HC 1652 Communities and Local Government CommitteeWritten submission from Newark and Sherwood Homes Ltd

Summary

Concentration of Affordable Rent and Low Cost Homeownership to deliver supply.

Concentrating resources in Growth Point Areas.

Targeting areas and local authorities which offer efficiencies.

State Lending at low levels of interest rates.

Flexibility on Agreements and arrangements with the Self-Financing Borrowing Cap.

Local authorities needing to retain asset and maximise number of properties for Self-Financing Business Plans.

Guarantor being high risk unless there is a large gain.

Pension Fund and Investors being more attractive to Social Rented Sectors.

ALMOs realigned to allow private borrowings not to be public as the current inequality.

Self-Financing developing significantly more properties while adding to the local authority asset.

Affordable Rent crating sustainable supply for the future.

Affordable Rent however expensive in some areas and still demand for other tenures.

How and where the more limited capital and revenue public subsidy can be best applied to provide the biggest return on the investment, in housing supply terms

The Affordable Rent Programme is anticipated to be a success in achieving this goal due to the lower subsidy requirements per unit created compared with social rent. It must however be stated that there will still be demand for social rent properties but it is appreciated that there is a strong middle market with demand for affordable rent and low cost home ownership initiatives such as Shared Ownership. This will allow properties to be generated with a low grant input in terms of capital and no requirement for revenue funding. Projects could be targeted which are at areas with Growth Point Status where there is already a key intention and desire to construct further properties and input may well act as a catalyst to assist development from commencing for all tenures.

Affordable Rent and Low Cost Home Ownership products do however need to be targeted where there are strong areas of demand and that they are financially stable but would generate the greatest return in housing supply. It should however also be noted that there are areas of the country which have less viable lower rental levels.

Capital can be invested where there are efficiencies such as with Local Authorities for New Build Proposals. Where they are already a landowner for example in Newark and Sherwood for the Local Authority New Build Scheme, 52 new properties have been constructed with an average grant per dwelling of £41,750 which is vastly below the average grant per unit for Local Authority New Build at £91,831 per unit or £59,148 per unit for the National Affordable Housing Programme 2008–11. There are therefore providers who work efficiently that can be targeted.

Where local authorities are not however in the receipt of land there is potential to acquire properties particularly in Growth Point Status areas by Section 106 Agreement adding additional Affordable Housing with no or limited public subsidy.

Build or acquisition by a local authority would lead to asset retention helping the 30 year Housing Revenue Account Business Plan to support the debt by retaining assets for the long term. It is considered that disposal of assets could undermine the long term business plan and therefore viability going forward under the Self-Financing Agenda commencing in April 2012.

What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them

There can be a requirement for state lending or investment on an ongoing basis as opposed to grant funding of schemes, although it is perceived that many schemes will not be viable without grant input. In terms of lending certainty and the level of interest, rates would need to be appropriate and as low as possible to encourage these to be an attractive proposal for any provider. In terms of investment mechanisms these could be considered by some providers negatively but if there is flexibility on any agreement and terms which would be acceptable to providers’ constitution and governance then these should be explored appropriately.

The question will be whether State Lending and investment can be sustained by the Self-Financing Business Plan for the HRA. Measures may be required which ensure that lending can occur but still be contained under the borrowing cap.

What the role is of the public sector in providing support in kind-for example land or guarantees-opposed to cash, and what the barriers are to this happening

There is a potential strength for public sector such as local authorities to provide land for the development of affordable housing but all local authorities at the current time would be keen to obtain ownership of assets for the long term future to assist with their Self-Financing Business Plans post April 2012. It is therefore considered that mechanisms should be available throughout local authorities to develop properties while retaining this asset to create the much needed affordable housing which is also likely to create efficient developments if carried out effectively. Land not suitable for affordable housing could also be considered for other uses in a partnership arrangement to ensure that suitable development occurs with a reciprocal arrangement allowing for the creation of affordable housing on more suitable sites which could be in private ownership. Historically land deals and arrangements are often in place with the intention to deliver increased quantities of Affordable Housing. With Self-Financing however the value of assets or receipts generated is more important to local authorities for paying off debt and ensuring they have a sustainable model for the future. There is a greater risk associated with disposal of any asset because of the focus on income generating or the potential to development income generating assets in the Self-financing Structure.

It is considered for the public sector to be acting as a guarantor for a private sector or Registered Provider to construct as this would potentially increase the level of risk above an acceptable level. The only time which some kind of guarantee would be viable would be if there is a higher return in terms of numbers of increased units were to be developed for Affordable Housing which could be transferred to the local authority to increase its level of stock in return for parting with the land to a developer whether they are a Registered Provider or Private Sector. A significant increase in property numbers that was higher than if the site was developed by the local authority itself would generate an improved position which may encourage the disposal of the land asset.

