HC 1652 Communities and Local Government CommitteeWritten submission from Genesis Housing Association


1. Development of submarket rented homes is possible only with subsidy. If this is to be limited, the government will need to look at what the purpose of subsidy is, as at too low a level, it undermines its own purpose. Possible uses for existing or future subsidy could include using it solely in the development of this type of housing; less subsidy implies less submarket rented homes, and may be considered an indication of the level of commitment to providing homes of this tenure.

A broadening out of provision/eligibility of submarket homes to households that would traditionally have been expected to access home ownership but now cannot—generation rent. Alternatively the government could look at using existing grant in production of new homes for people unable to access home ownership, with the broader intention of stimulating the economy. This would provide more economically and socially mixed communities, as well as cross subsidy to ensure affordability and sustainability in the long term.

2. The market is not willing or able to produce homes at submarket rents. It would be difficult to see scope for complete withdrawal of state lending to provision for this client group. Grant could be used by the state as investment in a social investment fund, using it as “seed money” rather than grant allocation. All monies in this fund would be ringfenced for financing housing supply.

To maximise state lending/investment the government should look at ways to reduce barriers for the sector in raising additional investment funding from other sources. Writing off grant and changes to the methodology used in valuing socially tenanted homes are two major issues that would support the sector in offsetting the reduction in grant, helping raise more investment capital in the medium to long term.

3. Support in kind eg land, can only be provided once. This type of support will need to be based on the actual market value of the support, with an agreed financial return on it, so this can be sustainable and not only a one-off. Local authorities may also wish to invest part of their income in a ringfenced social investment fund, or provide support in kind in other ways to support financing of new homes where the market will not.

Where the private sector is not willing to invest, there should be recourse to public sector finance if where there is housing need. Guarantees may reduce the perception of risk in these cases.

Exploration of alternative models such as mutuals will require guarantees in order to be viable. In principle they are complementary to the housing sector, although to date have not been successful in competing for contracts/tenders in other areas, such as in the health sector and banking.

4. Larger housing associations have been successful in issuing bonds to provide long term finance. There is scope to look at the affordability of this approach, with exploration of local or national government taking on the role of a guarantor/broker to assist in providing long term finance for housing supply.

New developments will need to be mixed tenure to attract private investors. Revenue raised from private homes would cross subsidise affordable and target rented homes.

5. There is possible disjoint between the long term regeneration objectives of housing associations, and the relatively short term need to maximise return to a private sector investor. This could be overcome by subdividing large scale projects into phases, to ensure both parties’ objectives are met.

Without some investment eg through a social equity fund, there may be less scope for local authorities to negotiate the number of homes at certain tenures. A further review of how allocations operate in a local authority area, for example by mixing the types of tenure in any future development, may increase the possibility of investment across a local authority area as these become less risky for private investors.

6. Local authorities will have a greater role in commissioning existing operators and direct capital to them, or consider local authority bonds to attract a range of schemes and housing associations. There is also scope to invest monies in a social investment fund which would be ring fenced. There may be a risk of mission creep as local authorities prioritise other areas of spending.

7. Affordable rent provides some funds against a backdrop of cuts. It is a resource hungry model, requiring private borrowing and higher rents elsewhere to offset the relatively low level of subsidy.

This particular product has created some challenges for housing associations. At its current level, with our current client group, affordable rent is not likely to provide the increased revenue stream expected.

An alternative definition of affordable rent, which provides for both target rent and affordable/intermediate rents, is urgently needed. Benchmarking pros and cons against the government definition of up to 80% of market rent, and an alternative sector definition of 35% of net income,1 as well as others from other quarters, would be a good first step in assessing the long term sustainability of funding and of affordability to prospective residents of the affordable rent model.

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

1.1 It is clear that any production of sub-market rent homes requires subsidy of some sort. The fact that there is an issue with scarcity of provision indicates clearly that private sector players either cannot or will not deliver this type of provision within the current economic and regulatory framework. With this in mind the government might wish to consider whether, if subsidy is limited, whether it should be aimed solely at the provision of target rent homes. A consequence of this interpretation of policy is that only the number of new build homes available at sub-market levels will be equivalent to the proportion of subsidy in any development. This in turn has implications for the level of subsidy government is willing to commit to provide homes where others cannot or will not. In order to ensure sustainability (and affordability) of housing, the government may wish to consider whether it is appropriate to compel housing associations to provide the shortfall, and where the loss will be borne if more homes are expected at sub market rents.

1.2 There are a growing number of households who would have traditionally been expected to access home ownership but cannot in the current economic climate. Housing such households helps to create mixed communities and greater sustainability both socially and economically. The government should look at whether the time has come when the purpose of the subsidy system, whether capital or revenue based in the future, needs to be redefined. An alternative to utilising this more limited subsidy to produce housing at sub-market rents is to apply it to stimulate growth more generally in the production of new housing for households unable to access home ownership.

