the FTSE4Good index.
Introductory Remarks There is an undeniable growing demand for private renting and a shortage of housing stock. The key issue is supply which is clearly recognised by many including the Government and this Select Committee. In order to match the demand for more rental stock by tenants, the Government’s desire for more houses and an investable asset class that is attractive to institutional investors, more land must be made available in suitable locations (close to transport hubs and in areas of greatest demand) for more homes to be built. The UK has a comparable proportion of home ownership compared to the US, but much higher than our Northern European neighbours. Grainger does not believe it is necessary to ask whether ownership is preferable over renting or vice versa. Instead, we believe that the important question facing UK policy makers is “When is owning appropriate and when is renting appropriate?” The Government must not treat or consider renters as second class citizens, the message that “it is always alright to rent” and the preferred choice at certain times of one’s life (young or old) should be adopted. Renting should be viewed as one of the stepping stones of housing tenure in most people’s lives. It is essential that the Government embraces this view and facilitates a functioning and effective private rented sector that is not overly burdened by regulation. In order to make the private rented sector (PRS) more attractive to financial institutions it has to offer similar scale and yields to commercial property (which is largely funded and owned by financial institutions). Initial upfront costs are often so high compared to rental income that yields are unattractive to institutions. If upfront initial costs could be reduced it could improve the yields. As there are a very limited number of existing opportunities to invest in residential stock at scale, solutions must therefore include a development and construction (ie new build) element. High land acquisition and development costs often reduce yields to an unattractive level for a rental income based residential investment model. Solutions which reduce these upfront costs and allow the investors to acquire the assets (or stock) “at cost” (eg wholesale) rather than at retail premiums, dramatically improve the financial viability of Build-To-Rent schemes. This is the approach that Grainger and Bouygues, one of Europe’s largest construction companies, have followed in our partnership to build and manage institutional grade private rented stock available to institutional investors. (See case study below.) By using public land on a deferred equity basis the Government can facilitate the delivery of more homes. Land can be provided on a condition that it is exclusively available for rent for a period of 7/10/12 years, aligning residential to commercial property in terms of the length of the standard commercial lease. It is vital that the private rented sector remains free from too much regulation and the market sets the rent levels. It is important that any form of rent capping is resisted as this will deter the financial institutions (and private investors) from investing in the private rented sector and detrimentally affecting supply. The introduction of regulation and rent capping in the 1980s led to the retreat of institutional investment in the PRS and has left us with the buy-to-let dominated sector we have today. Rent levels should be controlled by supply issues not regulation. (See Joseph Rowntree Foundation, Housing Market Taskforce, “The UK private rented sector as a source of affordable accommodation”, Professor Michael Ball, University of Reading, November 2010.) The Government has made a number of moves to facilitate the entry of institutions to this market, through changes in SDLT, the review of REITs and the Public Land Initiative. We strongly welcome these changes. By using its land assets selectively and prudently the public sector could further facilitate entry by institutional investors into the private rented sector at scale. Communities and Local Government Committee: Evidence Ev 117
Case Studies At the bottom of this response, we include several case studies to demonstrate how housing supply may be financed. The first case study demonstrates how the public sector can use its land to increase housing supply. The Defence Infrastructure Organisation appointed Grainger as a development partner to develop up to 4,250 houses on under-used military land at the Aldershot Urban Extension. The MoD retains ownership, while the agreement structure aligns the interests of Grainger with the MoD to deliver best value. The second case study is of a Build-To-Rent fund which will build new private rented sector accommodation and provide an entry route for institutional investors. This fund is being led by Grainger and Bouygues, one of Europe’s largest construction groups. The third case study is of the G:res Fund, which Grainger fund and asset manages and co-invests in alongside other domestic and international investors. It is a specific example of current institutional investment in residential, the ability to exploit economies of scale and provide attractive returns to investors.
Summary of Responses — Public land as an equity stake—This solution fits in with the Government’s drive to make better use of public land. With a similar principle to the “build now, pay later” scheme, we believe public sector bodies should be encouraged and, indeed, given advice and guidance in contributing their land into a partnership with a developer for an equity stake in the partnership to develop a Build-To-Rent scheme. This would increase viability for the scheme and the public sector body would benefit from a long term income stream which they could, if they wanted, sell to an institutional fund at some point. — Local authorities should be encouraged to be flexible in their approach to their land assets and should consider injecting their land into a partnership agreement with private sector delivery bodies for an equity stake in a long term residential fund. (See Resolution Foundation, “Making a Rented House a Home: Housing solutions for ‘generation rent’”, Vidhya Alakeson, August 2011.) — Reduce or remove affordable housing requirements on Build-To-Rent schemes—Local authorities should be encouraged to be flexible in their approach to Section 106 and affordable housing requirements when considering the merits of a new private rented sector development (ie Build-To-Rent). By reducing or removing the affordable housing requirements on developments built purely for the PRS, the ability for developers to deliver new rented accommodation will be increased dramatically. — To attract large financial institutional investment into the private rented sector, the Government must explore further policy levers that would facilitate the ability for such institutions to access assets and portfolios at scale (preferably new build stock) and at attractive yields by suppressing upfront entry costs.
Specific Responses to Questions 1. How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms? Grainger recommends that the Government reintroduce tax relief for remediating brownfield sites. Brownfield sites requiring remediation are often marginal and have very sensitive viabilities. We believe that the benefits to the UK economy of increasing the ability of the private sector to develop will outweigh any savings made by the Exchequer through the abolition of tax relief for remediating brownfield sites. Reintroducing relief would also bring the added benefit of giving greater support to the brownfield-first principle by supporting development on brownfield sites over greenfield.
2. What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them? No response provided.
3. What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening? Grainger recommends that Local Authorities should be flexible in their approach to land assets that they hold. Local Authorities should take account of, consider and incorporate plans for un-used or under-used land for development, particularly housing, in their local plans. One approach that Local Authorities and all public sector bodies should consider in the context of the Government’s ambitions to release public sector land for housebuilding is to swap public sector land assets for a long term equity stake in a partnership with a housing delivery body, such as a Build-To-Rent development. This would improve the ability of housing delivery bodies to increase housing supply. Ev 118 Communities and Local Government Committee: Evidence
Grainger recommends that a new approach to Section 106 and affordable housing requirements is taken when considering new developments for the private rented sector. The precedent already set within the student housing sector should also be applied to the private rented sector. Reducing or altogether removing affordable housing requirements on PRS developments would greatly increase the viability of the scheme and improve yields, making it a more attractive proposition for institutional investors. Grainger believes that it would be helpful to provide guarantees for first time buyers in the form of Mortgage Indemnity Guarantee schemes. This would help to de-risk housing development, thereby supporting the supply side of the housing sector.
4. How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening? The Joseph Rowntree Foundation identified the major barriers to institutional investment in the private rented sector in a paper by Professor Michael Ball of Reading University in November 2010. Each of those barriers are outlined below, with Grainger’s response highlighted in italics. — high investment transaction costs linked to the “too-small for them” scale of residential investments: — scale can be addressed by providing access to investment grade stock that is newly built, ie Build-To-Rent; — a lack of matching investment income with investor liabilities, because returns contain a significant capital element that cannot be realised without selling the properties: — by reducing upfront initial entry costs (such as land values), the reliance on capital returns can be offset with a more attractive investment proposition based on rental income; — intensive management and maintenance: — while it is true that residential management and maintenance is more intense and costly relative to commercial property management and maintenance, it is possible to reduce these costs to a reasonable level through economies of scale and efficient procedures (see “Economies of scale in residential property management” below.); — high tenant turnover and vacancy rates: — due to high demand in the private rented sector, this issue is no longer a significant barrier in many areas, however, good property management and efficient and effective procedures can reduce turnover, void and vacancy rates even during times of lesser demand; — potential reputational issues: — while reputational issues will always exist in residential more so than commercial, good professional property management can reduce this so that it is no longer a major barrier, and indirect investment vehicles can offer investors the opportunity to invest “at a distance” so to reduce their reputational risk even further (see “Professionalising residential property management” below); — illiquid, thin markets that make it difficult to sell blocks of flat on a timely basis or to work out what is their fair market value at some points of the property cycle: — there is already an active residential investment market for large scale portfolios. This financial year Grainger acquired, in two separate transactions, approximately 2,000 houses worth over £300 millon in total. And if Build-To-Rent developments get off the ground, opportunities to expand that market will grow even further (see section directly below, “Economies of scale in asset/portfolio acquisition”).
Economies of Scale in Asset/Portfolio Acquisition Scale in investment is important. Institutional investors will not find the private rented sector attractive until they are able to invest at levels of investment that are large enough. It is not in their interest to slowly assemble a residential portfolio over decades. Instead they would prefer to put their money to active use over the short to medium term. Despite Grainger’s two major transactions mentioned above, opportunities to invest at scale in existing residential stock, particularly the private rented sector, are limited in the UK. Instead, opportunities should be given to investors to invest in newly-built residential stock, ie Built-To-Rent. This would also support the UK economy and ease the housing shortage.
Economies of Scale in Residential Property Management Economies of scale in management are key to improving viability and returns. The main challenge for residential investment in seeking to compete in the capital markets is the constrained rental income/yield, which is primarily due to increased costs in both management and transactions compared to commercial property. We strongly believe the “service offering” that good property management represents is essential for profitable residential investment and in turn a strong PRS. If service/management is poor, tenants become Communities and Local Government Committee: Evidence Ev 119
unhappy (and therefore rental income is not steady or guaranteed) and the asset value deteriorates (as the property itself is in need of refurbishment). To ensure continuity of income (both through rents and sales), the property must be maintained and possibly improved. Rental income and capital values will only improve if the asset is managed well.
Professionalising Residential Property Management The Government should give greater support to the professionally managed private rented sector. Organisations, such as the Institute of Residential Property Management (IRPM), are working hard to provide a career path and recognised qualifications for those in residential property management, and the Government could support such private sector led initiatives. Having an established workforce of residential property managers would also address many of the reputational concerns that institutional investors may have in investing in the residential sector.
5. How housing associations and, potentially, ALMOs might be enable to increase the amount of private finance going into housing supply? Grainger recommends that the Government reviews the period of perpetuity. Affordable housing is usually restricted to the sector for a period of 125 years. If this was lowered so that there was a reversion after a shorter period then this might encourage institutions in to the sector, but still with a long term investment view.
6. How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply? No response provided.
7. How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term? No response provided.
Case Study—Build to Rent Institutional Investment Fund Bouygues & Grainger Fund Bouygues Development Ltd. (“Bouygues”), part of Bouygues Group, one of the world’s leading construction and services group, and Grainger plc (“Grainger”), the UK’s largest listed residential landlord, have partnered up with the aim of creating and co-investing in a new Build-To-Let Fund (“the Bouygues & Grainger Fund” or “the Fund”). The Fund will provide institutional investors with the opportunity to invest in scale into the Private Rented Sector (“PRS”) which to date has been relatively inaccessible. The Fund is unique in that it has a dedicated portfolio of purpose built PRS development sites in London and South East of England. The development sites are expected to provide over 1,000 residential assets on completion. The assets will be developed and built out by Bouygues in phases over circa three and a half years, with construction expected to begin in Q1 2012 and the first units expected to complete in Q4 2013. Bouygues will manage the investment and construction process, while Grainger will undertake the operation of the portfolio after completion, including property management, lettings, facility management, and fund and asset management. The Fund benefits from an exclusive pipeline of projects developed by Bouygues Development, and offers investors the opportunity to acquire the sites at cost, which will enable the Fund to deliver superior returns. The Fund aims to provide an attractive coupon based return over the development and investment stages, and a return based on capital appreciation. The Fund has been created with an eight year life, with an option to extend it by up to three years. Bouygues and Grainger will co-invest into the Fund upfront, and seek additional equity investment from institutional investors, totalling up to £150 million. The Bouygues & Grainger Fund is primarily designed to capitalise on the appetite of UK and overseas investors to put long term money directly into residential property in London and the South East. The Fund is also strongly aligned with the UK Government’s plans to increase the number of new homes being built, and the Housing Minister’s public land initiative.
Case Study—Public Sector Land to Support Housing Supply Aldershot Urban Extension, Ministry of Defence Defence Infrastructure Organisation (DIO) appointed Grainger as the developer to create a major new development of approximately 4,500 homes and community facilities on surplus military land in Aldershot, Hampshire. Ev 120 Communities and Local Government Committee: Evidence
DIO and the Homes and Communities Agency (HCA) have worked together to appoint Grainger to redevelop the 148ha Aldershot Urban Extension (AUE) site in Hampshire.
Grainger will regenerate the land at Aldershot Garrison to create a mixed-use residential scheme of around 4,500 homes together with community facilities, schools, local centres and leisure facilities. Work will include the restoration and conversion of the historic Cambridge Military Hospital building and will now work towards achieving planning.
DIO manages all of the Ministry of Defence’s land and is selling part of the estate after a planned restructure and consolidation to meet military operating needs.
The AUE is one of the largest brownfield sites in the South East of England. As Aldershot is the home of the British Army, much of the operational military estate will be retained.
The new development will take into account the heritage features and listed buildings, such as the Cambridge Military Hospital, and ensure that the development is delivered to meet the expectations set out in the Supplementary Planning Document (SPD).
Rushmoor Borough Council adopted the AUE SPD in March 2009 which sets out the guidelines for the development to ensure quality homes in a sustainable and energy efficient environment, where people want to live and work. The principles of the SPD built on the finding of the Enquiry by Design which took place in 2005.
The AUE represents the major housing allocation for the Rushmoor Core Strategy.
The appointment of Grainger follows a competitive tendering process.
Case Study—Example of Current Institutional Investment in PRS G:res
G:res is UK’s largest private rented sector residential investment fund, which has approximately £400 million of residential assets in UK.
Launched in November 2006, Grainger both advises and is the largest investor in the Fund, holding a 22% stake. G:res is a close-ended fund. It was established for a period of five years (to 2011), with 2x1 year extension options (2013), and a liquidation period which now brings the Fund’s life out to 2015. The Fund currently has 12 investors. As at the end of March 2011 it owned 2,056 units with a Gross Asset Value of £375 million excluding cash, Vacant Possession Value of £415 million and a Net Asset Value of £151 million. Around 93% of the assets in value terms are located in London and the South East. The extension will allow the fund manager to extract maximum value from the assets and crystallise as much vacant possession value from the portfolio as possible.
Specific objectives of G:res are to manage the portfolio to achieve: (1) Growth in rents whilst maintaining stable occupancy; (2) Attractive acquisitions; (3) Medium to long-term capital appreciation; and (4) Property disposal at the appropriate point to maximise investor returns.
An integral part of G:res’ strategy is to continue improving the quality and performance of the portfolio through effective asset and property management in order to enhance the value and saleability of each individual block and unit. October 2011
Supplementary written submission from Grainger plc
INQUIRY INTO FINANCING OF NEW HOUSING SUPPLY—SUPPLEMENTARY EVIDENCE REGARDING THE PROJECTION OF THE NUMBER OF HOMES THAT BUILD-TO-LET COULD DELIVER AND CHANGES TO THE REIT REGIME
We are grateful for having been invited to give oral evidence to the Committee for this particular inquiry. We strongly believe in the need for government and industry working together to find ways to unlock new sources of financing for housing supply.
Please find below our answers the supplementary questions we have been asked subsequent to the oral evidence session. Communities and Local Government Committee: Evidence Ev 121
Projection of the Number of Houses that could be Delivered Through Build-To-Rent Institutional Investment Models between now and March 2015 Unfortunately, predicting the number of houses that could be delivered over the next three years through an institutionally invested Build-To-Rent sector is impossible. It may be useful, however, to put into context where the residential investment sector is today and the potential the institutional investment market holds for the residential sector. Currently the Private Rented Sector in the UK is worth around £500 billion. Of that amount, institutional investment is approximately 1% or £5 billion. In comparison, the commercial property sector has over £120 billion of institutional investment. While institutional investment in residential will unlikely reach the same levels as the commercial property sector, it demonstrates the enormous potential for institutional investment in the residential sector.
Reaction to the Changes to the REIT Regime We believe that the measures on the REITs regime in the draft Finance Bill are all positive. They bring the sector one step closer to the possibility of residential REITs. The changes will encourage residential property companies to explore the opportunities arising from the changes for the possibility of setting up a new residential REIT. The barriers to entry for residential REITs have been reduced through the changes in the draft Finance Bill including the abolishment of the conversion charge, the opening of the regime to diverse ownership, close company tests being given longer to comply with the rules, cash being a good asset affording the REIT more time to acquire the right assets, and financing costs being redefined so that the tax charge on excessive interest doesn’t apply to non-interest finance costs. The one aspect of the REIT regime which was not taken up in the draft Finance Bill is the distinction between trading and investment for residential REITs. As the regime stands, residential companies are likely to be ineligible to convert to a REIT because they fail the trading/investment test. This remains a significant barrier for residential REITs. We have previously asked the government to consider the trading versus investment distinction specifically in the context of and for the purposes of residential REITs. We believe that this fits well with the existing REIT regime, but government has not yet addressed this barrier for reasons that have not been fully explained. Again, we’d like to thank the Committee for inviting us to give evidence to the Committee and look forward to seeing the outcome of the inquiry. December 2011
Written submission from the Council of Mortgage Lenders Introduction 1. The Council of Mortgage Lenders (CML) welcomes the opportunity to submit written evidence to the Communities & Local Government (CLG) select committee. The CML is the representative trade body for the whole of the residential mortgage lending industry. Our 109 members currently hold around 94% of the assets of the UK mortgage market, and include commercial banks, mortgage banks, building societies and non bank specialist lenders. 2. In addition to lending for owner occupation and private renting, CML members have lent over £60 billion to housing associations across the UK for new build, repair and improvement to social housing.
Housing Supply 3. There is overwhelming evidence that we are failing to keep pace with the housing supply needed. In 2004, the Barker review recommended a step-change in supply to 240,000 new homes per annum and in 2008 an assessment by the National Housing and Planning Advice Unit showed that a minimum of 240,000 homes would be needed annually to keep pace with demand. Similar projections have recently been made by Shelter and The Institute for Public Policy Research (IPPR). 4. With just 102,730 new homes built in 2010 neither of these projections show any sign of being met in practice. This figure is more than 15,000 less than the previous year and fewer than were built in the last year of the former administration. 5. Although house-building is at a record low, housing need continues to rise. It is predicted there will be 4 million additional households in England by 2025 as a result of population growth, demographic change and social change. In its recently published report “Build now or pay later? Funding new housing supply” the IPPR predict that the worst mismatches between supply and demand will be in the greater south east, with particular pressure on social housing. Ev 122 Communities and Local Government Committee: Evidence
6. Overall, IPPR has estimated that, building on government projections for household growth, provided the economy recovers at a reasonable rate, and assuming we build as many new homes in the next 20 years as we have in the past 20 (that is, on average, 160,000 per year), we will have in England 750,000 fewer homes than we need by 2025. With growing evidence of affordability pressures in both home ownership and the private rented sector, the demand for social housing is expected to continue to grow.
Private Sector Funding to the Social Housing Sector 7. The challenging conditions for the mortgage market continue and the supply of funding for mortgage and commercial lending is still markedly constrained. The housing association sector is increasingly turning to the capital markets as a source of funding. From 2005 to 2008 this made up less than 5% of all private finance, however the latest data from the Tenant Services Authority shows that this is now 37%. Institutional investors place great importance on cash flow underpinned by direct payments and the view of rating agencies is key to the continued success of this type of investment. This means that decisions on welfare reform and universal credit, in addition to the affordable rent programme discussed below, need to be taken with this backdrop in mind to ensure that the private sector can continue to fulfil its important role in funding social housing in the future.
Grant Funding and the Affordable Rent Programme 8. The government’s affordable rent proposals have made a significant impact on the supply of social housing. In July the HCA announced the results of the latest bidding round and forecast that the £1.8 billion allocated would produce some 80,000 affordable homes. This results in average grant rates of less than £23,000 which is a very significant reduction on the previous three years average of £65,000 for rented homes and £35,000 for low cost home ownership schemes. 9. This drastic reduction in grant rate has been achieved due to a number of factors, not least the expectation that rents for new homes, and a good proportion of relets, will increase to near market levels ie up to 80% of market rents. For housing providers this results in higher levels of borrowing and hence higher loan gearing, and more risk. 10. There are other factors that have contributed to the reduced grant rate of the Affordable Homes Programme (AHP). It is evident that housing providers made every possible contribution they could to the programme in order to ensure that they continued to maintain their development partner status. This includes maximising the cross subsidy they expect from other property sales, market renting or other business activities, and putting in free or heavily discounted land. 11. We believe that the levels of cross subsidy achieved in this programme are not likely to be sustainable for future years. Market conditions mean that contributions arising from Section 106 planning agreements are likely to reduce and some of the land contributed by housing providers came from previous years when economic conditions were considerably better. As such we believe it would be unwise to predict that grant levels could stay at the current AHP level in the long term. 12. With, or without the other cross subsidy contributions, the financial gearing of housing associations is bound to increase. Their ability to deliver further rounds of AHP homes is questionable and could result in “survival of the fittest”. The communities minister, Andrew Stunell MP, has acknowledged that there are difficult questions about the scheme’s viability beyond 2015, recognising that housing associations’ assets “are not inexhaustible” 13. A recent report from PricewaterhouseCoopers and housing association L&Q adds weight to our concerns. The report, Where next? Housing after 2015, suggests that even with substantial business efficiencies allowed for, housing associations will need to borrow around £15 billion by 2015 to build 150,000 homes and meet stock reinvestment and refinancing commitments. It says the sector’s capacity to continue developing will diminish swiftly and it would be very difficult for housing associations to manage a further large affordable housing programme under the same rules. 14. Other forms of subsidy or financial contribution are being considered. Ministers are encouraging developers to build on government land under a “Build Now, Pay Later” deal. Under the scheme, house builders pay for the land on which they develop only after they have started work on the new homes. This may produce some stimulus for the normal house-building market but without specific valuation discounts it will have limited impact on the provision of affordable homes. 15. A few weeks ago the Prime Minister reiterated the commitment to use public land for housing supply under “Build Now, Pay Later”, and announced plans to increase the discounts available to council tenants under the Right to Buy, and some housing association tenants under the Preserved Right to Buy. While we welcome the commitment to use surplus receipts to fund replacement homes we believe that “one for one” replacement may prove ambitious and for the reasons set out above government should not rely on AHP grant rates being replicated. 16. For housing associations the new funding arrangements will not only increase their loan commitments and financial gearing but it will bring greater risk to their business activities. Over time they will see more of Communities and Local Government Committee: Evidence Ev 123
their tenancies at “affordable rent” levels and this will be coupled with more variations in tenure. As noted above, other pressures will arise as a result of housing benefit changes and particularly the reduction in direct payment of rent to landlords which could arise from the changes currently under consideration in the House of Lords in the Welfare Reform Bill. The latter poses a considerable threat to the funding of the sector where there are already signs of reduced investor confidence. October 2011
Supplementary written submission from the Council of Mortgage Lenders What is your members’ estimate of the likely gross lending market between 2012 and 2015? Of this market how much do you estimate will be focused on new build? CML has just published its housing and mortgage market forecasts for 2012. As the supporting commentary to that makes clear, there is considerable uncertainty about the short-term direction of the wider UK economy. For this reason, we do not have explicit forecasts stretching beyond 2012. Assuming that Eurozone problems do not materially disrupt things, our general expectation would be that 2012 marks the low-point for housing and mortgage market activity. With UK interest rates expected to slowly revert to more normal levels over the medium-term, the evolution of UK house prices is likely to lag behind that of household incomes. We anticipate only a gradual progressive improvement in affordability pressures and credit availability, and therefore much slower recovery in property transactions than projected by OBR (its November 2001 Economic & Fiscal Outlook report envisaged transactions climbing to 1.3 million annually by 2015–16). We have no firm view as to what proportion of gross lending will relate to new build, although the new build indemnity scheme that is now supported by government, may lead to an increase in new build transactions relative to those of the market as a whole.
Over the next three years do you expect to increase: a) the level of lending to housing associations; and b) your support for shared ownership and other affordable schemes? If so, could you give us some indication of the likely scale of the increase? As the level of government grant for affordable housing has reduced by some 50% we expect to see a significant increase in the level of lending to housing associations. We cannot calculate specific estimates as we do not know the level of funds that will be provided from housing associations themselves, for example, from asset sales. We do not collect specific data for lending to shared ownership and other affordable schemes.
As a percentage of total mortgage lending, what levels of 95% mortgage lending do you expect to deliver between 2012 and 2015? We have no firm view as to the future LTV composition of gross lending. But whereas 95% plus lending has been virtually absent from the market over the past few years, we would hope that firms will be able to make such lending available where this is justified by the wider affordability characteristics of the borrower. We would expect this to be true with the new build indemnity scheme, where lenders will want to support creditworthy borrowers who can afford their mortgage commitment but do not have a large deposit saved.
How much Right to Buy lending do you expect to support between 2012 and 2015? Since 2009, Right to Buy (RTB) lending has run at around 3,000 loans per year. We cannot predict with certainty the effect that government’s reinvigoration of RTB will have on lending to this sector. Although the government’s proposed doubling of the average discount rate through increased price caps will potentially lower the effective loan to value of new RTB loans, lenders will still need to take account of both the borrower’s circumstances and whether the property represents adequate security, just as they do on all lending.
Aside from demand, what are the key factors limiting your members’ ability to increase lending for new housing? Since 2007 access to wholesale funding has been constrained by the global financial crisis and remains a serious constraint to lending levels overall. Although the position improved from late 2009 through to the first half of 2011, the Eurozone crisis has led to a deterioration in funding conditions since the summer. UK lenders are significantly better positioned now than in 2007, given their higher levels of capital and liquidity, and the gap between customer loans and customer deposits has shrunk considerably. However, difficult conditions in wholesale funding markets still have the ability to constrain lending volumes generally, not just for new Ev 124 Communities and Local Government Committee: Evidence
housing, and in 2012 events abroad, particularly in the Eurozone, have the ability to impact UK lenders’ ability to lend. December 2011
Further supplementary written submission from the Council of Mortgage Lenders You wrote to me on 3 February, requesting our views on custom and self-build. I am sorry to have missed your deadline. This is not a subject where we have considerable expertise or significant data. Our members are keen to support access to sustainable home-ownership. But this has to be set against the many constraints which are present in the current lending environment. Since the financial crisis, continuing funding constraints, increased capital requirements and more stringent conduct regulation have all contributed to a reduction in lenders’ risk appetites. We have also seen a degree of contraction and consolidation of active lenders. This has led to an overall reduction in gross lending to around £140 billion in 2011. This is down from the £345 billion lent as recently as in 2006. Against this background, there is limited availability of self-build mortgages among mainstream lenders. Where finance is available, there are often a number of conditions attached to it—for example, no lending against the first stage of the build or lending only up to the value of the part-build rather than against a projected valuation of the completed build. In addition, self-build often requires specialist underwriting. This is a resource that, at this stage, cannot be justified by many lenders given the relatively low demand for self- build finance coupled with its inherent risk. I am sorry that there is not more which we can say on the subject. Another source of input could be the Building Societies Association, some of whose members may have a particular interest in this type of bespoke finance. February 2012
Written submission from the Greater London Authority Summary — Investing in London makes sound economic sense. — London’s devolution settlement post-2012 will provide a great opportunity for maximising the return on housing investment in the capital. — While there are barriers to attracting institutional investment into the private.
How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms 1. For the Mayor, the key question is how to achieve optimal value for money with the very limited public investment that is made available for housing. 2. Even during an economic downturn, London continues to offer significant opportunities. Seven out of the eight largest regeneration projects are in the capital. All of these have significant housing components, or are housing led. The projects have been planned alongside major infrastructure investment, such as Crossrail and the Olympics, that increases the capacity for new homes. 3. London remains the economic powerhouse of the UK, and there are significant spillover benefits to the rest of the country. The capital continues to contribute more to the Exchequer—between £14 billion and £19 billion per annum—than it receives in public expenditure. Failing to invest in London’s housing will run the danger of choking off London’s economic growth and with it, the growth of the UK. 4. A recent study by Professor Mike Ball of Reading University identified that more than 200,000 professionals, essential to the capital’s economic future, are expected to join the London job market over the next decade. However, as the residential market becomes increasingly constrained, it is possible that 50,000 of these professional workers will not be able to find appropriate housing and may be forced out of London. The report identifies that the future economic viability of the capital depends fundamentally on the right type of housing being available. This is backed up by surveys of London’s business community, with over 70% of London’s businesses citing the lack of affordable housing as one of the most important constraints on the labour market. 5. Similarly, a recent report by the London School of Economics finds that affordable housing investment in the capital is used more intensively than elsewhere, as developments in London use less land per home and they lever in more private funding to supplement the available public funding. 6. The post-2015 investment round will be the first time in which London’s affordable housing settlement will come under the direct control of those who are democratically accountable to Londoners—the Mayor and Communities and Local Government Committee: Evidence Ev 125
London boroughs. This new landscape will provide an unparalleled opportunity to find new ways of maximising affordable housing delivery. It will be essential to make the best use of the full range of the newly devolved and existing powers of the Mayor and the assets that have been devolved, alongside the existing powers and resources of the boroughs and their new freedoms and flexibilities.
7. The Mayor is keen to review the extent to which the landholdings of the GLA group can create the keystone of a wider land release pool. This would bring together public sector land for development in London, including that of the GLA, government departments and agencies, and the boroughs. It would become the joint responsibility of the Mayor and boroughs to deliver these sites, under the auspices of the London Housing Board. To reduce procurement costs and speed up development, the GLA would develop a new set of development partner panels, building on the experience of the LDA and the HCA. There are already schemes on GLA family land that are helping to deliver significant numbers of homes, including Olympic legacy land through the Mayoral Development Corporation, LDA land at the Royals and some Transport for London land at Earls Court.
8. The Mayor is also keen for a radical rethink on how investment should work in the future, generally moving away from the old grant-based investment models and towards equity-based investments. The assets currently locked up in existing homes, in both the housing association and council sectors, could be made to work much more effectively, and the Mayor will work with partners to see how to make better use of these. In particular, the Mayor will work with boroughs to determine how the freedoms that HRA reform will bring can be optimised to better meet local need and London’s housing challenges. Alternative methods of finance will also be explored, with London making the most of the attractiveness of its housing market to major investment funds, alongside emerging finance options that the Mayor may consider for the GLA, including the potential for a Mayoral bond and Mayor’s mortgages.
9. But this radical rethink will only have the transformative impacts on London that the Mayor wishes to see if housing and infrastructure investment is joined up with wider social and economic regeneration. To make certain that it does, the Mayor will ensure that decisions on capital investment are made in partnership with the local authorities that know their areas best—and that can make the necessary connections with local employment and community development initiatives. The Mayor will also ensure that investment is fully aligned with the work of the London Local Enterprise Partnership, the Mayoral Development Corporation and other initiatives such as the Royals Enterprise Zone.
10. Apart from the economic benefits of investing in London, at a time of reducing public expenditure, public subsidy should be targeted at those geographical areas where housing need is most acute. London has, by far, the most pressing housing need in the UK: two thirds of all households in temporary accommodation, the highest levels of overcrowding, and the greatest disparity between average incomes and house prices.
11. While building new housing costs more in the capital in terms of grant per unit, there is greater value for money from building in London because the measures to deal with housing need also cost a lot more. For instance, investing in London’s affordable housing will significantly reduce the cost of housing benefit by reducing the number of households in temporary accommodation and in the private rented sector, where rents are higher than in the social sector. This level of saving would not accrue in other parts of the country, as there is not the same disparity between private sector and social sector rents, or as many households in temporary accommodation. By focusing funding on the highest concentrations of deprivation and need, investment in London does more to reduce the wider social costs and impacts associated with poor housing than is the case in any other part of the country.
How long term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening
12. There is considerable private investment in all forms of housing. However, the financial crisis has severely constrained both the availability of finance and the willingness of individuals and institutions to invest. There have been many attempts to attract such investment, but part of the previous failures has related to the challenges of ensuring residential investment delivers the same levels of return as commercial property and other investment opportunities open to them. Also, investor returns contain a significant capital element that cannot be realised without selling the properties, as well as the high management and maintenance costs.
13. Overcoming some of these constraints might require a change in government fiscal policy, for example tax breaks for institutional investors. In the 2011 Budget, the government took its first steps towards encouraging more investment with changes to the treatment of Stamp Duty Land Tax on bulk purchases. It is unclear what impact this will have; in the United States for example, where there is a long standing tradition of using tax credits to stimulate investment in private housing, only about 8% of the stock is owned by large scale investors.
14. There are, however, examples of innovative models being developed to encourage institutional investment in the private rented sector (although they do not necessarily fit the traditional models for such schemes). Ev 126 Communities and Local Government Committee: Evidence
HCA Private Rental Sector Initiative 15. In May 2009, the HCA launched its Private Rental Sector Initiative (PRSI) to support institutional investment in housing delivery. In September 2010, the Berkeley Group became the first investor to commit to a joint venture as part of the HCA’s PRSI. The deal will see the HCA invest £45.6 million in the scheme, which will result in 1,887 new homes built across Berkeley developments in the south west and south east. Of these, 555 will be retained for private rent by a private rental fund. The HCA will retain a 20% interest in the fund, with the option to withdraw at a later date.
LB Barking and Dagenham 16. This east London borough is championing a development model that will see the council enter the build to let market, while continuing to build homes for social rent. The council is using institutional cash to build 500 homes with an unnamed developer and institutional investor to house people on low incomes and on its housing waiting list by charging below market rents. Approximately 50% of the units will be let at 80% of market rent, 20% at 50% of market rent, and 30% at 65% of market rent. The 80% market rent units will be used to house people in work on low incomes and the cheapest rental properties will be used to house people currently on the council housing waiting list. 17. The council has donated two plots of land for the development instead of investing cash, and is planning to guarantee rents on the scheme for sixty years, after which the council will assume ownership of the homes. The scheme, which has been agreed by all parties, is expected to complete in summer 2013.
Bouygues Grainger Residential Fund 18. In October 2011, Bouygues and Grainger announced the creation of, and their co-investment in, a new build to let residential fund. The fund will provide institutional investors with the opportunity for large scale investment in the UK’s private rented sector. The fund is unique insofar as it has a dedicated portfolio of purpose built private rented sector development sites in London and the south east. 19. The development sites are expected to provide over 1,000 residential assets on completion. The assets will be developed and built out by Bouygues in phases over approximately three and a half years, with construction expected to complete in 2013. Bouygues will manage the investment and construction process, while Grainger will undertake the operation of the portfolio after completion, including property management, lettings, facility management, and fund and asset management. 20. The fund has been created with an eight year life, with an option to extend it by up to three years. Bouygues and Grainger will co-invest into the fund upfront, and will seek additional equity investment from institutional investors, totalling up to £150 million.
Akelius 21. In November 2011, Akelius, Sweden’s largest private housing company, launched plans to acquire 10,000 UK homes. Akelius appointed CBRE to acquire mid-market apartment blocks in and around London. The company has not said how much it is planning to spend, but it is believed to be in the region of £2 billion. Their aim is to create a portfolio of residential properties comprising freehold and investments let on assured shorthold tenancies. Akelius is not looking to buy new build properties, and will instead target existing portfolios from large landlords such as Grainger and the Wellcome Trust. 22. Finally, it is also worth noting that in future years we might well see emerging institutional investors on a smaller scale, in the form of individual landlords who started off with a few properties and have built up portfolios of several hundred properties over the years.
