UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1652-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Communities and Local Government Committee

Financing of New Housing Supply

Monday 28 November 2011

Nick Jopling, Paul Smee and Alan Benson

Evidence heard in Public Questions 98 - 152

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Oral Evidence

Taken before the Communities and Local Government Committee

on Monday 28 November 2011

Members present:

Mr Clive Betts (Chair)

Simon Danczuk

David Heyes

George Hollingbery

James Morris

Mark Pawsey

Heather Wheeler

________________

Examination of Witnesses

Witnesses: Nick Jopling, Executive Director of Property, Grainger plc, Paul Smee, DirectorGeneral, Council of Mortgage Lenders, and Alan Benson, Interim Executive Director of Housing and Regeneration, Greater London Authority, gave evidence.

Q98 Chair : Apologies for keeping you longer than we had intended. I hope at least we have entertained you while you have been waiting. Welcome and thank you for coming to our second evidence session in the inquiry into the financing of new housing supply. For the sake of our records, would just introduce yourselves and say the organisation that you represent?

Alan Benson: Good afternoon. I am Alan Benson from the Greater London Authority.

Paul Smee: Paul Smee, DirectorGeneral of the Council of Mortgage Lenders.

Nick Jopling: Nick Jopling from Grainger plc.

Q99 Chair: Thank you very much for coming. You are all most welcome. Also, thank you for the written evidence you have supplied to us so far. Just as a start to our discussions this afternoon, what do you think is the extent, the scale, of the problems that are currently in housing supply, and what do you think are the different impacts on the social housing sector and the private rented sector, which we ought to be addressing?

Paul Smee: There is a general view that we ought to be having new build housing totalling around, say, 200,000 to 240,000 new homes per annum. At present, we are producing housing in excess of 100,000, perhaps up to 120,000, which is rather short of that target, which suggests that there will be a continuing constraint on supply, which will inevitably affect demand and how it is satisfied.

Nick Jopling: The shortfall, which is often written about under new home build and acquisition, and firsttime buyers is also now starting to draw attention in the rental market, particularly in the South and South East, so the private rented sector is becoming an increasingly important stepping stone of tenure, if you like, if you use that terminology. It is a choice, as well as a way of living, for an increasing number of the population, again particularly in London.

Alan Benson: I can only speak for London rather than the national picture. Certainly, the Mayor has a target to deliver just over 30,000 new homes a year in London, which is very similar to the target of the previous Mayor in his London plan. We made progress towards that target for the first 10 years of this century. There has been now, in the last year, slippage and we have actually seen a decline in new house building over the last year, 201011, when we had figures, which mirror the decline in the rest of the country in the two years prior to that. We are in a situation where we have not delivered enough homes to meet London’s need, backlog of need and the growing population of London. We are in the worrying position at the moment where we seem to be slipping slightly backwards rather than forwards.

Q100 Chair : Are the problems in London different to the rest of this country or simply similar but more acute?

Alan Benson: In terms of overall supply, they are similar but more acute. We have the same problem as the rest of the country, but it is a good deal more acute in London, which manifests itself in much higher levels of homelessness, much higher levels of overcrowding and much greater affordability problems for the average population, who want to get on to the housing ladder. It is a more acute problem, but London does transform to quite different problems, rather than just being an acute situation of the same problem as the rest of the country, when you look at issues around the private rented sector, for example, in London, where the scale of the private rented sector is so large in London and it houses such a very differentiated group of people in London, compared to the majority of the rest of the country. In their situation, you have a slightly different problem, rather than the same problem just greater in London.

Q101 Simon Danczuk: How important is mortgage finance to new housing supply? The Home Builders Federation was saying it is the most serious constraint. Is that right? Is mortgage finance the most important issue?

Paul Smee: Clearly, there has been a reduction in the amount of loans that have been made available since the financial events of 2008. There are now attempts to address that. We would say that there is mortgage finance available. We are estimating that £137 billion will be lent over the course of this year, which is a considerable reduction from 2007, for example, when £363 billion was lent. The question of the balance between supply and demand in causing that reduction is more difficult to estimate. There are clearly regulatory constraints on banks from lending as they were doing before, and I suspect that there are also some demand constraints, with people feeling lack of confidence in going into the housing market.