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

2.1 Housing development is a capital-intensive business. The production of housing at sub-market rents requires a subsidy of some sort, where the market quite clearly neither willing nor able to develop housing at these rents. Put simply, removal of subsidy for housing development will mean an end to (in the short term) homes available at target rents and (in the long term) homes available at affordable rent. It is difficult to see scope for complete withdrawal of state lending if homes are to be provided that are affordable across all tenures.

2.2 A possible approach is to learn lessons from the private sector and look at appropriate investment or lending within the public and housing sectors. In an era when grant is not guaranteed, it may be possible to look at the government using their lending/investment as seed money, levied through a social investment fund. In this model, housing associations, government, the HCA, local authorities and the GLA (in London only) would pool monies to form a single fund. Either individually or collectively, housing associations and local authorities would be able to borrow money, to then use as seed capital for development. Investment in a social investment fund would be a sustainable approach, generating long term finance for housing development. Housing associations and local authorities (relative to their size) who contributed to this ring-fenced fund would be able to borrow in order to develop a range of innovative housing products at a range of rents and tenures.

2.3 It might be beneficial to examine the benefits of writing off historical grant in order to make housing associations’ balance sheets more attractive to private investors.

3. 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

3.1 One challenge for the public sector in providing support in kind is that a resource such as land can only be given once. In order for support in kind to be sustainable, there needs to be an agreed mechanism so a situation is avoided where there is no assistance from the public sector, be it either financial or support in kind. It may be possible that support in kind would form part of the investment in a social investment fund. In order for the model to be attractive to prospective private sector investors however, these would need to be valued at their market price. For example, support in kind of a piece of land from a local authority would need to be accurately valued to allow full and transparent calculation of the return for any investor; any financial return is based on the value of the land in this example. This would also allow a local authority or landlord to accurately anticipate the level of financial return at the end of the project.

3.2 In instances where a landlord or local authority identifies housing need but they are not able to attract private investment (either because the investor does not consider it worth investing or a higher level of cross subsidy is needed to make a project financially viable) there should be recourse to public sector support. In cases such as these, the government will need to consider what happens in situations where there is effectively market failure of provision and yet housing need, how to fund and develop socioeconomically mixed communities.

3.3 The challenge may be one of perception; in those cases where there is no other investor, public sector guarantees will be invaluable in ensuring development goes ahead. It would be in these cases where the government would need to consider financial as well as non-financial assistance. The question will be whether these are given at a local or national level. The reform of HRA opens up the possibility that these can be locally determined and therefore be more responsive to a given situation on the ground. Housing associations and local government would be able to aggregate their investment finance and work either in a commissioning partnership, or through a special purpose vehicle, where local authorities will be incentivised to take on more of the risk than they currently do now, in order to guarantee the number of homes they require.

4. 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 this happening?

4.1 Some larger housing associations have in the past issued bonds. In Genesis’ case this has helped us raise a significant amount of long-term finance. Whilst this has been successful, it may not be possible in other cases to do this. With the introduction of direct payments and increased expectations from the government to finance development through private borrowing, there is a strong possibility the impact will be negative on housing associations’ credit ratings. Perceptions that in the medium to long-term housing associations’ credit ratings agencies’ downgrades will mean increased borrowing costs, diverting monies from existing tenants and stock. This type of finance may not be cost-effective in the long term if rates significantly change, and means this by itself this cannot be a remedy. Long term affordability of private finance is a major barrier that could be addressed with government intervention at some level, to take on a guarantor/broker role for a longer period of time perhaps for longer than bond markets alone may be willing to accept. For smaller housing associations, this type of assistance would make their longer-term projects viable also.

4.2 The current economic situation provides an opportunity to consider a social investment fund approach to funding development. Implicit in this approach is the fact that all future development would need to be mixed tenure in order to be financially viable and provide a return for investors. Any investor returns would be based on revenue from private homes, with the cost of affordable/target rented homes cross subsidised by this. This approach also has the potential to address issues of concentration of single types of tenure in developments, be they social, rental or privately owned.

4.3 One obvious challenge is to marry up the long-term finance needs of housing development schemes with expectations on relatively short term return on investment required by the private sector. Two examples of this are Woodberry Down (London Borough of Hackney) and Grahame Park (London Borough of Barnet), both mixed tenure long term regeneration schemes that will take approximately 20 years to complete. Phasing of this type of wholesale neighbourhood regeneration into projects may be part of a solution to do this, but other considerations such as ensuring a holistic approach to place enhancing schemes whose development involves both the public realm and housing, which may be at odds with an the desired outcomes of a private sector investor.

