Examination of Witnesses (Questions 440
- 459)
MONDAY 16 APRIL 2007
MR BOB
YOUNG AND
MR ASHLEY
HORSEY
Q440 John Cummings:
How expensive is your private funding and how does it compare
to the average rental rates of return in the private sector?
Mr Horsey: The borrowing rates
that we have achieved, as my colleague said, are very favourable.
They are attractive rates which are helped by our RSL status.
In terms of the rental returns that we get compared to private
sector landlords, the issue for Local Space is we are a housing
association. We are looking to maximise the number of permanent
homes that are generated at the end of this scheme in 10 or 15
years' time. We are looking at the much longer term of the guaranteed
rental stream that we are able to service the debt with so that
at the end of the day we can go out and buy 1,000 properties.
Our business plan suggests that we may need to sell a percentage
of those—maybe 20 or 25%—and deliver the rest as affordable
housing at the end. However, if we are able to out-perform our
business plan—certainly year one results are very positive—we
may be able to get to a situation where we are having to sell
none, maximising 100% of the accommodation that we buy today as
permanent, affordable housing into the future, which at the end
of the day is really what this model has been set up to do.
Q441 John Cummings:
How does it compare to the average rental rates in the private
sector?
Mr Horsey: Sorry; I misunderstood
the question. In terms of the rent that we are being paid by the
London Borough of Newham in this case or any other borough if
we were to replicate this, it would be directly comparable to
the levels of rent that they would be paying through private landlords
to secure exactly the same service. The simple issue behind Local
Space is we offer local government the opportunity to buy the
same service that they have been buying for the last 10 or 15
years from private landlords: access to immediate accommodation
for homeless households today, at the same rent levels that they
are paying those private landlords. However, as opposed to just
going to create private profit into the future, it is being used
to pay off a private borrowing by a housing association which
then creates permanent, affordable, social housing assets at the
end of the day. We are charging the same rent levels as are being
paid by local government for purchase of the same supplied temporary
accommodation.
Q442 John Cummings:
Which is the most valuable in your opinion in terms of access
to private finance? Rental income or potential capital gain?
Mr Young: Rental income without
a doubt. It is the strength of the rental stream over a sustained
period which is the credit on which our borrowing is constructed.
Further down the track, once we have assembled our portfolio,
it may be possible then to diversify the funding arrangements,
in which case it is possible that the increasing capital values
could give us an extra boost in capital availability, but at this
stage it is very much dependent on the rental stream.
Q443 Chair: Does
that mean there is a huge risk if the Government were to change
its policy on the cap on housing benefit?
Mr Horsey: We do not perceive
there to be a huge risk because of the way that we have constructed
our model. We have constructed our model from the bottom up, cost
up, so the rent levels being charged by Local Space are currently
well below the capped levels. Obviously we could have done it
the other way and said, "How much could we get? Let us hang
everything off that." We decided not to do that for the simple
reason that we cannot always guarantee what is going to happen
in the future. We hope that the strength of the model that we
have put forward and the successes that we have achieved this
year and what we can therefore demonstrate going forward will
encourage government—DWP in particular—not to throw
the baby out with the bath water.
Q444 Anne Main:
I would like to take you back to the high rent model that you
say is absolutely crucial to delivering this. Does that mean that
there is no scope within your model to offer affordable rents
more quickly? You will not be prepared to alter your model at
all?
Mr Young: The model itself generates
surpluses, depending on the performance of the housing market
and indeed our own performance. That gives us the opportunity
of making available affordable housing earlier in the period.
It has to be said that the earlier those benefits are secured
the lower the ultimate quantum of social rented housing that is
affordable at the end of the period. It is possible to balance
early benefits in terms of affordable accommodation against a
later, larger portfolio of accommodation.
Q445 Anne Main:
Many of us have concerns that these levels are quite unaffordable.
How often would you track the market to alter the level of affordability
or the level of the rent that you would be charging?
Mr Young: There are two things.
First, all we are doing is at the margin providing a new opportunity
to procure accommodation using exactly the same public money that
is being spent on these high rents currently with private landlords
to achieve in London some 40,000-odd units of accommodation. We
are talking about the same issue, whether we are doing it or it
is simply being used for normal, short term, private sector leasing
with no possibility of a long term social asset. It is a social
asset and it is being achieved because we are harnessing these
high rents. For sure, these rents are not affordable. Even the
market rents that are being charged are not affordable to many
of the people who find their way into our accommodation. However,
the arrangements we have with the London Borough of Newham make
provision for the use of surpluses for a variety of alternative
policy aims. One of those is to mitigate the impact of high rent
for homeless households who are actively seeking training or job
opportunities. That is built into our model.
Q446 Anne Main:
Are you pepper-potting this housing model or do you have large
concentrations of these units so therefore your model is not typical
of where maybe the private rented landlord might be?
Mr Young: Our accommodation is
sourced across a wide area. What we are doing is buying, by and
large, settled accommodation in normal neighbourhoods, anonymous
properties where people can build a new life for themselves having
gone through the trauma of homelessness. That is what we sought
to achieve. We are not sourcing accommodation in big estates.