Conclusion 23. The new devolution arrangements will put London in a unique position, with a directly elected Mayor bringing together strategic direction and investment decision-making on housing and the key infrastructure necessary to underpin the delivery of the homes that London needs. These new powers put in one place the public sector landholdings acquired to promote housing development and the public investment necessary to fund these homes, so that this land can be brought forward to enable housing delivery. They also enable a closer alignment of housing delivery with the Mayor’s wider social and economic objectives and other major infrastructure investment opportunities, such as Crossrail, the Olympics and the large opportunity areas across the capital. 24. Investing in London is investing both where need is most intense and where the economic benefits that will accrue are greatest. November 2011 Communities and Local Government Committee: Evidence Ev 127
Written submission from the Association of Greater Manchester Authorities Summary — The nature of the UK housing market has fundamentally changed, and financing new supply on the traditional build to sell basis will not deliver the numbers of new homes we need. — Local authorities can act as enablers of new development, using their landholdings in partnership with institutional investors, and generating value from that investment in the form of deferred returns, and Greater Manchester is pushing forward work on turning that into a reality. — Government and other public sector agencies can act in a similar way and, if properly co-ordinated at a local level, much more can be achieved. — A new model of private landlord could be key to the achievement of high quality development at scale to meet the new realities and demands of the restructured housing market. — Housing associations have many of the skills necessary to deliver that new model, but the risks attached to the Affordable Rent model may act as a barrier. — Partnerships between housing associations and private investors may provide the best way forward, supported by local authority-led enabling work. — Government should urgently consider whether the short term nature of most private tenancies and the wider regulatory framework for the private rented sector fits with the changed nature of the UK housing market. — The New Homes Bonus should be recalibrated to better support delivery of volume housing.
1. The Changing Nature of the Housing Market 1.1 In very crude terms, there are two main housing career paths emerging as the fundamental building blocks of the UK housing market, with the key distinction being between households who have (or can afford to acquire) equity, and those who don’t (or choose not to): — The first path is to live with family or rent for a while (this now becoming an increasingly long while), then buy (maybe with help from family), then trade up and for some invest in Buy to Let, then downsize/release equity later in life. — The second is to rent for life—traditionally secure social rent, but now the emerging Affordable Rent option and, more strikingly, a return to private rent56 as a long term option—either through choice or, as the decline in number and accessibility of social rented property continues, through necessity. 1.2 All information would suggest that the second route is increasingly common, since the first is becoming more and more difficult for households to achieve and sustain unless they are well dug in with their own or inherited equity. That suggests possible high level objectives around: (i) Making the traditional path via owner occupation more financially achievable; (ii) Building some bridges or breaking down the barriers between the two paths; (iii) Improving the housing, quality of life, security and economic outcomes that the rental path offers, to try to reduce the economic polarisation that seems likely to result from continuing divergence; and (iv) Re-evaluating the economic arguments between home ownership and renting for households—is the popular perception of renting as “dead money” outmoded? These should be looked at in a context where the primary requirement is to secure housing growth to meet a quantum of demand which, while subject to debate at the margins, is clearly in excess of current delivery by a worryingly substantial margin. 1.3 From a Greater Manchester perspective, we need to close that delivery gap as a foundation for economic recovery and growth, both to contribute to national recovery and as a basis for achieving our wider social and environmental objectives. With funding from both public purse and financial institutions increasingly scarce, and household budgets squeezed, the main traditional drivers of investment have stepped back from the market, with obvious results in terms of numbers of market transactions and new development. Homes & Communities Agency colleagues estimate that around 60% of all new housing starts in the North West currently have some form of public subsidy, illustrating the scale of market failure. As the gap between household income and the cost of entering owner occupation continues, there will be a growing cohort of people who cannot purchase, even with the help of shared ownership/shared equity products increasingly available from developers. But with supply also continuing to be constrained by lack of finance, it seems unlikely that house prices will drop substantially, as might otherwise be expected when a product (ie owner occupation) becomes unaffordable. 1.4 The role of the housing market in the UK economy means that this knot of related issues poses a significant economic threat, given both the place housing has as an investment and the direct importance of the housing industry and related services as a source of employment. But it also points to a growing crisis in housing if the supply of homes across all tenures remains substantially behind household growth, as it arguably has since the late 1970s, and certainly since 2006–07. 56 CLG statistics suggest the private rented sector is growing at around 300,000 dwellings per year. Ev 128 Communities and Local Government Committee: Evidence
2. Opportunities and Risks 2.1 In this scenario, where are the opportunities for change and substantial progress? We can suggest five areas of opportunity in terms of bringing new investment in housing delivery in the broadest sense (ie in delivering additional housing supply or maintaining and improving the quality of the stock we already have): (a) New investment models to match demand for housing with requirement for long term sustainable, stable investment opportunities in more risk-averse financial climate; (b) A more active and flexible use of public sector assets to invest in housing delivery, complemented by levers such as New Homes Bonus and Community Infrastructure Levy (CIL); (c) New models of support for households unable to access housing they can afford through the market, such as the Local Authority Mortgage Scheme being promoted by Sector Group; (d) Carbon reduction and domestic renewable energy generation as an investment opportunity given expected significant increases in future energy costs; and (e) The financial implications of an equity rich, ageing owner-occupying population. We focus in this response on the first three, as perhaps the most relevant to new development. However, it may be worth noting and exploring the potential for the equity held by older households as a partial substitute for first time buyers in funding new development, allowing them to downsize later in life while releasing under-occupied larger homes. 2.2 In addition, we should consider the need to mitigate some key risks, including: (a) Increasing divergence between households (and in fact entire neighbourhoods) on each of the two housing career paths described above, and the economic and social impact that may have; (b) The extent to which a continued stagnant (or declining) housing market coupled with declining household incomes as the impact of recession and public sector cuts resonate through the economy will leave more households struggling to meet mortgage and maintenance costs of home ownership but unable/unwilling to sell their home because of negative equity; (c) The impact of reforms of Housing Benefit/LHA and the introduction of Affordable Rents on the way the market operates, the patterns of demand for housing (spatially and in terms of types of property), the rental income which can be generated by social and private landlords, and the resulting uncertainty around all of those issues which makes business and investment planning difficult for those landlords; (d) The impacts of a combination of increased demand for private rented homes at the lower end of the market and limited supply of new homes driving the creation of significant additional poor quality private rented homes as landlords acquire and sub-divide existing property; (e) The continued lack of available finance for both the funding of development and purchases by householders for an extended period, including the long term impact that could have on the development capacity of the commercial sector; (f) The declining ability of key public sector players to intervene as a result of reducing budgets and capacity in HCA and local authorities; (g) The divergence between areas where values are sufficient to maintain some housing delivery through traditional business models and those—likely to include much of Greater Manchester and other Northern urban areas—where new approaches will be needed; and (h) The barrier to development arising from the expectations of landowners of site values based on previously achievable prices rather than the new reality, added to the locked-in cost of sites already expensively acquired by developers in earlier times.
3. Elements of a New Approach 3.1 In a complex system such as the housing market, these risks and opportunities are of course inter-related. We will try to sketch out in broad terms a narrative as to how we see these and other issues fitting together, but focusing on securing new housing supply. 3.2 Bringing the first two opportunities together, Manchester City Council are leading pilot work on a new model which is intended to be applicable across Greater Manchester. Briefly, the scheme requires an investor, the local authority as land owner, a house builder/developer and a housing managing agent. Schemes for new private rented housing can be developed on the basis of deferred receipts from the land owner and rental guarantees from the managing agent (possibly a housing association), which together are sufficient to give a lender/investor confidence that the income from the development is sufficient to service a loan and provide a return. 3.3 Current work on a detailed proposal revolves around five local authority owned sites which are a mixture of good quality/high demand sites and more challenging regeneration linked sites. Detailed appraisals of the sites have been completed including a detailed housing market analysis. Significantly, Manchester City Council is in close negotiation with an investor which would significantly simplify the model. The simple model is an investor and a landowner coming together in partnership and procuring a house builder and housing managing Communities and Local Government Committee: Evidence Ev 129
agent. Whilst the initial sites are likely to be a mix of private rent and outright sale, further work is going on to determine if the model will accommodate a mixed tenure approach. The intention would be to utilise the Affordable Homes Programme together with the investment model to help bring forward further sites. Part of the local authority’s contribution is to help manage risk by using knowledge about existing and future housing need and demand to ensure schemes are closely aligned to the local market.
3.4 Our intention is to demonstrate through the pilot that this model can satisfy the requirements of the investment market, while producing a (deferred) return to the local authority and development at scale of new housing which meets the needs and aspirations of local residents.
3.5 In part, we are using this to help change the perceptions of investment markets of the residential sector as a source of acceptable returns on the basis of rental income streams. The attitude to this in the UK has been out of line with other markets internationally, including the United States, where residential holdings are seen as a natural part of investment portfolios, and where returns are expected to be generated from rental income rather than, as has often been the case in the UK, capital growth. This is accompanied by longer term tenancies than provided by Assured Shorthold Tenancies, providing greater stability and security for households (and communities) and helping to make renting a more attractive prospect as a housing choice. Larger landlords are also able to offer tenants alternative properties to fit their changing requirements over time—arguably a level of customer focus not commonly found in the UK.
3.6 In summary, we believe the time is right to pursue an alternative model for private landlords—working at larger scale, developing homes designed to be rented out to a range of households, and within a community context. In many ways this replicates the skills and experience of housing associations, albeit aimed at the mainstream market rather than the social housing sector, and the Committee might usefully explore the potential of associations—either on their own account or with private partners—to drive that agenda forward. This new model for private rent could, in our view, be strengthened by regulatory changes to offer landlords the ability to offer greater security of tenure in the private sector as part of an overall approach to improving the quality of both the physical product and the management service to ensure that households whose best long term housing option enjoy high quality homes in stable, successful neighbourhoods.
3.7 Returning to the Manchester pilot, our intention is that, if successful, this could be replicated across Greater Manchester, using packages of sites in all ten districts to provide a range of opportunities of different types of development to match the likely demand in different neighbourhoods across the conurbation, allowing investors to match their requirements in terms of market segments, risk, tenure, etc. The Committee’s questions about the best use of public subsidy and the balance between grant and lending or investment by the state are relevant here. In all sectors, the Greater Manchester approach is increasingly to seek to secure investment and recycling the proceeds of that investment to bring repeated and multiplied benefits, rather than chasing one-off funding. Over time we will build our ability to invest in the agreed strategic priorities that will underpin economic growth in Greater Manchester, and in practice it also drives a different, focused attitude to the development of projects with real and lasting impact.
3.8 Specifically on housing supply, the approach we are piloting is based on securing deferred returns to the authorities contributing sites to the project, with the potential to reinvest returns in time to repeat the cycle. If Government was able to add to the investment pot as a partner, the pace and scale of delivery could be accelerated, and an agreement could be reached as to the sharing of proceeds over time. A further alternative would be local authority bonds, suggested recently as a means of raising greater levels of finance to build out rental developments where sufficient returns can be confidently expected.
3.9 But there is a further element to the possible contribution of Government. The Prime Minister has announced a new push to secure housing development on Government owned land on a “build now pay later” basis. While we await further details of this, parallels with the model outlined above are obvious. We are already working with HCA and CLG in Wigan on a Capital & Asset Pathfinder project, seeking to exploit the public sector estate as an opportunity to drive development forward. Bringing those threads together, if we could manage local government, central government and other public sector landholdings such as the NHS in an integrated way, the scale of investment and delivery possible becomes much bigger. This would need to be done spatially, looking at places in an integrated way to construct a sensible pipeline of development to maximise both housing supply and financial returns to the various partners. We need to avoid opportunistic approaches from different parts of the public sector undermining collective returns through a lack of co- ordination and understanding of the impact on local markets. The Capital & Asset Pathfinder approach would appear to be a useful mechanism to help achieve that co-ordinated impact. With suitably strong support within Whitehall to secure a flexible and positive approach from across Departmental silos, more could be achieved.
3.10 The Committee also ask about the Affordable Rent model and its relationship to funding new homes. We are working closely with HCA and our partner Registered Providers (RPs) to ensure that Affordable Rent is implemented successfully in Greater Manchester, by which we mean that the funding the model makes available from HCA and via rental income from new build and conversions to Affordable Rent delivers the right homes in the right places to help meet local demand. However, there are clearly still questions for RPs in particular about the assumptions they should make about rental income, given the Government’s stated intentions around welfare reform. Housing Benefit changes (and uncertainty about their actual impact) can be Ev 130 Communities and Local Government Committee: Evidence
seen as a risk to landlords’ income streams, and therefore might well result in a more cautious view from RPs about their ability to commit funds to back new development. Some RPs may see development for market rent or low cost home ownership as an option they might pursue in order to hedge against the risks in the social rented/Affordable Rent sector. The balance between those arguments is hard to predict at the moment, and may be different in different places, depending on development costs and rent levels and their relationship to Housing Benefit thresholds. Equally, Government will no doubt be reviewing the impact of Affordable Rent on the Housing Benefit budget, and whether this is an efficient means of subsidising new affordable housing provision. 3.11 A further concern for the medium term is how the future for affordable housing provision will look once the current Affordable Homes Programme round is complete in March 2015. It is far from clear that RPs will be in a financial position to continue to borrow and invest to develop indefinitely via the Affordable Rent model at current grant levels, and assumptions around numbers and types of property converting to Affordable Rent remain untested. Clarity is also awaited on the Prime Minister’s recent announcement on revitalising the Right to Buy and the guarantee to replace each home sold. As many RPs are stretched in securing borrowing to support Affordable Homes Programme development, and receipts after discounts are unlikely to cover the cost of replacement homes, even if councils are able to provide suitable land. HRA reform may, in some places, provide some flexibility for local authorities to make a more direct contribution, as might prudential borrowing, although many councils are already under unprecedented financial pressure. 3.12 Finally, the New Homes Bonus is one Government contribution to this agenda. In terms of maximising the return on that investment, Government’s approach does appear to be flawed if housing delivery is the key intended outcome. Currently, properties built in Band H attract three times as much New Homes Bonus as a property in Band A. However, our evidence of the limited new development still being funded by the market suggests that this is concentrated at the top end where buyers are still able to purchase new property, drawing from equity in their existing properties. This is not to decry the need to build higher value homes—indeed, their relatively limited supply in Greater Manchester is seen as a barrier we need to overcome in retaining more of our high net worth individuals and their economic contribution to Greater Manchester. However, this is an inefficient use of New Homes Bonus, producing only a small number of new homes. A flat rate payment based on the Band D average would switch the emphasis toward rewarding volume of housing delivery, rather than providing an incentive to provide more high value homes, regardless of what local needs might be. In turn, that might allow local authorities greater leeway to use New Homes Bonus imaginatively as a means of supporting investment to drive housing delivery.
4. The Role of National Government 4.1 We can suggest a number of areas where Government is uniquely placed to act: (a) Making the case for housing as a high profile national issue. This is beginning to happen, though arguably much of the debate has focused on the welfare reform agenda and on the planning system, rather than on the financial issues which have actually caused the collapse in housing delivery nationally. But fundamentally, we are not building enough homes to meet household growth (and this was also true under the previous Government). This partly explains why house prices have remained relatively high. It should be possible to agree on a cross-party basis that having positive answers to the question “Where will our kids live when they grow up?” is a central political concern at both national and local level. (b) Rethinking the emphasis on home ownership as an achievable ambition for all. The evidence from the market—in the North West and nationally—indicates a structural shift away from owner occupation has been underway since 2003, and history suggests that “government rarely manages to buck fundamental trends in housing tenure [without] a very large financial commitment in the form of direct intervention … or incentives such as Mortgage Interest Tax Relief”57. Renting is the growing sector, and government needs to re-examine both the legal framework for protecting landlords’ and tenants’ interests and how investment into the private rented sector can be increased to meet future demand (both to maintain and improve quality of the existing stock, and developing new homes for rent). (c) Using levers available to influence/direct financial institutions, including those in substantial public ownership, in their attitudes to investment in housing. While many of the financial issues currently facing the UK and other developed economies can be traced in substantial part back to ill-judged lending on residential property, paradoxically there are now opportunities in the housing sector to achieve stable, low risk returns for investors with a long term view. We should look to see what lessons can be learned from other countries where the private rented sector is seen as a long term stable option for both tenants and investors, and whether key elements can be replicated in the UK to support the development of an active market in institutionally-backed investment in the sector. This should include for example looking at longer term tenancies, and at stamp duty and capital gains tax rules as they apply to landlords. This should complement measures to unlock the mortgage market for those households who can afford to buy but are currently unable to secure finance from lenders. 57 The end of the affair: implications of declining home ownership, Andrew Heywood (2011)—p 117. Communities and Local Government Committee: Evidence Ev 131
(d) Maximising the flexibility available to local authorities and their partners, including HCA and Registered Providers, to get things done in ways that work locally, and understand that the ability of those organisations to achieve more with less direct financial input from Government depends upon retaining and enhancing the capacity, experience and knowledge of regeneration, legal, housing, planning and other professionals. Procurement and State Aids issues often complicate the relationship between the public and private sector in this area, and this can get in the way of developing and testing innovative proposals, particularly with private sector partners. While the rules in place are there for good reasons, it may be worth Government exploring the potential for any flexibility that can be added without risking compromise of the key principles of sound governance in this area. (e) Ensuring Government Departments and Agencies are active partners mandated, encouraged and monitored on their commitment of landholdings and other assets into development proposals led by local authorities and their partners. The use of HCA as an enabler in this work is already a positive step—Ministerial and Treasury pressure to engage flexibly in this work and to accept deferred rather than immediate returns would be extremely helpful. The Capital & Asset Pathfinder work recently reported on by CLG provides some guidance on useful approaches, and we await details of the announcement by the Prime Minister on the eve of the Conservative Party Conference in regard to the “build now, pay later” release of Government land for housebuilding. October 2011
Supplementary written evidence from the Association of Greater Manchester Authorities (AGMA) Purpose of Report 1. At the Oral Evidence session on 19 December, the Committee requested a further note from AGMA on the barriers facing Manchester City Council in developing the pilot housing investment model with GM Pension Fund. The Committee also raised a question on the impact of procurement in general as they had heard previous evidence during a visit to Manchester suggesting that this was a significant barrier to development.
Background 2. The Manchester Independent Economic Review, conducted by leading economists from Harvard, LSE and Goldman Sachs, concluded that “outside London, the Manchester City Region is the area which, given its scale and potential for improving productivity, is best placed to take advantage of the benefits of agglomeration and increase growth.” There are many factors that need to be aligned if the city region’s growth trajectory is to be optimised. Ensuring that the supply of housing meets the demands of a growing workforce and population is a fundamental requirement if the supply side of the economy is to function effectively, and AGMA is therefore committed to restoring housebuilding from the current low levels. 3. The Manchester pilot aims to respond to the current market and assist in delivering increased numbers of new properties. In parallel, work is being done on the issues that would need to be resolved to expand this both to a full GM footprint and a wider range of partners, in particular other public sector landowners. This model is placed in the context of a proposed wider approach to tackling the need to address market failure while also delivering a wider range of new homes including higher value family homes. 4. The previous housing delivery strategies which involved encouragement of home ownership based on borrow, build and sell models have not been replaced by any convincing alternative in the current and as development finance and mortgage finance continue to be squeezed there is little prospect of a quick return to the old model. Some analysts believe that this situation will be the new norm possibly for the next 10 years. Our approach therefore aims to make use of other key levers to generate the necessary investment to allow significant housing development to resume. 5. Unlike in previous recessions, public sector finance is not going to be around to provide a stimulus— there will be some, but it is likely to be peripheral. Alongside this the withdrawal of mortgage funding is leading to a restructuring of the housing market, both in the way development is funded but also in the product—for example we are seeing a steady rise in the demand for private rented sector, at both the top and bottom of the value scale, which is unlikely to be a short term phenomenon. Supporting this is a significant culture shift in the way we use our property, particularly in the 18–35 age bracket where job mobility, life style choices, and debt accumulated through higher education are all having an impact on the type of property demanded. 6. New delivery models critically need to respond to this new environment and be based on an understanding that there has been a fundamental move away from grant-led funding, based on need, towards recyclable investment, based on return.
The Manchester Pilot 7. Discussions with the GM Pension Fund have been taking place to develop a Housing Investment Model in Manchester that will deliver both low and high rise mixed tenure options, capable of being applied across GM. The basic premise is very simple; there are two investment partners, the council with land to invest and Ev 132 Communities and Local Government Committee: Evidence
the pension fund with cash to invest. Together the investors procure a house-builder, sales and marketing function and a housing managing agent with which it enters into a minimum 10 year lease. Through the lease, both investors are able to take a guaranteed revenue return on their investment and both share in any capital return on the sales properties. The new build housing is targeted at economically active households. 8. The model is being tested on the identification of a range of sites with varying values and in different neighbourhoods. The initial appraisal has clearly demonstrated that some low value sites do not work as a stand-alone investment, but higher value sites do. However, by packaging sites in a structured way, it is possible to ensure that the overall rate of return is sufficient to create a viable proposition which meets the requirements of the Pension Fund while generating a significant scale of new development (250 units). 9. In order to check the assumptions made in the development of the housing delivery model, Manchester and the pension fund have carried out a soft market testing exercise. There were three main areas of the model to test with delivery partners—construction, property management and sales. A number of organisations from the Homes and Communities Agency’s Delivery Partner Panel were invited to participate, including a wide range of expertise across national house building, contracting and property management. The model was very well received and some of the organisations were already looking into the build to rent concept. One organisation in particular was already delivering a mixed tenure development using its own resources to provide the investment finance. The detailed feedback from the sessions has been gathered, and is now being incorporated into a detailed brief. 10. Following approval by the City Council’s Executive on 18 January 2012, procurement of a house builder and sales and marketing advice is being undertaken using the Homes and Communities Agency Delivery Partner Panel. This will reduce the procurement time considerably as the panel has been through the necessary OJEU process. Separately a housing management agent will be procured through a straightforward lease arrangement using a range of Registered Providers selected with a mix of appropriate private sector managing agents. Procurement and appointment of the delivery partners is projected for Summer 2012, and following the detailed design work a start on site in Autumn 2012.
Key Barriers Identified by Investment Partners Theoretical modelling v practical implementation 11. The key barrier is still to demonstrate to all partners that the model works. Modelling work done so far has taken this as far as possible with theoretical models using real sites, current values, and cost assumptions which we have tested with a range of potential bidders as a reality check. The final hurdle will be when the contractor and housing management agent are procured and the real costs can be properly modelled. Because of the nature of the investment proposals, very specific assumptions need to be made and incorporated into the model about the likely rental and sales income generated from each development—as with house prices, these vary significantly not just between different parts of the country, but between different sites within (in this example) Manchester. Management lease and rent uplift mechanism 12. The investment partnership needs to minimise its risk on the rental properties through a lease to a housing manager. Key to the proposal is what cost the housing manager will put on that risk. 13. One of the main risks for the investment partnership is how the managing agent will offer rent uplift over the period of the lease. A simple RPI mechanism appears straight forward but this has caused managing agents some serious issues in the past. Market rent levels are by their nature, very market sensitive and specific to the locality. Linking increases to a national index can create strange distortions at a local level and can quickly make a development uncompetitive. Part of the bidding criteria will be to evaluate how each managing agent proposes to set rents and more importantly review them over the life of the lease. This is likely to be one of the main factors in determining the investors participation in the final scheme and therefore a key barrier. 14. Another key risk will be managing turnover. The management agent’s approach to the question of tenancy durations will be key, in particular whether the standard private sector Assured Shorthold Tenancy is felt to help achieve longer-term stability for both manager and tenants. All parties to date agree that keeping turnover to a minimum will be key and that offering longer term tenancy agreements will be a major incentive and product differentiation to the investment. However this has to be balanced against the mechanism for agreeing market rent uplift. Governance 15. Under normal circumstances, the Council would need to invite a range of potential investors to consider the offer and to choose those offering the best deal in terms of rate of return required. This is difficult when developing a new untried concept as it is only by working through the issues with the investor that the scheme and governance arrangements can be addressed. It is worth noting that the City Council has been inundated with propositions from developers, consultants and individuals and without a procurement process it would be challenging to justify any one approach, especially as they all involve a requirement for the City Council to contribute its land as an investment. Communities and Local Government Committee: Evidence Ev 133
16. However, MCC is in the fortunate position of being able to work directly with the GM Pension Fund given that both the Fund and the City Council are public bodies. Each is therefore able to enter into a Memorandum of Understanding without requiring a time-consuming and expensive formal procurement process. By working together on the development concept and understanding the partners’ objectives, we have been able to frame the MoU in terms that support the partners individual needs and aims. 17. Providing the model can now be practically demonstrated, Manchester and the other GM Districts will be in a much stronger position to offer out future phases to the market as there will be a clear and credible demonstration of what the model is and how it works on the ground. Tax transparency 18. Tax issues are still being worked on. However one specific issue has emerged early on in relation to the type of partnership organisation used. There are two likely organisational structures, a Limited Liability Partnership (LLP) or a Limited Partnership (LP). Our current view is that an LLP structure would be the most practical solution, as it offers tax transparency (ie the partners pay tax on the income generated separately, rather than the partnership itself being tax liable) and greater flexibility in terms of implementation and changes at a later date. However pension funds are specifically excluded from tax transparency in an LLP making it impossible for them to opt for this type of partnership arrangement. A simple amendment to the Finance Bill could enable large scale investment proposals from pension funds to be tax transparent if they invested them through an LLP structure.
Procurement 19. Specific procurement issues have been mentioned above in relation to the Manchester pilot. However, there is a more general point that the Committee may wish to consider. The GM authorities have been approached regularly, particularly since the nature of the housing market has been radically changed over the last few years, by private sector partners with innovative proposals aimed at generating housing and mixed use development to test out different models from the traditional borrow, build and sell approach. While some may have been unconvincing, others have undoubtedly been deserving of further development, and may have become worthwhile additions to our (and Government’s) efforts to revive housing delivery. Most have involved local authority investment either through land or funding to acquire land. 20. However, procurement requirements mean that, other than through the partnership with the GM Pension Fund (because of its public authority status), we would need to openly procure potential partners to take those ideas through to delivery. Clearly, this requires the exposure of the innovative thinking underpinning the proposition, which private partners are understandably reluctant to agree. The outcome, though surely unintended, is that the procurement restrictions and the risk of challenge if not followed, have effectively undermined public authorities’ ability to partner with the private sector to test new ideas. January 2012
Written submission from London Councils Thank you very much for this opportunity to make a submission to the Communities and Local Government Select Committee enquiry into the financing of new housing supply. London has had a cross party consensus behind the principle of localising the Housing Revenue Account (HRA) which has been supportive of both the previous and the current Government’s work in this area. Devolution of the HRA in April 2012 is, in our view, potentially the biggest change to happen to council housing since the “Right to Buy” policy of the 1980s. In exchange for taking on £7.2 billion of national housing debt, 29 stock-owning London boroughs will gain full control of their housing stock for the first time in a generation. While the final settlement figures are to be confirmed, early estimates indicate that half of the affected boroughs in London are taking on an average of £380 million in debt each and the other half are having their debt reduced by £180 million. It is in this context that we believe there are a range of significant issues for boroughs to address but also potential opportunities to take forward. However whilst creating opportunities for boroughs, Government has placed an artificially low cap on the limit of borrowing that can be undertaken to finance HRA investment. We believe this prudential borrowing cap should be raised and indexed in order that “the investment value” of a borough’s borrowing capacity is maintained. In the light of this fundamental change to housing and also the deepening housing crisis in London, London Councils was keen to explore ground breaking ways that scope for investment can be maximised in a post HRA world, and in doing so shape the debate on the prudent maximisation of investment potential in London. London Councils research found that there were, broadly, three types of borough: — those with an HRA surplus on day one (either from having borrowing headroom that is not needed or from having an operating surplus on its HRA); Ev 134 Communities and Local Government Committee: Evidence
— those who could meet their investment needs in the medium term and then use a resulting HRA surplus to invest in new stock; and — those who would not be able to meet all their investment needs over a thirty year business-plan period. Although these might be better seen as different points on a continuum rather than three distinct types of local authority position. Our research indicates three broad options that boroughs might pursue collectively in order to increase the supply of new housing, or to improve existing housing: — “Trading” borrowing headroom between councils to bring forward investment or development. — Combining HRA funding and available development land between authorities for new development. — Exploring arrangements to share services, pool headroom or combine HRAs to optimise performance and maximise resources.
London Councils HRA Options Research Boroughs are now business planning to determine how they will manage the debt that they will take on in March 2012. Following the recent announcement by the Chief Secretary to the Treasury, it is very likely that boroughs will seek to pay the debt owed to central Government through a loan from the Public Works Loan Board. In this context, the challenge for boroughs will be to manage this debt whilst at the same time ensuring that income is optimised, costs are kept to a minimum (seeking to minimise any additional rent collection costs as a result of the Universal Credit and Rent Direct for example) and priorities—whether they be servicing debt, investing in existing stock or building new stock—are met. Once it has ensured that it has an active asset management strategy in place, a borough could consider an “Investment and Service Partnership” for its stock—essentially a PFI deal without the associated PFI credits— whereby capital is generated immediately for investment in new or existing stock, with long-term repayment by the borough to a third party. However, we recognise that, while this is an option that arises from HRA devolution, given previous experience of PFI deals, boroughs may not be willing to explore this possibility. Equally, a borough may consider how a stock transfer may enable capital receipts to be added to its HRA, enabling more housing investment to take place in subsequent years. While the options above take on a greater significance in a situation of self-financing for housing, the perhaps more interesting and imaginative opportunities present themselves when considering the options available to local authorities working together, either with one other partner or in groups. Because of both the number and variety of boroughs, and the governance arrangements of London, these options have a particular resonance in the capital. However, they could in principle work anywhere.
Borrowing Capacity and Headroom Sharing Following devolution in April next year, each borough will have freedom to borrow on the strength of its assets, both in terms of its housing stock and the rental income that it produces. However, this freedom may be constrained by two things—the need to invest income in stock and the cap imposed by the Treasury to limit the amount that it can borrow. While this limit is partly based on central government’s assessment of a local authority’s borrowing capacity, it is at best an estimate, and is different from, and in many cases lower than, that borough’s prudential borrowing capacity. Given this limit in borrowing, it may be the case that some boroughs will have the desire or need to access capital to invest in their housing stock, but are constrained by their debt cap from doing so. Similarly, some boroughs will find themselves with some borrowing capacity that they do not need to use, as their investment priorities can be met without borrowing. In these circumstances, there is the potential for the authority with higher needs but no borrowing headroom to access the borrowing headroom of the “better off” authority. The lending authority could charge a fee for providing this capital, and the borrowing authority would benefit from being able to access resources which it could use to invest in its housing to produce a higher return in future, from which the cost of the loan could be paid back. This would in effect merely re-distribute existing debt around local authorities and would not add to the aggregate HRA-related debt. However, at the moment it is not possible and would need central government’s approval to happen. As such a move would not add to the aggregate debt, and would allow boroughs to act far more like the housing business managers that HRA devolution implies, the freedom to swap headroom in this manner is something that we would strongly urge the Government to actively consider in the coming months.
Boroughs Working Together It is not merely swapping headroom for capital that becomes a possibility following devolution. There may be a situation where one borough has borrowing capacity but limited land on which to build new housing. If it were able to partner with another borough with land but not capital resources, it may be that the two could negotiate so that the former lends capital to the latter in exchange for a proportion of the nomination rights to the new social housing that the latter builds on its land. Equally, this sort of cooperation could happen between more than two boroughs or, in London, even on a sub-regional basis. In this way, imaginative inter-borough Communities and Local Government Committee: Evidence Ev 135
cooperation could enable delivery of new or improved housing where previously controls over boroughs’ HRA operations would have prevented such an approach.
The opportunities to bring forward new supply present themselves in other ways, too. Self-financing will encourage boroughs to consider their housing stock much more as a business than in the past. In this context they may do more than “sell” their borrowing capacity for a commission or for access to new housing. They may want to go further with partner boroughs and undertake new development collectively. Such joint development could take a number of forms: it may be that a number of boroughs enter into a contractual agreement or form a special purpose vehicle to pool resources such as land, capital, or development expertise, and use the sum of these parts to build new homes. Those homes would be allocated to the participating boroughs on a pre-agreed basis according to what each put in. Such a multilateral vehicle could also provide a body of development expertise and capacity to the participating authorities.
Going further, HRA devolution opens up the medium term possibility of local authorities combining their HRA operations. In this scenario, it is possible that we might see a situation where a number of authorities, possibly but not necessarily on a geographic basis, combine their HRA operations. This could in practice mean anything from sharing back office functions and administration to joint development along the lines mentioned above to even pooling or aggregating the debt caps of a number of authorities. Access to resources in this case could be bid-based or relate to agreed priority criteria, with the arrangement operating for a fixed term between a number of authorities. The business plan positions would need to be complementary for there to be mutual benefit for the authorities involved.
Going further, full HRA integration could be achieved through a number of neighbouring authorities combining their HRAs. In practice this would require the transfer of stock to a single authority to create a single HRA. Governance would be shared between the authorities and a “Group Structure”, akin to a housing association model could be adopted providing for local delegation. Shared services, including potentially housing management services could generate efficiencies.
Whilst they may theoretically be possible, we would caution that these options would require consent if not legislation from Government permitting them, and as such should be seen as a longer term possibility.
There are of course challenges within all the options above. Some authorities with high investment needs and relatively little access to finance may find even meeting the objectives of an active asset management strategy has its difficulties. However, London Councils is certain that all authorities will relish the opportunities and freedoms that the move to self-financing represents, including the possibility to build council housing in significant numbers for the first time in a generation.
Artificially Low Levels of Borrowing Capacity
There are some issues that threaten this possibility and create uncertainty, however. The imposition of a debt cap for housing that is unrelated to prudential borrowing rules or limits goes beyond necessary controls on public expenditure by local government. The prudential borrowing rules should be a sufficient guide to ensure an appropriate level of borrowing is undertaken by stock-holding councils to invest in housing. We would like to see the Government commit to reviewing this option as soon as possible following HRA devolution.
A further issue is the fixing of the aggregate debt cap in nominal terms by the Government. This means that, over time, the value of the debt that boroughs will be able to incur will erode with inflation, undermining their investment abilities. London Councils recommends that the cap be index-linked, so that it bears a closer relationship to rental income, which rises according to a formula that includes a measure of inflation.
Finally, the recent announcement by the Prime Minister to encourage a new round of “Right-to-Buy” sales could potentially undermine boroughs’ business planning abilities. While we support the aims behind the policy, we remain concerned that the combination of high levels of discount and the use of the receipts to fund the three-fold objectives of reducing the national deficit, underwriting the construction of a new home and compensating the relevant HRA for the lost rental income could undermine a local authority’s ability to borrow on the strength of its housing asset, as its future size and value will be more unpredictable. DCLG will need to ensure that any new manifestations of the Right to Buy policy do not undermine HRA business plans for the local authorities concerned.
