Memorandum by Gentoo Group (CRED 26)
SUMMARY
— The Government's targets for new
housing provision are unlikely to be met without a significant
shift in political and financial will to fund it.
— Volume build has been achieved before
but with much heavier public subsidy and lower build standards.
— The market conditions for new build
housing are extremely difficult with the result that many schemes
have been put on hold.
— Housing Associations are having to
constantly monitor financial ratios and covenants but remain viable.
— Innovation is required to unlock
the affordability problem and new products are being proposed
to address this.
— The mechanisms by which effective
demand and supply are brought together are currently frozen.
— The requirement to spend a high proportion
of income to be able to afford owner occupation negatively impacts
on the quality of life for many.
1.INTRODUCTION
1.1 Gentoo Group welcomes the opportunity
to respond to the Communities and Local Government Committee inquiry
into Housing and the Credit Crunch. The following response represents
the views of Gentoo Group, which comprises the following companies:
Gentoo Group Limited
Gentoo Sunderland
Gentoo Construction
Gentoo Homes
Gentoo Ventures
2. GENERAL COMMENT
2.1 The so called credit crunch has had
a range of effects on the housing industry. From the Group's point
of view this has had particular effects on the following areas:
— Supply of housing for sale and a
drop off in effective demand (ie able to purchase).
— The ability to cross subsidise from
sale to rental properties.
— Capital lock up in new developments.
2.2 Across all tenures the market positions
are now very different. The social rented sector continues to
see high levels of demand and low turnover. There is evidence
of increasing demand for market rental properties as an alternative
to accessing owner occupation. There is a long term demand for
owner occupation but this has been severely restricted by more
stringent mortgage conditions and a lack of confidence that has
resulted in a greatly reduced turnover of properties.
2.3 Within the Group there is a mixed tenure
portfolio which is insulating the Group from any immediate financial
pressure. The Group's development plans have had to be temporarily
scaled back however until such time as sale prices and demand
picks up.
3. SPECIFIC COMMENTS
3.1 In relation to the specific discussion
questions the Group will respond as follows:
3.2 Achievement of the Government's housebuilding
targets, both for market and for social housing
3.2.1 The Government's housebuilding
targets were always ambitious. The intention to increase supply
stated in the Barker Review of Housing Supply and in the Housing
Green Paper would see build rates achieving levels not seen since
the 1970s. Of critical importance in this is an understanding
of the supply side of new housebuilding. Since the 1950s the majority
of housing supply in England has come from private building peaking
in 1968 with 203,320 completions. In more recent times, ie since
1991, private housebuilding completions peaked in 2007 with just
152,090 completions. Unless something significant therefore happens
to massively increase the housing association or local authority
supply side, it is difficult to see how a 250,000 a year figure
can be achieved.
3.2.2 This is not to say it could not
be done however. England has seen public sector build rates in
excess of 100,000 units per annum as the norm before. Between
1946 and 1979 England saw annual completion rates of public housing
in excess of 100,000 units in 26 of the 34 years. It was only
in the 1980's that public sector build rates began to fall rapidly
such that we now regard completion rates in excess of 20,000 per
annum as significant. High volume build rates were clearly a political
and funding priority in historical times but would take a further
significant political and funding shift in current times to re-create
anything like build rates that this Country once regarded as the
norm.
3.2.3 There are further issues to consider
however, in discussions on volume build. The current build standards
are much more stringent than when volume building previously took
place with corresponding effects on unit costs. Without flexibility
on the revenue side to accommodate the cost elements it is difficult
to see how anything like the volumes previously seen could be
achieved.
3.2.4 From the Group's point of view
there is consistent high demand for an affordable housing product.
The issue is simply that the build cost is not met by the revenue
generated to finance it. On the affordable rented side the build
costs are still in excess of revenue, given the combination of
rising costs, restricted revenue through target rents and diminishing
grant rates. The cost tower (figure 1) shows the average costs
for Gentoo new build property. Even with a grant rate of £38,000
per unit there is a shortfall that has to be met from a combination
of core business cross subsidy, land and property sales. This
is not a sustainable position in the long term.
Figure 1
GENTOO NEW BUILD COST TOWER
In addition, for the private sale market, there
is a limit to what the market can command price wise and the current
market down turn has made formerly viable sites unprofitable,
resulting in them being mothballed.
3.2.5 A further illustration of difficulties
facing developers when building new affordable housing is the
shortfall in finance over a 30 year period when looking at rental
income.
— The average build cost shown in the
cost tower above is £121,951.
— The shortfall over a 30 year period
when socially renting is £68,048 (using an assumed interest
rate of 6% and a weekly rent of £80), inflating by 2.5% each
year thereafter.