Nick Jopling: With regard to mortgage finance, again it is the cost of sensible mortgage finance, and the importance of mortgage finance in your question is the advocacy of sensible levels of mortgage for anyone. Much of the debate is around firsttime buyers and their ability to be able to afford a deposit. The indemnity scheme addresses some of that, but setting that aside, affordability, confidence and sentiment play such an important part. The housing market is not purely an investment play of investment markets; it is often down to sentiment. The mortgage market has an impact beyond the firsttime buyer and the confidence to move for people who are existing home owners wanting to change up or down. That cost of stamp duty, arrangement fees and all of those around mortgages all have an impact across the market generally.

Alan Benson: I would say the market generally is affected. The harshest impacts are on firsttime buyers, because of the deposit requirements for a mortgage, which are much easier to acquire if you have equity in the home or you have parents, or friends or family that can be a bank to lend you the money to purchase your home. Having said that-and the mortgage expert sat next to me can tell me if I am right or wrong on this-as a percentage of overall house purchase price, the level of deposits required now are not that dissimilar from the level that were required throughout the period from the Second World War until the 1990s. It was only in more recent years that we have seen very small deposit requirements comparatively. What has changed is the gap or the ratio between incomes and house prices. House prices are so high that a 25% deposit requirement for a house in London is a very large requirement indeed, whereas a 25% deposit requirement in 1975 would not have been anything like the same requirement, but I am happy to be corrected by my mortgage expert on the left.

Paul Smee: I would not correct you at all, Mr Benson. I would add a slight gloss to it, which is to say that I think that those who have been most hit by the increased deposit requirement have been those who are in the position as firsttime buyers, where previously higher loan to value was more traditional, although obviously it did rise steeply during the course of the last decade.

Q102 Simon Danczuk: Paul, do you think revival of Right to Buy is going to soak up what little finance is available now?

Paul Smee: No, I think the Right to Buy scheme can be accommodated. There is a consultation coming out shortly, which will give us some more of the detail about how it will operate. Lenders will want to look at the properties that are being purchased to ensure that those who are applying under the scheme can afford the payments under their mortgages and do not get into financial difficulties with them.

Q103 Simon Danczuk: Alan, the people of London are eagerly awaiting the Mayoral bond and the Mayor’s mortgages. When will they come on stream?

Alan Benson: We are pausing a moment and considering the impacts of what the Government has announced. We are pausing to look before we make any formal announcements here. We were considering the options for a Mayor’s mortgage or a Mayoral bond, looking at what we could do to help firsttime buyers in particular, in London, deal with the problems of accessing mortgages, and then the Government announced its scheme on a national housing strategy, so we want to look at that very closely. We are talking to CLG about what we can do in London to work with that; if necessary, what would be most beneficial for Londoners to make the most of that scheme and add on to it potentially?

Q104 Simon Danczuk: So there is no time scale.

Alan Benson: Not at this point, no.

Q105 Mark Pawsey: We have already heard reference to the importance of the firsttime buyer. Mr Smee, you mentioned that £137 billion of mortgage finance went out in the last year, but my guess is that very little of that went to firsttime buyers, because of the need for big deposits. What has been the impact of that on the supply of new housing over the last few years and months?

Paul Smee: Between 190,000 and 200,000 loans per annum are being made to firsttime buyers, so there is still finance available for them once they have got the necessary deposit. We have got the new build indemnity scheme, which I think we are coming on to, which will deal with some of that. The fact that there are perhaps half as many firsttime buyers getting finance as there were at the peak of the housing boom will obviously make the market more sluggish. There will be, for some builders, a question of whether they want to build particular types of property.

Q106 Mark Pawsey: What effect has it had, though, on the types of property that are being brought forward?

Paul Smee: The evidence is that builders have tended to build away from starter homes towards more expensive properties, which would typically be bought by somebody moving up the housing ladder and using equity in their existing property.

Q107 Mark Pawsey: I wonder if somebody else could explain why the absence of the firsttime buyer is so important to the effect of the market.

Nick Jopling: I am not a house builder. I used the term earlier on about the stepping stones of tenure. What I mean from that is the leaving of home into university, the sharing with friends and then perhaps the sharing with a partner, while your relationship or your jobs settle down. Then that is the time point, and a very sensible point, at which people consider firsttime buying. That has pushed out from 32 to 37 over a period of only four years. It is actually moving faster than the chronology, as it were, as the years pass by, because of the credit crunch, because of the lack of confidence, because of, in some cases, the lack of the bank of mum and dad as well, because they are the people lending often on that deposit, and then into the more traditional home ownership percentage, which still is the largest percentage in quantum. Once those dynamics start to move around, they have an impact on the market elsewhere. That is why it is important.