We hope that the above is helpful to the committee’s enquiry, and we would be very happy to present our views to the committee in person should you desire. November 2011 Ev 136 Communities and Local Government Committee: Evidence
Written submission from Oxford City Council Summary — The biggest return on investment would be to invest directly in building new Council Housing. — There is a clear and significant role for the public sector to provide support in kind both on its own land and through reducing planning uncertainties and thus risk. — The potential for the HRA reform to be a force for good in reinvigorating new housing supply is significant providing the Government gives greater local flexibility under its Localism Agenda. — The Affordable Rent proposals are unlikely to be effective in the medium to long term; in particular Oxford will see investment in its affordable housing leach away despite the considerable housing needs in the area.
Introduction The City Council welcomes the opportunity to respond to the Call for Evidence from the Select Committee. It has particular concerns about the Government’s Affordable Rent proposals and the reduction in grant funding. The City has an acute housing shortage, particularly in the social rented sector. The Council remains committed to maximising housing development as far as it can within the tight administrative boundaries of the city and the constraints of the Green Belt, attractive landscape setting and flood plain. The adopted Core Strategy has a policy seeking 50% affordable housing from sites of 10 units or more with 80% of such affordable housing to be social rented, unless there are demonstrable viability constraints. The following key points are considered to have particular implications for the future of Oxford and its economic prosperity.
1. How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms To answer this question in terms of both social and economic policy, it is important to step back and start by considering whether public funds are better directed to investment in bricks and mortar or to housing benefits ie subsidies to landlords? Between the 1940s and 1980s national social policy prioritised the former approach through the purchase of land by public bodies, the construction of houses on this land and renting these properties directly to tenants, thereby minimising the housing benefit budget. In more recent decades, private landowners and developers have been placed under a range of obligations through the planning system to provide affordable housing, and Registered Providers have been pressed into becoming the principal providers of social housing. This has had the effect of shifting the balance of public funding for social and affordable housing towards the benefits system and away from support for land acquisition and house building costs. The rate of new homes provision has dropped markedly in the past decade with resulting increases in housing waiting lists. The present government’s policy of “Affordable Rents” seeks to further reduce the direct public funding for social housing through the recycling of rental incomes into land acquisition and construction; and simultaneously, to reduce the support to tenants’ rental costs by restrictions on Housing Benefits and Local Housing Allowance. The effect of these twin policies will inevitably be to reduce still further the ability of the public sector to provide affordable homes for those most in need. Affordable rents at 80% of market rents will not be covered by Local Housing Allowance in Oxford. For example the LHA rate for the whole of the Oxfordshire Broad Market Area for a three bed house is £213.46 whilst the 80% level of private market rent is £252.00, (June 2011 prices). There remains considerable doubt too that providers will be willing to charge a rent lower than 80%. In fact private rents in Oxford are considerably higher than in the rest of the Oxfordshire BMA. A point made by Shelter this week in its Private Rent Watch Report , which declared that “The least affordable local authority area outside London is Oxford, where typical rents account for 55% of average earnings” Therefore the Affordable Rent policy will not create extra funding for housing in Oxford. It can be predicted that the effect of these policies will be to direct the construction of “affordable housing” towards locations where private developers can make the most profit and where the Affordable Rent level is closest to Local Housing Allowance rates. This will mean that the location of new affordable housing will not be determined by the level of need for such housing and demand will continue to be massively out of balance with supply—both in volume and spatial distribution. The effect may be such that the Return on Investment from State funding is positive but at the cost of providing homes in the wrong place for the wrong groups of people. The City Council has analysed the potential impact of the affordable rent policy and concluded that it will make a very limited contribution to meeting the housing needs of the 6,000 plus families who are currently registered on its housing waiting list. Our firm view is that the biggest return on government investment would be to work with local authorities and to invest directly again in building new Council Housing. Communities and Local Government Committee: Evidence Ev 137
2. What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening The public sector has potentially a very key role in tackling the backlog demand for social housing through the provision of support in kind through the use of sites that it owns and, more indirectly, through reducing planning uncertainties and risk. In the current economic climate increased perceived uncertainties and risks are leading private landowners, developers and their funders to increase profit margins and thus reduce the capital available to provide affordable housing. The City Council has embarked on an exemplar project to deliver the greatest number of affordable homes at social rent as is possible in the current economic circumstances. It has formed a Joint Venture partnership to develop an urban extension of around 1,000 houses on its own land. Because it is also the planning authority, it is in position to also provide a clearer planning framework in terms of both timing and S106 costs. Regrettably, other parts of the public sector are not adopting this approach. For example, the British Rail Residuary Body is seeking to sell land within Oxford on the open market with significant uncertainties for developers over the development potential and with significant planning uncertainty. In short, by obliging a private investor to absorb a very high level of development risk, the government is squandering the potential to secure the best available affordable housing yield from the site. Another barrier to a rational approach to land use is the pattern of restrictions on land, which has the potential to be developed, and the Government’s ambiguous stance towards Localism. While espousing a rhetoric of localism, it is reinforcing central controls through the draft National Planning Policy Framework, especially the policy on Green Belts. There is land adjacent to the urban area of Oxford that is both in public ownership and of low environmental quality. This land is well located to be developed as a significant and sustainable urban extension to the city of at least 4,000 homes. It would make a considerable contribution towards meeting both the public and private housing needs of the city and the sub-region served by the Local Enterprise Partnership. This land was designated for an urban extension in the adopted South East Plan (regional spatial strategy). However it lies in the Green Belt and there is very little prospect of it being developed because the NPPF and other government announcements indicate that Green Belts will be protected without exceptions, and the RSS housing targets and spatial allocations will be abolished. It remains the case nevertheless that development of this land would be the most cost effective way of providing affordable housing around Oxford and would only involve the loss of 1% of the Green Belt around the City. This is not “urban sprawl” but the sensible use of publicly owned land in a sustainable way. As has been argued in the past, including in the Barker Review, jumping green belts to provide housing in dormitory settlements is an unsustainable approach to land use planning. Yet this is has been the policy in Oxfordshire for almost 20 years. The result is that while some 75% of residents live and work in Oxford, 75% of residents in the dormitory market towns of Witney and Bicester commute out of these towns, many of them back across the Green Belt into Oxford.
3. How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply The extra borrowing headroom proposed in the reform of the council HRA system is welcome although the removal of the cap limit would be more effective in delivering housing units. However, the recent announcement by Ministers that Right to Buy discounts will be increased together with central government retaining a substantial percentage of RTB receipts, will potentially create a situation in which local authorities will be like a family who take out a mortgage and then have to stand by while the property on which it is secured is gradually demolished. The ability of Councils to repay the substantial housing debt that they will take on as part of the HRA reforms would be significantly undermined as the size of their stock is reduced through RTB purchases. This would in turn limit Councils’ ability to fund new house building and, in a location such as Oxford where land values are high and developable land in short supply, would mean that value taken out of the council’s stock would most likely be used to build affordable homes in other locations where easier and more profitable development conditions obtain. If the Government genuinely wishes to stimulate the development of affordable housing in locations where it is most needed, complete local flexibility is needed, including retention of 100% of Right to Buy receipts coupled with a statutory obligation to use those receipts to improve the quality and/or quantity of affordable social housing. Local authorities have the potential to play an important role in providing direct or facilitating new housing supply. Councils are able to internally borrow capital and also have access to more affordable finance than Registered Providers or the private sector, thus ensuring bigger returns on investment. The potential for the HRA reform to be a force for good in reinvigorating new housing supply is significant providing the Government gives greater local flexibility under its Localism Agenda. Ev 138 Communities and Local Government Committee: Evidence
4. How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term The Affordable Rent proposals will not be effective in increasing funds available for new housing, not least because they are accompanied by a 65% cut in the HCA budget. In practice, new housing will be funded in the near future by Registered Providers (RPs) drawing from their reserves, together with some limited HCA grant and limited borrowing. However, the security of the RPs’ rental income is diminished by the proposal to introduce a Universal Credit, including an element that was previously covered through housing benefit, to be paid to the tenants directly and no longer to the landlord. This will create an insecure income stream for RPs and Councils, reducing their ability to raise new finance. This is not sustainable in the long term and the current four year proposal will lead to reduced funds rather that an increase in funding over the medium to long term. The other serious implication is that the RPs, through new voids and churn on their stock, will draw value out of high-price market areas, such as Oxford, and use this to build in less expensive areas with lower market rents. Therefore, the Affordable Rent proposals are unlikely to be effective in the medium to long term, in particular Oxford will see investment in its affordable housing leach away despite the considerable housing needs in the area. Taken together, the above considerations highlight the risk of disinvestment and value extraction from social housing stock in areas of high housing need and high housing cost (where the former is often a symptom of the latter), leading to inappropriate development of social and other affordable housing in areas with lower land values (and often, concomitantly, lower housing need). October 2011
Written submission from the National Federation of ALMOs Summary — The NFA believes that ALMOs can play a key role in ensuring that the government make the best use of any public sector subsidy in delivering new homes. — ALMOs could help their local authorities fund development programmes through a more positive asset management programme if certain financial and bureaucratic restrictions were lifted. — The NFA believes that councils and their ALMOs need more flexible options in the future in order to be able to continue to meet the needs of their communities. We urge the government to support the development of the three “CoCo” options outlined in the NFA publication “Building on the potential of ALMOs to invest in local communities”. The three new types of ALMO could give them the opportunity they need to borrow private finance whilst keeping their strong links with their local authority. They would also be able to retain the tenant focus, which has often distinguished them from traditionally managed council housing. — The government should also consider changing the classification of borrowing for council housing investment, recognising that council housing is a trading activity and that, under European accounting conventions, its borrowing need no longer count towards the main measure of general government debt. — The recently announced changes to the Right to Buy regime look likely to threaten the viability of self- financed business plans and council housing as an on-going business and our members are very concerned about this. — The NFA is concerned about how the “Affordable Rent” programme can be sustained over the medium to long term. Many of our members have been keen to explore the “Affordable Rent” product, but would like to see it as one of the housing options available to the community, alongside social rent within a coherent and equitable local housing strategy.
How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms In the current economic and fiscal environment it is imperative that the limited public subsidy available to support the development of new affordable homes is put to the best use it can to provide the right kind of new sustainable homes across the country. The NFA believes that ALMOs can play a key role in ensuring that the government makes the best use of any public sector subsidy in delivering new homes. Recent ALMO developments have shown that ALMOs can provide much needed homes for communities on existing council land. ALMOs in many areas have built on land that no other developer was interested in, land that was deemed to have little or no value and to be a cost to the local authority in maintaining and managing it. ALMOs have offered local authorities an option to develop that means the council can retain control over the land and the asset as well as ensuring that local housing management is not fragmented. Communities and Local Government Committee: Evidence Ev 139
For example, last year Stockport Homes developed 17 new homes on an existing council estate to meet housing need in the area. In this instance the development included larger family sized homes as well as wheelchair accessible homes for families and couples. The development has made fantastic use of an under used area of the estate, which tended to attract low level anti-social behaviour and has helped to meet clearly identified housing need in the area. The NFA believes that it is critical that in the desire to maximise housing supply from a limited amount of public subsidy the government does not rush to build large numbers of homes in the wrong parts of the country and focus entirely on numbers, which could encourage the building of smaller homes rather than the family sized homes that are required in many parts of the country. The NFA believes that ALMOs, working closely with their parent local authorities can help to ensure that local housing need is met in a sustainable but cost effective way.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them Many of our members across the country are looking to see what they can deliver without the use of social housing grant, and a number of ALMOs are engaged in discussions with their local authorities regarding the possibility of funding development programmes through a more positive asset management programme, selling some properties under shared ownership, some on the open market and some land to private developers and using other council-owned sites to develop social housing with the proceeds. This model will allow some local authorities to make better use of existing council properties and assets and develop new homes to meet the specific housing needs of their tenants and people on the waiting list. Some ALMOs and their councils would also like to make more of the rental income that they will be managing under self-financing from April 2012 to provide more new affordable homes. Even though the NFA along with other housing stakeholders argued very strongly that the existing safeguards in relation to new borrowing, such as the Prudential Code, the limits on rent increases and the HRA ring fence were all sufficient to ensure that local authorities did not increase borrowing at unsustainable levels, the government has felt it necessary to impose further limits on new borrowing in a self-financing regime. We understand the commitment that the government has made to reducing the public sector deficit, but feel that borrowing for investment in new affordable housing should be considered separately to borrowing for other purposes. Any borrowing for new affordable housing with the self-financed business plan would be subject to a clear business case based on rental income and costs over a 30 year period. The NFA and others have already proposed a borrowing ratio of income to debt, which could be agreed with and set by central government. This would allow some local flexibility around the timing of new borrowing and allow central government some on-going control, whilst allowing local councils and their ALMOs to make the most of their assets and deliver some of the new housing that the country so desperately needs. Some of our members are also interested in the idea of “build now—pay later” and believe it could help them unlock key development sites with their parent local authorities for a mix of private and social homes or be used entirely to help kick start private development on some local authority land which, in time, would help fund new affordable homes in the area.
What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening For ALMOs to help their parent local authorities make the best use of public assets, local authorities should be able to more easily dispose of land or empty properties their ALMOs. This would assist local authorities in managing their self-financed business plans and encourage them to make the best use of all of their assets. It is important that there are a number of options for local authorities to make use of in order to encourage them to be more innovative in their approach to asset management, but at the moment the government is proposing to exclude disposals to an ALMO from a general loosening of controls on such disposals. The NFA believes that this is a missed opportunity because whilst there will be occasions when a local authority could sell land or vacant dwellings on the open market or offer discounted land to housing associations, there will always be some pieces of land or property that are not suitable for such disposals. A transfer to an ALMO offers a local authority another option for difficult to dispose of or strategic land and property, enabling it to make better use of an asset whilst retaining control of it. ALMOs can then use their expertise and resources to help the local authority provide the right kind of sustainable homes in their area.
How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening From discussions that ALMOs and the NFA have had with the financial sector there does seem to be some investor interest in both local authority and ALMO housing projects at the moment. Some members have been talking to both the banking sector and institutional investors such as private pension schemes and there is potential for them to invest in the ALMO sector, especially whilst the returns from the stock market are so risky. However, for this to be possible either ALMOs would need to move out of the public sector or Ev 140 Communities and Local Government Committee: Evidence
government would have to remove the current restrictions and allow ALMOs to attract private sector investment for new housing supply. It appears to be a catch 22 situation where potential investors are attracted to the low risk but steady returns of a local authority backed sector, but government does not want local authorities or their subsidiaries to make use of private sector finance, even for housing projects delivered by well-managed organisations with solid business plans based on the rental income.
How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply In the current economic climate and the corresponding cuts to public sector spending the ALMO sector is less able to deliver new affordable homes for their communities under the traditional models. As council- owned bodies any borrowing an ALMO undertakes is counted against the public sector borrowing requirement set by government. Changes to the way in which the HCA now assess public sector spending in their value for money assessment mean that ALMOs have been less successful in gaining access to HCA grant than they had been in the previous allocation rounds. In light of this and the need for further investment in their existing stock, ALMOs are now looking at different ways to attract funding and a number are looking to diversify and change their operational model in order to break away from public sector borrowing limitations. The NFA commissioned a report to consider proposals which would build on the current, successful ALMO model, creating a new form of organisation with strengthened accountability to tenants and to the community, and which could raise new resources independently from government finances. The report entitled “Building on the potential of ALMOs to invest in local communities” has been sent alongside this submission for the committee’s information. The work recognises the important priority which the government is giving to reducing the public sector deficit and the implications for future spending on housing after the Comprehensive Spending Review. The aim has been to find ways to generate the extra investment needed in council housing, taking account of these financial constraints, and at the same time address the government’s agenda of decentralising services and strengthening accountability to customers. To meet all of these challenges, ALMOs will need more flexibility. If they want to bring in extra funding, they cannot stay as they are. Three new types of ALMO could give them the opportunity they need to borrow private finance. But—unlike stock transfer to a housing association—the new options would all allow ALMOs to keep their strong links with their local authority. They would also be able to retain the tenant focus, which has often distinguished them from traditionally-managed council housing. The report gives more detail on the three options, but they range from a long-term management contract of 35 years with the ALMO no longer a local authority controlled organisation, but the housing stock still under local authority ownership, to a stock transfer, to a new type of organisation that is both Community and Council owned but not controlled by the council, the “CoCo”.
How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply Critically, in the first instance, the government should consider changing the classification of borrowing for council housing investment, recognising that council housing is a trading activity and that, under European accounting conventions, its borrowing need no longer count towards the main measure of general government debt. This would offer the government the opportunity to give council tenants, councils and their ALMOs real freedom to maintain, regenerate and build new homes for their communities, whilst helping to kick start economic growth in their areas. In terms of the detail of the current settlement the recently announced changes to the Right to Buy regime look likely to threaten the viability of self-financing and council housing as an on-going business and our members are very concerned about the possible implications. We are aware that government has made assurances that an allowance from the capital receipt will be made to repay the debt associated with that property, but our members are concerned about other impacts on the business plan and the likelihood that the remaining receipt will not be retained locally to replace the lost social home but given to the HCA to redistribute through the Affordable Rent programme nationally. If the government significantly changes the discounts to encourage another wave of council house sales to tenants our members are fundamentally worried about the future sustainability of the Housing Revenue Account in terms of the management of a dwindling and residual stock. Without being able to retain all of the receipts locally to be able to replace the sold dwelling in the most appropriate way, the whole idea that self-financing would enable better asset management and a long-term future for council housing is put into question. Any changes to the Right to Buy regime will also play out very differently in different parts of the country. In some areas of England there are such low values for some council housing that the current discounted value would not cover the debt repayment for those homes and the receipt could never help re-provide a new home Communities and Local Government Committee: Evidence Ev 141
even at affordable rents. At the other extreme, in very high value areas you could easily repay the debt and re- provide a social home on council land, but the high cost of the homes will probably mean that there will be little take up unless the new discount is extremely large. It should also be noted that the best properties have already been sold under the Right to Buy policy and that combined with the residualisation of council housing with the concentration of low income families in the less attractive (to lenders) dwellings means that even with an enhanced discount a revived Right to Buy policy is unlikely to deliver the level of receipts that it did in previous years and so the anticipated number of new units that the receipts could finance are unlikely to be realised.
How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term The NFA can understand why the government has chosen to deliver the “Affordable Rent” programme with its limited funds in order to increase the number of homes it can help build at this difficult financial time. However, the NFA is concerned about how this can be sustained over the medium to long term. Our members have been keen to explore the “Affordable Rent” product, but would like to see it as one of the housing options available to the community within a coherent and equitable local housing strategy. Many of our members are very clear that in their areas there will continue to be the need for social rented homes as “Affordable Rent” is just not affordable for many in high value areas or for larger families in some areas. In other areas “Affordable Rent” levels are roughly at the same level as social rents so will not bring in any additional income to help fund new building. In high value areas it also looks like it will counteract much of the work being done by the Department of Work and Pensions to make the transition to work for unemployed households easier by making the benefit trap steeper for those families already on housing benefit being housed in “Affordable Rent” properties. ALMOs are also at a disadvantage under the “Affordable Rent” programme as they have very small numbers of homes to convert to “Affordable Rent” within their own stock. The NFA would like to see the HCA being able to agree stock disposals from councils to their ALMOs specifically in order to make use of this programme, where appropriate and allow ALMOs to deliver new “Affordable Rented” homes for their communities. If these types of stock disposals were allowed and any borrowing by the ALMO or local authority was not counted again in the HCA value for money test, it could really help councils and their ALMOs make better use of their assets and develop more new housing in a much more sustainable way than the current proposals on the Right to Buy do. October 2011
Written submission from the Residential Landlords Association Summary of Evidence 1. We are looking at issues from the perspective of the PRS which is now a major sector in housing provision. 2. Buyers are being shut out of the owner/occupier sector and the social sector is afflicted with ever lengthening waiting lists. 3. The reality is that there is little likelihood of the social sector being able to provide the requisite number of new homes. 4. There are major demographic and economic trends relevant to the supply of new housing. We have a rising population but at the same time the average size of each household is falling, both of which necessitate extra housing provision. Coupled with this we have a densely populated country which has led to restrictions on supply. 5. We face a huge contraction in the availability of credit. The wholesale money markets have been closed and banks are contracting their loan books. Property development is seen as a high risk lending area. 6. Social housing provision has been squeezed out by other demands on the public purse eg welfare benefits. 7. Owner/occupied housing and PRS housing are the same assets class but there is no point in the sectors squabbling over the same housing stock. 8. The PRS is having to provide accommodation for those who otherwise normally access social housing. 9. On the face of it the PRS is doing well with rising rent levels but this picture is highly misleading. 10. PRS provision has been artificially boosted by involuntary landlords. Some landlords have been kept afloat by low interest rates. Arrears will increase along with repossessions of rented property once interest rates raise. 11. Fundamentally the PRS business model is now flawed because capital appreciation is no longer a realistic possibility. Ev 142 Communities and Local Government Committee: Evidence
12. There is therefore the spectre of disinvestment. The key to this is return on investment in the PRS. Hitherto this has depended on capital appreciation because rental yields are too low. Yields need to be rebalanced. 13. We take it that it is a given that there is a need to improve housing supply. 14. Much PRS stock is older housing. Generally PRS landlords do not purchase new dwellings although some do. There is a premium price to be paid. PRS provision is more heavily geared towards the younger element of the population. 15. The importance of the PRS is twofold. It buys up existing housing which enables owner/occupiers to buy new property. Importantly, the PRS contributes through converting older stock to sub divide it into individual units. 16. Provided certain issues are successfully addressed the PRS can help expand housing provision. However, structural issues need to be addressed first. 17. PRS tenants indirectly bear a much higher taxation liability than in either of the other two tenures. This feeds through into increased rents. 18. Residential landlords are also disadvantaged in relation to VAT because of the exempt supply treatment of residential accommodation. This means also extra costs are passed on to tenants. 19. Owner/occupiers are in particular privileged regarding their tax treatment. 20. PRS gearing is at around 55%, at least for longer term traditional professional landlords; as opposed to new entrants. 21. The PRS is made up of small and medium sized landlords with little prospect of direct institutional investment. Institutions are better suited to provide finance for the PRS. 22. The PRS has traditionally been dependent on bank and mortgage lender debt financing. 23. Going forward this traditional type of lending is not going to be available and we need to look at alternatives to develop new funding arrangements. 24. Essential to this is a structural reform of taxation system for the PRS such as capital gains tax roll over relief and entrepreneur relief. 25. Alongside this tax incentives are needed to boost the acquisition of new properties at the lower end of the market. 26. We recommend two incentives a private rented sector expansion scheme and for SIPPS to be able to invest in residential properties. Both could be geared towards lower valued properties. 27. There is no instant remedy but the PRS has a role to play to help promote sustainable growth in housing supply. To do this we need to address the structural issues such as taxation reform. 28. We have major concerns about the way the planning system works particularly in relation to the provision of shared houses which are needed to meet increasing demand. 29. Urgent action is needed to help grow housing supply.
Response About the Residential Landlords Association (“RLA”) 1. The Residential Landlords Association (RLA) is one of the two direct membership national landlords associations operating in England and Wales. We have a membership of around 15,000. Our members own or control over 150000 units of accommodation. Primarily our members are landlords in their own right but a number are managing and letting agents, some of whom are also landlords. Our members operate in all sub- sectors of the Private Rented Sector (PRS). Properties are rented out to families, working people, young professionals, the elderly, students and benefit customers. Communities and Local Government Committee: Evidence Ev 143
The role of the Private Rented Sector 2. This submission is made from the perspective of the PRS. This Sector has grown significantly and now represents around 14% of housing provision with about 3.5 million dwellings, approaching parity with the social sector. Although the PRS provides accommodation across all age groups predominantly the Sector houses younger people (see Table below):
40
35
30
25
% 20
15
10
5
0 16-24 25-34 35-44 45-54 55-64 65 or over Note: Household reference person. Source: EHS
3. The average age of a first time buyer is now approximately 38. Aspiring home owners are being shut out of the owner/occupier sector. They are unable to afford the higher deposits required and mortgage funding is being rationed. Others are preferring to rent through choice. The social sector is also severely constrained with ever lengthening waiting lists. Due to cut backs in public spending there is little likelihood of the social sector being able to provide the required number of new homes. Relative to other sectors the size of the owner/ occupier sector has contracted.
The underlying trends 4. There are in our view a significant number of underlying trends which the Committee needs to consider as part of this Inquiry. These are both demographic and economic. So far as the demographics are concerned in the United Kingdom we have a rising population. There is continuing net inward migration. Unlike continental Europe the birth rate is not falling. Most importantly, the population are living longer. 5. At the same time average household size is falling. More people are living on their own or in smaller units. Part of this is aspirational because children want to leave home and set up on their own. Part is due to social change and most importantly many older people, who are living longer anyway, end up living on their own. The upshot of all of this demographically is that demand for accommodation across the board is rising. 6. We also have the particular problem in this country that it is one of the most densely populated in the World even though the built up land mass probably represents no more than 10% of the total land area. This in itself has led to constraints on supply. 7. Turning now to the economic position, huge forces are at work as a fall out from the excesses of the credit boom prior to 2008. We face a huge contraction in the availability of credit. New housing provision is, of course, capital intensive. The increasing regulatory requirements such as Basel III tighter oversight by regulators and significantly market forces mean that credit is going to be much more limited. It has been estimated that lending peaked at around 1.2 x deposits but in the USA and Japan the ratio is a much more prudent 0.7 x deposits. 8. Our lending levels are coming down. Our lenders have had to rely on access to wholesale funding to bridge the difference and this has been particularly true of mortgage lending. It was the closure of these wholesale markets that precipitated the credit crunch. Buy to let mortgage provision through specialist lenders was funded through the wholesale market model. Across Europe banks are deleveraging. They are contracting their loan books because it is simply not practicable for them to raise additional equity funding. The only way they can do it therefore to meet market conditions and regulatory requirements is to cut back on the amount available to lend. Furthermore, property and property development in particular are seen as a high risk lending Ev 144 Communities and Local Government Committee: Evidence
area. The omens for reversing this trend and expanding the occupier housing provision in the short to medium term are not good. 9. When it comes to the social sector what we find is that social housing provision has been squeezed out of national budgetary provision. Previous expansions of social housing were publically funded. However, because of the shifting of emphasis in Government spending it is no longer realistic to expect that the tax payer will fund new social housing provision on any kind of scale. Too much money is now spent on welfare benefits, pensions, personal social care and, of course, education. These big spenders have crowded out social housing provision coupled with a declining tax base due to the recession and a reluctance on the part of people to pay higher taxes. It is unrealistic to expect significant public funding of social housing provision in the future. The current deficit deduction programmes have accentuated this problem. Furthermore, in the social sector to ensure that they are affordable (so called) rent levels are such that there is no return on investment for the tax payer. Where outside funders are involved then this can only be achieved by way of public subsidy but tax revenue are insufficient.
The PRS as a housing provider 10. Housing in the owner/occupier sector and in the PRS is in the same asset class. Houses are bought and sold and transferred between these two sub-sectors of the private sector. Another way of looking at it is that because there is a shortage of accommodation the PRS and owner/occupiers squabble over a limited housing stock. This lead to complaints, often unjustified in our view, that prior to 2008 in the boom landlords were squeezing out first time buyers and pushing up prices. This was yet a symptom of the overall problem of insufficient supply. What is not mentioned, however, is how the PRS helped to fund many new developments at that time often through off plan purchases, particularly of new apartment developments. By putting down initial deposits and pre-purchasing PRS investors gave developers the necessary funding and confidence to proceed with these developments. This is, of course, no longer feasible. 11. On the face of it the PRS is doing well. Rent levels are rising, there is increasing demand because of the lack of supply in both the owner/occupier sector and the social sector. Increasingly the PRS is having to provide accommodation for those who would otherwise have been housed in the social sector, with the assistance of housing benefit budget. Rent rises have been particularly marked in London of late. Some would say the PRS is a bright spot in an otherwise drab picture. 12. The RLA, however, believes that this picture is highly misleading. There are a number of reasons why: (1) Provision in the PRS has been artificially boosted by a significant number of “involuntary landlords”—these are individuals who cannot sell at the moment. They may well be in negative equity. Potentially, over time, as market conditions improve they will sell up. (2) Many landlords in the PRS, especially late entrants, are being kept afloat by low interest rates. Property values have fallen generally outside London by 20% in nominal terms (equivalent to 30% in real terms) on average. However, debt levels remain the same. Rental margins are tight so it is the low interest rates which mean that these landlords still afford to make their repayments. However, as and when interest rates rise, as they inevitably must because they are at an artificially low level, these PRS landlords will face real distress and repossession. (3) Although the arrears rate for buy to let mortgages is low at present, and falling, as outlined in the previous paragraph as interest rates start to climb again we face a potential wave of repossessions. (4) Where repossessions have already taken place lenders are being much more canny than they were in the last recession at the end of the 1980s/early 1990s. Although there have been some sales, in many cases lenders are appointing rent receivers and hanging on to properties which continue to be rented out. (5) Fundamentally, for the PRS the business model is now flawed. It was originally built on capital appreciation with the ability to make and take a big capital profit because of apparently booming house prices. (6) Those who came into the PRS late on on the back of the boom culminating in 2008 now realise that capital appreciation was a mirage and likewise so many will want to get out as soon as market conditions improve so far as selling the property is concerned. (7) Although the capital appreciation model of investment in the PRS is no longer viable, although we believe that the long term professional landlords will, by and large, remain. (8) Now that the capital appreciation is no longer the viable fundamental concern is the return on investment in the PRS. Historically, the Sector has depended on capital appreciation rather than rental yields. Rental yields themselves are low. However, in the current climate because of downward pressure on income many cannot afford higher rents. Nevertheless, because of the shortage of supply of accommodation and the need to rebalance yields rents are currently on an upward trajectory in many parts of the country, especially in London. Returns are currently too low now that capital appreciation is no longer part of the equation. There needs to be a significant adjustment to produce a worthwhile return on investment in the PRS. Otherwise, large scale disinvestment will follow. Communities and Local Government Committee: Evidence Ev 145
The need to increase housing supply 13. For the purposes of this Inquiry it is taken as a given that there is a general acceptance of the necessity of improving housing supply. We have already referred to CLG estimates of need and given evidence above as to the underlying demographic changes in this country which are driving the demand and therefore the need for an increased supply. Importantly, by increasing supply we will prevent further booms in house prices.
The PRS and provision of new housing stock 14. The bulk of the PRS stock is to be found in older housing stock. On the whole the PRS does not purchase new dwellings although the off plan purchases referred to above were a notable exception to this. Some PRS investors do specialise in buying new properties. Indeed, quite a number of buy to let investors in the boom leading up to 2008 bought properties on new developments. Nevertheless, there is a perception that if you buy a new property then a premium price is being paid. Money is perhaps unnecessarily being spent on shiny fixtures and fittings which soon depreciate. 15. The importance of the PRS in new housing provision is twofold. Firstly, it recycles existing stock enabling owner/occupiers to buy new properties. This has been demonstrated by the demographic changes which have taken place in the past decades. Owner/occupiers have moved out of city areas for example and purchased new homes on new developments on the fringes of the city. PRS renting has stepped in. The second way in which the PRS contributes and in this case it does provide new dwellings is by converting older stock. Often this takes place by way of sub-division particularly with larger older Victorian and Edwardian properties, for example. Commercial properties may also be recycled and converted. This is a particular skill of the PRS. 16. We need to see if the PRS can expand to try to help restart housing provision but as well as the concerns outlined in Paragraph 12 above there is a major structural problem which needs to be addressed affecting the PRS namely its taxation regime.
The PRS and tax 17. Beside the need to reconfigure the return in the PRS, the other message which the Association want to put over to the Committee in this evidence is that the disadvantageous tax treatment of the tenant in the PRS as compared with that in the other two tenures. The immediate reaction will be “what are they talking about”? It is the landlord who is taxed not the tenant. This is not so, it is the tenant who indirectly bears this tax burden which falls on the PRS to a much greater extent than either the owner/occupier sector or the social sector. The latter is tax exempt because local authorities do not pay tax and registered social landlords, as charities, are also exempt. 18. Owner/occupiers also receive huge tax breaks in comparison. As a business person, when you look at your return on your investment ie your income (whether from rents or capital receipts) you look at your return after tax. Taxation costs are therefore factored into your calculation and are included in your charges ie the rents paid by your tenants. Landlords in the PRS, unlike social landlords, are taxed on their receipts both in terms of rent net of expenses and interest and capital gains if they dispose of a property. The burden of capital gains tax is particularly iniquitous because it now makes no allowance for increases in value due to inflation. The a business of residential renting is not regarded as a trade so Entrepreneur Relief is not available. Like the costs of regulation, all of these costs ultimately bear down upon the tenant through the rents which they pay. 19. When it comes to value added tax (VAT) again the residential landlord is disadvantaged. Residential renting is an exempt supply but unlike say, the supply of food which is zero rated, this means that the landlord cannot recover the VAT he pays out, eg on repairs. Instead, again this cost is passed on to the tenant. 20. The consequences for tenants who indirectly bear these taxation costs arising from VAT are as follows: (1) The landlord has to pass on VAT spent to purchase materials or to carry out works. EU law allows a reduced 5% rate but the UK Government has not adopted this approach. (2) When it comes to provision of new housing by conversion the residential investor has to bear the full cost of VAT and, therefore, again passes this on indirectly through the rent to the tenants. This contrasts with a purchase of a new home which is zero rated for VAT. Here the builder can recover VAT and the purchaser does not have to pay VAT on the purchase of the dwelling. Clearly, this adversely affects a landlord wanting to carry out a conversion and distorts the provision of converted accommodation, in which the PRS excels. 21. So far as owner/occupiers are concerned they are privileged when compared with PRS tenants as are social tenants. A landlord’s rental income is taxed so this burden ultimately falls on PRS tenants. There is no tax however on any imputed rent on owner/occupied properties. When it comes to capital gains tax an owner/ occupiers principal private residence is exempt from capital gains tax; whereas the PRS landlord is fully exposed to CGT liability. Even worse there is no rollover relief for the PRS landlord who sells a property although they may want to reinvest in the PRS. This is why the PRS tenant is disadvantaged because these extra taxation costs are passed on. Ev 146 Communities and Local Government Committee: Evidence
Gearing in the PRS 22. In conjunction with Prof. Michael Ball of Reading University the RLA has recently carried out the first ever in depth survey of landlord’s costs. This is not yet a published work. From the initial response 200 of our members gave detailed costings and this showed that the level of gearing, on average, is at 55% based on current property values. This is in line with Dr. Julie Rugg’s findings that the PRS is generally low geared. 23. Bearing in mind that as a national Landlords Association we tend to represent professional landlords (the average portfolio size of our members is 8 as against the national average of 4), we have yet to investigate how this relates to gearing of a particular group of landlords we have identified, those who were brought into the sector in the boom leading up to the crash in 2008 using buy to let finance generally. It is clear from other survey evidence and information held by mortgage lenders that this sector is far more highly geared and in many cases may well be in negative equity particularly where properties were bought towards the end of the boom. It is this type of landlord which we have already indentified which is under threat as and when interest rates rise.