— To fund this new build unit over
30 years, with no profit would require a market rent of £148
per week—an increase of 85% over the social rent.
— This means that an affordable rent
only funds 54% of the rent required to pay back the original build
cost even with NO PROFIT for the housing provider.
3.2.6 In terms of the scale of the Group's
new build activity there are plans to build out 3,600 new properties
for a mix of rent and sale over the next ten years. However, the
sale elements of this programme are under threat given the current
market conditions. As a proportion of the whole programme relies
on sale to cross subsidise the rental element, there is therefore
also a knock on effect to the rental elements of the programme.
In short, until the market stabilises and begins to pick up, the
majority of schemes within the overall programme will have to
be halted thereby delaying the overall delivery profile.
3.2.7 In summary there are now major difficulties
facing the achievement of the Government targets for new build
housing. Part of this is market based in that there is little
current incentive to build in a declining market. Part of this
is simply down to income and expenditure in that previous funding
streams to enable new affordable housing provision are no longer
viable or achievable.
3.3 The financial viability and ongoing business
of housing associations
3.3.1 Having taken a view of the current
economic climate it is also fair to say that the overall financial
position of the Group has remained healthy. The Group is continually
monitoring and revising its financial projections. Having taken
a pessimistic view of the potential to sell new build homes, the
Group has been able to continually meet its financial covenants.
However, should the market deteriorate further then as with most
Housing Associations we may look to renegotiate the loan covenants
with lenders. That said, the RSL part of the Group continues to
perform strongly in terms of its KPI's. The Group's wider business
activities are all monitored as part of the Group's business planning,
risk management and financial appraisal mechanisms. The key financial
ratios of gearing and net interest cover are also monitored as
a matter of course, as are the loan covenants with the Group's
principal lenders. Where there have been concerns over particular
commercial developments these have been appraised on a case by
case basis and in some cases have been put on hold where there
may be a risk to the viability of a particular scheme. The Group's
monitoring has included sensitivity analysis to a range of sale
and market scenarios such that the Group's exposure to risk at
any time can be controlled.
3.3.2 There has been recent concern that an
increasing number of RSL's are balancing their books through property
sales with six of the top 20 providers of social housing reporting
a combined total of £129 million through surplus on the sale
of fixed assets in 2007-08. Steve Douglas, Chief Executive of
the Housing Corporation has also gone on record to say that they
are watching a number of housing associations very carefully.
The reality facing housing associations is that they have to keep
their business portfolios in balance, ring fencing and protecting
the social housing assets whilst balancing the risk elements of
their commercial dealings.
3.3.3 A particular issue the Group is facing
in the current credit crunch is the capital lock up associated
with new development schemes. The Group has mitigated against
exposure to large, capital intensive schemes through limiting
the number underway at any time. The Group underpins these schemes
through gap funding, while maximising alternative funding through
sales and market rental options. Sales to investors have also
fallen off due to restrictive lending criteria, which have further
exacerbated the lack of activity in the housing market. Indeed,
lending rates need to improve to at least 2007 levels for private
purchasers and investors as a step towards kickstarting some movement
and activity in the housing market.
3.4 Measures to help existing and prospective
homeowners affected by the credit crunch
3.4.1 The Group has had a particular concern
over the issue of access to the housing market for some time.
This has been articulated with the former housing minister—Caroline
Flint and with senior civil servants within the CLG. There is
a wealth of evidence that indicates there is a large section of
the population who are finding it increasingly difficult to access
the housing market through the three tenure options of affordable
rent, market rent and owner occupation and have an acceptable
standard of living. Even in the current market downturn, medium
term house price inflation has dramatically outstripped earnings
leading to increased mortgage to income ratios required to access
owner occupation.
3.4.2 The Group has looked to model the
impacts of this and in Sunderland this has led to the picture
illustrated in figure 2.1. On a simple traffic light system where
green is equal to less than 30% of disposable income on housing
costs, amber is between 30% and 50% of disposable income on housing
costs and red is greater than 50% of disposable income on housing
costs it becomes clear that large sections of the population are
excluded on affordability grounds from certain tenures. Affordable
rented housing is the most affordable tenure but the reality is
that this is severely restricted due to a combination of low turnover
and priority based on need rather than affordability. This situation
is not specific to Sunderland and is replicated across England
as seen in figure 2.2. Put simply, people not currently in the
housing market are finding it increasingly difficult to get a
foot on the housing ladder. It is also essential to address the
negative impact that the rising cost of housing has had on people's
standard of living.