We are not looking for that kind of development opportunity.
Q447 Sir Paul Beresford:
You say you buy across a wide area. Presumably, Newham is what
is close?
Mr Horsey: And the four adjacent
east London boroughs.
Q448 Sir Paul Beresford:
What is the reaction of the local, neighbouring boroughs to the
prospect of Newham's homeless families moving in? Secondly, you
are a fairly big buyer in a fairly small market and in a fairly
small geographic area so presumably that has an effect on house
prices, supply and demand. Therefore, it will have an effect on
presumably the rents. What happens when you have built your portfolio
and you stop?
Mr Horsey: In terms of the relationship
with the other boroughs, that was clearly a key concern of ours,
of Newham's and indeed the Housing Corporation's and the Department's
as we were setting the scheme up. All four other east London boroughs
where we are buying property have given their approval and agreement
via Newham to the Housing Corporation to allow us to buy in their
area. Indeed, in certain conversations that I have had with representatives
of those boroughs, they are very happy to see Local Space going
in effectively replacing the short term three/five year leased
accommodation that already exists in their area.
Q449 Sir Paul Beresford:
It is not for their people.
Mr Horsey: Because of the input
of the social housing grant from the Housing Corporation into
our model, the eventual permanent affordable homes that are going
to be delivered are going to be shared on a sub-regional basis.
The rather complex equation which I have to admit is probably
beyond my calculations, but some very skilled people have put
it together, is that there is benefit to the boroughs if they
are hosting the accommodation. At the end of the day they will
get a bigger slice of the cake that comes out. Most of the boroughs
I have talked to appreciate the more settled nature of the accommodation.
This is owned by a housing association on day one. It is subject
to Housing Corporation regulation and oversight from day one.
There is no inbuilt churn requiring that property to be handed
back to a private landlord in two, three or five years' time that
in many parts of east London in particular but in other parts
of the capital and elsewhere across the country has created highly
unstable communities, where you have a high degree of private
renting, a high turnover or private sector leasing with this very
high turnover and constant churn of homeless families with very
little incentive on their part to engage in society or to become
members of the local communities.
Mr Young: Could I pick up on the
supply and demand issue that you raise? Right from the very beginning
we were very concerned about what the impact might be. We got
advice from an outfit called King Sturge which is a fairly well
known surveying firm who provide this kind of detailed assessment.
They looked at 17 postcode areas in which we proposed to acquire
and they posited the view that, as long as the impact that we
made on the market was less than 10%, there would be little likelihood
of a blowback in terms of values because of the type of accommodation,
where we were buying, the band, the size, the type and the price
band. We have had that situation monitored subsequently. We have
never bought above 7.5% of the turnover in the market. We were
assessed every quarter by Savills to check on this and other issues
to do with probity, value for money and other issues and the value
of our accumulating asset base. Now we are having monthly assessment
by Savills. In a rising market we have been concerned to check
whether we are in fact shooting ourselves in the foot. So far
I am happy to say—though we have to keep our finger on the
situation—we have had no negative feedback at all. We are
not making those kinds of difficulties for ourselves or for other
people.
Q450 Chair: Is
that the case even in Newham? On the figures we have you were
up to 20% of the property purchases in Newham in November 2006.
I have 19.3 here as a computation.
Mr Young: No.
Q451 Chair: We
had better let you see the figures we have in our briefing and
invite you to comment on them afterwards.
Mr Young: We are very happy to
make available the figures that we have had provided to us by
Savills which of course are checked by our bankers as well. If
there are those kinds of views being expressed, we would very
much like to know how that information was gathered.
Q452 Mr Betts:
There is a certain dichotomy in the position you are in. You are
indicating that what you are providing is a much more "secure"
and stable environment in which people can live. On the other
hand, effectively your whole financial model relies on the accommodation
being designated as temporary because otherwise you will not get
the housing benefit levels to sustain the finances. Is that not
a fundamental dilemma?
Mr Horsey: It could be considered
as such. We do not believe it is. The other side of this that
we also need to bear in mind is the view of the private sector.
We have secured £200 million of new investment in social
housing, not attached to a refinancing deal which, to my understanding,
is one of the larger pieces of private sector finance coming into
new social housing for some time. Part of the requirement of the
bank is, as with most mortgage lenders, the ability to step in
should we default at some stage into the future. The temporary
nature of the accommodation, the non-secure tenancy certainly
assists with that side of it, giving some degree of comfort to
the bank should the model fail, should we fail as an organisation,
that they have some step-in powers. It is also enabling us to
tap into the higher rent levels that have been discussed earlier.
The housing benefit cap gives everyone a degree of comfort. It
is there in black and white. This is the figure. As long as you
do not go above that, DWP will honour that. DWP are making some
changes in that or are reviewing that and we will need to work
with that into the future. That is where our view is that the
simple definitions of temporary accommodation as opposed to settled
accommodation fail ourselves and I think perhaps fail the wider
society. We are providing settled accommodation. People when they
move in on day one have the ability to stay there for 10 or 15
years, to benefit from the ownership of a benign, registered social
landlord. We are not requiring them to move out in three years'
time when a private landlord wants to have that property back.