The nature of the PRS 24. Overall, the PRS is made up of small and medium sized landlords. Experience in the UK is in line with other countries in this regards. Following the passing of the Housing Act 1988 there was a view held that this would bring in larger corporate investors but this has not materialised outside specialist areas particularly students, this picture is likely to change. The problem is that rented properties tend to be scattered in many different locations. In practice, it is hard to put together a portfolio which would achieve economies of scale. Smaller or medium sized landlords frequently self manage and therefore can achieve economies in this way, particularly by avoiding having managing agents to manage their properties for them. Although it is the Government’s hope, we do not feel that there is going to be an influx of corporate investment directly into PRS renting. On the other hand there is a clear opportunity for indirect investment by providing funding. Essentially this is what happened with the buy to let boom in that mortgage lenders provided funding for property purchases and improvements.
Funding for the PRS 25. Traditionally, the PRS, although relatively low geared, has been highly dependant on debt funding from banks and mortgage lenders. Traditionally, the high street banks have funded property purchase and improvement for renting out and then the specialist lenders, the buy to let lenders, came into the market, usually funded through wholesale borrowings as already pointed out. Normally, because of being small and medium sized operators this has been by way of traditional mortgage funding, taking security on a property and lending 60% or 70% of its value. Landlords have been able to use their portfolio to leverage in borrowings eg to fund new property acquisitions or to improve their existing stock. Obviously, with the current loan to value ratio for many existing landlords there is still considerable equity held by them which could continue to be utilised in this way, if only funding were available. As always in a recession there are bargains out there to be had if the money is available. 26. Going forward, however, the problem is whether traditional bank type debt funding is going to be available. We have already highlighted the contraction in lending overall which is going to occur as banks readjust their balance sheets following the credit crunch. It is critical to this Inquiry as it directly bears on how far the PRS can contribute towards the increase of housing supply.
What part can the PRS play in increasing housing supply? 27. Previously, in this submission we have identified three potential ways: (1) The purchase of new stock direct from builders. (2) Conversions. (3) Purchase of existing stock which in turn helps the sales chain that ends in the acquisition of new properties by owner/occupiers. 28. We believe that the PRS can play a role in all of these but it needs two things. Firstly, the yield issue needs to be addressed. Secondly, we have to develop a new funding model to supplement traditional debt/ mortgage funding and thirdly, through the tax system tax reform and incentivisation to bring about growth.
New funding arrangements 29. When it comes to new funding models further work is clearly needed to see what appetite there is for this from funding institutions. We are not arguing for the existing debt model to be superseded, only to supplement it. However, for any new funding model to be successful the issue regarding return on investment for PRS landlords themselves, already referred to above, needs to be successfully addressed. Importantly, the structural tax changes referred to below will also help. On the footing that generally speaking institutions are not going to want to invest directly but are better providing funding for PRS landlords, we need to develop ideas such as residential rent bonds to access the bond markets and equity investment. Communities and Local Government Committee: Evidence Ev 147
30. Similarly, if equity capital could be made available to landlords this would provide another source of funding. The problem at the moment is that the banks are fighting shy of the traditional lending model because they have become over exposed to property generally, or so they perceive. The banks themselves who are struggling to find funding. Clearly these new sources of funding, if they could be developed, could be focused on providing new housing supply for renting in the PRS. After all, one advantage the PRS does have is a growing market with strong demand.
Reforming taxation in the PRS 31. Essential to this is a structural reform of taxation in the PRS. For example there is an immediate step to be taken by giving PRS landlords deemed trader status in the same way as furnished holiday lettings are treated. Then at least CGT treatment would be brought into line in other businesses. The PRS landlord is even more harshly treated than other businesses who do obtain various reliefs in respect of CGT eg rollover relief and entrepreneur relief. It is appreciated that this will not sit easily with the Treasury’s wish to maximise taxation but by stimulating the market and particularly construction other tax revenues come in eg stamp duty land tax, income tax from workmen, VAT on the sale of furniture and equipment.
Tax incentives 32. As well as this structural reform the Association strongly believes that tax incentives are needed which would help boost the supply of new housing via the PRS involvement. These are twofold: — Private Rented Sector Expansion Scheme: (1) The Business Expansion Scheme was originally introduced alongside the introduction of the current Assured Tenancy Regime but ended a long time ago. It stimulated growth in the PRS. It led to new build. Our scheme is modelled on the same kind of principles. It should be aimed at the provision of new accommodation. (2) By providing tax breaks for new build and the creation of new units by conversion/ extension, not only is this much needed accommodation provided but as already pointed out the Government can increase tax receipts. Now is a good opportunity for land to be acquired to provide new housing (for instance what about all the empty pub sites?). (3) What we call the Private Rented Expansion Scheme, modelled on the old Business Expansion Scheme, should be reintroduced to stimulate growth in the PRS. As already stated there is still good demand for rentals and it is likely that this will increase. It is not therefore going to be a case of new dwellings being provided only to stand idle. (4) We should also look at using tax breaks to encourage landlords in the PRS to buy up new build units which are standing vacant (or vacant conversions) which have been carried out with a view to being sold so far unsuccessfully to the owner/occupier market. (5) What form should the new Scheme take? Firstly, there should be indefinite capital gains exemption so long as these properties are kept within the private rented sector for, say, five years. Realistically it will be some time before there is capital appreciation anyway so there is no immediate loss of tax revenue. (6) Secondly, all rental income for these newly created units should be tax free for five years. Obviously the landlord would not then get the benefit of related expenditure which was otherwise tax allowable; nor related tax relief on interest. As these are new units of accommodation by definition there would be no loss of tax revenue because at the moment tax revenue would be received for these properties anyway as they are not currently in existence/use. (7) Just as importantly, we would have a ready source of new homes to rent for those in need. Pressure would therefore be taken off local authorities, particularly local authority homelessness sections. There would be a saving on costly provision of bed and breakfast type accommodation and expensive contracts to provide short term housing for the homeless. (8) All round this should be win win not just for tax revenues but for the economy as a whole particularly as it would stimulate the down and out construction Sector. People would get back in to jobs with a saving on benefits. It would help regeneration particularly existing derelict sites. (9) The Business Expansion Scheme was proven to work so it is a tried and tested means of promoting economic development. — Self Invested Pension Schemes (“SIPPS”): (1) To promote employment, retention of skills in the construction sector and to take up empty units the Government should allow self invested pension funds to invest in residential units, up to a maximum purchase price of £250,000 per unit outside London (with a suitable adjustment for London prices). Ev 148 Communities and Local Government Committee: Evidence
(2) The units must then be let out by an ARLA, NALs etc affiliated letting agent. These measures would prevent any abuse, mop up unsold units, allow part finished developments to be completed, free up capital for both building companies and banks. The tax take would also increase as would employment taxes as a gradual improvement in prospects would follow. (3) The real cost of this measure is negligible yet it could reap very great benefits very easily. It is suggested that this be introduced for a limited period of five years in order to stimulate demand. There is capital in these funds waiting to be invested. Although we have talked of the tax treatment of new properties there is a strong case that this should extend to investment in existing properties to also assist in generally stimulating the market.
The current crisis 33. Confidence has slumped and demand is generally low. Unfortunately, there is no magic bullet; no instant remedy which will bring about large scale change. If there was somebody would have thought of it by now. We are going to have to claw our way out of the current mess. The RLA believes that the PRS has a role to play in helping promote sustainable growth in housing supply especially because of low gearing there is equity available. Properties acquired at the right price can provide the rental yields required to stimulate investment. We do need to find new ways of providing the necessary funding but for a lowly geared business model which can be achieved. However, the taxation regime is punitive and stands in the way of growth for the Sector. It urgently needs reform. Tax incentives which we believe will be tax neutral (because they will provide other forms of revenue for the Exchequer) are a way of kick starting investment in this way. By channelling investment through tax neutral tax incentives to new properties growth can be achieved. 34. What we advocate is both our proposed tax incentive schemes should be focused at the lower end of the market in value terms and also be concentrated on provision of new units. This does not mean just brand new properties but also bringing back into use empty units, as well as promoting conversions/extensions. It lends itself to new units being provided above shops, as another example. We acknowledge that safeguards are required to prevent abuse but feel that these can be successfully put in place.
The Planning System 35. We consider that the planning system as it presently operates is broken and no longer fit for purpose. It is standing in the way of improving housing supply. We have made submissions to this effect both to this Committee and to the Government’s consultation on the proposed National Planning Policy Framework we support the thrust of the draft Framework. We are extremely concerned at the hysterical opposition which has been whipped up against these sensible measures. Indeed, we feel that the Framework needs to be clarified and strengthened to help grow both housing supply and particularly the wider economy.
Houses in multiple occupation (HMOs) 36. One particular area of expertise for the PRS is providing shared housing and bedsits especially for the young. 37. The Association, along with many other landlord representative organisations consider that it is absolutely vital that as a matter of urgency the planning regime for these small HMOs needs to be revisited. Unless radical changes are made and the old planning regime is reinstated this will stand in the way of the urgent need to provide shared housing and bedsit type accommodation, particularly for young people. This is particularly important in the light of the change to the shared accommodation rate for local housing allowance and housing benefit purposes. 38. Some 30 local authorities are imposing Article 4 Directions requiring planning permission for a change of use from a single dwelling to a small HMO (occupied by up to six unrelated persons). We believe that this power is being abused and is highly discriminatory against very young people for whom the PRS caters. There is a pressing need for this kind of shared housing. It is not the function of the planning system to determine who can live where or to impose quotas on the numbers which is what is happening as a result of the changes to the planning law originally implemented by the previous Government. We believe that this whole situation calls for an urgent review. It will clearly inhibit conversion of properties and changes of use to provide the required accommodation and stand in the way of expanding housing provision.
Conclusion 39. We believe that urgent action is needed to grow housing supply. At the moment we cannot turn the supply tap on but what we can do is to put in place the ground work along with incentives hopefully to kick start some growth. The PRS has a significant part to play in this as it is the one sector of housing provision which is still growing. However, this should not be about squabbling over existing stock; rather the imperative is for new stock. The planning system needs to be reformed particularly in relation to smaller HMOs. We need to look at new ways of housing finance. The present tax system for the PRS which discriminates against renters Communities and Local Government Committee: Evidence Ev 149
in the private sector needs structural reform. Changes need to be made to the VAT regime. To help the supply we have put forward two suggested proposals for tax incentives. The PRS has a role in helping to promote growth but only if the reforms we have referred to in this evidence are implemented. October 2011
Supplementary written submission from the Residential Landlords Association There is £101.7 billion invested into just over 800,000 Sipps currently. There are different types and characteristics but of the higher value more flexible type which would have funds and the ability to undertake the investments required there are 200,000 or 25% of the total number. My original estimate of 50,000 that would be interested or likely to take up such an offer would appear to be on the conservative side according to those I have spoken to. There is the potential for a significant contribution to the economy, that would grow further with stamp duty, furnishing, etc etc. January 2012
Written submission from Paragon Group Executive Summary — Tenant demand is already outweighing existing stock in the private rented sector (PRS). — Private rental is the only growing tenure type in the UK. The PRS is already the dominant housing choice with transient sectors of the population including students, economic migrants and those who relocate for employment purposes. Long-term demand in the PRS is forecast to rise, fuelled by major socio-economic factors and a contraction in the owner-occupier and social housing tenures. — Private landlords are the backbone of the PRS, accounting for 89% of landlords and 71% of properties. Buy-to-let financing has enabled growth in the PRS and incentivised landlords to improve their properties, driving up standards in the sector. — Experienced private landlords do not typically purchase new build properties but tend to invest in existing properties because rental demand is focussed overwhelmingly on established communities with good local facilities and transport links. Landlords know the market conditions of the area in which they are investing and choose properties that correspond to local demand. — Institutional investment has only ever played a limited role in the provision of housing and is, by its nature, unsuited to the fragmented, dispersed nature of the rental market because it can only deliver value from economies of scale. There is a distinct lack of tenant demand for the type of properties in which institutions tend to invest except in very specialist sectors. — The most effective way to tackle the issue of supply in the PRS is to foster a regulatory and economic environment that encourages a committed base of landlord investors and lenders.
About the Paragon Group Paragon is the leading independent provider of mortgages to residential property investors in the private rented sector through our specialist brands, Paragon Mortgages and Mortgage Trust. We launched our first buy-to-let mortgages in 1995 and have increasingly focused our business on professional landlords who have proven experience in purchasing and letting residential rental property. This focus is reflected in the excellent performance of the Group’s buy-to-let mortgage assets and our reputation as a leading voice in the sector. We currently have approximately 40,000 landlord customers and manage over £9.5 billion of loan assets. In addition, we operate a specialist loan servicing business for third parties through our Moorgate Loan Servicing brand. The division offers a professional, flexible, efficient and cost effective proposition to lender clients to help them manage their loan assets effectively. Clients include building societies, investment banks, specialist lenders, commercial banks and other financial services companies.
The Role of the Private Rented Sector in Meeting Housing Need 3.4 million households in England, nearly one-in-six, now class the private rented sector (PRS) as home, an increase of 1.4 million since 2001. Private renting is the only growing tenure type although it is still small compared to other European countries and the historic highs reached in the UK during the 1960s. The PRS is already a popular choice with transient sectors of the population including students, economic migrants and those who relocate for employment purposes. Long-term demand in the PRS is forecast to rise, fuelled by major socio-economic factors such as the growing number of single person households and people starting families later in life. There is a changing perception of renting, with it increasingly seen as a tenure of choice rather than the poorer choice of either social housing or ownership. Ev 150 Communities and Local Government Committee: Evidence
First-time buying is declining but it would be inaccurate to portray this as being caused by buy-to-let investors. Mortgage finance has become harder to access as lenders have responded to the credit crunch by requiring larger deposits (the average loan-to-value fell from 95% in 1994 to 77% in 2010) but rising levels of graduate debt, affordability constraints and lifestyle choices have also contributed to the decline of first- time buying.
The contraction of the social housing sector has meant a greater role for the PRS in housing people on lower incomes and the Government’s decision to move social housing rents more in line with market rates in order to finance new housing supply will make private rental an option for many who would not have previously considered it. The Localism Bill is also likely to push more tenants who would previously have not considered renting privately towards the PRS.
Housing supply is failing to meet demand. The UK population is expected to grow to 71.6 million by 2033 with an estimated 290,000 new homes required each year to satisfy that demand. Only 102,500 homes were built in England last year. In the PRS tenant demand is already outweighing existing stock, with the Association of Residential Lettings Agents claiming the sector is operating at capacity.
The current economic environment is exacerbating the underlying pressures on housing. The lack of consumer confidence and the drying up of mortgage finance has resulted in a dysfunctional market that places severe pressure on the PRS, which in turn filters through to rental inflation.
Housing Supply in the PRS Private landlords
Private landlords are the backbone of the PRS with 71% of properties in the PRS owned by individual landlords. While there is no such thing as a typical landlord, the average landlord is just over 50 years old, is financially astute, has been letting property for 11 years and holds an average of eight properties. The idea that the PRS is dominated by novice landlords is a myth; most individual landlords consider themselves to be professional investors and nine out of 10 have more than six years’ experience in renting out property.
Contrary to public perceptions, landlords do not usually buy up new build properties but tend to invest in existing properties because rental demand is focussed overwhelmingly on established communities with good local facilities and transport links. The PRS grows through landlords purchasing and improving existing properties which avoids the new property premium, offers scope for refurbishment (and therefore higher yields) and is aligned better with tenant demand. DCLG figures show 77% of property owned by private landlords was constructed pre-1980.
Furthermore, private landlords typically know the market conditions of the area in which they are investing and so choose properties that correspond to local demand, often holding a mix of different property types to match the needs of different tenant types.
The flexibility afforded by private landlords’ investment in diverse property portfolios to respond to this variation in tenant demand is one of the reasons why private landlords are the dominant suppliers to the PRS. Another important factor is that the private landlord model is much more economically efficient than any other. Private landlords will often discount their own efforts in managing and improving their properties, lowering the cost of a portfolio and leaving tenants as beneficiaries of lower rents as a result.
Buy-to-let support of the PRS
Buy-to-let has increased choice for tenants and is an important (but not exclusive) source of finance for the PRS. The rapid growth in the PRS and the number, and value, of buy-to-let mortgages since the late 1990s coincided with a period of strong economic growth and an increase in demand for flexible, high quality rented accommodation amongst several demographic groups. The growth in the market has also prompted an improvement in housing stock as landlords have been incentivised to improve their properties.
Buy-to-let was significantly affected by the credit crunch with an 81% decrease in the value of new loans, and the number of buy-to-let products declining by 90% from July 2007. Although buy-to-let lending has entered a period of recovery, it remains difficult for private landlords to access finance for property purchases, thus contributing to the current market dysfunction.
Institutional investment
There has been a great deal of comment on the role of institutional investment in the current debate on the housing supply crisis. For many, it appears to be a panacea to the structural problems affecting the housing market. However, institutional investment has only ever played a limited role in the provision of housing, even when it has been encouraged by successive governments. Its current role extends only to students, the elderly and large housing developments. Communities and Local Government Committee: Evidence Ev 151
There are several reasons why institutional investment has not had the impact expected by some policy- makers. This type of investment is, by its nature, unsuited to the fragmented, dispersed nature of the rental market because it only delivers value from economies of scale. The kind of properties that institutional investors are likely to invest in through “build-to-let” schemes, such as two-bedroom flats, in large purpose-built developments are unattractive to tenants and there is already an over-supply of this type of property caused by pre-credit crunch property developer and investment club activity. Institutional investment also works against the development of generally mixed communities because of the preference for larger developments. The Government’s Rugg Review noted that encouraging institutional investment via build-to-let might create rental “silos” and make the market more inflexible. Furthermore, while private landlords do not charge for their time, investing instead their “sweat equity”, the kind of management companies that the institutional investment model requires can significantly affect the cost of managing properties, reducing investment returns, creating inflationary pressures on rents and raising questions about economic viability. Paragon does not oppose attempts to encourage institutional investment, notwithstanding the above concerns, but it is important that institutional and individual investment should be seen as complementary and treated equally in terms of regulation, tax breaks and other fiscal incentives. Any skewing of incentives towards institutional investors could actually result in a contraction of supply over the medium term if individual investors feel they are not competing on a level playing field.
Alleviating Pressure in the PRS Paragon believes that there is stock available within the UK for landlords to invest in, and there is a will among individual investors to purchase that stock. However, the muted wholesale credit markets and the lack of consumer confidence in the owner-occupier sector have stalled the usual operation of the housing market. European Commission proposals that seek to bring buy-to-let into the scope of consumer regulation would further restrict finance and hamper the delivery of new PRS supply. As stated above, private landlords—the backbone of the PRS—do not typically invest in new build property, and will only do so where there are proven and sustainable levels of tenant demand. But government initiatives on public land and empty homes are welcome for the effect they may have on reducing the pressure on different tenures. The most effective way to tackle the issue of supply in the PRS is to foster a regulatory and economic environment that encourages a committed base of landlord investors and lenders. It is also important that governments work together to achieve solutions to the global economic problems that have constricted the supply of finance. The Coalition Government has so far shown a good understanding of the PRS and has stopped further layers of landlord regulation. It is another myth that the sector is not regulated—there are over 50 Acts of Parliament and 70 sets of regulations that govern the sector. Increasing this regulatory burden risks causing landlords to leave the sector and so put further stress on supply. There are tools that can be used to further encourage landlord investors and create a business environment more akin to that of countries with comparable private rented sectors where landlords benefit from more competitive taxation regimes and are able, in some cases, to offset capital losses. Paragon would welcome any initiatives that are intended to encourage private landlord investment. October 2011
Written submission from the National Housing Federation 1. Introduction and Summary 1.1 The National Housing Federation represents 1,200 independent, not-for-profit housing associations in England. Our members provide two and a half million affordable homes for more than five million people. Our members are the main providers of new affordable homes, they will be building 90% of homes delivered under the Affordable Homes Programme 2011–15 (AHP) and currently build around half of all new homes. 1.2 We welcome the opportunity to submit evidence to the Communities and Local Government Committee inquiry into the financing of new housing supply. The focus of the inquiry is on steps Government could take to ensure that resources are available to support future housing delivery. 1.3 In a difficult economic climate and with political focus on reducing the public deficit it is inevitable that there will be very tough decisions to be made about where and how best to target scarce public subsidy in housing in the context of rising housing need. We are supportive of the Government’s ambitions to deliver 170,000 affordable homes over the next four years and other steps it has taken to boost overall housing supply. However, we are concerned by some of the consequences of these policies on new supply and the erosion of the sector’s capacity. Ev 152 Communities and Local Government Committee: Evidence
1.4 Due to the considerable overlap in the committee’s questions we have set out the background of the AHP and the financing of new housing supply below, followed by a response to the questions. The key points in our response are: — We have a number of concerns about the implications of the new investment model and believe that the model is unlikely to be sustainable far beyond 2015 in its current form. Government needs to reconsider how Affordable Rent can work alongside a different model of investment. — Government needs to reconsider its approach to assessing value for money of revenue versus capital subsidy for the provision of affordable homes. We do not believe that a revenue based model offers best value for money for the taxpayer. — Government should focus on securing the best delivery environment for housing and helping to support stable lending. We have made a number of recommendations in this area. — Government should consider our recommendations to increase the capacity of housing associations to fund new homes and help attract institutional investment.
2. Public Subsidy For New Affordable Homes 2.1 In the 2010 Comprehensive Spending Review (CSR) the capital budget from Government to build affordable homes was slashed by 63%. The Government has allocated resources of £4.5 billion for the AHP over the next four year period to deliver up to 150,000 homes. The gap left by the drastic cut in capital grant will be filled, in part, through revenue from the introduction of a new affordable rent—up to 80% of the market rate—to be charged for most newly built homes and a proportion of re-let properties. 2.2 The new investment model leads to a much greater level of development risk being transferred to housing providers and requires much higher levels of borrowing to deliver new homes. 2.3 Before we turn to focus specifically on the financial implications of the new AHP it is first worth considering what will be delivered as a result of the proposals. We have a number of concerns about potential weaknesses of the new approach: — the model fails to support the delivery of a range of housing tenures to meet a range of local housing need; — the model makes delivery difficult in low value areas, in particular in regeneration areas, due to the limited additional financial capacity that can be secured through higher rents; — the exclusion of some small and medium sized provider, who unlike national organisations are unable to reinvest capacity from high value to low value areas; — the uncertain future for affordable home ownership products that remain in high demand and help people on moderate incomes to buy a home; — the impact of a number of fundamental weaknesses and risks inherent in a revenue based model of development for both government and providers; — the impact of welfare reform on the viability of the new investment framework and the conflict in policy especially around larger homes and under occupation; — affordability and work disincentive implications for tenants paying the new intermediate rent; — considerable local authority opposition to the new model and the impact that this could have on delivery; and — gradual erosion of housing association capacity and longer term sustainability implications. 2.4 We believe that a sustainable investment model should be underpinned by a number of key principles. For the sector and government it should: — support the development of affordable homes at scale, with a range of tenure options; — be viable for housing providers to deliver; — support flexibility and innovation; — offer excellent value for money for the taxpayer; — consider quality, tenure and need—not just number of units and average grant rates; — have a balanced approach to risk sharing between government and housing associations; — enable a range of providers to be able to develop, ensuring maximum use of sector capacity; and — offer genuine freedoms and flexibility to local government and their housing partners to meet local housing need. 2.5 For people in housing need investment in affordable housing should: — deliver homes at a scale that meets local need; — support the delivery of a range of affordable homes at difference price points and tenures; — deliver sufficient numbers of specialist and supported housing, larger and rural homes; — offer solutions for areas of the country which have lower land values; Communities and Local Government Committee: Evidence Ev 153
— enable regeneration activity to be funded; — be able to respond flexibly to local needs; and — support job creation and local economies.
3. Financing the Delivery of New Affordable Homes 3.1 Private finance going into housing supply has historically come from two sources; conventional corporate debt provided by financial institutions and bond finance either publically listed or privately placed. 3.2 Debt finance has been the major source of private funding for the housing association sector. Banks have made long-term finance (for periods up to 30 years) available at exceptionally competitive rates. For housing associations whose balance sheets are modestly geared, this conventional corporate debt was the most cost effective way of funding the needs of their business in terms of financing growth through development and acquisition of new homes. 3.3 However, there are questions surrounding the continued availability of long-term debt finance and the cost of capital. Banks are coming under considerable regulatory pressure and are being encouraged to match the lifetime of their assets with their liabilities. Many lenders are of the view that that there will be an increasing move towards shorter or medium term finance of between five to seven years. Where long-term conventional corporate debt finance remains available, it is likely that lenders may demand an ability to reprice at intervals of five years. For many housing associations this may well represent a refinancing or repricing risk that they are unwilling to bear. 3.4 This suggests that the funding of the affordable housing sector may well be moving to a more polarised position with the banks providing short-term finance which could be on a individual project rather than a corporate basis, with the capital markets and a wider pool of institutional investors being the main source of long-dated debt. 3.5 Bond finance is well established as a mainstay of housing association financing, with over £8 billion of current bonds outstanding. Even in a volatile market. There remains good institutional appetite for bond finance from the current investor base. 3.6 Raising finance via the capital markets is not solely limited to the larger housing associations issuing in their own name. Institutions like The Housing Finance Corporation (THFC) acting as a conduit for the sector, enable smaller and midsized housing associations to access the capital markets by aggregating their individual funding requirements to an amount which is acceptable to the market. There is also an active private placement market, which enables smaller issues of debt to be placed with individual investors. 3.7 Having set out the background context underpinning the enquiry we now turn to answer the specific questions posed by the committee.
4. How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms? 4.1 In principle we believe that Government has the right approach in ensuring that limited public subsidy is targeted at providing affordable homes for those in greatest housing need and that the provision of market housing can best be facilitated through creating the right planning and operational environment.
Revenue Versus Capital Investment 4.2 Debates about the value of revenue versus capital often come back to the issue of how to measure value for money and the assessment factors that are incorporated into the model. Minimal changes in the assumptions used can produce very different answers. 4.3 The Federation does not believe a revenue investment model provides the best value for the taxpayer in the medium to long term. A revenue funded model looks to deliver best value if a short-term value for money assessment is used. Government typically uses the period of time that a household stays in an affordable home or is in housing need. However, a more sensible measure would be the lifetime of the property as, by definition an affordable home will always be used to house families in housing need. 4.4 An assessment using net present value (NPV) also fails to take account of wider costs or second order factors that cannot easily be given a financial value. For example, with rising demand for affordable housing and future demographic pressures, the majority of people living in new affordable rented homes are likely to rely on housing benefit to meet their housing costs. However, the impact on the housing benefit bill of the rent level of newbuild affordable homes being set at 80% of market rents, rather than at social rent, has not been factored into Government’s analysis. 4.5 Current NPV/Cost Benefit Analysis (CBA) approaches also fail to assess longer term risk and often underestimate revenue risk for the taxpayer. To continue with the example of housing benefit, housing benefit is paid to anyone eligible and the costs associated with this are not always easily predictable. This is compounded by the fact that housing benefit is one of the “automatic stabilisers” in the economy and costs rise during economic downturns. Ev 154 Communities and Local Government Committee: Evidence
4.6 A stark illustration of this is past experience when in the 1990s the then Conservative administration experimented with altering the balance of housing subsidies in favour of revenue support: a policy characterised as a move to “let housing benefit take the strain”. By 1993–94 the housing benefit bill had risen to £10.4 billion from £5.7 billion in 1990–91, an increase of 82.5% in just four years.58 In another unintended consequence general inflation in the economy increased as rent increases fed through. 4.7 Finally, value for money assessment also fails to recognise that housing associations still fund the majority of the costs of new affordable homes. To date associations have taken every pound of public grant for new affordable homes (34 billion in total) and matched it with nearly two pounds from their own resources (£60 billion in total). A revenue based model greatly increases the amount of their own resources that housing associations need to invest, which erodes their capacity to build homes in the future. 4.8 We believe it is short sighted of government not to give due consideration to the impact of the reduced capacity of delivery partners and the impact on the future housing supply chain. 4.9 Historically, when undertaking value for money assessments of Government capital support for affordable housing have been underpinned by a restrictive and narrow focus on average grant rates and number of homes delivered. This approach has failed to consider the type, location, quality and size of homes being provided and the longer term savings to the taxpayer. A realistic value for money assessment should take a broader view of the social impact of investment.
Housing as an economic stimulus 4.10 Investment in housing supply offers an especially effective way of stimulating economic growth. Research commissioned by the Federation in advance of the 2010 Comprehensive Spending Review indicated that for every £1 spent on housing, £1.40 of expenditure is driven in the wider economy. The added advantage of using housing as an economic stimulus is that spending can be committed very quickly in comparison with investment in major infrastructure projects such as road and rail where the planning and approval process means it may be many years before money can be invested. 4.11 The Federation has recently called for Government to invest £1 billion in building shared ownership over the next three years. This would deliver: — 66,000 shared ownership homes. — 99,000 jobs directly in the construction industry. — 396,000 jobs within the wider supply chain. — Generate £15.25 billion within the wider economy. — In addition it would pump £342 million into local economies through the purchase of furnishings and local services such as surveying.59 4.12 The Federation believes that greater Government investment in shared ownership would not only represent an enormous boost to first-time buyers who are able to sustain home ownership, but unable to raise a deposit; but would stimulate a wider, faster economic recovery.
Failing Housing Markets 4.13 The Government must ensure that they do not evaluate the efficacy of public subsidy with a “one size fits all” approach. Many parts of England are struggling with the impact of failing housing markets. Whilst there has been substantial progress in regeneration initiatives over the past decade backed by significant public investment, this is now threatened by the recession and drastic cuts in public subsidy. In these areas the evaluation criteria is not just new supply, but reversing housing market failure and supporting wider economic growth. The Federation’s detailed response to the CLG select committee inquiry into regeneration sets out our views on this area and we look forward to the forthcoming response of the select committee.60 4.14 We believe that the Government could consider the following options: — Review the approach to assessing value for money when evaluating future funding models and include second order factors such as impact on the housing benefit bill. — Ensure that housing policy and welfare reform policy are aligned. — Help ensure long term funding at reasonable terms by extending the current formula for social rent increases (RPI + 0.5% plus or minus £2) until 2020. This would also make the sector more attractive to potential institutional investors, discussed in more detail below. 58 Steve Wilcox, UK Housing Review 2009Ð10, Chartered Institute of Housing and Building Societies Association, 2009. 59 This is based on our figures quoted above. Also The Home Builders Federation state that every home built creates 1.5 fulltime jobs plus up to four times that number in the supply chain. Research carried out for Kate Barker’s review of housing supply concluded that 1.5 workers per dwelling were directly engaged in the house building process, including office staff and wider professional support associated with development. Source: Ball Michael, The labour needs of extra housing output: can the house building industry cope, and CITB—Construction Skills and the Home Builder Federation, December 2005. 60 The Federations response to the CLG select committee enquiry into regeneration is available from: http://www.publications.parliament.uk/pa/cm201011/cmselect/cmcomloc/writev/regeneration/m15.htm Communities and Local Government Committee: Evidence Ev 155
— Confirming a mixed funded approach to support development post 2015. Whilst we accept that the government will be unable to confirm future spending settlements offering reassurance of a future programme would enable housing associations to secure future pipelines and reassure lenders. — Introduce a reduced VAT rate of 5% for labour intensive services consumed by housing associations in the delivery of key activities such as repair and maintenance of social housing stock. The extension of the reduced rate of VAT specifically for the repair and maintenance of social housing stock would release funding within the sector of £623 million a year. — Invest £1 billion into a national shared ownership scheme to deliver 66,000 new affordable homes.
5. What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them?
5.1 Given current economic and fiscal constraints the Federation’s view is that Government should not be looking to lend directly to housing providers and their focus should be on ensuring that the operating environment for housing associations and other providers is conducive to investors and banks being willing to continue to provide funds to housing providers at a reasonable cost.
5.2 Areas where Government can support housing supply include ensuring their proposals for welfare reform support housing delivery. Changes to Housing Benefit and the introduction of Universal Credit, including withdrawal of the option for tenants to have their housing support paid directly to the landlord, threaten to substantially increase the cost of finance for housing associations.
5.3 Other supply side measures that the Government could take include ensuring that banking regulation alongside the FSA’s ongoing Mortgage Market Review does not restrict the availability of mortgage finance for first-time buyers. If mortgage supply for first-time buyers is significantly restricted, this is likely to slow the pipeline of new housing developments being brought to the market.
5.4 It has been difficult in the past to bring forward a mechanism where Government through its agencies can make equity type investments into housing supply. Previously the Homes and Communities Agency (HCA) have proposed providing equity type investment into new low cost home ownership (LCHO) homes. The Government has previously recognised that equity sharing does not work for social rented homes. Social rented housing is, to all intents and purposes a loss making activity, especially when costs of housing management, maintenance and long term stock investment are taken into account. As a result there is no value uplift to share. Equity sharing for LCHO is also problematic. Previous proposals have stopped short of a full risk sharing approach and while Government wanted to take a share of any uplift in property values, there was no intention of sharing any falls in property values.61
6. What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening
6.1 We strongly welcome the announcement by Housing Minister Grant Shapps on 5 October 2011 announcing the plans of government departments with significant landbanks to use them to support the delivery of up to 50,000 new homes. Public bodies should be encouraged to evaluate the disposal of public sector land against a wider framework than simply reverting to “best consideration.” This should include the wider long- term benefits that can be delivered for the local community, including the provision of affordable housing.
6.2 The HCA should also move swiftly to use its landbank to support housing delivery, including recent land transferred from RDAs, to support the delivery of new affordable homes. This should include being flexible about mechanisms to support viable development. As such we welcome the housing Ministers’ commitment to make as much of this land as possible under the Build Now, Pay Later model and hope that government will prioritise the delivery of desperately needed affordable homes.
