HC 1652 Communities and Local Government CommitteeWritten submission from the London Borough of Newham


The London Borough of Newham welcomes this opportunity to share our experiences and concerns over the financing of new housing supply with the Committee. The key points we make in our submission are:

Whilst we welcome the opportunities and freedoms presented by the HRA system reform and the Affordable Rent regime, we are concerned that there is a significant lack of funding available to build new housing across London and in particular affordable housing.

The impact of the lack of funding could be mitigated through a series of freedoms given to local authorities: to prudentially borrow against future income streams, to charge up to market rents, and to keep the full receipts of sales of housing stock.

If local authorities were given similar powers to those of housing associations, we believe we could make a substantial difference to the housing on offer to our residents. For example, we would like to improve the private rented sector by buying up street properties and offering longer-term tenancies. We are also keen to improve the financial resilience of our residents by helping them onto the housing ladder with a shared equity scheme or deposit scheme.

We are concerned by the government’s recent announcement of a further discount for Right to Buy tenants and a replacement house for every property sold. Whilst we strongly support the principle that social housing tenants should have the opportunity to buy a home it remains unclear how new housing will be built to replace the properties sold. We would urge the Committee to press the government on details of this scheme and ensure that Councils have enough finance to carry through the promise of replacing homes sold under Right to Buy.

We also offer a number of practical solutions for improving the level of housing supply.

1. Providing the biggest return on the investment, in housing supply terms, from the more limited public subsidy

The cuts to funding of new housing supply are severe, and as discussed below, are not sufficiently mitigated by the affordable rent regime method of financing new supply. Nationally only £4.5 billion is available for the four year period in contrast to £8 billion for the previous three years. This amounts to less than £21,690 of HCA grant finance per dwelling. It is worth noting that for the 2008–11 investment period which has just ended, Newham secured £320 million of investment for affordable housing in the borough with grant levels for social rent closer to £150,000 per property. Relatively high levels of grant in 2008–11 encouraged new supply and helped keep rents at affordable levels for Newham residents.

However there are ways in which the Government could significantly increase the supply of housing. Firstly, amending the timing of payment of grant to start on site rather than completion would reduce affordable providers borrowing costs, and improve their cash-flow.

Secondly, providing freedoms regarding the ability of Councils to raise finance, charge appropriate but varying rents, and build out a full range of rented and sales homes would make a huge difference not only to the supply of new housing but to the ability of Council to shape and improve neighbourhoods. More details on the freedoms we seek are outlined at points 6 and 7.

2. The role of state lending or investment, as opposed to grant funding, and the appropriate balance between them

The Committee needs to examine the use of “staircasing” receipts held by housing associations from the sale of retained equity in low cost home ownership schemes to ensure they are maximising the re-investment return into new supply.

Where grant or land is provided by the state, then it should see a share in the uplift arising from future sales, with this return being ploughed back into new supply.

Local authorities should be enabled, encouraged and funded to develop a range of intermediate products that address the various and numerous needs of their individual housing markets. This would increase tenure diversity and possibly allow cross subsidy to deliver family units across all income groups.

3. The role of, and barriers to, the public sector in providing support in kind

Previous attempts to encourage Councils to identify surplus land for development have not always met with success, but enabling them to be the direct beneficiaries of development activity would overcome this. We are keen that any development projects meet with our more general housing and community aims, ensuring that our residents will benefit from development.

Councils need to be able to develop the full range of tenures on their land in order to make developments viable and to offer a range of options to residents. For example so-called PFI Lite deals using institutional funds (as discussed in point 4) where the authority becomes the owner of the accommodation at the end of the finance term would encourage institutions to move into the sector and authorities to make best use of its land and other holdings.

4. Bringing long-term private finance into the private and social rented sectors

Newham is keen to intervene in the private rented sector as it represents around 35% of the housing market in the borough. This private rented sector housing is often of low quality. We estimate there are over 4,000 private landlords in the borough and there is evidence of unscrupulous landlords operating. We would like to be able to offer our residents a secure, good quality option in the private rented sector both through new build and buying up street properties.

We believe that securing institutional or pension fund finance looking for a steady return and diversification away from the volatility of the FTSE and other stock markets will deliver investment into new housing supply. Newham is currently investigating starting such a scheme working with a private partner/investor or other. We would seek to buy up street properties in areas of low quality PRS, or equally the scheme could fund new build for private rental use. The properties would be let out at market rents, offering a high quality offer to residents in the private rented sector which could include longer-term tenancies (if required) and the security of having a Council special purpose vehicle managing the property.

Newham would like to be able to offer assured or assured shorthold tenancies on purchased and new properties. This would allow us to be flexible in managing the properties and allow us to maximise revenue for PFI lite investors. It would make our aim of achieving a high quality private rented sector realisable, by removing the council’s market disadvantages in relation to buy to let investors.