Q453 Mr Betts:
What sort of guarantee do people really have? They do not have
legal security, do they? Do they have anything from you which
says, "As long as you behave yourself and abide by the tenancy
conditions, you are still likely to be here in 10 years' time
if you want to be"?
Mr Young: We need to be clear
that what we are doing is supplying the accommodation on lease
to the London Borough of Newham and that the tenancy is between
the London Borough of Newham and the individual. The London Borough
of Newham is concerned to ensure, we understand, that the conditions
in which those people find themselves are settled and secure.
The local authority, albeit through a non-secured tenancy, is
giving that guarantee to the individual. Behind the local authority
they have the assurance from us that there is the opportunity
to use that accommodation for that purpose for 15 years.
Q454 Mr Betts:
You are saying really that the difference here is not that the
rents will be any different to what a private landlord would charge
but that ultimately the value of the property will come back to
the public sector and be usable eventually as secured tenancies
in the public sector. There is an interim problem though. While
people are in the properties as temporary accommodation, they
are going to be required to pay these very high rents or housing
benefit is going to be required to pay them. Does there still
remain therefore a fundamental disincentive to get work, which
is what we have already found in the private rented sector in
these circumstances? Does not that problem still remain?
Mr Young: Of course it does. We
have been led to believe on research that the Department has done
that some 15% of people in temporary accommodation would be able
to access training and employment if it were not for these very
high rents which are prohibitive. That is why earlier in response
to a question I said that we have made provision in our model
for dealing with the mitigation of that rent impact, where those
circumstances came about. We are able to make sure that tenants
in our accommodation, through the partnering arrangements we have
with the local authority, are able to have that rent impact mitigated.
Q455 Chair: Can
you explain exactly how?
Mr Young: Exactly how?
I cannot. Let me explain from our side how it works. We have a
model which is built upon a master agreement for 15 to 18 years
with the London Borough of Newham. Within that model it is accepted
that there will be surpluses generated if the model is managed
effectively and satisfactorily. Those surpluses that are generated
may then be used, by agreement between the parties, and this is
a sequential test, for a hierarchy of purposes: more temporary
accommodation for homeless people, more affordable accommodation
now for people who need it, paying down of debt, or contributing
to schemes which ameliorate issues of welfare and issues which
might be able to support homeless households getting into training
and employment.
Q456 Chair: Are
there any such projects in operation at the moment?
Mr Young: As you are probably
aware, there is a scheme, not that we are involved in but that
the London Borough of Newham is involved in, called the Working
Futures Scheme, which is a pilot project, I understand, supported
by the Department of Work and Pensions. We are suggesting something
more particular and specific to people who live in the properties
that we have provided because it is relating to steps and policy
objectives that were locked into our master agreement with the
London Borough of Newham.
Q457 Chair: Just
to be absolutely clear, none of the people living in your properties
at the moment is getting additional help to offset the disincentive
on them going back to work of the fact that they are paying enormous
rents on housing benefit and therefore could not afford to work?
Mr Young: No, they are not.
Q458 Anne Main:
Are you saying that housing benefit will effectively generate
a profit that will go into a pot for a diversity of uses to then
subsidise other things such as training or any disincentives to
get out of the temporary housing? Is that the best use of our
housing benefit to do it through that model?
Mr Young: I could not answer the
wider question about the best use of housing benefit but I can
certainly say that one might adopt the same view about the £25
million of social housing grant that is being put into the scheme;
or indeed the other contributions in kind made by the London Borough
of Newham: £50 million-worth of equity. We felt that this
was an appropriate use of surpluses generated by a sophisticated
model, competently managed. It remains our view. I think there
is a wider debate. I am not sure that we can add much to it, but
I do take the point that there is a sense in which the surpluses
which are generated, as a result of happenstance which is very
much to do with the operation of the housing market, and if the
housing market benefits the scheme in terms of appreciating values,
an opportunity which then means that the resources which have
been sunk can be recovered for other social purposes. You cannot
do that with private sector leasing with private landlords.
Q459 Anne Main:
You did say "competently managed". Do you have any sense
that the model, since we do not have one working anywhere, could
not be competently managed? What would happen if it failed?
Mr Young: We have put in place
a series of checks and balances, not least because of the fact
that we required Secretary of State approval at the outset in
order to for Newham to transfer the equity stock to us. We required
detailed assessments of our operations from KPMG in order that
the Housing Corporation was satisfied that they should invest
social housing grant. I believe that all the checks, balances
and risk assessments have been put in place. Indeed, my audit
committee and the board are apprised on a regular basis through
external, independent assessment that this operation is being
competently and successfully managed.
Mr Olner: It sounds a very good operation.
When you mentioned the money that Newham was able to put in, I
wondered whether other housing authorities apart from London housing
authorities are able to take advantage of the same type of scheme.
We have heard during this inquiry that is not exactly fair. Some
of the housing authorities from areas other than London have to
contribute to London's problems.
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