7. How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening
7.1 Securing institutional investment into residential property has been a “holy grail” of innovation in financing new housing supply for a number of years. Despite a number of government and housing sector initiatives institutional investment has never been unlocked in significant amounts. However, the tide may be turning—the turbulent financial markets have lead to investors seeking lower but safer returns. Forthcoming measures contained in the 2012 Finance Bill should help create a better environment and changes in the housing markets are combining to make securing large-scale institutional investment more likely. 61 It is also exceptionally difficult to develop a way of devising a workable equity type investment model for the delivery of affordable rented homes. Government has no responsibility and plays no role in longer term property management, maintenance and post construction works. Any significant increase in property values are often driven by wider neighbourhood work funded by housing associations. As businesses housing associations also invest heavily in having the staff expertise and organisational capacity to manage the development programme—a substantial business expense which enables associations to assess and take market risk. Ev 156 Communities and Local Government Committee: Evidence
7.2 Unlocking institutional investment in the residential property market has failed for three main reasons— low return on investment and insignificant scale, volatility and viability issues from a provider and investor perspective and an unfavourable legislative and fiscal environment. 7.3 Institutional investors, in particular pension funds and life companies, but also potentially sovereign wealth and opportunity funds, typically require a yield of around 7% on their investment. However, indications suggest that investment performance for residential let properties in England has provided a yield well below this rate, at approximately 3.5%. However, recent volatility in the financial markets and diminished opportunity for such high level returns on investment have resulted in an increased appetite for lower yield, but more secure returns. In particular an interest on long leased properties preferably with RPI linked leases as liability matching assets.62 7.4 Issues with low yields have been further compounded by the volatility of rental yields from private sector rents and general development viability risks that have resulted in institutional investment models being potentially high risk for both investors and developers. With the fragmented nature of the private rented sector market it is very difficult to generate economies of scale needed to secure institutional investment. 7.5 Recently government has announced a number of measures including revisions to stamp duty on bulk purchases and changes to REITs regulation that could help attract institutional investment.63 There are also factors that are leading to more demand for PRS accommodation, and therefore more secure returns and opportunities for “build-to-let” large scale landlords.64 7.6 We believe that the Government could consider the following options: — Establish an expert advisory group of investors and housing associations to review barriers to the development of social housing REITS. In 2007, a consortium of over 20 housing associations attempted to establish HA REIT, the first social housing REIT. However it failed due to the high risk and intensive start up costs.65 Current changes mean that now is the right time to establish a mechanism for taking this model forward. — Help increase investor appetite by piloting “build-to-let” REIT model on a number of HCA land sites. Large scale “build-to-let” models are relatively untried and untested and demonstrating their viability and potential investor return could create a crescendo effect by making the market more attractive to more investors. The value of piloting it on HCA sites would be the opportunity to de-risk the development by providing the land up-front at no cost and the HCA taking either an equity stake or build now pay later approach to ensure a return on the public asset. The HCA would also have the opportunity to do this across a number of sites helping to achieve the “critical mass” that would be needed. — Work with housing providers to support and establish a housing investment fund. Government support and underpinning of a pilot housing investment fund run by housing associations, would enable the development of mixed tenure sector schemes at scale and would attract investors and create confidence in the market hopefully acting as a prelude to it increasing in scale. Housing associations could reach an agreement with government around underpinning the risk and guarantee on investor return, but the clear backing and support of government would attract and reassure investors and government could play a role as broker.
8. How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply? 8.1 While the sector has a history of providing low risk returns to funders with no credit defaults, and credit ratings agencies continue to have a positive view of the sector, there is a need to acknowledge that if supply of private finance at a competitive cost is to be retained a number of factors need to remain in place. A recent report by Standard and Poor’s on housing associations summarises these risks well “Across the sector we 62 Williams, P et al, Opportunities for institutional investment in affordable housing: Report the HCA Housing Finance Group 2011, Cambridge Centre for Housing & Planning Research. 63 The 2011 Budget announced a revision of stamp duty on bulk purchase, meaning that stamp duty on the purchase of more than one property will be calculated by the average value of the properties, not the bulk value. Whilst this won’t automatically result in more institutional investment it will make a considerable difference to the potential rate of return and help make the market more attractive. Housing associations could have a strong role to play in securing institutional investment. Their considerable expertise in understanding local housing markets could help ensure investment in the right locations, in terms of a secure rental market—helping to secure investor returns whilst minimising development risk. Greater and more secure returns can be offered through minimising voids through the use of longer term tenancies and management at scale—both of which play to the skills and strength of associations. For example, in recent weeks Derwent Living have agreed a £45 million deal with Aviva Investors to fund the purchase of 839 properties from Home Group through the asset manager’s REALM social housing fund. Investment manager M&G is also on the process of raising money for what it hopes to be a £1 billion social housing fund. The diverse ownership role states that 35% shared of a REIT have to be in public hands. 64 Despite being a “home owning democracy” owner occupation levels have fallen from a peak of over 70% in 2003 to its current level of around 67%. This decline is not unique to the UK, but is a global trend. In a corresponding shift, the proportion of people in the private rented sector (PRS) has risen to 16%. This has been matched by some early indications, amongst younger generations in particular, that tenure aspirations are changing and the PRS is perceived as a more desirable tenure choice than it has been in the past. At the same time ongoing falls in numbers of first time buyers and lack of housing supply also indicate that in many housing markets private rents will continue to rise, recent figures commissioned by the Federation from Oxford Economics that suggest that rent levels will increase by 40% by 2020. 65 Northern Ireland Assembly, Alternative Financial Delivery Models for Affordable Housing, April 2010. Communities and Local Government Committee: Evidence Ev 157
believe that there may be some weakening in creditworthiness, due to the exposure to the various risks [increased debt, higher rents, welfare reform etc]. That said, we believe the political importance of housing associations’ role is likely to ensure sufficient government support that the vast majority of the sector will retain its investment-grade credit quality”.66 8.2 Areas of Government policy which impact most directly on the availability and cost of private finance include: — Welfare reforms including cuts to housing benefits and movement away from direct payment of rents to landlords under the Universal Credit proposals. — Reductions in the availability of capital investment which may mean that associations become involved in high-risk commercial activities in an effort to fund development.
9. How reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply 9.1 We are supportive of the principles underpinning the ongoing reform of the HRA system, though unless there are revisions to the rules surrounding public sector net cash requirement (PSNCR) we are doubtful that there will be substantial increase in funding available for housing supply. It has also been suggested that continued borrowing constraints after reform has been completed could result in further large scale voluntary transfers (LSVTs) to housing associations.67
10. How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term 10.1 The impact of the new funding model will be to increase the amount of resources that housing associations need to invest to support the delivery of affordable rent homes, which in turn will limit future funds available to support new housing supply. Modelling by Social Housing Magazine and Savills has indicated that associations will need to find an additional £10 billion to finance the 2011–15 development programme.68 10.2 The higher rents were anticipated to provide housing associations with a greater capacity to take on more debt. However, because of lender concerns over higher turnover and increased voids, currently valuers have been unwilling to factor in the higher rental streams into the valuation of housing association stock. This impacts significantly on Loan-to Value (LTV) ratios that lenders use to assess housing association debt capacity. 10.3 As developing housing associations take on increasingly more debt their businesses will become more highly geared. This will not only diminish the ability of developing housing associations to persuade lenders to continue to provide the additional funds they will need, but as levels of debt increase, it is likely that housing associations will find it increasingly more difficult to service debt from their rental income. 10.4 Going forward, housing associations’ ability to service debt may be further exacerbated by an increased cost of capital. Historically, housing associations have had plentiful access to funds at exceptionally low rates. It has been usual for many business plans assume that the long-term cost of capital will be 6%. 10.5 For the multitude of reasons listed below, it is possible that housing associations will struggle to borrow at the low rates they have done in the past and many members are now assuming future costs of funds at around 7.5%, because: — Stronger regulation of the banking industry through the Basel III proposals. — Increased costs of funds for the banks. — Re-financing risks. — The ongoing risk of bank back-book re-pricing. — The potential separation of UK retail and investment banking as recommended by the Independent Banking Commission. — In the medium term, possible competition from local authorities for bond finance Bank of England rates and LIBOR are at historically low levels. When these rates rise, housing association cost of funds will also rise. 10.6 The Federation has undertaken some modelling to evaluate the impact of a repeat of the same investment model in 2015 to illustrate this point further. Whilst we have used the best available data and robust assumptions, any future financial modelling by its nature is inexact and is used here for illustrative purposes only. Our analysis suggests that: — to support the delivery of one new build affordable rent home, nearly three existing properties need to be used as security to support higher borrowing requirements, rapidly eroding the sector’s borrowing capacity; 66 Standards & Poor’s, Report Card: U.K. Housing Associations face New Age of Austerity and Innovation, 2 February 2011. 67 Williams, P et al, Opportunities for institutional investment in affordable housing: Report the HCA Housing Finance Group 2011, Cambridge Centre for Housing & Planning Research. 68 Social Housing Magazine, Vol 23 No 10, October 2011 “£10 billion finance needed to deliver development plans”. Ev 158 Communities and Local Government Committee: Evidence
— AHP 2011–15 and additional nil-grant delivery will result in the sector using 46% of total sector loan capacity, this will severely constrain future development capacity and reduce the amount of resources that can be invested in supporting wider neighborhood investment; and — if the same investment model was used for development of new affordable homes post 2015 the security capacity of the sector would be exhausted after 11 yrs. Whilst our sector has always been the key partners of government in affordable housing delivery, and will deliver 90% of homes delivered under the AHP no sector would accept such a medium term erosion of its asset base.69 10.7 Our modeling and analysis has not accounted for the recent Government announcement to revitalise the Right to Buy (RtB) policy and sell up to 100,000 new homes. These are to be replaced on a one-for-one basis with homes which are likely to be let on affordable rents ie at up to 80% of the market rent. The policy will apply to housing association tenants who hold a tenancy which grants them a Preserved Right to Buy (PRtB) following stock transfer. 10.8 The Department for Communities and Local Government (DCLG) estimate that 700,000 housing association tenants hold the PRtB. To avoid a repeat of the past erosion of social housing stock, housing association will need to be able to replace stock sold on a one-for-one basis. To achieve this housing associations will need to be able to retain all receipts and any capital shortfalls borne by associations when delivering replacement homes should be met by Government. This will help avoid additional capacity being sucked out of the sector, at a time when balance sheet capacity is already being put under pressure by the affordable rent model. October 2011
Written submission from Home Group Introduction 1. The Communities and Local Government Committee has recently launched an inquiry into the financing of new housing supply, focussing on the steps which need to be taken by Government to ensure that the resources are available to enable the nation’s housing needs to be met. 2. This note provides Home Group’s contribution to the debate and puts forward a range of options to increase the supply of finance available to housing associations to help deliver the affordable homes the country desperately needs. 3. Home Group (Home) is one of the leading nationwide registered providers of affordable and supported housing within the United Kingdom and the UK’s largest provider of care and support services. Home has a turnover in excess of £300 million, provides care and support services to more than 20,000 people and owns or manages over 54,000 homes. Established (through an Act of Parliament) as the North East Housing Association in December 1935, 2011 represents Home Group’s 75th year of operation.
Executive Summary 4. With increasing pressure on Government finances, grant available for the development of new affordable homes is likely to continue to decline. This note looks at some of the alternative sources of finance available to housing associations and suggests how they might be enabled to access additional finance to develop more affordable homes. 5. The note considers: — Joint ventures/partnerships. — Increased use of market sales. — Bond markets. — Equity versus grant financing. — Removal of historic grant. — Extending the recently announced right-to-buy policy to housing associations. — Releasing public land for development. — Tax incentives. — Maximising alternative sources of Government finance. 69 Our modelling has evaluated the value of the sectors assets base and the asset based cover this could support and looked at the implication of delivery of the AHP. We have used figures from Savills who recently conducted an exercise to estimate the consumption of sector property assets as security for finance to fund the AHP programme 2011–15. Savills assesses that the average value (EUVSH) of a housing association property as £55,000. The most up to date assessment of the average cost of developing a new housing association property from government data is £145,000. We have assumed that members will deliver an additional 10% of units beyond those delivered via the AHP, based on a conservative estimate from nil-grant development since 2000 as reported in the Regulatory Statistical Return. Communities and Local Government Committee: Evidence Ev 159
Background 6. Historically housing associations have required significant levels of grant funding from Government to ensure development of new social housing schemes was viable. Initially the sector relied heavily on grant, requiring 75–85% of grant from Government in the early years of grant funding in the mid-sixties. 7. Throughout the seventies and eighties successive Governments looked for financial innovations to reduce the burden on the state. The introduction of private finance in the late eighties greatly reduced the amount of grant required to finance development to around 30%. Although the level of grant subsidy has reduced, grant funding remains an essential element of housing association development finance. Housing associations enjoy top level financial ratings from rating agencies in part as a result of the stability of grant funding, ensuring they are not over leveraged with private debt. 8. Alongside the introduction of private debt finance, housing associations have also diversified the range of products on offer, introducing shared ownership models and developing a small proportion of housing for outright sale to cross-subsidise new developments. This increasingly sophisticated approach from housing associations has allowed government grant to go further and more affordable homes to be built. 9. More recently the Government have introduced the Affordable Rent product as part of the new Affordable Homes Programme. This has further reduced the amount of grant available to housing associations for development purposes. This has meant a greater reliance on debt financing and cross-subsidy alongside the additional income and borrowing potential generated through a move to 80% market rents.
Financing Affordable Home Delivery 10. The Homes and Communities Agency’s (HCA) Affordable Homes Programme runs until 2015 after which a new funding model for the delivery of affordable homes will be required. It is clear that the pressure on Government finances will continue, and the grant available for new affordable homes will be limited in the future. This note looks at some of the options available to housing associations to generate capital for new homes.
Increasing the Use of Joint Ventures/Partnerships 11. As mentioned earlier, grant funding from central government has been core to the viability of social housing development over the past half century. In the future, with continuing pressure on Government funds, and an environment where housing associations are developing homes with ever decreasing amounts of grant, alternative funding sources will be required to continue to deliver affordable homes. 12. Increasingly, housing associations have looked to enter into longer term partnerships with developers for the provision of affordable homes. This can take many forms but often involves housing associations taking on the social rented and shared ownership element of large mixed tenure schemes. These partnership arrangements share the risks of development between the partners and provide housing associations with an element of control surrounding the design and location of new properties (compared with s106 agreements). Whilst these partnerships can provide a degree of scale and certainty for housing associations, it also means taking on more sales risk. In a world where mortgage availability continues to be constrained and planning policy is still in development, the sales risk associated with any new development is significant. So whilst these joint venture partnerships will continue to be important they are not without risk. However they will form an important part of the picture when developing affordable housing in the future. 13. An example of one of the innovative joint venture partnerships Home Group are currently engaged in can be found in Appendix 1.
Market Sales and Group Restructuring 14. One option available to housing associations is to increase the amount of homes built for outright sale and use the profits generated to re-invest in new affordable homes. Currently housing associations are able to develop a certain proportion of homes for outright sale and still retain the privileges associated with charitable status/not for profit. There is scope to change the structure of housing associations and create for-profit businesses as part of the overall group. This restructuring can allow development of a larger number of units for outright sale and some providers have gone down this route to cross-subsidise affordable housing. As described above, a greater reliance on outright sale to fund further development carries with it significant risks (especially in the current financial climate) and will not be suitable for all (particularly smaller) housing associations. The legal structures and cross financing of this type of arrangement can be very complicated and care must be taken to protect charitable status when operating this business model.
The Bond Market 15. The bond markets have in recent years provided an additional source of finance for housing associations. Bond issuance has risen since the onset of the banking crisis and will continue to be a useful form of finance for the sector in the future. The banking crisis and the resulting cost of traditional debt finance has improved Ev 160 Communities and Local Government Committee: Evidence
the competitiveness of the bond market. Bond finance also allows providers to diversify sources of debt funding—an increasingly important consideration given the tightening of lending from traditional sources. 16. A recent development in the bond market has been Places for People’s recent retail bond issue in June 2011. This was the first time any housing association has accessed the retail bond market and another example of the sector innovating to access new sources of finance. The retail bond market targets individual private investors and not large corporates and pension funds that the sector has in the past encouraged to invest through more traditional corporate bonds. The success of the launch of the bond is encouraging and could provide a significant additional funding stream for the sector that is attractive to individual investors. However, if retail bonds are to be a success they must deliver value for money and not prove to be too expensive to service when compared with traditional debt or corporate bonds.
Equity Versus Grant Financing 17. One alternative funding option is to allow housing associations to generate funding through the release of shares—with the equity raised used to build more homes. This would require a fundamental change to the operating model of housing associations in the move to a “for profit” element or arm of the organisation. This could be achieved without full privatisation through some form of cooperative, mutual or partnership arrangement which could still include not for profit elements within the new business model. 18. Generating equity through issuing shares clearly has the direct benefit of generating funding, but there are also other reasons to consider such a move. Traditional debt finance is generally provided by the big five banks and building societies and in post-credit crunch world there is likely to continue to be a tightening of lending to housing associations. By raising funds through equities, housing associations can diversify their capital base and become less reliant on traditional debt finance. 19. Clearly having a “for-profit” element as part of the business model will mean significant changes for many in the sector and investors will indeed want to see a return on any investment. This changes the dynamic of the business model and could increase the pressure for providers to generate returns. This must be achieved without compromising quality and customer service. Currently in the not for profit model, all returns are re- invested within the business to improve customer service and the quality of homes. 20. Home Group, like the majority of the major developing RPs is a Charitable, Industrial and Provident Society (IPS). Whilst we have explored with interest many of the recent proposals concerning the creation of share capital or equity within housing associations, our legal advice is that raising equity finance would adversely impact both our charitable and IPS status which therefore prevents us from taking this option forward.
Removal of Historic Grant 21. Many RPs have recently raised the issue of historic grant write-off with Ministers, with the suggestion being that the written-off debt would reduce the gearing of housing associations and allow access to significant additional borrowing—to build new affordable homes. 22. This would of course require the support of banks and other lenders to make this work as key to the success would be borrowing at the same low interest rates the sector has benefited from in the past. 23. We understand the historic grant held within housing association properties does not sit within CLG or HM Treasury books as an asset and therefore there could be a case for writing off some or all of the historic grant without detrimental impacts on the public finances. 24. Whilst this proposal sounds attractive at face value it raises many issues surrounding the accounting treatment of the written-off debt. It is possible that the change in status of the debt could have unintended consequences through eg increased depreciation charges that could leave little or no advantage in financial terms after write-off. Also, in many cases access to additional borrowing is not the single limiting factor for housing associations when looking to build more homes. Increased borrowing could lead to additional costs to I&E and interest cover ratios which limit the development capacity of many housing associations. We have raised the potential difficulties surrounding write-off of grant debt through discussions with CLG officials and would be happy to engage further to develop thinking on this issue.
Extending the Revised Right to Buy Policy to the Registered Provider (RP) Sector 25. The Prime Minister has announced plans to revive the right to buy policy—pledging to increase the discounts to council housing tenants who wish to buy their homes and for the money raised from the sales to be re-invested in new affordable homes. 26. The Government have argued that the revised right to buy policy could be applicable to up to two million council houses, and through introducing appropriate discounts to tenants, up to 100,000 new affordable homes could be delivered. Although the announcement concerns council tenants we believe a similar policy could be introduced for RP tenants to deliver even more affordable homes. Communities and Local Government Committee: Evidence Ev 161
27. RP homes could be offered to tenants at a sale price which would cover the build cost of a new affordable home of a similar size locally. The sale proceeds generated would be used by the RP to build a home of equivalent size within the same local housing market area wherever possible. In order to help the tenant move into home ownership, Government would gift some of the grant that was utilised when building the original home to the tenant to use as a deposit when seeking a mortgage. This would result in: — A tenant being able to access a mortgage to buy the property through the use of historic grant as a deposit. — A new home being built in the local area on the back of the sale—one new affordable home would be built for the sale of every home. — A solution for the use of historic grant. — A new affordable home within the RP’s asset base—maintaining supply within the local area. 28. We believe this innovative use of historic grant could provide Government with a route to help thousands of hardworking families achieve their dream of owning their own home whilst also maintaining the numbers of affordable homes for rent. A fuller description of the policy proposal can be found in Appendix 2.
Releasing Public Land 29. A significant element of the cost when developing new homes is land value. Government have clearly recognised the need to release more publicly owned land and recent announcements from CLG Ministers in this regard are welcome. The Housing Minster has indicated that he hopes the majority of released public land could be developed on a “build now, pay later” model to reduce the upfront costs for developers. Whilst this is helpful in cash flow terms, it will still require developers to pay full value for the public land that is brought forward for development. 30. We believe Government must go further if it is to encourage the scale of house building the country requires. Land must be available at reduced cost to increase the levels of affordable homes delivered. Government must also work with local authorities to ensure they are doing all they can to bring forward low cost land for development.
Tax Incentives—VAT and Corporation Tax 31. Housing associations currently benefit from lower levels of VAT in many areas of our activity. However one area in which associations currently pay full VAT is repairs and maintenance. If the rate of VAT was brought down to the lower 5% level, collectively the sector could save millions of pounds which could be used to deliver more affordable homes. The reduction in VAT could also help the sector achieve its ambitions surrounding energy efficiency and provide a stimulus for jobs and economic growth. 32. Home Group through our registered charity status is not currently required to pay corporation tax. However, as many in the sector are not registered charities, many housing associations are currently liable for corporation tax. Any change in legislation which protects housing associations from corporation tax could release significant funds within the sector which could be used to deliver more affordable homes.
Maximising Other Forms of Government Finance 33. In order to maximise finance available for new development, housing associations should continue to be at the forefront of Government funding schemes for energy efficiency and micro generation. Schemes such as the Green Deal, Renewable Heat Incentive and Feed in Tariffs fit will with the social purpose of housing associations. These schemes help to protect our customers from fuel poverty and reduce the capital costs associated with retrofitting our stock. Housing associations are well placed to lead the roll out of such Government schemes and have demonstrated our ability to deliver large scale renovation programmes through eg the Decent Homes Standard. Preferential access to Government funding and capital through these schemes, alongside access to planned schemes such as the Green Investment Bank will not only provide the Government with the scale needed to realise the planned benefits of the schemes, but also allow housing associations to focus the limited funding available to them on the development of new affordable homes.
Investor Confidence 34. The social housing sector remains attractive to investors due to the certainty of the rental income and the current housing benefit formula (and their effective link to RPI). This alongside the fact that housing benefit is paid direct to landlords, which in turn reduces arrears and keeps the costs of rent collection down appeals to investors and allows the sector to access favourable lending rates. 35. Assuming housing demand continues to remain high, the rates of debt interest the sector can access are low, and rents predictable then the sector will continue to appeal to investors looking for a secure (if modest) return on investment. Any changes that upset this balance of factors which inform investor confidence could have dire consequences for the sector. If we are to move to a model where new affordable homes are funded from a range of funding sources then the sector must continue to be able to access favourable rates of debt (and bond) finance. Ev 162 Communities and Local Government Committee: Evidence
36. Any planned changes to the funding or benefit systems must not adversely affect investor confidence. For example, the introduction of the new Affordable Rent model linked to market rents will increase the rental income and borrowing power of housing associations. However as rents are linked to market rents there is potentially less certainty in the rental income received, which in turn could have a knock on effect to lender confidence and the cost of debt finance. Careful monitoring of this and other planned changes (eg housing benefit) will be required to retain investor confidence in the sector.
Legal Implications 37. Although this note has not considered the legal implications of the options discussed above we believe Government must look favourably on relaxing/amending necessary legislation governing the sector if we are to enable a more innovative funding model for the delivery of new affordable homes. 38. Current restrictions surrounding the charitable status of some housing associations can mean that it is difficult to raise equity finance and to trade commercially. Clearly this provides significant barriers to the sector when looking to access additional funding and move away from a reliance on Government grant. It is vital that Government looks to relax some of the restrictions currently limiting the sector’s ability to raise additional finance if housing associations are to deliver increasing numbers of homes with limited grant.
Conclusion 39. Over time housing associations have continued to innovate in the way they access finance to develop new affordable homes. The reliance on Government grant has declined and new forms of low cost finance have ensured affordable homes continue to be developed to meet growing housing demand. The introduction of Affordable Rent through the Affordable Homes Programme provides a new route to reduce the reliance on Government grant and its implementation will be followed closely by the sector and our investors. 40. Although the sector’s reliance on Government grant has over time declined, grant still remains a vital element of the current funding model when financing new affordable homes. Grant ensures housing associations are not over-leveraged with private debt and underpins the stability of the current funding model. Building homes with the aid of grant has been the defining factor of developing housing associations—the one element of our business model that sets us apart from the private sector. Grant ensures the viability of schemes, plays a big part in maintaining investor confidence, which allows the sector to access low cost private debt. 41. Whilst the sector has demonstrated its willingness to innovate and seek out new sources of low cost finance, we have yet to reach a position where we are delivering large numbers of homes without grant. To move to a position where housing associations are delivering affordable homes with no grant will require changes to the regulation and restrictions currently governing the sector. Developing without grant will mean increasing the number of homes for outright sale to cross subsidise affordable homes; increasing rents, and; a heavier reliance on private debt. 42. With planned changes to the welfare system and reforms to social housing rent and tenancy policies, it is essential that the sector retains an element of stability when designing any future funding model for the delivery of affordable homes. Stability and predictability of returns is vital to retain investor confidence, which in turn will enable housing associations to access the private finance at affordable rates to continue developing new affordable homes the country desperately needs. Communities and Local Government Committee: Evidence Ev 163
APPENDIX 1 AN EXAMPLE OF INNOVATIVE JOINT VENTURE DELIVERY OF AFFORDABLE HOMES Gateshead BIG Project 1. Gateshead Council has agreed to form a joint venture partnership with Evolution Gateshead, a consortium of Home Group and Galliford Try, to build around 2,400 new homes south of the Tyne (650 of which will be affordable homes). 2. The homes will be created on 19 different sites (approx 70 hectares) and include both greenfield and brownfield sites. The sites will be developed over a period of 15 to 20 years by a Joint Venture Vehicle (Gateshead Regeneration Partnership) which is a formal partnership between Gateshead Council and Evolution Gateshead.
Home Group Galliford Try
50:50
Evolution Gateshead Council Joint venture Gateshead
50:50
Gateshead Joint venture Regeneration vehicle Partnership
The Partners 3. Home Group—Registered Provider of Social Housing with a strong historic presence in Gateshead. Currently own and manage 1,725 affordable homes in Gateshead. Home will own and manage all affordable homes provided by the partnership. 4. Galliford Try—FTSE 250 listed housing developer which builds over 1,800 homes annually. Galliford have delivered over 500 units in the North East over the past 10 years. Galliford Try will also act as the construction manager for the physical delivery of the sites. 5. Gateshead Council—The regeneration of the proposed 19 sites within Gateshead fits well with the Council’s Sustainable Community Strategy (Vision 2030). Gateshead Council will provide the sites for the project with no cash investment or gap funding required. The Council will also receive 50% of the return from the project.
What is innovative about this? 6. Creating a joint venture partnership means that both sides will be able to share the risks—and the rewards—of the development, and the return from the development will reduce the Council’s reliance on central government funding. The profits from the project will be split 50:50 between Gateshead Council and Evolution Gateshead. 7. In addition, it will allow a whole package of sites to be developed, including important regeneration sites which will greatly improve the choice of homes available to people wanting to live in Gateshead. 8. Whilst on the whole the working relationships in the Gateshead BIG project have been very productive there are challenges to working within the joint venture model, some of which are highlighted below: 9. Attitudes — Much is down to individuals and strong personal relationships—the ability to get on but also the ability to be able to challenge and change without damaging the relationship (obvious but very true)—attitude is everything and the will to make things work. — There is often a local authority distrust of the private sector and unless the LA are commercial in their approach (like Gateshead have been) then this makes things very challenging. Ev 164 Communities and Local Government Committee: Evidence
— JV working is still a relatively novel approach for many local authority partners which can result in a cautious approach (which can hamper innovation and result in partners “playing it safe”). — A key barrier to success is the attitude and approach of the public sector partner/local authority— JVs can only work well when there is a will on all sides for sharing long term risk and reward rather than immediate returns and short term gains. 10. Commitment — Large scale projects over many years need organisations to commit long term. All partners need confidence in each other, the agreement and the support from the community and politicians before entering into any arrangement. — LAs are facing major cuts which means long term regeneration is slipping down the priority list in favour of asset disposals to maintain a LA operational budget—this is a major barrier at the current time—LAs do not need to sell the family silver—JV models can allow LAs to hang on to their assets in the long term — Ensuring that the parties in a JV (whether public or private) have aligned objectives—there are some developers for instance that are driven by immediate returns rather than a long term approach— therefore only when there is a synergy of approach to JVs really work. 11. Resources — Often a lengthy process with associated resource and cost implications—bidding rounds can be over several months/years and need significant resources (at risk). Need to be of sufficient size as an organisation to take on costs and risks of this approach. — Legally very technical and again comes at significant cost and resource implications. Structures can be complicated to set up so can only really be justified on projects of a certain size, or as a portfolio of individual projects. 12. Technical — The often overlong, overcomplicated procurement process—different authorities/organisations have very different approaches—a major barrier to delivering a successful JV. — Sometimes there is the risk of overcomplicating the model—each opportunity warrants an appropriate individual solution—barriers are often how the funding is structured and a lack of understanding/ transparency.
Encouraging Joint Venture Partnerships 13. As mentioned above, joint venture partnerships can bring real benefits to all partners if the right deal can be put together. The barriers outlined above provide significant challenges to agreeing joint working arrangements but all can be resolved through discussion and negotiation between partners. 14. Joint venture working is still a novel approach to many local authorities which often results in a cautious approach by the public sector. Many local authorities will be looking to generate additional income to offset Government grant reductions over the coming years and JV partnerships could provide the additional capital they require without selling off valuable assets. CLG working with the Local Government Association could help to promote the benefits of JV working through providing case studies and best practice guides for local authorities to try and break down some of the perceived barriers to this kind of working and encourage innovative JV partnerships.
APPENDIX 2 EXTENDING THE REVISED RIGHT TO BUY POLICY TO THE REGISTERED PROVIDER SECTOR Right to Buy in the Registered Provider Sector—Home Group’s Proposal Purpose 1. This note puts forward the case for extending the Government’s revised right to buy policy to the Registered Provider (RP) sector. Through the innovative use of historic grant held within social housing, Government could help thousands of families buy their own home whilst maintaining the supply of affordable homes for rent.
Background 2. The Prime Minister has announced plans to revive the right to buy policy—pledging to increase the discounts to council housing tenants who wish to buy their homes and for the money raised from the sales to be re-invested in new affordable homes. 3. It is hoped that the plans, along with proposals to release more government land for development, could lead to the creation of 200,000 more affordable homes. Communities and Local Government Committee: Evidence Ev 165
4. Further details on the policy will be included in the Government’s housing strategy to be published in the Autumn. Although the announcement concerns council tenants we believe a similar policy could be introduced for RP tenants to deliver even more affordable homes. This note puts forward the case for extending the Government’s revised right to buy policy to RPs.
Proposal 5. The Government have argued that the revised right to buy policy could be applicable to up to two million council houses, and through introducing appropriate discounts to tenants, up to 100,000 new affordable homes could be delivered. 6. As homes in the RP sector have also been built with the assistance of grant we believe RP stock could also be included in the revised government scheme to deliver even more affordable homes. 7. RP homes could be offered to tenants at a sale price which would cover the build cost of a new affordable home of a similar size locally. The sale proceeds generated would be used by the RP to build a home of equivalent size within the same local housing market area wherever possible. In order to help the tenant move into home ownership, Government would gift some of the grant that was utilised when building the original home to the tenant to use as a deposit when seeking a mortgage. This would result in: — A tenant being able to access a mortgage to buy the property through the use of historic grant as a deposit. — A new home being built in the local area on the back of the sale—one new affordable home would be built for the sale of every home. — A solution for the use of historic grant. — A new affordable home within the RP’s asset base—maintaining supply within the local area.
Issues 8. Although tenancies provided through RPs are not exactly the same as those provided to council tenants, many of the rights available to tenants in council housing apply in some form in the RP sector. Certain RP tenancies allow tenants the right to acquire their home if they have lived in the property for over two years in the same way council tenants have the right to buy. Therefore there is a clear case for extending the Government’s revised right to buy policy to the RP sector. 9. If the revised right to buy policy is extended to cover the RP sector as suggested in this note some of the historic grant within the property being bought under right to buy would move to the tenant and not all to the RP (as currently happens) when the house is sold. This is the key innovation of this model. Although the RP would not benefit from the full transfer of grant, the new property built with the proceeds of the sale would maintain the level of the RP’s stock in the local area. So, for example: — House is bought by sitting tenant for £120,000 using 20,000 of the historic grant held within the property as a deposit to raise mortgage finance for the purchase. — RP receipt from the sale is therefore £100,000. — Build cost for new build in local area for a similar property is £100,000. — The tenant now owns the property and the RP builds a new affordable home in local area thus maintaining supply. — Affordable property delivered (at up to 80% market rent) without the need for additional grant. 10. In cases where the sale receipt does not cover the cost of rebuild the RP would use additional borrowing capacity of new property set at Affordable Rent levels to plug the construction cost gap. 11. Therefore this innovative model of affordable home delivery would help move the sector away from a reliance on Government grant, increase the borrowing power of RPs alongside helping tenants into home ownership and delivering new affordable homes. 12. This would not require “new” Government money but the innovative recycling of historic grant. Currently Treasury have few conditions on housing grant held in RP properties and there is no defined schedule for its repayment. Essentially the grant is held in the asset long term without repayment or recycling of the grant until homes are sold or demolished. Through extending the revised right to buy policy to the RP sector, Government can open up an innovative route to recycle historic grant—ensuring the grant is not locked away in RP assets but working hard to help families own their own home whilst also delivering more affordable homes the country desperately needs. 13. It is intended that the sale proceeds are used to build a similar sized property (ie the same number of bedrooms) within the local area where possible (eg property type meets local needs as set out in local plans and there are suitable development opportunities locally). Where local development is not possible a new home must be delivered within the wider HCA region. 14. A number of key elements would need to be in place to ensure the model’s success. First, the HCA would need to have a prominent role in facilitating the process. The build costs for different sizes of properties Ev 166 Communities and Local Government Committee: Evidence
(eg one-bed, two-bed, etc) would need to be established for local areas (eg local authority or broad market rental area) to help establish the sale price for individual properties. This will be key to the success of the policy as the sale proceeds must cover the build cost of a new affordable home. Clearly this will be achievable in more desirable, higher value areas but may prove difficult in some lower value locations. 15. Second, the proposed model would require an element of scale to deliver the benefits envisaged and the development capability of RPs will play a large part in the extended right to buy policy’s success. Clearly RPs will not have prior knowledge of which homes will be bought and sold, so care must be taken to protect the business planning of individual RPs whilst also encouraging home ownership. 16. Third, as the level of historic grant used to build individual properties has varied over time, similar property types in a local area could contain significantly different grant amounts. In order to avoid perceived “winners and losers” from the proposed policy a way of smoothing out historic grant rates must be found. This would ensure the policy provides a level of equality to tenants wanting to take advantage of the right to buy. This could take the form of an average grant rate per property type, or perhaps, a percentage of the home’s value per property type. This will provide a level of certainty surrounding the value of the grant/deposit the tenant receives when they invoke the right to buy. 17. Finally, although we have no way of knowing the overall demand for this from customers we believe this policy will be attractive to many families. Key to the success will be the access to mortgage finance for customers to enable them to purchase their own home. This must be at an attractive rate for customers and will require the support of the financial sector to make this work.
Conclusion 18. As mentioned above, the right to buy may not be appropriate for all customers but could provide a route to home ownership for many whilst protecting the numbers of affordable homes for rent. Clearly this new approach would need to dovetail with other government housing policies and raises many questions that would need to be resolved to ensure a smooth introduction. Nevertheless, we believe this could be an innovative model for the delivery of new affordable homes the country needs whilst also helping hard working families achieve their dream of home ownership. October 2011
Written submission from Places for People Group 1.0 Introduction 1.1 Places for People is one of the largest property management, development and regeneration companies in the UK. We own and manage more than 62,000 homes and have assets of £3 billion. 1.2 Our vision is to provide aspirational homes and inspirational places and our approach looks at all aspects of communities rather than focusing solely on the bricks and mortar provision of homes. Places for People’s innovative approach to place management and placemaking allows us to regenerate existing places, create new ones and focus on long-term management. 1.3 The financing of a sustainable housing supply is a crucial issue for the prosperity and wellbeing of the UK and we welcome the opportunity to respond to the Select Committee’s call for evidence. In section 3 of our response we reiterate our proposals for residential REITs and equity funding, which we are currently discussing with the relevant Government bodies. Section 4 contains our detailed responses to the issues raised by the Select Committee.