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

5.1 Special purpose vehicles have in the past been used to varying levels of success within the sector. The benefit of this approach to the private sector is that at the outset projects would be risk assessed and their returns calculated. This would be a huge shift from looking at large scale vision to smaller scale deliverable project delivery with predetermined financial outcomes predicated on private and social housing delivery. For this approach to work, large-scale development projects undertaken by housing associations, would need to be further compartmentalised into projects to assess the return on investment for private finance for each phase. Private investors that invested in projects seen as high risk would expect a higher rate of return than those assessed at a lower risk. In most cases private investors would take on revenue risk, with a social investment fund/local government taking on the capital risk.

5.2 One of the beauties of the current system is that finance can be raised on the strength of an association’s balance sheet. A compartmentalised system where finance is provided on a project-by-project basis, making development finance extremely disjointed. Masterplanning on the scale of Woodberry Down (4,600 homes) and Grahame Park (5,000 homes) would simply not be feasible using a project-by-project approach, and there would be real risks that large-scale regeneration schemes would not be realised.

5.3 One significant challenge with this model is that within a single development or single local authority area projects that are similar in size and scope will carry different levels of risk, affecting the viability of development at all in some cases. Where the appetite for private investment is low, it will be for the government/local authorities to provide housing within that community. A reformed allocations process that takes this into consideration and levels the playing field will mitigate any further residualisation of social and housing association homes, through mixed tenure allocations by local authorities and housing associations.

5.4 For local authorities under pressure to deliver more social housing this approach would mean less scope in negotiating the number of homes per unit at certain tenures, unless there is a clear contribution either financially or as support in kind.

6. How the reform of the council Housing revenue account system might enable more funding to be made available for housing supply

6.1 With the reform of housing revenue accounts (HRA) local authorities should in principle be able to better determine how to reinvest their surpluses on provision of more council housing. There will be a need for vigilance in ensuring monies are allocated so as to ensure proper maintenance of existing stock, as well as investment in new homes. The challenge will be how to do these two things, and simultaneously ensure debts or loans are serviced.

6.2 With more freedom to allocate monies to directly providing homes, local authorities will be able to commission more homes. This raises the prospect of more local authorities raising money through non-traditional financing. Where a local authority has a number of housing associations or developers, it may be possible to consider a local authority bond, where local authorities act as guarantor for any scheme. This has the advantage of ensuring that monies are available to both maintain and develop homes, freeing up capital to invest. One risk is that monies previously ring-fenced are in future used in areas other than housing. Given the current economic climate and the challenges faced at a local level in service provision, there is a strong possibility of mission creep.

7. 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 and long term

7.1 The affordable rent programme does provide some support for a development programme against a backdrop of severe national economic constraints. The cut to the housing programme for 2011–15 is some 63% compared to that for 2008–11. For housing associations, prospective and existing tenants, the affordable rent model as it is being currently implemented is problematic. The key problem of long-term viability is that affordable rent is a resource hungry model. Grant levels in the new programme equate to 15–20% of the cost of development; upwards of 85% of development costs need to be found from a combination of increased income from higher rents, reserves or other resources and private borrowing. HCA constraints on conversion of properties to this new tenure and raise income means the burden of raising development income falls to housing associations’ own resources and ability to borrow or raise development finance, something that is clearly not sustainable in the long term. Housing associations will, in the medium to long term, reach their capacity in terms of what can be raised against their assets.

7.2 In order for this product to be successful, the government and local authorities will need to square the circle of who exactly is affordable rent aimed at. A product such as affordable rent is not suitable for current or prospective tenants who are allocated housing through choice based lettings. Without input into allocations, it is difficult for housing associations to extend the affordable rent product to, for example, people that previously were eligible for intermediate rent through housing options or under the current firststeps portal. In order to make affordable rent effective, for the government and local authorities to achieve their housing objectives, a commitment must be made to develop for both target and affordable/intermediate rent levels, and have one system of allocating accordingly, that housing associations have some sway over.

7.3 We believe there is urgent need to look at alternative definitions of affordability. An alternative, costed definition of 35% of net income should be considered.2 For a person on an average income, this equates to a rent of £170 a week. Clearly both this lower figure and the current definition of up to 80% the sector is working with have pros and cons in terms of what they can actually deliver in the long term. It is clear however that a reliance on rental income alone to develop and build new homes is not feasible in respect of investment in new housing in the long term, and that defining affordable rent at up to 80% of market rent will not necessarily increase funds over the long term if people cannot afford to rent the homes developed.

7.4 If, as seems the direction of travel, housing associations and (should they decide to develop) local authorities will be expected to attract investment income from sources other than the government, the lower affordability definition provides more stability in both income and in tenancy. Full modelling of the current definition, this alternative definition offered by the sector, and other suggestions should be considered to accurately define what an affordable rent is, and what the implications are for current and prospective tenants, housing associations, local authorities, and prospective private sector investors.

October 2011

1 “Where next?” Housing after 2015: Creating a Sustainable Housing Investment Model, London and Quadrant Housing Association.

2 “Where next?” Housing after 2015: Creating a Sustainable Housing Investment Model, London and Quadrant Housing Association.

Prepared 1st May 2012