HC 1652 Communities and Local Government CommitteeWritten submission from Midland Heart

Summary of Main Points

We feel that there is little room for manoeuvre in order to better apply the capital and revenue public subsidy, although we consider there to be a case for relaxing controls on PRP current asset management strategies and that the ring fencing parts of supported housing funding should now be seriously reviewed.

Midland Heart believes that given the current state of the economy, central government lending is not likely to offer further benefits or be viable through PWLB. However, we have posed the question as to whether funded government pension schemes might be encouraged to invest in social housing (recognising the concentration risk which this might pose for some such schemes).

There are a number of roles for the public sector. They include the provision of land for social housing development but, related to this, there may be further scope with the relaxation of valuation rules and a review of specific covenants that pertain to land and capital grant funding.

The potential impact of the Community Infrastructure Levy as now envisaged within the Localism Bill should be reviewed to better assess its impact on the supply of affordable housing through Section. 106 agreements.

We believe that bringing long term private finance into the future provision of social housing can be effected through a number of approaches, including continued access to the capital markets or through club issues such as THFC. However, we should also consider constraints on gearing and whether the main banks can also develop more lending arrangements.

There are serious issues of concern regarding the impact of Welfare reform which may have implications for further private finance. For example, direct payments to tenants are viewed with suspicion by lenders.

Whilst reform of the HRA is welcomed we feel that there will still be limitations to further local authority borrowing, given prudential debt ceilings. To combat this, we believe that there should now be greater scope for partnerships arrangements between councils and housing associations to realise borrowing potential and deliver more affordable housing.

Midland Heart believes that whilst generally there is potential for affordable rents to increase income levels for social housing providers, its effectiveness is likely to vary from region to region.

There are concerns that affordable rents as currently planned, may be too closely linked to market fluctuations rather than to what individuals may be actually able to afford.

Looking to the future, we feel that providers should be more focused on increasing efficiency—reducing costs whilst maximising income. In addition, there should be greater flexibility to enable associations to make the best possible use of their assets.


This submission to the Communities & Local Government Select Committee offers an important opportunity for private registered providers of social housing to give our views on issues relating to both the financial advantages and constraints to funding new housing.

Midland Heart accepts that the current system is overly complex and requires an overhaul with clearer guidelines. We recognise that whilst resources are finite, they should also be targeted to those in most need and that the Government facilitate in what ever ways possible more affordable housing.

Our submission is intended to respond to key questions raised by Select Committee and to feedback our concerns for the provision of more and better quality social housing to meet a growing demand for more affordable housing.

About Midland Heart

Midland Heart is one of the largest social housing, care and regeneration groups in the country and the largest based in the Midlands. We operate across over 55 local authorities and have approximately 32,000 homes, including nearly 22,000 general needs rented properties, over 2,000 shared ownership homes and a very significant care and support provision of nearly 6,500 units of accommodation. Each year, we have invested over £100 million in improving homes, building new ones and making neighbourhoods more desirable and sought after places to live in.

At Midland Heart we firmly believe that every customer should be able to live in an environment that is affordable; where they feel safe, are empowered; can influence services, and where their care and support needs are appropriately met. The Midland Heart way is to help transform lives and communities through housing, care and more.

We use our resources to respond to local need, championing local causes whilst delivering the benefits of a larger organisation, ensuring a voice for customers both at a national and regional level. We operate across a large number of local authorities, working with our customers and their communities to understand the issues that concern them and seeking lasting solutions. Our work involves, supporting those who need help to live independently, assisting in regenerating communities and helping an individual to discover their own abilities just as much as it involves providing and maintaining homes for more than 70,000 individuals.

We believe that access to housing has now become a key issue for many communities. Traditionally, social Housing has accommodated and supported some of the most vulnerable and needy in society—including those on the lowest incomes—with higher health inequalities and the potential for high care needs, often unable to access any other form of housing.

Detailed Submission

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

Midland Heart feels that there is very little scope for significant changes here as a consequence of extremely limited grant availability. Given the varying local property markets across the country, we believe that there is an argument for relaxing controls on housing association’s current asset management strategies and allowing the flexibility so created to enable redirection of grant away from London and the South East towards more strained housing market areas.

In addition, we feel that current attempts to ring-fence elements of the programme to supported housing are to be welcomed, but that proposals to change housing benefit arrangements for supported housing could undo all of this good work by making any new development unviable.

We note also that both the biggest pressure on the Welfare Reform Bill and some of the poorest quality accommodation remains within the private rented sector, and we would welcome consideration of whether central and local government can explore options to redirect some of the public subsidy paid to poorer quality private landlords into the provision of affordable housing by registered providers.

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

We believe that state lending through the PWLB is unlikely to be viable given the current economic crisis, and does not appear to offer many benefits compared to existing sources of private finance.