2.0 Executive Summary 2.1 We believe that the financing of new housing supply needs radical reform in order to promote a long- term, sustainable supply of new homes in a range of tenures. The Government’s Affordable Rent model may be effective in stimulating development in the short term, but due to its impact on gearing ratios, the current scheme can only have a limited lifespan. 2.2 In our view, residential Real Estate Investment Trusts (REITs), as well as Government equity funding, would both be effective models to boost housing development over the long term. We explain both proposals in more detail in section 3 below. 2.3 Specific barriers or more accurately “prerequisites” for equity funding are (1) yield and (2) liquidity levels that are acceptable to investors. 2.4 In more general terms, we believe that models that apply a number of basic principles, as outlined in paragraph 4.2 below, have the best chance of leveraging in private sector finance to build both new affordable and market housing supply. 2.5 Given public sector debt issues, we would recommend that the Government’s focus is applied to providing a guarantee on revenue funding, in order that public capital subsidy is limited to either subsidising Communities and Local Government Committee: Evidence Ev 167
specific housing interventions (ie mortgage support for intermediate market or environmental improvements), or providing much needed infrastructure in regeneration areas. 2.6 We believe there is a role for public sector bodies to provide support in kind, especially as this could enable them to generate sources of future income (eg delayed land receipts).
3.0 Places for People’s Proposals Financing New Housing Supply 3.1 Places for People has long argued the case for radical reform to the way social housing is funded in the UK. We formally submitted these proposals to the Homes and Communities Agency (HCA) as an alternative bid to the new Affordable Rent programme earlier this year, and have held discussions with the HCA, as well as CLG and HM Treasury, about our proposals. We believe that the proposals we outline in this section are a viable way to ensure a long-term sustainable supply of homes in a range of tenures. 3.2 Our proposal for a residential Real Estate Investment Trust (REIT) could, provided that that future changes to the UK REIT legislation are made in the 2012 Finance Bill according to our response to the Government’s informal REIT consultation, deliver yields of around 7% to investors which a number of them have confirmed is acceptable. 3.3 Our initial modelling of the REIT proposal works on the basis that around 5,000 existing rented properties are purchased by the REIT, including social rented properties that have been converted into Affordable Rent when they fall vacant. The funds generated by the sale of properties into the REIT would be used to finance additional development of new homes in affordable rented and market rented tenures, and once occupied these new homes would then be sold onto the REIT. This process or cycle could be repeated a few more times until the REIT needs to be reseeded or restocked with existing residential properties. 3.4 The transfer of existing social rented properties into the REIT would be on the basis that any social housing grant attached to the initial properties transferred would be recycled and existing debt would likely to be rolled over. 3.5 Our Equity proposal is based on Government changing the funding of social housing to an equity finance model. Whilst equity funding requires higher yields, it ranks behind debt in terms of priority of payment and so should give debt lenders more confidence to lend into the sector in the absence of grant. 3.6 For the equity proposal to work, Government would need to change the designation of the historic social housing grant that sits on the balance sheets of registered providers in order to create the headroom to release equity into the market. The income payments for equity would be funded by RPs converting the required number of existing social rented void properties through a HCA-led Affordable Rent scheme. 3.7 We estimate that with this mechanism, Places for People alone could attract £750m of equity to fund the production of a further 5,000 new affordable houses, without the need for Government to issue any further grant. We calculate that this level of funding will require around 75% of our existing social housing properties to convert to Affordable Rent. This will enable the £350 million equity funding to be introduced in either Year 2 or 3, with the remaining £450 million equity funding following three years later in either Year 5 or 6. 3.8 Our modelling of the application of the model to the whole sector shows that it would attract around £25 billion of equity funding across at least three tranches and deliver around 160k new affordable homes without the need for Government to issue any further grant. 3.9 In addition to the provision of new affordable housing through the application of either the REIT or equity funding model, we also estimate that this boost in affordable homes development will provide a catalyst for additional market sale houses to be built in a 3:1 ratio in mixed developments across the country, by a combination of registered providers and housebuilders.
4.0 Response to the Issues Raised in the Call for Evidence How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms 4.1 Places for People has for some time appreciated that over-reliance on Government grant funding is not a sustainable approach in the long term. Our strategy over the last five years has therefore been to, where possible, build affordable housing without the need for grant. 4.2 Initially we achieved this aim through cross-subsidisation from receipts obtained from market and intermediate sales. However, recent and ongoing paucity of mortgage finance means that we will need to adapt our strategy to apply the principles (but not necessarily the exact details) of the current Affordable Rent model, namely: — A modest uplift in rents to generate running income yield that is inflation-linked (this could be done either in two subsequent increases of 4%, or a one-off increase from social to 80% of market rents); — Using the incomes derived from the above rental increases to obtain long-term equity funding from investors, in order to build a new supply of affordable housing without requirement for capital grant; Ev 168 Communities and Local Government Committee: Evidence
— Using any proceeds either from staircasing of intermediate housing products (ie shared ownership or sale of rented properties) to build new affordable housing without a requirement for capital grant; and — The provision of new affordable housing will then enable either RPs or housebuilders to obtain working capital to build additional new market sale/rent houses at a 3:1 ratio. 4.3 In our opinion, models that apply the principles outlined above have the best chance of leveraging in private sector finance to build both new affordable and market housing. 4.4 Given public sector debt issues, we would therefore recommend that the Government’s focus is applied to maintaining a revenue public subsidy in order that public capital subsidy is limited to either subsidising specific housing interventions (ie mortgage support for intermediate market or environmental improvements), or providing much needed infrastructure in regeneration areas.
The role of state lending or investment, as opposed to grant funding, and the appropriate balance between them 4.5 We believe that the principal role of the state should be to provide a guarantee on revenue funding in order that it can attract private equity funding to act in a similar manner to grant funding in repayment terms (ie lower repayment priority) and so maintain confidence for debt and bond finance. Any remaining state investment or grant funding would in our view be most effective when spent on specific housing interventions (eg environmental improvements) or infrastructure in regeneration areas. 4.6 Over and above that, we think that there is a role for local authorities to effectively become equity investors in their land (see below) and possibly use their prudential powers to provide mortgages to individuals.
The role of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and any barriers to this happening 4.7 We believe there is a role for public sector bodies to provide support in kind, especially as this could enable them to generate sources of future income (eg delayed or deferred land receipts). For instance, an obvious and attractive option would be for a local authority to contribute land into a fund, into which private investors would then provide funding. In return for the land, the local authority would get an equity stake that could later be cashed in (as the sales receipt would start to produce profit) or be carried over and used to fund further development of intermediate/rented homes in the local authority area.
How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply [The following paragraphs form a combined answer to these questions] 4.8 As stated in section 2 above, we believe that our equity and REIT proposals are the next logical development from the bond market finance we and other RPs have been obtaining. 4.9 Whilst we still believe there is a role for bond finance, especially some further potential for retail bond finance, large financial institutions have indicated to us that they would be interested in providing equity funding on the basis outlined above. 4.10 Specific barriers or more accurately “prerequisites” for equity funding are (1) yield and (2) liquidity levels that are acceptable to investors. In relation to yield, we are likely to target investors such as infrastructure funds who typically seek lower returns over longer periods of time. Liquidity levels would be achieved either through scaling up the conversions of existing social rented properties to affordable rent and/or through consortia of RPs. 4.11 We believe it is possible to achieve yield and liquidity levels acceptable to investors based on our initial modelling and discussions with large financial institutions either from single large scale RPs or from collections of RPs (eg REITs).
How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply 4.12 Subject to the confirmation of the details from Government surrounding the HRA system, especially relating to the Public Works Loan Board (PWLB) and individual borrowing cap arrangements, we believe that the reforms do offer potential for more funding to be made available for new housing supply. This would be the case in particular if the Local Authority were to transfer its housing to a registered provider, so that it could make more use of some of the mechanisms outlined above. Communities and Local Government Committee: Evidence Ev 169
How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term. 4.13 The current Affordable Rent model applies some of the principles set out above, which we suggest are required to lever in large-scale private finance. However, the reductions in grant rates require RPs to borrow more money to finance the development of new affordable housing thereby exacerbating gearing levels. For this reason, we believe the Affordable Rent model as currently specified only has a limited lifespan. 4.14 However, we do feel that the principles of the Affordable Rent model can be used to enable RPs to attract equity funding and in so doing avoid exacerbating their gearing levels and act as a “proxy” for grant in terms of priority of payment for debt and bond lenders (as set out above). 4.15 We understand that equity finance is relatively more expensive than debt finance but believe that this is an appropriate mix of finance in the medium to long term, given the situation concerning future Government grant levels and relatively higher costs compared to historic levels of debt finance.
APPENDIX 1 ABOUT PLACES FOR PEOPLE Places for People is one of the largest property development and management companies in the UK, with more than 62,000 homes either owned or managed in a mixture of different tenures. With over 2,000 employees, it is a unique organisation that provides a diverse range of products and services to build quality, safe and sustainable communities. Places for People is active in 230 local authorities. Places for People regards itself as a housing and regeneration organisation that puts people first. We provide solutions that not only cover a range of different housing tenures but also offer a range of support services including affordable childcare, elderly care and financial services—all the things that contribute to making neighbourhoods of choice; prosperous, popular and truly sustainable. Places for People currently has around 40,000 affordable rented properties, over 6,000 properties available for market rent and just under 10,000 properties where we retain a freehold stake as part of either shared ownership or “right to buy” arrangements in a number of developments throughout the UK. We also own and manage around 6,000 homes for older and vulnerable people. Our portfolio is designed to “Create neighbourhoods of choice for all” and covers the following broad mix of products: — Places for People Neighbourhoods—investment, regeneration and placemaking. — Places for People Homes—neighbourhood and property management. — Places for People Individual Support—support for independent living. — Places for People Property Services—in-house maintenance services. — Places for People Development—master planning and building new developments. — Places for People Financial Services—financial products for customers. — Places for Children—early years childcare. — Cotman HA—managing around 3,000 homes across East Anglia. — Emblem Homes and Blueroom Properties—homes for sale and rent We want all our neighbourhoods to be places where people are proud to live. To do this, our developments need a mix of homes, easy access to shops, schools, healthcare and leisure activities, safe public spaces, good transport links and job opportunities. When we create new places for people to live we plan a mix of tenures and house types designed for communities that have people from different social backgrounds. All of our homes whether for sale or for rent are designed and built to the same high standards with the same specification, making different tenures indistinguishable. October 2011
Written submission from London and Quadrant Group Summary Long term risk is one of the biggest deterrents to developers in housing supply. Development risks could be reduced through the early payment of capital public subsidy. A revenue public subsidy should be complemented by a mixed funding approach and a product range which is responsive to the consumer market. Public subsidy is a crucial part of the funding equation in affordable housing. The expected role and level of state lending or investment is difficult to measure. It is clear that housing associations will become more “debt rich” and take on more risk in financing new housing supply. Ev 170 Communities and Local Government Committee: Evidence
Public sector in kind investment would support housing supply and in return present opportunities for long term State investment. There are, nevertheless, a number of financial, legislative and administrative barriers to this. Regulatory reform around Real Estate Investment Trusts could attract long term private finance into the private and public sectors. A new form of long term market rented housing might also attract more private finance. Housing associations are in a good position to attract private investment. They can demonstrate their track record as managers of diverse portfolios, guarantors of quality and offer some degree of security to investors. There are further areas which could be addressed to enable the sector to become more attractive to investors. The Affordable Rent programme was embraced as a way to tackle the undersupply of housing in England, however, foresight points to some challenging times ahead.
L&Q Response How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms Early payment of capital subsidy is preferred as this derisks development and reduces funding requirements. Upfront funding and the input of public land could act as a catalyst for maximising housing supply. The deployment of revenue subsidy calls for a mix of funding and products for cross subsidy and should be balanced with local housing needs and the affordability of customers. The intermediate market provides attractive return investment and reinvestment capacity and opportunities in the market rented sector also present real potential. Creating a new “social equity fund” could enable funding. Public subsidy is a crucial part of the funding equation in affordable housing supply. Affordable housing is a simple model; providing housing at below market levels will always require subsidy.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them Given the austerity in public expenditure, state lending or investment could adopt a more flexible role and commercial approach. Equity investment, for example, could lever in new types of private funding and kick- start regeneration, new town planning and multi tenure schemes. It is difficult to be definitive about the appropriate balance of state and other investment or indeed the scale of borrowing needed. A whole range of factors will affect requirements including the mix between cross subsidies, organisations’ efficiency savings, deployment of revenue subsidies and varying in kind inputs from local authority partners. It is, however, clear that housing associations will become more “debt-rich” and take on more risk.
What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening Support in kind through tax breaks, access to public land and deferring receipts on land would support housing supply. In return government and local authorities could expect to receive a share in long term capital growth. An approach might be a joint venture partnership, the provision of seed funding together with land contribution in the form of an equity stake could facilitate access to land. Some barriers to in kind support from the public sector include; financial pressures on public authorities including stringent value-for-money policies; competing capital needs of other local public services or infrastructure; planning risk; limited availability of surplus public land; risk appetite of stakeholders; legislative impediments. Flexibilities around tax could also assist with strengthening finance in the sector. For example, VAT charged on maintenance costs including major repairs across the sector was estimated at £1.2 billion (2009–10); this leakage of cash could have been used to leverage in private finance.
How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening One of the main barriers to attracting long term private finance especially from large financial institutions is that up to now, residential housing has not offered the rates of return these organisations require; investing in housing has traditionally been seen to result in poor yields. The outcome of the Government’s consultation on the entry barriers for residential Real Estate Investment Trusts could be crucial to changing this and may stimulate investment in the sectors. Other ways of attracting private finance might be to develop a new form of market rented housing with a differential offer such as longer tenancy options. This would give the cashflow certainty investors look for and Communities and Local Government Committee: Evidence Ev 171
allow time for asset value growth. Any number of deals could be struck to ensure capital returns are eventually achieved but one which retains rented stock on longer terms will be more sustainable.
How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply Housing associations are in a good position to attract private investment. They have a wealth of experience managing rented accommodation and through this have the capacity to continuously develop a range of housing products. There is potential in the future to invest in partnerships with others, including becoming key delivery vehicles for upstream institutional funders of market rent which would help to achieve scale. Housing associations also have the ability to act as guarantor of quality and a degree of security to the benefit of both consumers and investors. Ultimately securing private finance is contingent on investor confidence and credit ratings. Further areas which may enable more private finance attraction into the whole sector are tax breaks, flexibility around asset management, greater certainty of rent formula post 2015, greater flexibility around regulation, impact assessment of welfare reforms on social housing sector and how it affects the sector’s ability to attract private finance.
How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply We welcome partnership working opportunities with Local Authorities which may be enabled through Housing Revenue Account reform and the introduction of the self-financing system and look forward to exploring those.
How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term L&Q has welcomed the Affordable Rent programme as an opportunity to positively tackle the undersupply of housing at a time of pubic austerity. Research and modelling has revealed large amounts of housing association sector’s capacity will be absorbed within the next four years. Affordable Rent combined with the current development pipeline and other important commitments will stretch balance sheets to the maximum and may lead to depleting investor appetite. The Affordable Rent programme may leave some legacies such as rent flexibilities and the regard for household income in setting rents. In the long term, however, it is unclear whether the Affordable Rent model can deliver the level of outputs needed to meet England’s housing needs. October 2011
Written submission from Castle Trust Executive Summary 1. Castle Trust offers a long term, sustainable, private sector solution to many of the problems in the housing market, without the need for taxpayer assistance. 2. This submission focuses on new solutions to help the housing market as a whole, not just new housing because 2.1 the housing market as a whole experiences six times as many purchase transactions as the new housing market alone;70 2.2 the mortgage market is currently valued at over £1,200 billion;71 and 2.3 the value of housing in the UK is approximately £4,000 billion72 which is greater than the sum of listed equities, government bonds and corporate debt outstanding in the UK. 3. These three factors mean that solutions to the housing and mortgage market as a whole have significant macro-economic benefits for the UK economy and cannot be ignored. By making the overall housing market stronger, safer and more efficient, this will also improve the attractiveness of building and financing new housing supply because new and existing housing are economically substitutable goods and are therefore inextricably linked. 4. The housing market is very highly leveraged (in the form of mortgages) which, in addition to increasing the risk to individual homeowners, contributes to the boom and bust cycles in house prices (see previously published blogs in Appendix 1). Our intention is to enable part of the mortgage debt in the housing system to be replaced by equity. We do this by allowing homeowners and retail investors seeking exposure to housing to transfer funding and returns between each other, thereby reducing risk in the housing market. 70 Source: HM Land Registry & DCLG live tables 213 and 214 71 Source: CML Statistics Table MM4 72 Source: DCLG live table 101 & Halifax House Price Index Ev 172 Communities and Local Government Committee: Evidence
5. Our business not only reduces the risk to homeowners, but opens up a potentially enormous, and previously untapped, source of funding for the mortgage market, with all that would offer to homeowners. Castle Trust’s funding (via HouSAs) is arguably better suited than existing bank deposit funding, which is a funding model that is almost unchanged since the first “permanent societies” appeared over 150 years ago73— the basis of modern building societies and mortgages.
6. Key issues facing homeowners today include: 6.1 The risk of their home being repossessed. The Financial Services Authority’s (“FSA”) Mortgage Market Review (“MMR”), published in December 2010, indicated that approximately 50% of mortgage borrowers struggle to make mortgage payments at least from time to time. 6.2 The risk of negative equity (due to house price declines and high leverage), which impedes the homeowners ability to move home or remortgage onto favourable rates. 6.3 The risk of rising standard variable rate mortgages (“SVRs”) (which is driven by lenders’ cost of funding via global credit conditions, not just the Bank of England base rate). 6.4 Pressure on post-tax incomes (ie inflation). 6.5 Job insecurity. 6.6 Lack of mortgage availability.
7. A key issue facing those not yet on the housing ladder (aspiring homeowners), is finding a suitable and accessible investment such that their savings grow in line with (or ideally better than) the housing market generally while they are building up the necessary deposit.
8. A key issue faced by lenders (banks and building societies) is satisfying the dual requirements of government to (i) increase lending and (ii) maintain and improve their capital strength (often in conflict with the interests of their shareholders).
9. Castle Trust intends to offer two new products, which we believe can help homeowners, aspiring homeowners and lenders with the issues above: 9.1 The Partnership Mortgage—a shared equity mortgage which provides homeowners with a safer way to buy a home and reduces monthly payments by about a third. Details can be found here: http://www.castletrust.co.uk/mortgages 9.2 The HouSA—an investment product which makes it easier for aspiring homeowners (savers) to build up a deposit for a house, by offering returns in excess of the housing market for as little as £1,000 (available in an ISA and a SIPP). Details can be found here: http://www.castletrust.co.uk/investments
10. We believe market demand is very significant. Over the last two years, Castle Trust has conducted extensive market research and product testing. 10.1. Approximately 80% of consumers surveyed thought that the Partnership Mortgage would be helpful for the mortgage market generally (regardless of whether they were personally interested) 10.2. 50% of consumers surveyed were interested in taking a Partnership Mortgage
11. The government already supports shared equity mortgages (FirstBuy and historically other offerings such as HomeBuy Direct), however these mortgages are targeted at different customers (lower income/essential workers/first time buyers) and FirstBuy is only available on new build properties. The Partnership Mortgage, in contrast, is a product which is only available to responsible, good credit quality customers and is not available on new build properties. In other words, our shared equity mortgage is complementary to, not a substitute for, the government’s shared equity mortgages.
12. We believe that the government should provide support and endorse privately financed shared equity, in the same way that it does for the government’s own subsidised shared equity offerings—with the key difference being that private shared equity doesn’t require a financial subsidy. Government support for private shared equity will facilitate the cooperation of a number of the large incumbent lenders (to provide traditional mortgages alongside the Partnership Mortgage), who currently have little incentive to be the first to do something new, and find it easier to adopt a “wait and see” attitude. The cooperation of the larger lenders would benefit homeowners by (i) allowing more Partnership Mortgages to be provided to aspiring homeowners; and (ii) providing increasing competition and thus more choice to customers.
Key risks and problems associated with buying a home
13. For most people, their home is their biggest asset, by far, and they buy it with very high levels of leverage (ie a mortgage of, say, 80% LTV, which is usually many multiples of their salary). Servicing this mortgage is a long term commitment that can typically last for up to 25 years or longer. The biggest risk to the homeowner is their inability to service this mortgage, which ultimately could lead to their home being 73 Source: Building Societies Association Factsheet: The History of Building Societies Communities and Local Government Committee: Evidence Ev 173
repossessed. Over the mortgage term, some borrowers may experience life events that could lead to a reduction in their income or to an increase in their expenditure. The FSA’s Mortgage Market Review references a survey of borrowers which indicated that 32% had been made redundant at some point, 26% had experienced a relationship breakdown; and 15% had been seriously ill or had an accident, all of which are strong indicators of financial distress. Another survey referenced in the Mortgage Market Review indicated that just under 50% of mortgage borrowers had less than six months’ worth of savings to cover mortgage payments.
14. Although the housing market as a whole is relatively stable (for example compared to the equity market), individual properties are extremely volatile (risky) assets. This volatility, compounded by the high amount of leverage that many homeowners take on, means that they are highly exposed to the risk of negative equity in the event of falling prices. In fact the chance of a homeowner falling into negative equity even with a 20% deposit is one in six, and approximately 800,000 households in the UK are already in negative equity. See http://www.castletrust.co.uk/blog/what-are-the-precise-chances-of-losing-money-on-the-average-home for details of the analysis.
15. Mortgage payments can often be over 50% of a household’s income after tax (because interest rates might have risen faster than income, because borrowers have stretched their affordability as far as possible at outset or because inflation puts other, more pressing, demands on household finances) and leave homeowners vulnerable to rising mortgage rates (driven by banks’ cost of funding, on which stresses in global credit markets have recently been placing further upward pressure). Around 90% of homeowners either already have variable rate mortgages or have fixed or tracker rate deals ending soon and they face rising mortgage payments as they switch to lenders’ standard variable rates (“SVR”).
16. Mortgage availability is currently poor, with the most attractive deals only available for ≤60% loan-to- value (“LTV”) mortgages
The Partnership Mortgage
Description
17. A Partnership Mortgage is a loan for 20% of the value of a property, which is taken out alongside a traditional repayment mortgage to purchase a home. The borrower must have a minimum 20% deposit, so the repayment mortgage is for no more than 60% of the property value. There are no monthly payments on the Partnership Mortgage. Instead, when the property is sold, or at the end of the mortgage term, the borrower repays: 17.1 The original amount borrowed plus 40% of any increase in value, if the value of the property has risen; or 17.2 The original amount borrowed less 20% of any decrease in value, if the value of the property has fallen (ie the borrower repays less than they originally borrowed).
18. The repayment principles behind the Partnership Mortgage are that if the borrower’s home doesn’t increase in value, the customer repays no more than they borrowed when they sell their home and the loan costs them nothing. If the borrower makes a profit then we share that profit with them. Castle Trust receives more than 20% because we don’t charge the borrower rent or interest. The borrower always retains the majority of any profit (ie 60%).
Benefits to Homeowners
19. By replacing part of their traditional mortgage with equity via the Partnership Mortgage, homeowners can receive the following benefits:
A safer way to buy a home 19.1 It reduces the risk of repossession by about one third. If the borrower’s financial circumstances change unexpectedly, for example if they lose their job, the lower monthly payments can provide a helpful cashflow buffer to allow their savings to last longer until the borrower finds a new job. If a borrower had enough savings to service their traditional mortgage for six months without a job, we estimate that with a Partnership Mortgage they would have been able to live off their savings for an additional two months without having to change their lifestyle. 19.2 It reduces the risk of negative equity by about a half when purchasing a home (because the Partnership Mortgage shares 20% of any loss with the homeowner). 19.3 It reduces the borrower’s exposure to rising SVRs, which is arguably the most widespread risk currently facing all homeowners with a mortgage. SVRs can be up to 3% higher than initial mortgage rates. SVRs rise and fall at the lender’s discretion and are therefore dependent upon lenders’ borrowing costs which are driven by the conditions in global credit markets. We believe that few homeowners are aware of the risks embedded in an SVR. Ev 174 Communities and Local Government Committee: Evidence
A reduction in monthly mortgage payments of about a third 19.4 This monthly cash saving can allow homeowners to use some of their income to achieve other life goals, such as paying for their children’s education or to assist with the financial strain of a new child.
In most circumstances, a cheaper way to buy a home 19.5 If the value of a customer’s home falls, or rises by less than 3.5% a year, using a Partnership Mortgage will be a cheaper way to buy a home. In fact, in the current environment, we estimate that it will be a cheaper for over half of all homeowners than a traditional mortgage alone. 19.6 From both a risk and reward perspective, using a Partnership Mortgage can in many ways be considered to be between buying and renting. A customer with a Partnership Mortgage is effectively buying 80% of the home and having Castle Trust take all of the risk on the other 20% of the home. The customer does, however, retain 100% of the title in the home, as a Partnership Mortgage does not share the ownership of the property.
Costs to Homeowners 20. The main potential cost to borrowers is that, if their home rises significantly in value, a Partnership Mortgage will cost more than a traditional mortgage. However, the borrower is always free to repay some or all of the Partnership Mortgage at any time without penalty (for example by remortgaging or using their existing savings). If the customer’s home has increased in value this should be relatively easy to do as their total loan as a percentage of the property (ie LTV) will have fallen. 21. Further information on the Partnership Mortgage can be found here: http://www.castletrust.co.uk/ mortgages
Benefits to Traditional Lenders (Banks and Building Societies) 22. As well as securing high quality, low risk borrowers, a very important side-benefit to banks of lending alongside Castle Trust is that they can provide mortgages to around 2.5 times as many customers for the same amount of equity capital. 23. The interim Financial Policy Committee of the Bank of England wants lenders to increase their equity capital and liquidity buffers, but NOT to constrain lending. These goals are normally somewhat contradictory; however, an important side-benefit of lending alongside Partnership Mortgages is that it allows banks and building societies to do just that. 24. Lenders providing traditional mortgages alongside a Partnership Mortgage will be able to lend to approximately 2.5 times as many homeowners for the same amount of equity capital. This is for two reasons: 24.1 Each eligible customer only requires a 60% LTV mortgage to buy a home, rather than an 80% LTV mortgage—so each £1 of funding enables 33% more people to buy a home; and 24.2 The traditional mortgage provided alongside a Partnership Mortgage will be risk weighted exactly the same as any other ≤60% LTV mortgage. The capital requirement for an 80% LTV mortgage to the same customer without a Partnership Mortgage (for an internal ratings-based lender) would be several times higher, depending on each bank’s own internal capital model. This reflects the much lower risk of the house price falling by 40% (the index has not fallen by this much in living memory) compared to the risk of a house price falling by 20% (which, as we have explained above, is roughly one in six over five years). For every £1 of equity capital, lenders can therefore multiply their lending back into the real economy without increasing their risk.
HouSAs Description and Benefits 25. HouSAs provide retail investors with returns in excess of the Halifax House Price Index (HHPI). There are two types of HouSA, both available from as little as £1,000, which can be invested via an ISA or a SIPP: 25.1 Income HouSAs provide a fixed income every three months as well as the full returns of the HHPI; and 25.2 Growth HouSAs outperform the HHPI in a rising or falling market, providing investors with a multiple of any rise in house prices or reducing their losses if house prices fall. 26. HouSAs can be important investment options both for aspiring homeowners saving for a deposit and for savers and investors more generally (ie as a diversifying investment to reduce portfolio risk while keeping portfolio return constant). An Office of National Statistic survey in December 2009 found that 60% of people below State Pension age believe investing in property is the best way to save for retirement. Currently their only real option is through buy-to-let investment, which requires a significant investment amount (necessary for a deposit), and is risky because the investment is in an individual property, not the national index; there are material cashflow risks associated with tenancy vacancy (“voids”) and repairs; and finally there is the financial risk of a traditional mortgage. Communities and Local Government Committee: Evidence Ev 175
Funding Model 27. The majority of HouSA investments are used to fund Partnership Mortgages, with the rest invested into gilts. The business model is most analogous to a building society with two exceptions: 27.1 Castle Trust’s assets (Partnership Mortgages) and liabilities (HouSAs) are linked to house prices rather than interest rates as in the case of building societies. 27.2 Castle Trust’s liabilities (HouSAs) are long term funding—three, five or 10 years, which is significantly longer than the duration of building societies’ funding (which must be rolled over on a very regular basis to fund the long term mortgages), and therefore safer.
An Extremely Brief Academic Background 28. Partnership Mortgages are not a new concept; the idea of shared equity was proposed by Professor David Miles (member of the Bank of England’s Monetary Policy Committee and previously a non-executive director of the FSA) in 1994 in his book, “Housing, Financial Markets and the Wider Economy”, and by Professor Andrew Caplin of New York University and others in their 1997 book, ‘Housing Partnerships: a New Approach to a Market at a Crossroads’, which describes the problems caused by the indivisibility of housing and the lack of options currently between completely buying or completely renting. The solution proposed was a partnership between the owner occupier and an external investor. 29. In 2010, Professor Christine Whitehead wrote the following in “Shared ownership and shared equity: reducing the risks of home-ownership?” “the focus of shared ownership and shared equity needs to change—away from encouraging people to spend more towards assisting those who are able to pay for their housing over their lifetime but not able to cope with the risks involved” and later in the same report, goes on to state: “Evidence suggests that there are market and regulatory failures which have made it difficult to develop market-based products in any scale…Government support can take many forms that do not involve subsidy, including regulatory adjustments to reduce costs and increase the incentives to provide both dwellings and finance” 30. The situation outlined at the start of this evidence is neither an indication of new problems we are facing, nor new conceptual solutions. Turning sound academic theory into a practical and financially viable reality, however, is difficult. The practical implementation of such solutions would benefit from government support.
Key Challenges and Benefits of Government Support 31. The government can demonstrate its support for innovation and promote competition by encouraging traditional lenders, or at least those with government funding, to cooperate with Castle Trust. As mentioned previously, our research confirms that there is significant customer demand for our products, but in our discussions with traditional lenders to date we have found that there is no incentive to be the first to support new propositions. This is despite the fact that it would be economically beneficial for them to lend alongside the Partnership Mortgage. One primary lender specifically said that the only reason that they support FirstBuy is because of government pressure, and that they would certainly lend with Castle Trust if we received government support, however in the absence of such support, it was easier just to carry on doing what they did yesterday and not to innovate. 32. We believe this complacency by incumbents is driven by multiple factors including: 32.1 the inertia and bureaucracy in large institutions; 32.2 the fact that new lending is currently profitable for banks and so there is little incentive to do other than to stick with their knitting; 32.3 the perception that there is little downside in continuing with the status quo. 33. The simple fact is that unless the larger lenders support shared equity, many consumers will fail to benefit. We have the support of several building societies and smaller banks, who are more nimble and customer focused, but until the larger lenders provide support, the number of customers who can benefit from our products will inevitably remain limited.
One Recommendation for How the Government Can Assist 34. The government can make clear to the present suppliers of mortgages the need for further innovation in the mortgage market, over and above those offerings the government has itself promoted and to which it has committed financial support. In particular, we believe the government should make clear its strong support for privately financed shared equity for the housing market, as a complement to the governments’ own shared equity offerings. We suspect the government underestimates the influence such a recommendation would have: we know of major mortgage providers which have only accepted innovations as a result of government recommendations, and believe that public government support for private shared equity would substantially facilitate its introduction and accelerate its adoption, with all the benefits this would bring to customers. Ev 176 Communities and Local Government Committee: Evidence
About Castle Trust
35. Castle Trust was established to 35.1 Provide responsible, good credit-quality homeowners with a new and safer financing choice, unlike anything else previously available to them; and 35.2 Provide savers and investors seeking to invest in housing with a way to access the returns to the national housing market with less capital than is required for a deposit and without the risks of buying a single investment property.
36. J.C. Flowers & Co. has provided the equity funding to bring Castle Trust to the UK mortgage and investment markets. The Chairman of Castle Trust is Sir Callum McCarthy, a non-executive director of the Industrial & Commercial Bank of China, IntercontinentalExchange and former chair of the Financial Services Authority and Ofgem. Independent non-executive directors of Castle Trust include The Rt Hon. John Gummer, Lord Deben, a former Secretary of State for the Environment, Transport and the Regions (including the Ministry of Housing and Local Government) and Dame Deirdre Hutton, non-executive director of HM Treasury, former chair of the National Consumer Council and deputy chair of the Financial Services Authority. Further information can be found here: http://www.castletrust.co.uk/about-us
APPENDIX 1
How to price equity loans 22 December 2011 http://www.castletrust.co.uk/blog/how-to-price-equity-loans
Shared equity and consumer protection 21 December 2011 http://www.castletrust.co.uk/blog/shared-equity-and-consumer-protection
Shared equity and financial stability 16 December 2011 http://www.castletrust.co.uk/blog/shared-equity-and-financial-stability
Paralysed UK housing market requires a new model 17 November 2011 http://www.castletrust.co.uk/blog/paralysed-uk-housing-market-requires-a-new-model
UK housing system must reform, say experts 31 October 2011 http://www.castletrust.co.uk/blog/uk-housing-system-must-reform-say-experts
The consequences of failing to address the UK housing shortage 13 October 2011 http://www.castletrust.co.uk/blog/the-consequences-of-failing-to-address-the-uk-housing-shortage
Mind the gap—how UK housing supply is critically short of demand 4 October 2011 http://www.castletrust.co.uk/blog/mind-the-gap-how-uk-housing-supply-is-critically-short-of-demand
Time to relax planning regulations? 13 September 2011 http://www.castletrust.co.uk/blog/time-to-relax-planning-regulations
Even sensible mortgages contribute to housing bubbles 29 July 2011 http://www.castletrust.co.uk/blog/even-sensible-mortgages-contribute-to-housing-bubbles
Are current LTVs too high or too low? 13 July 2011 http://www.castletrust.co.uk/blog/are-current-ltvs-too-high-or-too-low
What are the precise chances of losing money on the average home? 4 July 2011 http://www.castletrust.co.uk/blog/what-are-the-precise-chances-of-losing-money-on-the-average-home
Why a Partnership Mortgage is different to previous shared equity offerings 20 June 2011 http://www.castletrust.co.uk/blog/why-a-partnership-mortgage-is-different-to-previous-shared-equity-offerings January 2012 Communities and Local Government Committee: Evidence Ev 177
Written submission from Assettrust 1. Summary 1.1 The purpose of this submission is to describe how substantial value could be released from the social housing sector to fund new housing supply through the voluntary purchase of social housing homes by the occupying tenants, using an affordable shared ownership product. The headline outcomes would be: — Satisfying tenants’ ownership aspirations, using the incentive of a 25% discount of market value to ensure affordability to a large population of social tenants while preserving sufficient sales receipts to re-stock the social housing pool. — Releasing more than double the current EUV-SH valuation of Social Rented properties. — Generating capital at a competitive and viable cost of borrowing, typically less than 5%. — Retaining transacted properties within the social housing sector. — Delivering significant capital to deliver new affordable housing in volume, typically allowing for replacement, on a one-for-one basis, of the existing Social Rented homes bought by customers. 1.2 Our submission responds to the current review of Right-to-Buy being undertaken by Government.