Right to Buy Discounts being increased are adding to concerns with regards to Asset Ownership and Self-Financing. Equity Deals with a payback on return of investment however could be attractive and link to Government Proposals.

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

It is felt that there is currently interest from larger financial institutions particularly Pension Funds to become involved in Private and Social Rented Sectors. The Social Rented Sector has a more stable long term return potential being less volatile than the majority of market driven investments. An example of this has already occurred with AVIVA investing in properties for affordable/social rent with the registered provider—Derwent Living. As this deal becomes more public it is likely that other financial institutions will follow suit to provide long term finance of a non-traditional nature.

The main barriers at the current time are thought to be of scale and location. Many long term large investors more interested in large scale developments in the South of the country creating a divide in the availability of finance. The same considerations can also be provided for the Private Rented Sector where large portfolios around areas with high market rental values would be more attractive to a financial institution.

How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply

There are currently concerns with the Housing Association sector particularly those involved with swops in terms of the future availability of finance or the new cost of finance for the long term. Publication of the reserves held by some large Registered Providers could encourage them to invest in new housing supply with little or no public finance involved.

For the ALMO Sector it is currently considered that there is a great disparity between them and a Housing Association in the way finance is treated. At the current time if a housing association raises a charge based on its income stream from rented properties this is counted as private subsidy. However in the terms of an ALMO borrowings paid for by rental income on the stock, are currently being considered and referred to as public subsidy in the way that developments are assessed by the Homes and Communities Agency. The finance can be privately borrowed and repaid in the same mechanisms but for the ALMO Sector it is categorised as public borrowing despite being the same low risk. An ALMO is an anomaly having private accounts for a Publicly Owned Company.

The realignment of this inequality would increase the ALMO Sector to develop further and be assessed along with Housing Associations especially as they will be accessing Local Authority land and therefore allowing development to be constructed in an efficient manner whilst retaining the asset from the asset base to maximise the Self-Financing Housing Revenue Account.

A mechanism to enable an ALMO to develop within the headroom or that unlocks potential borrowing outside of the debt would encourage further investment. This could currently be carried out only as part of a company with co-ownership and the local authority being a minority shareholder or by the creation of a charitable subsidiary. It is a proven delivery vehicle with Decent Homes success.

Newark and Sherwood Homes has carried out extensive modelling and sensitivity analysis around different scenarios and would be willing to share these to assist for consideration on request.

How the reform of the Council Housing Revenue Account system might enable more funding to be made available for housing supply

As the Self-Financing of Housing Revenue Account will enable more funding to be made available for housing supply as generated head room will allow local authorities to further develop new supply. Further supply will ultimately increase the value of the local authority assets and also income for the organisation while also offsetting any properties which are lost through Right to Buy sales with concerns on increased discounts. This will therefore create a more stable portfolio with the creation of further efficiencies through economy of scale. It does however mean that local authorities will need to retain and maximise assets as a result of the reforms. Audit needs to be in place internally to ensure correct handling of this higher risk activity.

In terms of examples Newark and Sherwood Homes have calculated that if no debt is paid off by Newark and Sherwood District Council over a 30 year Business Plan the reform could fund 1,720 new dwellings, if they decided to pay off a figure of £10 million during the life of the 30 year plan then the build would still facilitate 1,630 new properties to be created. There are therefore other scenarios which would be available allowing build in different years to maximise balance and repayment during the 30 year plan. This would therefore if replicated through the country create a significant supply of additional dwellings which are in great demand.

It is felt that proven Delivery Mechanisms such as ALMOs should be used with a track record of results from Decent Homes delivery. This would reduce the difficulties faced by the HCA when cash take up by Housing Associations is below forecast.

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

It is felt that the new Affordable Rent Proposals are likely to be sustainable over a longer period of time due to the low grant input required to create the properties. However affordable rent is more attractive in higher value locations or ones with greater demand but the product itself could be less sustainable in extremely high value areas such as London where the affordable rents are not affordable. It is felt that the product will increase the Housing Benefit pressure although there is a demand for this more intermediate style product particularly in the unsettled financial environment.

There is still further demand for Supported Housing Initiatives and that other products are also required to support the affordable rent initiative in particular with the current aging population. Care must be taken with conversions into Affordable Rent from Social Rent to enable sufficient income to be generated to allow increased levels of development yet to not diminish the social rent properties which are also in demand to an unsustainable level.

October 2011

Prepared 1st May 2012