The state already has a quasi-investment role given the provision of grant and the RCGF arrangements and to introduce any further element of investment return (for example, making RCGF interest bearing) would inhibit the ability of housing associations to increase investment in new stock.

Central government may wish to consider whether funded government pension schemes such as LGPS should be encouraged to invest in social housing projects, while recognising that this must be the decision of the trustees of such a scheme and taken in the longer term interests of scheme members.

Finally, in respect of shared ownership property we feel that the government’s influence over state-owned banks should be more fully exploited to place pressure on lender’s underwriters to recognising the mortgagee protection clauses. In our view, this would prevent lenders from increasing interest rates on shared ownership lending. This action might also influence a reduction in deposit levels based on a perception of reduced risk and, ultimately, might encourage more shared ownership mortgage products to be made available and offered to prospective purchasers.

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 can take a number of forms. Provision of land is the obvious example and we feel that this should continue to be encouraged.

In addition, further relaxation of the rules relating to the valuation of land transferred to housing associations should be considered so that local authorities are not placed in the position of requiring a land receipt which then directly takes away from the provision of social housing.

Consideration should also be given to the extent to which land and capital grant funding is provided with conditions which affect the value of the land. Covenants which require land to be kept in perpetuity for social housing or, worse, for a particular client group, significantly limit the value of property as security and limit housing association’s ability to borrow against the property. Allowing such rights to fall away once a mortgagee exercises its right to possession of the property would substantially deal with this issue.

Finally, we also feel that there should be further consideration of the potential impact that the Community Infrastructure Levy (CIL) as now outlined within the Localism Bill could have on the delivery of affordable homes. To date, a large proportion of social housing has been achieved through Section 106 agreements, but 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. In respect to this issue, we would refer Select Committee to the recent briefing by the National Housing Federation on Part: 5 of the Localism Bill (Lords Committee stage), whose detailed concerns we would echo and whose recommendations for amendments we would strongly support.

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

For larger housing associations such as Midland Heart, the capital markets remain the obvious solution and there is an effective liquid market for housing association debt, albeit one which is less favourable for PRPs than it has been.

For smaller associations, the issue costs mean this is unlikely to be cost effective and so the continuing use of club deals such as THFC should be encouraged and expanded where possible—although heavily structured and security intensive deals should be avoided because of the way in which they tie up security and limit future borrowing.

Gearing is increasingly becoming the constraint on future borrowing for the sector. Consideration of ways to mitigate this should now be seriously considered. For example, thought should be given to whether the recent Places for People retail and unsecured bonds provide an alternative to secured facilities.

In addition, the government should also consider whether it can use its influence over majority state-owned banks to develop appropriate lending solutions for the sector.

Pension funds and other institutional investors clearly have a role to play in the provision of private finance to the sector and this should be encouraged. The downside for housing associations in these deals is typically the level of occupancy and income collection risk that they are asked to bear. We believe that consideration of how this can be mitigated could prove fruitful.

We feel that the government should also bear in mind that housing association activity has continued to be buoyant—due in part to the sector’s strong credit rating—and should think carefully before taking action which might impact on this. Rating agencies are particularly concerned about the prospect of universal credit being paid directly to tenants and learning from the pilots about the point at which benefit should be paid directly to landlords will be critical in reassuring them.

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

See above comments.

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

Reform of the HRA has the potential to enable more borrowing to support new supply, subject to prudential borrowing limits for local authorities. However, it is likely though that councils may find themselves with increasing revenue streams which could be used to support borrowing but with a prudential debt limit which does not permit further borrowing. In this instance, we believe that consideration should be given to whether public/private partnerships between local authorities and housing associations where a JV borrows on the strength of these receipts can deliver more funding for affordable housing.

How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing

It is our view that the affordable rent proposals could generate more income and thus support more borrowing and hence new supply, but, that the impact will vary markedly across the different regions. In addition, we are concerned that rather than being linked to what people can actually afford, it is being linked to the market. As we have already recently seen large rental increases because of the deteriorating housing market through a shortage of mortgage availability—which has notably impacted on first time buyers—the whole issue of affordability now becomes challenging.

The main factor which might permit housing associations to deliver more housing will ultimately be anything which enables them to drive down the cost per unit and free up more surplus to service future borrowing. We therefore feel that the focus on increasing efficiency among associations should be welcomed, as should the refocusing of regulatory activity.

In addition, consideration should also be given to the extent to which the government can and should encourage mergers between associations to deliver economies of scale and in particular encourage the use of the balance sheet strength of those associations which have not previously developed. Finally, Midland Heart feel that a flexible approach to asset management which unburdens associations to make best use of their assets should be welcomed.

October 2011

Prepared 1st May 2012