2. Assettrust Housing Ltd (AHL) 2.1 Founded in 2003, AHL is an affordable housing provider and property manager of social rented housing and Shared Ownership housing (where the tenant owns a portion of the property through a long lease and pays rent to the owner of the remainder). 2.2 Using our experience, operating model and focusing on shared ownership assets (with no void, no maintenance and low management costs) we will provide institutions with an investment opportunity in long dated RPI linked appreciating property assets to release significant volumes of capital from RP balance sheets to drive new supply. 2.3 Our five year business plan is to acquire and manage c.£2 billion of shared ownership assets via three routes: — Buying existing assets from Registered Providers (RPs) via our unique approval under s.172 of the Housing Act. — Buying assets from RPs that have been newly created using our exclusive OwnYourHome (OYH) programme that helps social rent tenants become shared owners. — Buying assets from house builders that have been newly created to satisfy s106 planning requirements. 2.4 RPs manage our assets under contract and guarantee 96% of the rent. We manage their performance. 2.5 Our existing portfolio has 755 social housing assets (570 shared ownership and 185 social rented). We are in contract to buy 886 shared ownership assets from RPs and have a pipeline of over 1,500.
3. Submission 3.1 The Government’s deficit reduction programme has halved social housing capital grant rates and the availability of bank funding at higher margins has led to RPs having reduced funds to deliver new affordable housing. Regardless of these factors the demand for affordable housing continues to outstrip supply and the aspiration for home ownership remains strong. In a YouGov survey of September 2010 carried out on behalf of the Council of Mortgage Lenders (CML), 85% of respondents chose home ownership as their tenure of choice in 10 years time. 3.2 The Government’s new Affordable Rent model seeks to increase borrowing capacity and new supply in the housing sector by allowing social housing providers to charge rents on new tenancies at up to 80% of market value. 3.3 We believe that additional, much needed future housing supply could be funded through the unlocking of historically accumulated public grant and capital value in social housing stock. 3.4 How? — By incentivising and enabling social housing tenants, who want to and can afford to buy a share in their home, to do so using a shared ownership product and good quality, accessible mortgage. — By accessing the difference between the current sector valuation of Social Rented housing, circa £140 billion and its open market value of circa £440 billion. The current EUV-SH valuation of the average Social Rented property with a rent of £80.00 per week is £35,000 compared with an open market value of £125,000. The tenant buyer and AHL/investors can combine to access and release some of this value difference via shared ownership sales. A 30% sale via the AHL, investor funded OwnYourhome shared ownership model will release more than double the EUV-SH value to social housing providers. We estimate the average sale proceed would be £85,000. Ev 178 Communities and Local Government Committee: Evidence
— If 90,000 customers proceeded, this would deliver £7.65 billion of potential re-investment into the social housing sector. Given historical Right-to-Buy trends, we believe this level of conversion is feasible. 3.5 Why? — This form of programme will transfer precious subsidy from less needy households already in social housing to more vulnerable households on waiting lists. — Up to 900,000 of existing social housing tenants could afford to buy a home and evidence suggests a high percentage would like to become homeowners. — Meeting the individual home ownership aspirations of existing social tenants through a shared ownership model supports the economic diversity and prosperity of social housing communities. — We believe there is growing support in the social housing sector for an asset management programme that effectively maximises value from existing assets. In addition we see latent and emerging opposition to pushing tenant affordability and security through reform of tenure and rent regimes. — There is growing acceptance among providers and policy makers that a revised Right-to-Buy offer that re-stocks rather than depletes the existing social housing portfolio is a feasible and preferred option. 3.6 A full description of our product proposal and further analysis is provided in Attachments 1 and 2. A summary of our product is set out below: — The social housing provider (which could be a Registered Provider or Local Authority) offers the Social Rented home for sale to the current customer on a shared ownership basis at a 25% discount to the RICS open market value. — This 25% discount acts as the tenants’ deposit supporting a full 100% loan to cost mortgage, allowing occupants to buy between 30% and 60% of their home using a conventional Shared Ownership mortgage product from a high street bank without the need to find or save for their deposit. — The customers lease the part they do not buy from the social housing Provider at a low rent and have an option to buy more of their home in the future at a 25% discount to the RICS open market value at the time. — Assettrust enables a further capital release from the Provider lease interests, resulting in total potential Provider receipts of up to 75% of the current RICS open market value of their portfolios. 3.7 In light of Government announcements and consultation on RTB we promoted the scheme to over 200 RPs and LAs. Detailed discussions have taken place with over 40 and a number are at various stages of tenant consultation, executive approval and pilot programme roll out.
4. Feedback and Support 4.1 From feedback we have had to date Government may be able to improve the marketability and appeal of our product and other capital release programmes for social housing providers by: 4.2 Allowing RPs greater freedom in the use of capital sales receipts beyond investment in new build housing and new build Affordable Rent tenures. For example, allow investment in the reburbishment of homes or estates in need of regeneration or empty homes. 4.3 Allowing a reasonable proportion of like-for-like replacement of Social Rented homes so that their profile of lower debt per unit and higher grant helps to sustain financial strength. 4.4 Reviewing the treatment of Social Housing Grant when it is released from asset sales and placed into the Disposal Proceeds Fund (DPF) or Re-Cycled Capital Grant Fund (RCGF), enabling it to continue to act as equity in support asset cover/gearing calculations. Otherwise, the current accounting treatment of DPF and RCGF could thwart the ability of RPs to fund future housing supply growth through asset management of existing stock. 4.5 Lengthening the current three year repayment period of DPF and RCGF by RPs to the Homes and Communities Agency and supporting greater freedom of spend of the funds beyond the Local Authority it was generated in to support longer term housing re-investment plans. 4.6 Allowing RPs to use released grant to fund the purchase of existing satisfactory open market homes or offer grants for customers to buy them directly on a shared ownership basis. This would allow providers to: — Offer a choice of new build or second hand homes to potential shared owner or renting customer. — Match the supply of existing homes closely to prepared demand, thereby blending lower risk with the higher sales and lettings risk associated with investment in new housing supply, where future demand at the end of a typically two to three the build and sales cycle is harder to forecast. — Deliver demand to stagnating local housing chains and introduce stable, residential occupiers to areas with high rates of temporary rented tenancies. Communities and Local Government Committee: Evidence Ev 179
4.7 Facilitating the evolution of the market for good quality housing management and the efficient rationalization of management footprints by allowing Registered Providers and other regulated agents, such as Local Authorities to undertake services to each other and private landlords on the same exempt VAT terms as when they supply services directly to residential customers. 4.8 Increasing the motivation and benefits to Local Authorities of participating in Right-to-Buy style asset management programmes, by allowing them to retain a higher proportion of the receipts in support of their own housing investment strategies, as opposed to the current 75% transfer to The Treasury. January 2012
Written submission from the Mill Group Introduction 1. Mill Group welcomes the opportunity to submit its views on Financing New Housing Supply. 2. Mill Group is a property and finance company now focused on the home ownership expectation of young and upwardly mobile consumers. It has created the Co-investment Model which solves most of the investment issues faced by institutions and other investors by providing an effective and economically attractive route to investment in the residential market. 3. We are very pleased to be able to contribute to the debate, as we have a very strong view that the core requirement to housing supply is to ensure that there is adequate and well funded demand for owner occupation housing. 4. Our submission is focused on the First Time Buyer housing market; however the ramifications go far and wide beyond this, including the rental and affordable housing market.
Executive Summary — The First Time Buyer (FTB) has historically been the bellweather of the housing market—and remains so. — The FTB market is the primary source of new financing of housing supply. — Developers cannot invest in new housing without the knowledge that there is a well financed and willing market. — There is an urgent need to find new and alternative sources of finance for FTBs, given the current and anticipated longer term position of the mortgage market. — New models that can provide this source of finance need to be explored. — The Government should invest in and encourage such models. 5. Housing supply is totally dependent on a developer being able to build new housing, be that for rent, or for sale. Without developers having the resources to build, development will remain at current historically low levels. 6. Traditionally, the primary driver of the housing market has been First Time Buyers (FTB) funded by mortgage lenders. Not surprisingly, the significant fall in the level of mortgage lending to FTBs over the past few years has resulted in a dramatic fall in new housing supply. 7. Why? The housing market has lost £billions per annum that was consistently and increasingly channelled via the mortgage lenders to be used by FTBs to buy properties from developers, who in turn used it to finance their developments. Without a consistent continuation of this, or an influx of new money from other sources, the housing market is starved of resources for new build developments. 8. The primary Government focus always has been on the supply side—in keeping with its objective to increase the quantity of housing. However, supply in isolation can never guarantee demand, especially if that demand is restricted due to lack of finance. 9. Focus needs to be put on an immediate solution for FTBs to kick-start long term change. National planning, investor cajoling, land resourcing or co-funding of developments will take too much time and will not result in a sustainable, long-term building programme without them.
The Solution Lies in Providing New Sources of FTB Financing 10. With the current Financial Services Authority’s ongoing mortgage market review, the Basel III rules, Solvency II and proposed European directives on mortgages, the mortgage lenders have become more cautious about loan volumes and associated Loan to Value especially with regard to First Time Buyers. 11. According to the Council of Mortgage Lenders, there is little likelihood of changing this liquidity of the mortgage market. A completely new source of liquidity in the housing market is urgently needed, a source that Ev 180 Communities and Local Government Committee: Evidence
does not add to the debt burden of the purchaser, does not risk negative equity, and is affordable and competitive with other sources of finance and other tenure options. 12. Mill Group is proposing a solution to this limited liquidity within the housing market—which is called Co-investment—to put £billions of new funding into the hands of FTBs, for them to put it into the hands of developers.
What is Co-investment—a Summary 13. Co-investment introduces the principles and practice of the private sector’s potential role in the residential property market, whereby owner occupiers (“the Co-owner”) and Investors jointly buy and own residential property. The share of the property owned by each party can vary from 5% to 95%, depending on mutual agreement. 14. Co-investment is a new approach, focused on the mainstream housing market rather than the social or “affordable” end for which Housing Associations and similar organisations provide. 15. There are currently a series of problems, constraints and inefficiencies in the UK’s housing market. These are the three fundamental ones: — Households are tied to either renting or owning, unless they can access subsidised housing, which is limited and not open to everyone. Subsidised housing is tied to particular housing needs, which differ from the requirements and expectations of the many. — Households are financially constrained. Many cannot have the homes they want or the financial security they need, because they cannot command a large enough down payment. — Investors have limited residential opportunities. The current array of investment options in housing is often unattractive for investors, especially larger ones. New models are needed, of which Co-investment is one. 16. Co-investment opens up a new arena for mutual assistance and benefits between households and Investors. This helps to overcome these three major problems identified above. 17. The mutual benefits arise because Co-investment: — Provides new sources of liquidity. — Mutually aligns the interests of homeowners and Investors to gain through transacting with each other. — Enables risks to be pooled in new, innovative ways. — Places repair and maintenance responsibility with consumers where it can most easily and cheaply be dealt with, improving net returns to investors to attract their capital. — Lowers risks and the threat of default by smoothing out household budgetary burdens. — Enables households more closely to optimise wealth, income and consumption. — Facilitates Investor asset diversification strategies. — Provides Investors with opportunities to invest in housing market capital appreciation without excessive lock-in. 19. The Co-investment model consequently has housing market, financial, investment, and housing policy benefits. The opportunities created are especially important at present because of: — Reductions in public expenditure which will press down on housing opportunities, including reduced housing benefit and lower subsidies for social housing and housebuilding. — New mortgage regulation is squeezing out more potential homeowners from traditional mortgage finance routes. — The housing market is recovering weakly and needs new purchase opportunities and finance. — The economy is growing only slowly and there is a risk of renewed decline, partly dragged down by the problems of the housing market.
How Co-investment Works—for Home Buyers 20. Under Co-investment a resident owner-occupier (“the Co-owner”) and an investor jointly purchase and own a dwelling. The initial share owned by each party can vary from 5%—15% for the Co-owner and 85%— 95% for the Investor, depending on the Co-owner’s level of initial funding. The Co-owner has the right to live in the whole property as a normal home owner, without the threat of losing their right to occupy (provided payments are maintained). They own their share without debt, as their initial share is used to purchase their proportion of the property, without a mortgage. 21. The Co-owner pays an annual Co-investment charge to the Investor related to the property’s capital value for use of the Investor’s share of the property. This charge is then linked to RPI for a minimum of 5 years at which point it is reviewed based on the House Price Index and rebased, if appropriate. This provides Communities and Local Government Committee: Evidence Ev 181
Co-owners with long term predictability of housing costs, which can remain fixed in real terms for the duration of their Co-investment occupation. 22. The Co-investment charge is dependent on the value of the property, but should be lower than an equivalent repayment mortgage or comparable rent (depending on location). 23. The Co-owner has the right to purchase a greater share of the dwelling if and when they are ready, in small, manageable steps at the prevailing property value. As they do so, the Co-investment charge decreases accordingly. 24. When ready—for example the Co-owner has saved sufficient money to cover the deposit requirements; they can buy out the Investor and so own the property outright. 25. Co-owners can sell on their share in the property, sell their share back to the Investors, or sell on to another Co-owner—always at the prevailing market rate. 26. Property choice is crucial for both Investor and Co-owner. People who set up home with Co-investment have a much wider choice than renters. They can buy in their preferred localities from across the whole housing stock up for sale in the same way as other homeowners, rather than from the limited number of rental properties available in any locality at any point in time. 27. For potentially large numbers of people, Co-investment widens consumer choice and improves market outcomes. An implication is that Co-investment will appeal to a broader range of people than does the private rented sector itself. 28. In many respects, Co-investment is similar to direct house purchase. There are the ownership rights and freedoms that go along with owner-occupation, plus the financial and social benefits. A legal agreement is drawn up at the time of purchase which sets out how the property interest is held by the Investor and Co- owner. Under English law, the property is owned jointly as “tenants in common”, with each party having defined ownership percentage and sale proceeds and clearly explained obligations towards each other. This type of ownership structure is well established, so represents no challenge to property holding structures; while the rights and obligations associated with tenants in common agreements are. 29. Co-investment can effectively last for as long as the Co-owner wants the arrangement. As part of the Co-investment agreement, the Co-owner would be expected to be responsible for on-going maintenance, so that the obligations and costs are clear-cut. Commonly, homeowners like to expand, or otherwise improve, their properties to enhance liveability and value. Under Co-investment arrangements, Co-owners can so if they wish, subject to approval from the Investor from whom they could expect a financial contribution in accordance with written provisions reflected in the contract. 30. Co-investment could also be portable. If a Co-owner wishes to move, the Co-investment arrangement can be set up for the new property, subject to checks and mutual agreement. Likewise when a Co-owner wishes to sell, the Investor can agree to put the whole property on the market jointly, or offer the Co-owner’s share to another applicant.
How Co-investment Works—for Investors 31. The Investor could be any individual Investor, institution, Local Authority or fund. Investment gains can be derived from owning a pool of Co-investment properties and in the origination and management of them. Consequently, Investors will tend to either be relatively large in size and, so able to finance several hundred or more properties or, alternatively, be special purpose funds. 32. Co-investment provides the Investor with a wide variety of specific investment strategies. Each has potentially different exposures to the housing market. For example, portfolios could concentrate investment by location, household type, or dwelling type characteristics, as well as differing development exposure and gearing levels. 33. Though in principle Investors could directly manage their own Co-investment properties, there are benefits to having specialist service teams undertaking the origination and management of Co-investment portfolios on their behalf. Asset Managers would have the scale to generate efficiency gains and the expertise to undertake all aspects of transactions: including the administration associated with property acquisition; the screening of potential properties for viability; the responsibility to evaluate the buyers’ credit-worthiness; and also to provide advice to both potential Co-owners and Investors on the best options for them to meet their requirements, such as capital gains provision etc.
The Benefits of Co-investment 34. Co-investment represents a new tenure form. It differs in several important respects from products such as shared equity and shared ownership. Specifically: — It is aimed at the intermediate and mainstream segments of the housing market, is a purely private sector solution and involves no element of subsidy nor third party involvement. — It facilitates liquidity by creating new sources of funds into the housing market. Ev 182 Communities and Local Government Committee: Evidence
— It is a simple and transparent joint investment, with no hidden obligations or risks, so that both homeowners and investors can feel comfortable with their roles. — It lowers the cost of entry to homeownership and enables households to optimise entry by lowering the initial deposit and other financial constraints. — It provides a new form of home ownership, widening access to it while providing for security of tenure as long as payments and other contract conditions are maintained. — It enables households to substitute potential future capital gains for current income, through trade with investors that have different time preferences. — It improves the ability of homeowners to reassign their wealth portfolios and income horizons and to take positions on future house price change by altering their proportion of the ownership of the property they live in. — It improves overall risk exposure, enabling risks to be reassigned between homeowners and investors on the basis of trades between them. — It facilitates a route for investors into the mainstream residential market and improves the opportunities for funds to invest in housing. — It enables investment funds and other large-scale investors to invest in residential in an efficient and diversified way. — It can be made tax efficient in a variety of ways, potentially including REITs. — It brings new, permanent sources of funds into housing finance and new forms of residential investment. By doing so, it improves competition in both housing finance and in the private rented sector. — It offers the opportunity to limit the default risk arising from temporary loss of household income.
The Benefits of Co-investment for Public Policy 35. Government rightly has long-term aims with respect to housing and is concerned with wider long-term housing issues, such as market efficiency and stability, consequences for labour market mobility, fairness, and increasing housing supply. In addition, short-term recovery is currently at the forefront of policy concern, particularly related to mortgage finance and house building. Co-investment can play a role in all of these aspects. Below we look at some of the key ones.
Accessibility and Choice 36. Improving access to owner occupation By lowering the substantial entry barrier to owner occupation represented by the deposit requirements associated with mortgage lending, Co-investment expands the scope of ownership. It also speeds up the time at which some can buy into their home, stair-casing to full ownership later if they wish, and lowers the deposit barrier that it is impossible for others to overcome—even households that could afford the on-going costs of ownership. 37. Widened tenure and housing choice By increasing the option of owning or renting, Co-investment extends the range of choice open to consumers. 38. Expanding the rental sector By offering the choice to part rent on more secure terms than currently offered in the private rented sector, Co-investment is an attractive option for many households to consider. The ability of Co-investment to increase both ownership and renting at the same time is not a paradox because of the “joint” tenure nature of the model.
Improving the Functioning of the Housing Market 39. Bringing in new sources of finance Co-investment offers Investors an equity play and a rental yield return on the UK housing market. It has a distinct underlying asset and default profile differing from either direct mortgage lending or the purchase of mortgage-related capital market paper or fixed income bonds offered by Housing Associations. As such it offers a distinct route for bringing additional finance into the UK housing market that will be attractive to a broad range of UK institutions and foreign investors. 40. This feature is particularly important at present because the UK mortgage market is suffering from a particularly large shortage of funds and near closed capital markets; characteristics that are likely to endure for some years to come. 41. Helping to stimulate housing supply and regeneration Recent research has highlighted that mortgage market constraints are particularly detrimental for new build, because new housing disproportionately serves purchasers worst hit by mortgage contracts, such as FTBs. By improving the ability of first-time buyers to purchase, Co-investment will help to stimulate the demand for new property and encourage expansion of housing supply. 42. First-time buyers are one of the main purchasers of newly built properties in regeneration areas, so that the stimulus effect will be disproportionately felt in such areas, where house building has been particularly badly hit. The possibility of Co-investment funds pre-purchasing properties would also help bring new Communities and Local Government Committee: Evidence Ev 183
development forward. Development finance is currently extremely difficult to come by, so that this type of supply-side stimulus would be highly effective. 43. Problem areas, such as bringing empty properties back into use, would be made easier through a Co- investment approach. It could both help incentivise purchasers by lowering deposit hurdles and spread the risks between the Co-owner and Investor. 44. Freeing up the housing market The housing market, outside of a few strong growth areas remains in a moribund state. Co-investment could help in freeing up the housing market in key aspects of activity. Mobility in general would also be improved. 45. Increasing competition in housing finance By introducing a new flow of housing finance; by offering consumers alternatives to simple renting or buying. Co-investment compliments current housing market offers. Competition is thereby enhanced. Furthermore, Co-investment is not a proprietary brand. Once it is successfully in place, the expectation would be for new entrants to be encouraged into the market place, stimulating competition and the potential for innovation around the Co-investment theme. 46. Improving housing market efficiently Co-investment can impact on housing market efficiency; by enhancing housing finance; optimising housing mixes; improving mobility; risk pooling; lowering transaction costs; and making better use of the stock. These and more suggest that the widespread option of the approach would offer significant efficiency gains. 47. Stabilising the housing market The housing market is subject to substantial fluctuations and innovations can play important parts in inducing greater housing market stability. There is a much lower risk of repossession under Co-investment, as there is no debt and no risk of negative equity. Moreover, Co-investment funds are distinct from those of investment in mortgage finance and spin-off instruments. Therefore, the flow of funds into Co-investment would be distinct from that of mortgage finance.
Wider Economic and Social Effects 48. A variety of economic and social goals are facilitated through Co-investment in housing. Trend economic growth is enhanced by the greater labour mobility that would arise from the widespread adoption of Co-investment. That, in turn, would limit inflationary pressures as the economy expands. 49. Concern has increasingly been raised about the difficulty of those without wealth, to gain access to it via housing. By offering an intermediate stage towards full ownership, Co-investment opens up greater equality of opportunity by offering a chance to enter homeownership for those without parents affluent enough to offer financial assistance, especially those that missed out on the cyclical property booms. 50. Worries over growing consumer indebtedness would be diminished, particularly with regard to the young who currently face the prospect of higher debts to go to university, larger mortgages to become homeowners, and other financial pressures to fund deposits.
(a) What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them 51. Grant funding should, in our opinion, be focused on those that cannot necessarily raise the capital required by any other means and/or are unlikely to be able to repay the monies. Grant funding, therefore, should be directed at those that cannot get any other means of support. 52. On the other hand, state lending or investment must be assessed on a purely commercial basis. For loans, the key criteria are: Will the money be repaid, including interest; Is it supported with sufficient security in case of default? For investment, it is ensuring that the returns, whether in asset growth and/or yield is such that it makes sense to allocate the funds to this or that investment. 53. It is perfectly acceptable, as part of the evaluation of cost, to include an element of “social impact” as this has an opportunity cost attached to it by reducing costs in different areas of Government budgets. 54. State lending or investment into Co-investment would demonstrate an understanding of the need to generate new sources of funding for the owner occupier market. It would accelerate the “proof of concept” that is so critical to Investors considering a new financial model. It can and should be done on a commercial basis, with minimal risk and in expectation that, at worst, the initial investment will be returned, in full.
(b) What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening 55. If cash is not available, the State can have a significant influence in gaining traction for new models by declaring publicly that it can see merit in the concept and would like to see it in action. 56. The State is able to help facilitate a meeting of minds between potentially interested parties and, by doing so, demonstrate its support for the concept of Co-investment, recognition of its value and a desire to see it take place. Ev 184 Communities and Local Government Committee: Evidence
57. Too often, the State takes the view that if there is no direct action needed, then no action is needed— and nothing can be further from the truth, especially if, at the end of the process, the State becomes the major beneficiary!
(c) How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening 58. The major barrier to long-term private finance from large institutions is the lack of attractive residential housing investment models. Most institutions have considered the existing models and have concluded that the returns on investment are insufficient and the reputational risks too high to justify their commitment to any significant scale of investment. 59. The Co-investment model specifically has been developed with this firmly in mind and is able to generate higher IRR’s than other models through the unique concept of co-investment. Not only does this deliver a higher and indexed yield for investors, it also provides them with a higher level of security about the quality of occupier they are associating with—and more significantly, one that is committed to looking after the property until such a time that they either buy out the investor in full, or move on, by selling their share of the property back to them (or on to another Co-owner).
How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply We have no comment to make.
How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply We have no comment to make.
How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term We have no comment to make. October 2011
Supplementary written evidence from the Mill Group Additional written evidence on how Government can help innovation—in response to oral evidence given by David Toplas, CEO of Mill Group. 1. I was struck by the comment of the Minister in his subsequent oral evidence to the Committee that he had a willingness “to support new ideas”, but when asked “What do you need?” the usual answer given is “nothing”. 2. Mill Group would like to amplify its request of Government that Government support is needed to support the market initiation of new models of housing investment. 3. Government has to find long-term sustainable sources of finance, without exposing the Exchequer to £billions of risk, subsidy or off balance sheet funding. Institutional investors could do this but to-date has not, largely as existing models of investment do not provide adequate returns. 4. New models have been developed but are having difficulty in getting initial support to prove the concept. Institutions are very unlikely to invest in unproven models, particularly if these are focused on providing relatively low levels of investment return over a long term. 5. Government endorsement and financial support of all worthy new models into the market via financially limited pilot schemes could break this impasse and speed the adopting of new models and the arrival of substantial levels of institutional investment. Government’s investment would be returned after the pilot’s successful conclusion. 6. Government has encouraged mortgage lenders with the New Build Indemnity Scheme (now the NewBuy Guarantee Scheme) to provide sufficient finance to enable those with 5% deposit to buy new homes. 7. We suggest that the NewBuy Guarantee Scheme precedent is a useful example of Government support for a new private sector model and ask that Government provide a similar financial encouragement to institutions to provide investment finance to enable consumers to buy homes and simultaneously initiate a new investment market for institutions. Communities and Local Government Committee: Evidence Ev 185
Illustrative Proposal for Co-investment Support
8. This illustration mimics the NewBuy Guarantee Scheme under which the risk of loss is shared between the consumer, the finance provider (ie lender in the NBGS) with recourse to a 3.5% second loss layer (in NBGS provided as a deposit from a housebuilder) after which the Government has a 5.5% remoter level of risk. Other risk layering arrangements can and should be explored.
9. The provision of a Government underwrite would encourage investors to come forward in an analogous way to lenders. The legal structure difference between debt and equity is not in point as both providers of finance are at risk of capital value decline and consumer default.
10. Illustration (i) The first 5% of loss and the next 3.5% would be combined as a first loss layer for the consumer and investor to share (ii) 95% of the next layer of loss would be recovered from the Government indemnity, with 5% being borne by the consumer and investor (iii) Any further losses would be suffered by the consumer/investor (iv) The “loss” would be determined by either actual default of the consumer and realized value on sale, or an assessment of value at say eight years, after which the Government indemnity would fall away
If the specific risk profile of the NewBuy Guarantee Scheme is mimicked, public money will only be at risk if there is decline in capital value of over 8.5% over the period of the indemnity.
Background
11. Co-investment can: — Generate new money in substantial amounts for the housing market, NBIS will only reallocate finite liquidity that lenders have available. New money will fill the gap in mortgage availability. — Increase new build sales and bring forward developments with commitments to purchase arrangements. — Make Right to Buy affordable and accessible. — Take pressure off the rented sector and so sustain affordable rents. — Regenerate communities by supporting a balanced mix of tenures. — Reduce overcrowding by accelerating the time it can take aspiring adults to move into home ownership. — Empower home buyers by offering long-term security of tenure in return for the rights and responsibilities of home ownership. — Offer a fast-track route into home ownership without debt of negative equity, giving home owners time to save up for a deposit while living in the home they want to buy. — Above all, it will in the short-, medium-, and long-term provide the solution to the shortage of housing supply.
12. Mill Group has created the opportunity for £30 billion of new money to be invested in the residential market that will have a massive impact on new housing supply over the next five years and beyond.
13. Mill Group needs the Government to recognize that innovation has to be nurtured through its development stages if it wants to reap the rewards new ideas can generate.
14. Our proposal is that Government also creates a New Build Investor Indemnity Scheme (NBIIS) which will mirror the NBMIS.
15. Consumers can then have a choice over whether they take a debt offer with its consequential negative equity risk, or a co-investment offer without negative equity risk and a smaller share of house price growth upside.
16. So while we do not ask for legislation changes, (Co-investment operates within existing law) and are not looking for contributions through taxation or subsidy, we are saying that we need Government’s active and public support to establish this new housing tenure.
I very much hope this further note is helpful and am more than willing to provide further information should the Committee require it. February 2012 Ev 186 Communities and Local Government Committee: Evidence
Written submission from the R55 Group 1. R55 Group (R55) welcomes the opportunity to submit written evidence to the Department of Communities & Local Government (CLG) select committee on the Financing of New Housing supply. 2. R55 are construction innovators, urban strategists and financiers of complex real estate assets not suited to traditional debt funding solutions. R55 offer pension fund backed long dated funding solutions to both Registered Providers and Local Authorities.
3. Summary — Alternative funding structures to Bond finance and traditional banking debt. — VAT Exemption in areas of unaffordable housing. — Equalisation of VAT on new & refurbished buildings for housing. — Retaining public sector land banks. 4. Our evidence presents both observations from our experience of unlocking brownfield sites for housing in some of Britain’s lowest income areas and from our recent activity in developing pension fund investment structures for social housing finance. 5. “The problem that we have is that lenders aren’t lending, builders aren’t building and people can’t get their deposits together to buy, so we’ve got a triple problem in the housing market.” Housing minister Grant Shapps MP 6. Since the economic crises banks have gradually and significantly withdrawn from funding all aspects of the housing cycle; People are unable to secure affordable mortgages without having a substantial cash deposit to contribute, lending criteria has also become significantly stringent even for individuals with good credit profiles. Subsequently the acquisition of new homes and the fluidity of the housing market generally has almost ceased, with such obvious lack of demand housing developers are unable to fund such risk. 7. Under the Basel III accord banks have had to introduce significant additional capital buffers, increase their capital base, introduce minimum leverage and liquidity ratios. Given such increased cash reserve requirements banks have sought to reduce their exposure in many ways some of which have impacted significantly on the housing cycle. 8. Registered Providers have witnessed banks seeking to re-price existing long term low cost debt facilities at any opportunity where the RP requests an amendment of an existing loan. The few remaining banks willing to lend to the sector will now only enter into five year loan agreements or agreements with five year re-pricing options, this does not allow Registered Providers to manage their risk profiles long term as they have previously been able to do under the traditional facilities. The majority of the main lenders have subsequently withdrawn from the market.
9. Alternative Social Housing Funding. “The funding community to the social housing sector takes great comfort from the strong regulatory framework and implicit Government revenue support in the form of social housing grants and housing benefit. Investors and rating agencies believe these two elements in particular have underpinned the default free history of the sector.” Moodys 10. Several of the larger Registered Providers have accessed the Capital Markets through a Bond issuance, smaller RPs have also accessed such funds through umbrella brokers. The inflation linked nature and long term Rental Income streams from social housing similarly reflect the annuity obligations of pension funds making the marriage of both RP and Pension Fund a comfortable fit. 11. Pension Funds through their obligations seek much lower risk profiled assets and stringent regulatory environments compared to other investors. The mechanism by which Housing Benefit income flows from the Government to the Housing Association is fundamental in effecting the perceived risk to an investor. Currently Housing Benefits flow from Government directly to the RP, with the Provider being regulated this environment often enables them to obtain excellent credit ratings of AA2, with such good ratings institutional and pension fund investors have considerable appetite to invest in the sector. 12. A recent bond issued by a large RP for GBP45m was 185% over subscribed. Since a bond issuance by Peabody early last year and the issue by Moat RP more recently the pricing increased by 100Bps, the cost of bond finance is on the rise. 13. Should a policy change allow for Housing Benefits to be paid to the Tennant and not directly to the RP, this will create a perceived increased risk of default, the introduction of such an additional risk layer with respect to rent collections will likely result in a rating agency issuing a much lower rating, this will subsequently reduce investor appetite and increase the cost of funds to the Registered Provider and impact on the delivery of new social housing. Communities and Local Government Committee: Evidence Ev 187
VAT breaks—stamp duty exemption in rundown areas— 14. Lord Rogers’ Urban Task force report made several excellent contributions towards assisting the funding of housing. In particular the exemption of stamp duty in urban regeneration areas had a significant positive impact on the ability for developers to fund projects. The exemption from such areas was short-lived, where stamp duty was reintroduced many of such rundown areas failed to kick start their housing delivery. We encourage Government to observe the benefits such exemption made and reintroduce the policy but expanding it to all regions where homes are deemed unaffordable.
Equalisation of Vat on construction materials between old homes and new 15. Many existing buildings can be converted into homes cheaper in many cases than the construction of new buildings. VAT chargeable on existing buildings for residential conversion can often make the delivery of housing cost prohibitive and subsequently unviable, many opportunities for converting existing buildings to homes are lost due to this policy. We encourage Government to equalise VAT on existing buildings to 0% in line with that of new build schemes.
Public sector land bank disposals 16. The credit ratings of Government and its risk profile of default are highly attractive to the pension fund investment community. The lack of institutional investment into the sector other than through a Bond instrument (which they are most comfortable with) is often due to the lack of a familiar transactional structure providing the low risk profile environment they require. The significant over subscription of RP bonds is testimony of pension fund appetite for investing in the sector and demonstrating that through finding an appropriate structure such channelling of pension funds is a viable option. 17. An estimated 40% of large housing development sites are in the ownership of Government and public sector departments; the high credit rating of Government coupled with the billions of pounds in pension funds seeking a secure home, legal frameworks suited to both Government as Landlord and Pension fund as investor could be put in place allowing Government to kick start a housing delivery programme on its own redundant land. January 2012
Written submission from the Department for Communities and Local Government Introduction 1. We welcome the Department for Community and Local Government Select Committee’s decision to hold an inquiry into the financing of new housing supply. This is a crucial issue and one which cuts across all aspects of housing policy—from development of new market housing, to investment in the private rented sector and delivery of affordable housing. 2. Housing plays a key role in delivering the Government’s objectives for economic growth and social mobility. Yet in previous years we have seen a sustained shortfall in the supply of new housing. The previous Government’s model of top-down housing targets did not deliver the housing this country needs. Indeed, house building fell to 103,000 in 2009–10, the lowest peace-time level since 1923–24. 3. This is against the back drop of increasing demand. The latest (2008-based) household projections show that the number of households will grow by an average of 232,000 every year74 until 2033. This gap between supply and demand has resulted in deteriorating affordability and an increased number of households on social housing waiting lists. 4. As a result we have seen young people having to rent for longer, unable to buy their own home until later in life and often reliant on family support to be able to do so. Rising house prices, and more recently large deposit requirements, have meant that more than three in four first time buyers aged under 30 need financial assistance to buy. The pressures of our ageing society mean we must also do more to increase the housing choice and support available to older people. 5. We therefore need a step-change in our approach to housing to ensure we are building the homes that this country wants and needs and supporting our plans for economic growth. The Department is currently working with colleagues across Government and with our delivery partners to develop and publish a Government Housing Strategy. This will be published later in the autumn and will focus on three core objectives across the housing market affordability; stability; and quality. 6. This submission sets out our response to the key questions which the Select Committee has indicated they want to explore. These issues will also be explored in more detail through the Housing Strategy and we will ensure a copy is made available to the Committee as soon as possible. 74 Average annual figure until 2033 (Source: DCLG). Ev 188 Communities and Local Government Committee: Evidence
Response to Select Committee Questions How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms? What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them? 7. This Government is taking a new approach to investment in and deliver of housing. We have moved away from the top-down approach of the previous Government, with a new focus on incentivising local areas and communities to welcome housing growth.