We are keen to deliver this programme of activity but procurement of the joint venture needed for delivery can be costly in time and procurement costs. Standard drafting from the Treasury/Infrastructure UK (to ensure private as well as public sector buy-in) would speed up agreements.

Alternatively, if local authorities issued bonds to finance this activity we could secure finance at lower costs, enabling us to build in headroom to mitigate its risks. In addition, these models are predicated on delivering rent-only schemes, so other approaches will be needed to generate other tenures and sales products. These are discussed below.

5. The role of Housing Associations

Housing associations have staircased receipts that could be better used. The housing association sector could better address its day to day costs to free up revenue to finance more supply. Registered providers (RPs) should be encouraged to finance their projects over the total life of their schemes ie up to 60 years to reflect the actual assumed life of the properties. RPs should assist and work jointly in partnership with local authorities to deliver new housing

Many “affordable rents”, ie ones that are above 60% of market rent, are unaffordable for Newham residents in larger homes. We believe that the balance between rental income and capital, in the development of new supply, must be increased in favour of capital to improve affordability for low and middle income families. In addition this rebalancing should apply to council led development programmes.

6. Increasing funding after the reform of the council Housing Revenue Account system

One of the key changes government could make is to enable local authorities to keep all of their receipts from sales activity as long as it is re-invested into new supply. Ending the practice of the Treasury receiving 75% of receipts from sales to Council tenants would give local authorities a valuable resource to invest into new housing for residents. The current system means that money raised from the sale of our stock cannot be ploughed back into housing and our residents miss out. Right to Buy receipts should be retained by local authorities to provide new supply, in lieu of the units sold.

The government’s recent announcement of an improved offer for Right to Buy tenants, followed by a guarantee that any homes sold will be replaced, raises a number of concerns over how that promise can actually be carried out. Whilst we welcome the government’s announcement in principal, here is an urgent need for government to offer more detail around debt repayment. Our initial analysis suggests that currently Newham would only receive £22,500 for each Council home sold once debt post HRA reform has been taken into account, and 75% has gone to the Treasury. Other considerations to take into account are the need for land to build on, the type of property that is built as a replacement (for example if it is a family home that has been sold, a family-sized property would need to be rebuilt), the level of rent the properties are let at and the lag between selling a property under Right to Buy and building a new property. We would also welcome more discretion in making Right to Buy more clear and transparent to applicants before they buy.

We would strongly urge the Committee to raise these issues with government to ensure social homes are not lost.

In addition, we are concerned that the Debt Cap has been set artificially low and has no regard to the borrowing capacity that local authorities could prudently manage. At the very least it should be subject to a review mechanism and annually inflated. Local authorities could also develop out low cost home ownership schemes on our own land using the resultant receipts to build out other sites and so on, on a rolling basis. This would ensure we had a constant flow of new build properties coming on stream.

Finally, we would suggest pooling borrowing capacity and headroom so that there is no overall increase to the national debt as activity remains within the permitted ceiling. This would assist local authorities who have capacity to develop but no headroom to build using the headroom of other authorities who have no in-borough capacity.

7. The Government’s “Affordable Rent” proposals and long-term funds for new supply

As noted above, the Affordable Rent model of financing new supply does not mitigate for the lack of funding for affordable housing. As discussed at point 1 there are ways that the limited funding available could be put to better use with changes to the timing of payment. In addition we are concerned that the level of borrowings this regime requires is not sustainable in the longer term with gearing levels leading banks to mitigate their risk by increasing the costs of loan finance to Registered Providers. This in turn puts pressure on the RPs and reduces their development capacity.

We are also concerned that essentially financing the Affordable Rents for residents who cannot afford it will come through housing benefit. From our initial analysis it appears a significant number of our residents would be pushed into benefit dependency in order to pay the Affordable Rent. It would be better to make the Affordable Rent a truly new and intermediate offer, whilst maintaining an appropriate level of social rents.

The Committee may care to establish how many housing association homes will be sold to generate funds to help them deliver the HCA’s 2011–15 Affordable Housing Programme. This is clearly not sustainable in the longer term and will encourage the sale of affordable homes in high value areas, which will reduce the opportunity for people of all incomes to live in the same neighbourhood and reduce the number of mixed communities in London.

The big win would be in allowing local authorities to prudentially borrow funding in a sustainable way, through increasing rents on our existing stock. Local authorities should be given greater freedoms to set rent levels on re-lets that would enable us to fund new supply. We need to be free to sweat our assets, and be given the range of freedoms that housing associations enjoy to develop and sell housing. As well as this we need to be able to let our properties at market, Affordable and social rents to reflect the greater needs of the area and the role Councils have in re-balancing local housing markets.

October 2011

Prepared 1st May 2012