HC 1652 Communities and Local Government CommitteeWritten submission from Westminster City Council

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

With reduced levels of public subsidy available in future, we must make what we have go further. We see two potential means through which this could be achieved:

(i)through leveraging the public funds by attracting additional private finance, and

(ii)by supporting local authorities to build homes on their existing, extensive, land holdings.

Generally, the former will best be achieved by providing subsidy to the RSL sector which has the ability to access additional funding off the government balance sheet. By taking the price of land out of the equation, the latter has the benefit of significantly reducing the costs of development, thereby enabling more homes to be built for a given level of funding. Local authorities also have the advantage of being able to access sites that would be difficult for other organisations to develop.

As is argued later in this submission, freeing local authorities’ housing activities from public sector borrowing restrictions would also increase the ability to access additional funds to support growth in housing supply.

Also the planning system needs to support delivery and the proposal to enable the change of use from business to residential property without planning permission will reduce the supply of affordable housing delivered and may prevent local authorities from securing their required mix of unit sizes in new residential conversions.

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

Westminster Council has historically provided “top-up” finance (through our own Affordable Housing Fund, and alongside HCA funding) to make affordable housing schemes work. This is because the cost of land in Westminster is prohibitively high. In future we will move towards investing our Affordable Housing Fund as investment in order that the Affordable Housing Fund is recycled wherever possible. Nevertheless for S106 schemes, which predominate in Westminster, we expect planning conditions to be priced in by developers so the need for additional subsidy is minimised.

Investment in intermediate based affordable housing would create potential for investment returns linked to house price inflation. The provision of investment into intermediate accommodation provides the opportunity for time limited investment where returns could also be linked to stair casing and market sales on low cost home ownership products.

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

We would expect owners of public land to get a return on their asset. However where land is poorly used or is of low value, a proportion could be offered to enable wider redevelopment and regeneration.

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

Barriers to long term private finance in the private rented sector are widely reported to be:

Low yields.

High management costs.

High transactional costs.

Access to scale/large portfolios.

Residential property is a “lumpy” investment and building a portfolio of any reasonable size is difficult and costly compared with other investments to which large scale institutions or funds have access. While equities can be traded easily and at low cost (stamp duty at 0.5%, for example), property transactions are both lengthy and costly (stamp duty at up to 5%, for example). Such difficulties no doubt bar institutional investors from direct investment in the sector, however opportunities for indirect investment, eg through property trusts, are limited in the UK.

There is a need to challenge perceptions about low yields as there is some evidence that they compare well to other assets and capital growth has been strong for a decade. In Westminster, our market delivers high capital returns and low volatility and should be attractive to the industry and we have the scale—and capital that could link investors to assets.

Interest in models that provide affordable housing have focused on the intermediate sector and the City Council is considering how it can influence the delivery of a broader range of private rented intermediate homes. This includes through S106 negotiations and officers have commissioned some modelling work to look at, where scheme viability is at risk owing to the base affordable housing planning policies, whether time limiting use of intermediate homes as affordable housing to 15 to 25 years might ensure delivery and greater influence over factors such as size and affordability to households.

This has been informed by a commissioned study carried out by DTZ to explore the appetite of private sector investors and developers for providing intermediate rented homes. Interviews with 12 players in the residential property market found:

The appetite for providing intermediate housing for rent chiefly depends on the level of social obligation and the return that can be delivered—and a healthy level of appetite was found.

While two of the interviewees were averse to providing intermediate rented housing as this was not part of their core activities and wouldn’t meet their minimum return requirements, all other commercial parties had an appetite provided returns were in line with other property sectors.

The appeal of providing intermediate rented housing was enhanced by confidence in rising capital values in Westminster and a belief that voids will be lower due to the high demand.

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

One option may be for affordable housing voids to be temporarily released to the market thus generating increased revenue streams which could be re-invested in affordable homes—for example for bedsit and studio properties which can be hard to let.

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

The forthcoming reforms to the HRA subsidy system are welcomed by the City Council, as they will bring greater certainty regarding future income and enable us to plan to meet our housing investment needs for the longer term. In addition, we will finally be able to free up resources for much needed new housing supply in an area of very high demand. More could be done, however, by enabling local authorities to borrow above the limits to be set, providing prudential borrowing rules are followed.

The housing activities carried out by local authorities constitute a sustainable trading activity and there are arguments that such activity should not be counted within government borrowing limits. Current and anticipated restrictions on borrowing arising from the HRA settlement may pose a financial disincentive for local authorities to develop new supply due to:

Reserve powers to cap local authority borrowing by government.

UK centric fiscal rules about how debt is measured.

Concern about the impact of further local authority borrowing on public sector debt.

Uncertainty about the agreement of the abolition of the HRA subsidy system.

Section 13 of the 2003 Local Government Act which restricts the ability of local authorities to ring fence any borrowing against the HRA.

The City Council proposes two options which would give local authorities greater freedom to borrow and fund new housing supply:

Option 1—that local authorities should be allowed to borrow against the value of future revenue streams within their housing stock and this should be accounted for outside of existing government Departmental Expenditure Limits (DEL), but still counted as part of public expenditure. Precedent exists in Scotland for prudential borrowing for local authority housing to be accounted for outside DEL, which provides freedom for Scottish Local Authorities to invest in new housing. To achieve this primary legislation would be needed to amend Section 13 of the Local Government Act 2003 which restricts local authorities’ ability to secure borrowing against future revenue streams.

Option 2—that local authority housing is 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. Currently the UKs fiscal measurements include debt and borrowing of publicly owned trading bodies which are financed by their trading incomes—this is inconsistent with EU measures. Research has indicated that changing the rules would not be viewed unfavourably as the credit rating wouldn’t be affected nor would the cost of borrowing. The rules could be changed by taking all the remaining trading bodies out of the government’s main definition of public sector debt by adopting “General Government Gross Debt” as the main measure, rather than Public Sector Net Debt. Alternatively current UK debt measures could be retained but borrowing for local authority housing could be made an exception to it.

Further details are contained in the attached paper, Strong Foundations for New Homes, submitted to the Coalition government for consideration in March 2011.1

Additionally greater freedoms over rent setting would enable local authorities to plan better financially and meet local housing needs in a more sustainable way.

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

In principle the affordable rent regime is a good way of increasing funds available for new housing supply but it’s effectiveness in central London will be restricted by:

The proposed welfare benefit cap which is likely to make anything above target rents unaffordable to larger non working households in three plus bedroom properties.

The need for Affordable Rents to be “affordable” to social housing customers and not reinforce long term benefit dependency. In Westminster our supported affordable rent levels reflect lower quartile to median incomes of households registered on our intermediate housing list. These are considered moderate incomes to which households eligible for social housing could reasonably aspire. They are significantly below 80% of market rates.

The need to let Affordable Rent tenancies to households eligible for social housing which in the main have low incomes.

October 2011

1 Not printed.

Prepared 1st May 2012