Supporting delivery of new housing 8. At the heart of this approach is the New Homes Bonus—a simple and powerful incentive, which rewards local authorities and communities who increase their aspirations for housing growth. Launched in April 2011, the New Homes Bonus match funds the additional council tax raised for the first six years for new homes and long-term empty properties brought back into use, with a premium for affordable homes. 9. The Department for Communities and Local Government has set aside almost £1 billion over the Spending Review period for the scheme, with the first cash payments totalling almost £200 million made in April 2011. From Year 2, 2012–13 we will pay an additional £350 for each affordable home over the six years. This means that the bonus available for an affordable home will be up to 36% more than for a similar market home, 10. We have also given local authorities the ability to receive a proper contribution from developers when they build new homes or businesses. The Community Infrastructure Levy allows local authorities to charge a levy on new development in order to raise funds to meet the associated demands placed on their area and so enable growth, The money can be used for a range of infrastructure provision, such as transport schemes, flood defences, health and social care, parks, green spaces and leisure centres. 11. Our reforms to the Community Infrastructure Levy in the Localism Bill include ensuring that neighbourhoods will have a meaningful say in how the impacts of new development are managed. We will direct a meaningful proportion of the receipts raised from new development towards managing the demands that are placed on the communities and neighbourhoods that host it. We will also give those communities the flexibility to address the matters that they identify are necessary to make development sustainable. Communities will in turn be more likely to accept and welcome development when they understand that they will not suffer loss of amenities or services as a result of hosting it. 12. To help finance the essential infrastructure to ensure that new housing growth is delivered, Government has announced the creation of a new £500 million Growing Places Fund. The fund will support economic growth by helping to unlock developments which will provide the jobs and houses we need. 13. The draft National Planning Policy Framework will also help support delivery of new housing. The Framework puts local people in the driving seat of decision making in the planning system. Communities will have the power to decide the areas they wish to see developed and those to be protected, through their local plan. The policies in the Framework will include rigorous protection for the Green Belt, for National Parks, Areas of Outstanding Natural Beauty and Sites of Special Scientific Interest, and give local people new powers to protect other green space that is important locally. 14. It is for these reasons the Government is abolishing regional strategies in two stages first by removing Part 5 of the Local Democracy Economic Development and Construction Act 2009 and secondly by revoking each existing Regional Strategy by Order. They have been ineffective—housing targets did nothing to incentivise new development, and put pressure on councils to review the Green Belt in 30 towns across the country. They alienated the public, undermined support for new housing and turned whole communities against the principle of development. It is the Government’s clear policy intention to revoke existing regional strategies outside London but this is subject to the outcome of the environmental assessments that we are undertaking on a voluntary basis. Decisions on the revocations will not be made until the Secretary of State and Parliament have had the opportunity to consider the environmental reports. 15. We are also working with the HMT, Financial Services Agency (FSA) and lenders to unlock mortgage lending, particularly to First Time Buyers. First Time Buyers are the engine of the housing market and we recognise that lack of effective demand from First time Buyers threatens the ability of house builders to respond to long term demand and is a source of profound frustration to aspiring first time buyers excluded by poor affordability, deposit requirements and increasingly under pressure from rising rents. 16. Government is working closely with the Financial Services Agency and lenders to create the right regulatory framework and allow the supply of mortgage finance to flow, whilst ensuring responsible lending and borrowing. The Minister for Housing has held a number of First Time Buyer summits, to support the development of innovative new approaches to help First Time Buyers get a foot on the ladder. 17. Since the first summit lenders have worked in partnership with Government, local authorities and house builders to explore new ways of supporting First Time Buyers and getting the housing market moving again. Communities and Local Government Committee: Evidence Ev 189
We have already seen several innovative schemes to support First Time Buyers announced by lenders and developers and new partnerships have been formed with local areas. 18. We are also providing direct support to First Time Buyers through the FirstBuy scheme, which will help almost 10,500 aspiring home owners by Spring 2013. 19. The Government recognises that the regulation of new home building has the potential to add costs, and has committed to reduce the sum of regulatory burden on house builders over the course of this Parliament. It is also looking closely at how other policies can be adapted so as to minimise the costs they add to new development. For example, the Plan for Growth announced a new approach to the Government’s commitment that all new homes will be built to a zero carbon standard from 2016; an approach which is expected to more than halve the cost to house builders.
Investment in affordable housing 20. The Government has invested around £40 billion75 of public money in the provision of social and affordable housing over the past 30 years. That investment has helped to provide homes for around 20% of households in England.76 Despite this level of investment, research suggests that around 1.9 million (9%) English households may remain in housing need.77 The provision of sufficient affordable housing remains a pressing goal. Further, building homes is a powerful driver of economic growth, creating jobs and thereby reducing the overall benefit bill. 21. We have committed nearly £4.5 billion investment in new affordable homes over the 2011–15 Spending Review period. However, the current fiscal environment means that the former funding model, with its heavy dependence on public grant, is no longer sustainable. 22. The new Affordable Homes Programme is predicated on providers levering more investment from the private finance markets, to reduce the amount of new Government funding needed per home. The key innovation is the introduction of Affordable Rent, allowing providers to set rents at up to 80% of market value (rather than the previous model which required providers to set rents at lower, “target” levels—social rent which averages 62% of market rent nationally). Allowing a certain proportion of new tenancies to be at Affordable Rent will give social landlords the flexibility they need to make the best use of their valuable social housing assets, but existing tenants will see no changes to their rights to lifetime tenancy and social rents. 23. This enables providers to borrow more against the higher income stream to help meet the cost of new supply. With the agreement of the Homes and Communities Agency (HCA), providers can also convert some existing social rent homes to Affordable Rent at re-let with the additional financial capacity generated being used to fund new supply. Grant remains the sum which bridges a viability gap, but the new model significantly increases the financial capacity of providers.
24. This marks a significant shift in the balance of funding for new affordable housing. Contracts are currently being finalised between providers and the Homes and Communities Agency, and initial agreements show that Government investment under the Affordable Homes Programme will be less than half previous rates. This means it will be possible to deliver more new affordable homes for every pound of public capital investment.
25. Social housing providers have risen to the challenge to deliver under the Affordable Rent model. Housing Minister Grant Shapps announced in July 2011 that the level of offers had exceeded expectations—146 providers, including housing associations, local authorities, and private developers, will deliver up to 80,000 new homes for Affordable Rent and Affordable Home Ownership with Government funding of just under £1.8 billion. We expect to provide up to 170,000 affordable homes by 2015, compared to the 150,000 originally estimated. Successful bids come from all areas of England, with about 9% of the homes in rural areas. 26. The new programme acknowledges the continuing importance of affordable home ownership—around 20% of new homes delivered will be on a shared ownership basis where this is a local priority, enabling households on a range of incomes to get a foot on the home ownership ladder. 27. The new Affordable Homes Programme will generate more homes and more jobs than a continuation of the previous programme would have done with the same amount of Government funding. These extra homes let at higher rents will have some impact on the housing benefit bill, but this is lower than it might otherwise have been because those moving into a subsidised Affordable Rent tenancy would generally have been housed more expensively in the private rented sector. The increase in any case will be outweighed by the economic 75 Source: Tenant Services Authority Global Accounts data to 2009–10. 76 The General Lifestyle Survey—Household tables 2009 published by the Office for National Statistics (http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77–218807) gives 10% households renting from a council and 8% renting from a housing association. Further households have benefitted from affordable home ownership schemes, so 20% represents a reasonable estimate of the total percentage of the population who have benefitted from Government investment in affordable housing, to one significant figure. 77 Heriot-Watt University, “Estimating Housing Need” (November 2010). Need is defined broadly and includes, for example, unsuitable or over crowded accommodation as well as more obvious forms of need such as homelessness. Ev 190 Communities and Local Government Committee: Evidence
benefits from increased housing supply and associated impacts from construction activity and the distributional benefits of increased social housing.78 28. The Select Committee asks what the role is of state lending or investment, as opposed to grant funding. The Government currently uses both grant funding and investment to support provision of new affordable housing; the Affordable Homes Programme makes grant funding available to supply new homes, primarily for affordable rent and shared ownership. Funding of FirstBuy is a form of investment in which the Government takes an equity stake in the new properties. These two forms of funding play complementary roles. 29. Developing new homes for rent requires registered providers to undertake significant long term private borrowing. Providing funding as grant can help therefore provide reassurance to social housing providers and their lenders; supporting appetite to develop and helping the sector to access more affordable credit. The grant therefore helps lever in significant amounts of private finance to fund new supply. 30. In the longer term, historic social housing grant is also routinely recycled within the sector through the Recycled Capital Grant Fund and Disposals Proceeds Fund. Recycled Capital Grant Fund gives Housing Associations the option to recycle grant themselves into affordable housing provision within three years, or repay it to the Homes and Communities Agency. An average of between £200–£250 million recycled capital grant fund is reinvested each financial year, with an average around 60% of that amount reinvested in new supply. The new Affordable Homes programme is designed to encourage providers to reinvest Recycled Capital Grant Fund promptly within the programme to support delivery of new homes. 31. Affordable Home Ownership is one area where, under some schemes, Government takes a direct investment stake. In the 2011 Budget, the Government announced a 20% equity loan scheme called FirstBuy, with half the equity loan provided by the Government and the other half by the house builder. Under FirstBuy, the Government and house builders are together providing around £400 million to assist first time buyers purchase new build property in England, Government investment as an equity loan means that on repayment the receipt is available for new homes or other forms of future investment. The Government and house builders share equally in any increase or fall in property value. 32. The Prime Minister recently announced the Government’s intention to raise Right to Buy discounts to make it attractive to tenants across England. Under the previous Government discounts were reduced to very low levels, which resulted in fewer people being able to take up this opportunity. We want to help people meet their aspiration for home ownership, whilst using the receipt to build more housing for Affordable Rent. Under this new plan, for every home bought under Right to Buy, a new affordable home will be built—over and above our existing plans. Details of our Right to Buy proposals, including the level of discounts to be offered, will be set out in the Housing Strategy which will be published this autumn.
What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening? 33. The public sector can play an important role in delivering new housing through support in kind—in particular by freeing up land held in the public sector for development. An estimated 40% of larger sites suitable for development are sitting within public sector land banks and it is clear that we need to maximise land release and ensure this is being used to support new homes getting built and new jobs created. 34. To accelerate the release of surplus formerly-used land and property, the Homes and Communities Agency and the four major landholding departments, Ministry of Defence, Department for Environment, Food and Rural Affairs, Department for Health, and the Department for Transport have published land disposal strategies setting out how they will bring this land forward. These have been scrutinised by Cabinet Committee to ensure they are sufficiently robust, and there will also be ongoing challenge by the Committee to ensure they are delivering. Support is also being put in place which departments can draw on to help accelerate release of their land. This includes Homes and Communities Agency support, and their on-line tools and specialist services such as the Advisory Team for Large Applications. 35. Land identified for release in the strategies has the capacity to deliver more than 60,000 new homes. This builds on the 11,000 homes that will be delivered by the Homes and Communities Agency’s land release, and is excellent progress towards the Government’s ambition to release land with capacity to deliver 100,000 homes over the Spending Review period, and support as many as 200,000 construction and related jobs. 36. To get development moving quickly, we will be looking to extend the use of Build Now, Pay Later models—meaning developers don’t have to find the money upfront for the land but can pay as the development gets underway, or homes are sold. This will help tackle cash flow problems which can act as a barrier to house building. 37. To make the land government holds work harder for us, we will now be working with smaller land holding departments, including the Home Office, Ministry of Justice and DECC to identify surplus public land that they hold with capacity for housing. And we will be considering public corporations with significant landholdings to identify the potential contribution they might make. Following the transfer of Regional 78 Source: Impact Assessment for Affordable Rent, Department for Communities and Local Government, July 2011. http://www.communities.gov.uk/documents/housing/pdf/1918816.pdf Communities and Local Government Committee: Evidence Ev 191
Development Agency assets to the Homes and Communities Agency on 19 September further work will be undertaken to understand the potential housing capacity of this land. 38. We have also introduced a new Community Right to Reclaim Land, which helps local people ensure that public sector bodies do not unnecessarily hold underused land or property to encourage bringing these Brownfield sites back into use. 39. The Right comprises two elements; improved transparency by giving citizens on-line access to information to make it easier for them to see which public body owns what land, and improved accountability by reforming the Public Request to Order Disposal (PROD) process that enables any citizen or organisation to ask the Secretary of State to direct that a specified parcel of underused public land or property should be sold in the open market. 40. Public Request to Order Disposal has now been made easier to use, wider in its application and more robust in the testing of the evidence provided by landowners seeking to justify their actions. It also means that all major land-owning local government and many other bodies are now able to be held to account.
How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening? How housing associations and, potentially, Arms Length Management Organisations (ALMOs) might be enabled to increase the amount of private finance going into housing supply? 41. We have set out above the important role that private finance is already playing in the delivery of affordable housing. Whilst Government’s role in funding affordable housing in the longer term is a matter for the next Spending Review, a significant role for private finance is likely to remain. 42. Housing associations already make significant use of private finance to fund stock improvements and new development. The stable income streams from rents (with around 65% underpinned by housing benefit currently paid direct to landlords), strong regulatory oversight and Government’s financial commitment in the form of grant subordinated to secured borrowings have traditionally made the sector attractive to the lending markets, including bond investors such as life and pension funds. 43. With ongoing volatility in global financial markets and regulatory changes in the banking market, lenders are less willing to offer long term debt, As a result, developing associations have increasingly turned to the capital markets. During 2008–10, £2.8 billion of public bonds was issued by social housing providers at rates between 4.87% and 7.25%. Several of the largest developers issue own name bonds and enjoy strong credit ratings (generally Aa2) and associations continue to secure competitive margins on bond issues. Alternative types of bonds are also being explored by the sector—for example unsecured and retail bonds. 44. Arms Length Management Organisations (ALMOs) are wholly owned local authority companies set up to manage stock on behalf of their parent local authorities under fixed term contracts. As such, most Arms Length Management Organisations have no substantial assets or long term revenue streams to support independent borrowing. On-lending by parent local authorities is counted as local authority public sector borrowing. Access to private finance (borrowing not counted as public sector borrowing) would, as with any other local authority landlord, depend on transferring the stock out of public ownership and control. Future transfer policy is being considered as part of the Department’s housing strategy. 45. In addition, the recent emergence of Affordable Rent and the strength of the wider rental market have stimulated further interest from new types of providers in getting involved with providing social housing. Since 2010, profit-making bodies have been able to register with the Regulator as social housing providers and a number of companies have already done so—making them eligible to own grant-funded social housing. As a result, the Regulator is involved in discussions with a number of publicly quoted companies who wish to set up a social housing subsidiary. Subject to the passage of the Localism Bill, the existing regulator (the Tenant Services Authority) will be abolished and its remaining functions transferred to the Homes and Communities Agency on 1 April 2012. Government and the Regulator are working closely with a range of organisations, advisors, trade bodies and consultants to ensure that the new opportunities are well understood. 46. The ongoing viability of the sector is vital if it is to continue to attract private finance. Private Registered Providers involved in bids under the Affordable Homes Programme were assessed by the Regulator to ensure that they were—and were likely to remain—in compliance with the Regulator’s Governance and Viability Standard. Together with the Regulator and the Homes and Communities Agency, we will be monitoring delivery of the programme through the new Affordable Homes and FirstBuy Delivery Board to assess its impacts, making sure that objectives are achieved and that risks are effectively managed. 47. The Affordable Rent model has also brought greater focus to asset management strategies as a way of driving value for money. Providers already cross-subsidise development from their operating surpluses and some progress has been made towards improving operating margins. However, further improvement in operating efficiency has the potential to increase margins further and release more cash for investment in new supply. The Regulator will consult in late 2011 on a new Value for Money standard which will require providers to demonstrate that they are achieving value for money in delivering their objectives. The Government believes that greater transparency will also drive improved value for money. We have introduced a contractual clause for bids to the Affordable Homes Programme which requires providers, where they are receiving more than £3 Ev 192 Communities and Local Government Committee: Evidence
million in grant, to publish expenditure over £500 related to grant-funded development. We also intend to consult on whether housing associations should be subject to the Freedom of Information Act. 48. The Government is also keen to encourage more large scale private investment in other forms of housing—particularly in the private rented sector. 49. To provide stronger incentives for investors, the Government announced at Budget changes to the stamp duty treatment of bulk purchases of homes. This means that larger scale investors could now pay a typical 1% instead of 5% on bulk purchases, as stamp duty is assessed on the average value of individual properties instead of on the overall value of the portfolio.79 This scheme tackles a tax distortion which previously favoured individual purchases over large scale investment. 50. The Government also announced a range of measures in the Budget to support the development and growth of UK Real Estate Investment Trusts (REITs), to make them more suitable for residential investment. These measures address both barriers to entry and investment for new and existing Real Estate Investment Trusts; and promote good business practice for existing and future Real Estate Investment Trusts. In line with the Government’s approach to tax policy making, HMT have consulted further on these measures before the Government publishes draft legislation for Finance Bill 2012. The consultation closed on 10 June 2011. 51. The Government is also very interested in exploring options for targeting Build-to-Let in the disposal of public sector land. The Homes and Communities Agency are investigating the economics of marketing a site specifically to include homes for rent. Different financial models are being explored (including who retains equity stakes in the development and for how long) as well as different markets and management models. Further detail will be published in the Housing Strategy. 52. We are also supporting the self-build industry and are keen to see this options considered as a more mainstream housing choice. One of the key barriers to growth of the self-build sector is access to finance. To help address this concern, the Minister for Housing has written to banks and building societies, calling on them to make more finance options available to those looking to build their own home.
How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply?
53. Local authorities own 44% of the social housing stock in England,80 including housing managed by their Arms Length Management Organisations. They therefore have and will continue to have a considerable role to play in affordable housing as landlords as well as planning authorities. With their Arms Length Management Organisations, local authorities own 44% of the social housing stock in England.81 They therefore have and will continue to have a considerable role to play in social housing as landlords as well as planning authorities. 54. The abolition of the Housing Revenue Account subsidy system and a new system of self-financing should put councils in a better position to increase their supply of new homes. These reforms, which are being taken through in the Localism Bill, will mean councils with their own housing stock will be able to keep their rental income in return for a one-off adjustment of their housing debt (councils will only be asked to take on extra debt if their rental income will be able to service it after costs are met). When reforms come into effect in April 2012, councils will have an average of 14% more to spend on their stock than under the present system. They will also be able to plan more effectively over the long term on the basis of a reliable income stream.
55. Under the new Affordable Homes Programme, 26 local authorities were successful in bidding for support from the Homes and Communities Agency to build approximately 4,000 new homes (subject to confirmation of their borrowing capacity under self-financing and subject to contract), which demonstrates councils’ appetite for new building. We have agreed a process with the Department for Work and Pensions whereby local authorities offering Affordable Rent can access Housing Benefit above the Limit Rent, while at the same time ensuring value for money and guaranteeing new supply. This will help local authorities build more new homes with their own resources, as housing associations do. 56. Local authorities make their own decisions about whether investing in new stock is appropriate in their areas—appetite and ability to support debt generated, demand for new social rented housing, borrowing costs and timings of repairs and maintenance required will differ between areas. It should also be noted that, as part of national deficit reduction and debt management strategy, some councils may find their ability to build new stock is in the short term restricted by a borrowing cap. 79 Example—Eight separate residential freehold properties are purchased by the same buyer at the same time for £1,600,000 in aggregate; average consideration is £200,000 per property; so the applicable rate of Stamp Duty Land Tax (SDLT) under these new rules is 1%; SDLT due is 1% x £1,600,000 = £16,000. Compare that to the previous position under the normal linked transaction rules, where the SDLT rate would have been set by the aggregate consideration of £1,600,000, so giving an SDLT rate of 5% x £1,600,000 = £80,000. 80 DCLG Live Table 116 (date for 2010). http://www.communities.gov.uk/housing/housingresearch/housingstatistics/housingstatisticsby/stockincludingvacants/livetables/ 81 DCLG Live Table 116 (date for 2010). http://www.communities.gov.uk/housing/housingresearch/housingstatistics/housingstatisticsby/stockincludingvacants/livetables/ Communities and Local Government Committee: Evidence Ev 193
How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term? 57. We will fully evaluate the Affordable Rent model’s impact on providers and funding in the coming months. The most recent survey by the Regulator (June 2011) showed that associations have loan facilities of £63.9 billion in place with £51.0 billion drawn (80%). However, the new model stretches provider borrowing capacity and there is therefore much interest in alternative ways of funding affordable housing over the longer term. 58. The role of the public sector in providing other forms of support, whether in equity stakes or through land provision, is also important. Local authorities are already able and encouraged to dispose of their land for less than best consideration where it meets local policy objectives and can do so innovatively, for example using Build Now, Pay Later models. October 2011
Supplementary written submission from the Department for Communities and Local Government Financing of New Housing Supply When I appeared before your Committee on Monday 30 January, I promised to write to the Committee with more details about our reforms which will replace Housing Revenue Account subsidy with a devolved system for financing council housing from April. As I said to the Committee, this is a very important reform which will involve £19 billion of payments between central and local government. It is also a particularly complex deal, but one which will deliver a much simpler, more transparent and locally accountable system. The Committee was interested in how the deal affected councils with large amounts of historic debt which arose from house building programmes dating back several decades. The principle of self-financing is that councils should have a level of debt which can be serviced from their income after meeting their running costs. Many councils with large amounts of historic debt will therefore get a part of this paid off by Government. But the self-financing settlement does not specifically target historic debt; it simply adjusts the level of debt in each council to a level that is affordable locally. Where a council has transferred its entire housing stock to a housing association, the housing debt will have been settled at the time of the transfer. Councils without stock will not be involved in the self-financing settlement. The Committee was also interested in the headroom that councils would have to borrow under self-financing. The reform creates a new cap on the amount of housing debt for each council. This is necessary to ensure our reforms support the Government’s priority of tackling the deficit. However, most councils will have some headroom to borrow under this cap. The amount of headroom will depend on the level of prudential borrowing for housing undertaken by the council prior to self-financing. I also told the Committee about the extra money all councils would have to spend on managing, maintaining and repairing their homes under self-financing. There is an average 15% increase in money to spend on homes and services compared to the funding provided through the subsidy system. I attach a table which shows for each council: — the one-off payment each council will make to, or receive from, Government in order to adjust its current housing debt to a level it can finance locally from its rents; — the increase in funding for management, maintenance and repairs; — a forecast of the headroom each council will have to increase borrowing under self-financing. Full details of our reforms can be found on the Department’s website at: www.communities.gov.uk/housing/socialhousing/councilhousingselffinance I hope that the Committee find this information helpful but please do let me know if you require any further information on this, or other issues raised, during my oral evidence session.
HOUSING REVENUE ACCOUNT REFORM: KEY DATA Payment to Government (a negative figure indicates a payment Potential borrowing Increase in funding for from Government) headroom management, Local authority £’000 £’000 maintenance & repairs Adur 51,185 0 13.9% Arun 70,902 8,386 13.2% Ashfield −9,353 2,866 12.5% Ashford 113,713 2,043 15.8% Babergh 83,647 0 15.7% Ev 194 Communities and Local Government Committee: Evidence
Payment to Government (a negative figure indicates a payment Potential borrowing Increase in funding for from Government) headroom management, Local authority £’000 £’000 maintenance & repairs Barking 265,912 6,695 19.0% Barnet 102,580 38,704 16.8% Barnsley 22,030 10,146 13.6% Barrow 17,089 9,942 8.3% Basildon 51,551 3,002 14.1% Bassetlaw 26,863 10,328 13.9% Birmingham 336,087 0 13.7% Blackpool −41,523 19,226 8.8% Bolsover 94,386 11,452 13.5% Bournemouth 42,488 11,629 16.1% Brent −198,000 58,866 17.2% Brentwood 64,166 0 12.0% Brighton & Hove 18,081 24,594 14.8% Bristol 45,489 12,471 17.6% Broxtowe 66,446 8,504 10.4% Bury 78,253 16,699 12.9% Cambridge 213,572 16,091 13.3% Camden −42,006 86,677 14.5% Cannock Chase 59,245 3,023 14.6% Canterbury 96,828 7,594 13.9% Castle Point 36,451 3,089 12.1% Central Beds UA 164,995 7,739 13.9% Charnwood 79,190 9,580 11.6% Cheltenham 27,414 6,717 17.9% Cheshire West UA 90,591 10,733 14.3% Chesterfield 116,949 12,932 14.0% City of London 10,912 2,947 13.4% City of York 121,550 5,626 13.2% Colchester 73,694 15,698 11.9% Corby 70,646 0 13.3% Cornwall UA 82,185 14,979 18.5% Crawley 260,325 3,577 14.1% Croydon 223,126 23,187 17.2% Dacorum 354,015 8,115 14.8% Darlington 33,300 0 8.0% Dartford 86,953 2,789 14.4% Derby 28,164 0 13.9% Doncaster −59,769 27,669 13.7% Dover 90,473 5,272 14.6% Dudley 335,608 0 15.6% Durham UA 52,891 18,445 12.6% Ealing −203,039 50,311 16.3% East Devon 84,376 2,838 18.6% East Riding 208,082 19,931 10.6% Eastbourne −30,482 5,922 14.7% Enfield 28,789 38,441 16.7% Epping Forest 185,456 31,882 13.5% Exeter 56,884 0 17.4% Fareham 49,268 3,047 11.8% Gateshead −21,450 0 11.9% Gloucester 2,143 6,794 15.9% Gosport 57,029 0 14.1% Gravesham 106,246 10,875 14.8% Great Yarmouth 58,383 12,676 13.6% Greenwich −125,533 0 16.2% Guildford 192,435 0 14.0% Hackney −752,570 101,415 14.5% Hammersmith −197,354 37,142 15.6% Haringey −233,850 54,684 18.3% Harlow 208,837 8,198 14.3% Harrogate 67,967 8,425 9.2% Harrow 88,461 0 17.9% Communities and Local Government Committee: Evidence Ev 195
Payment to Government (a negative figure indicates a payment Potential borrowing Increase in funding for from Government) headroom management, Local authority £’000 £’000 maintenance & repairs Havering 165,248 28,591 15.6% High Peak 37,481 4,928 13.2% Hillingdon 191,571 43,925 16.6% Hinckley 67,652 1,718 13.0% Hounslow −275 29,619 17.6% Ipswich 99,602 10,132 15.2% Islington −367,266 67,309 15.6% Kensington 24,960 11,423 13.0% Kettering 72,903 1,425 12.8% Kingston upon Hull 78,989 0 12.9% Kingston upon Thames 115,531 19,410 14.8% Kirklees −31,395 35,675 10.9% Lambeth −165,210 147,933 15.2% Lancaster 31,241 13,650 14.8% Leeds −112,138 25,369 12.9% Leicester −8,414 4,987 14.6% Lewes 56,673 5,317 15.1% Lewisham −136,338 43,730 15.2% Lincoln 24,931 7,385 13.6% Luton 89,456 20,582 14.7% Manchester −294,276 60,104 13.5% Mansfield 52,173 10,305 12.8% Medway Towns 19,144 4,689 13.5% Melton 27,622 1,649 12.9% Mid Devon 46,590 7,293 20.6% Mid Suffolk 57,206 0 18.1% Milton Keynes 170,360 5,310 15.7% NE Derbyshire 127,090 10,640 16.9% New Forest 142,704 11,736 15.8% Newark 36,078 7,487 13.4% Newcastle upon Tyne −293,702 0 11.7% Newham −544,045 81,868 15.3% North Kesteven 56,867 9,987 16.7% North Tyneside 128,193 0 11.5% North Warwick 59,539 0 15.9% Northampton 192,920 17,918 14.7% Northumberland UA 10,254 7,454 14.0% Norwich 148,898 35,225 14.6% Nottingham −65,988 45,609 14.2% Nuneaton 71,455 9,088 14.4% NW Leicester 76,785 10,141 13.9% Oadby & Wigston 18,114 3,763 12.7% Oldham −29,277 7,855 7.9% Oxford City 198,528 24,695 16.1% Poole 43,908 0 15.3% Portsmouth 88,619 37,363 13.8% Reading 147,821 4,205 14.6% Redbridge 60,121 33,931 16.0% Redditch 98,929 0 14.8% Richmondshire 22,188 3,660 12.4% Rochdale −123,395 20,972 12.8% Rotherham 15,188 39,964 12.9% Rugby 72,949 4,592 13.9% Runnymede 103,292 355 15.9% Salford −61,056 16,803 14.5% Sandwell 25,489 55,959 14.0% Sedgemoor 47,321 5,649 17.9% Selby 57,733 6,190 13.5% Sheffield −518,353 42,558 12.8% Shepway 40,110 5,922 14.8% Shropshire UA 83,350 9,765 15.6% Slough 135,841 18,433 14.0% Ev 196 Communities and Local Government Committee: Evidence
Payment to Government (a negative figure indicates a payment Potential borrowing Increase in funding for from Government) headroom management, Local authority £’000 £’000 maintenance & repairs Solihull 69,566 4,694 12.7% South Cambridge 205,123 0 19.0% South Derby 57,423 9,430 13.3% South Holland 67,456 4,448 17.1% South Kesteven 121,652 11,361 14.5% South Lakeland 69,897 13,124 9.9% South Tyneside 60,818 19,581 11.6% Southampton 73,847 21,927 14.2% Southend−on−Sea 34,692 0 12.8% Southwark −199,254 125,937 14.5% St Albans 175,916 0 14.3% Stevenage 199,911 21,583 14.5% Stockport −25,943 21,628 12.0% Stoke−on−Trent 74,441 15,033 14.8% Stroud 91,717 10,764 18.2% Sutton 141,126 14,829 18.9% Swindon 138,617 21,917 18.3% Tamworth 44,668 11,345 16.0% Tandridge 70,189 0 11.7% Taunton Deane 85,198 16,134 18.0% Tendring 35,979 5,365 11.4% Thanet −925 4,750 16.5% Thurrock 160,889 20,294 14.9% Tower Hamlets −236,199 114,706 14.1% Uttlesford 88,407 1,458 15.4% Waltham Forest −120,427 29,964 17.5% Wandsworth 433,623 70,431 14.7% Warwick 136,157 14,211 14.4% Waveney 68,286 9,136 14.6% Waverley 188,797 0 14.7% Wealden 47,923 11,352 12.5% Welwyn Hatfield 304,799 2,555 16.3% West Lancashire 88,212 17,354 13.5% Westminster 67,945 36,289 14.0% Wigan 99,083 38,372 14.5% Wiltshire UA 118,810 2,120 18.4% Winchester 156,722 0 13.8% Woking 98,006 0 13.4% Wokingham 95,468 5,768 14.9% Wolverhampton −47,748 2,828 13.8%
February 2012
Further supplementary written evidence from the Department for Communities and Local Government Local Government Guarantees When a local authority gives a guarantee it will normally have two effects on the accounts: (a) a charge will be made in the accounts equal to the “fair value” of the guarantee (ie a market value based on the size and profile of the risk). No payment is involved in this charge, but the amount is held on the authority’s balance sheet until the guarantee comes to an end, when it is released back into their accounts as income. (b) a disclosure is made in the notes to the accounts of the guarantee as a contingent liability. The disclosure will describe its nature and the amounts involved. If at any stage it becomes more likely than not that the guarantee will be called upon, an immediate provision for the likely amount has to be made by the authority. The establishment of the provision is treated as expenditure even if at that stage no payment has had to be made. If a payment does have to be made it is made from the provision, rather than by being charged to the authority’s revenue account (but any difference between the provision and the payment is taken from the revenue account). If a provision is made but in the event the Communities and Local Government Committee: Evidence Ev 197
guarantee is not called upon, the provision is credited back to the authority’s revenue account once a final position has become clear. The amount of the guarantee is set by its terms and all the relevant information available at the time. As the above hopefully makes clear, the amount of the guarantee itself isn’t an item in the authority’s accounts—only any fair value charge for it and any provision that has to be made. As such, a guarantee is not in itself a part of the authority’s debt, and is not a part of government debt. General Controls There are no general controls on the size or number of guarantees an authority can grant, assuming it has the legal power to do so (either a specific power or under the well-being power or general power of competence). But as part of the prudential system for capital expenditure an authority intending to borrow has to be satisfied that the borrowing is affordable. One of the (many) items an authority would need to consider in assessing affordability would be the risk it runs of having to honour any guarantees it has granted. This is just to state a general consideration in financial management that an authority would need to consider the risk of a guarantee being called upon and its ability to find the necessary funds if it were. NewBuy The under writing for this scheme counts as a Contingent Liability; DCLG has made provision to cover expected losses within this Spending Review period in its Departmental Expenditure Limit. This does not therefore score as government debt; there is no accounting entry as a result of a contingent liability being recognised. During the life of the scheme provisions and charges may be made in line with the potential and actual defaults against mortgages supported by the scheme. Any costs incurred in this way could be said to be adding to government debt, in the same way as any public spending would. February 2012
Further supplementary written evidence from the Department for Communities and Local Government When I appeared before your Committee on Monday 30 January, I talked about our investment in affordable housing. For clarity, this letter sets out the different elements of this investment. Overall, we are investing some £4.5 billion in affordable housing over the Spending Review period (2011–15) including existing commitments of around £2.3 billion. The £2.3 billion figure covers commitments entered into before April 2011, mainly from the Homes and Communities Agency’s National Affordable Housing Programme, but also from the Local Authority New Build, Mortgage Rescue and Kickstart programmes. The National Affordable Housing Programme is now closed and has been replaced since April 2011 by the Affordable Homes Programme 2011–15 which will provide new affordable homes mainly for Affordable Rent. We are planning to deliver up to 170,000 new affordable homes over the Spending Review period (2011–15)—72,000 of these will be through the £2.3 billion funding for existing commitments, of which 52,000 are estimated to be homes for social rent. Our Affordable Homes Programme—costing a further £1.8 billion— will be delivering another 80,000 new affordable homes towards the 170,000 total. Further information on this is included in the Homes and Communities Agency’s Corporate Plan 2011–15: www.homesandcommunities.co.uk/sites/default/files/aboutus/hca-corporate-plan-2011–25july11.pdf The following table sets out an indicative breakdown of the £4.5 billion of Government investment by programme: £ billion National Affordable Homes Programme 2008–11 commitments 2.27 Affordable Homes Programme 1.80 Mortgage Rescue 0.22 Empty Homes 0.15 Homelessness Change Programme 0.04 Traveller Pitch Funding 0.06 Total investment in Affordable Homes 4.54
Note: The figures include adjustments, made after the Spending Review, to Homelessness Change Programme and Empty Homes following announcements on agreed allocations. I hope that the Committee find this information helpful. March 2012
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