Figure 2.1
HOUSING AFFORDABILITY ANALYSIS IN SUNDERLAND
ASHE percentiles
| Gross
earnings at
each
percentile
point in
Sunderland
| Monthly Net
Income | Total in each
percentile
grouping
| Average
Social Rent | Average
Private Rent
| Owner
Occupation* |
| | |
| £247 | £485 | £770
|
| 10% | £5,822 | £485
| 9,300 | 51% | 100%
| 159% |
| 20% | £9,616 | £673
| 9,300 | 37% | 72%
| 114% |
| 25% | £11,344 | £784
| 4,650 | 32% | 62%
| 98% |
| 30% | £12,965 | £864
| 4,650 | 29% | 56%
| 89% |
| 40% | £15,242 | £1,003
| 9,300 | 25% | 48%
| 77% |
| 60% | £20,162 | £1,276
| 18,600 | 19% | 38%
| 60% |
| 70% | £22,644 | £1,415
| 9,300 | 17% | 34%
| 54% |
| 75% | £24,502 | £1,510
| 4,650 | 16% | 32%
| 51% |
| 80% | £26,768 | £1,650
| 4,650 | 15% | 29%
| 47% |
| Key: % of net income |
| 0-30% | In italics |
| 30-50% | In italics |
| 50-100+% | In Bold |
| Likely to be eligible for Government Support
| In Italics |
| * Average monthly repayment for a Flat/Maisonette in Sunderland at £112k on a 25 year repayment at 6.5% interest, no deposit.
|
Figure 2.2
HOUSING AFFORDABILITY IN ENGLAND
Ave House Price in Eng
(Land Reg Data Sep
2008)
| Deposit
(15%) | Interest
Rate
| Monthly
Payment | Income Required
(Housing Costs at 30% of Net Income)
| |
| | |
| Monthly | Annual (Net)
| Annual (Gross) |
| £168,814 | £25,322 |
6.5% | £980.30 | £3,267
| £39,189 | £56,303 |
3.4.2 The situation is equally bleak in England as a
whole. As the table above suggests a relatively high income is
required to afford an average house price (even with a 15% deposit).
Indeed, ASHE (Annual Survey of Hours and Earnings) data suggests
that less than 10% of individuals could realistically afford a
property without using more than 30% of their income on housing.
The situation is similarly bleak if looking at household income
(ie potential for two incomes), with ONS statistics suggesting
only the top quintile group would be able to access housing at
a reasonable proportion of income.
3.4.3 Given the affordability scenarios there is a need
to think creatively around the models of access that can be generated
to assist people into the housing market who otherwise cannot
afford to do so. The Group is currently working on two models
that have been discussed with civil servants with a view to feasibility
and market testing in the coming months. These models are aimed
at improving access to housing, whilst also allowing individuals
to have a good quality of life. These are described as follows:
3.4.4 Homestart
Homestart is a scheme that produces Housing "Graduates"—people
who are ready and able to buy their first home and all that goes
with it. It includes a savings plan linked to a home with a reasonable
rent which allows what we call the "Trapped Generation"
to live independently whilst saving to invest in their own future.
It effectively guarantees that they save for a deposit.
Initial modelling has worked on the basis of a monthly fee
payable by the occupant, part of which effectively acts as rent
and part of which acts as saving. Within four years it would be
possible to first of all be adequately housed and secondly to
save up to a £12,000 bond (on the basis of a £500 month
fee half of which acts as rent, half as a savings bond) which
could be carried forward as a deposit for a new home.
3.4.5 "Donk"
The Group are currently exploring another solution for those
unable to access housing at present (currently being called "Donk").
This model would negate the need for a deposit and mortgage, while
giving the feel of owner occupation (the ability to acquire equity
in your home). The model also reduces the risks for the purchaser
associated with a traditional mortgage by allowing them to fix
their housing costs for five years and offers increased flexibility
to reflect changing personal circumstances.
The model works on the basis of the property owner holding
the mortgage, with the customer living there for the payment of
a management fee whilst also giving the opportunity to purchase
an equity stake of between 1% and 4% on annual basis. This will
provide the opportunity to gain a foothold on the housing ladder
and invest in an equity share that could then be used to move
on into the housing market.
3.4.6 For both of these models there would be a subsidy
requirement against the rental element but it would introduce
a significant element of churn into the housing market. Homestart
effectively assists seven households over a 30 year period. The
"Donk" model increases churn by introducing a new financial
product which will help people access housing. This would then
stimulate turnover in the housing market and enable a larger number
of people to gain access to subsidised housing than would otherwise
be the case in a typical new home capital subsidy model.
3.4.7 In terms of wider support and assistance the Group
would support the further development of mortgage rescue and assistance
measures announced recently by Government. The reality of re-possession
is that people are simply moved within the housing market often
with an increased burden on an already pressurised affordable
rented sector. Measures that allow people to stay in their own
home but effectively switch tenure must therefore be supported.
October 2008
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