Q108 Mark Pawsey: What is the impact elsewhere?

Nick Jopling: The impact in particular is the increased demand for rental stock. That is the major impact that we see as a business: the demand for renters and rents rising accordingly. Supply and demand works in the same way.

Q109 Mark Pawsey: I wonder then, Mr Benson, is it important therefore to find some schemes to get these elusive firsttime buyers back in the market and, if so, what would you favour?

Alan Benson: It is important if you want to try to meet the aspirations of people in this country to go into home ownership to have some schemes to help firsttime buyers enter home ownership. Levels of home ownership have flatlined from the mid1990s.

Q110 Mark Pawsey: Is that a problem?

Alan Benson: That is a very big policy question for politicians to decide, not for an officer like me to determine. There is no appropriate or correct level of home ownership, neither in the UK or anywhere in Europe. Countries all work at different levels and very effectively at different levels, depending on a whole series of cultural and social phenomena. In London, we stopped seeing an increase in home ownership from the mid1990s and it has been declining significantly since the turn of the century. Now that pattern is being replicated in the rest of the country, so London led the way. It is not just a UK phenomenon.

Q111 Mark Pawsey: Can we not argue that is a good thing, because it gives much more labour market mobility? Why is it so important to have these firsttime buyers getting started on the housing ladder?

Alan Benson: You are right in terms of labour mobility. There is evidence clearly that the private rented sector is the most mobile sector. It is the sector that attracts the most economically dynamic people. A large part of why London was economically dynamic over the last 10 years has been the growth of the private rented sector, which is the route for the vast majority of people, like myself, who came to London to seek employment. The private rented sector does that very effectively, but people have a desire and an aspiration to go into home ownership, settle down and have roots. Home ownership itself produces a huge number of other benefits over and above having a roof above your head, as a hedge against inflation, against pensions, against care costs later in life, etc. There are many financial reasons why people like to get into home ownership, and yet there is a groundswell of opinion out there of people feeling they are locked out of home ownership who, a generation ago, or even 10 or15 years ago, would have felt they have an expectation to be home owners.

Q112 Mark Pawsey: To all of you, given that it has not been happening over the last few years, what is the best way, in your view, to get these firsttime buyers into the market?

Nick Jopling: The view is I think we have to start building. We have to recognise, and there are very few people who have not met anyone yet who has not recognised, that we have a shortfall of new build construction. The sensible area would be to stimulate the supply side of stock.

Q113 Mark Pawsey: How would you do that?

Nick Jopling: I actually think the mortgage indemnity was a good touch on the tiller. I am not a great one for government intervention into free markets, and that is what the housing market is, because you can be the wrong side of the impact. Very often, they get unravelled as quickly as they have been put in. What was recommended last week was, because it is focused towards new build only and is not necessarily restricted only to firsttime buyers-it is open to anyone who can prove that they can only gather together 5% of deposit-I would say that was a sensible touch on the tiller.

Q114 Mark Pawsey: Mr Smee, is this going to do the trick?

Paul Smee: I think it will make a contribution; I very much hope that it will. We have got this imbalance of supply and demand. There is a lot of evidence that people who are currently in the rented sector are paying levels of rent that demonstrate that they could afford a mortgage. They are in effect waiting to build up their deposit, whilst paying their rent at the same time. This will bring forward people who can quite safely be lent to at a high loan to value, bring them on to the property ladder and allow them to meet their aspirations. Nobody is being forced into this scheme; this is something where we think people’s aspirations can be met and, at the same time, it will contribute to a growth agenda, because it is being focused on the new build sector, with the economic consequences of that.

Q115 George Hollingbery: Returning to the new build indemnity, we met last week and we had a fairly robust discussion, I think, about some potential problems with it. I worry about several things, but, first, can you just flesh out for us how this scheme works? How many years is the Government tied in and so on and so forth?

Paul Smee: The idea behind the scheme-some of the details are still being worked out-is that when a new home is purchased by somebody on a high loantovalue mortgage, the builder will put 3.5% of the value of that house into an indemnity scheme for seven years.

Q116 George Hollingbery: I made this point last week and I will make it again. The builder is putting money in, but they are putting money in that would not be there if they were not just selling a house, correct?

Paul Smee: That is correct.

Q117 George Hollingbery: It is not money they are finding from anywhere else; it is money that is generated by the profit they are turning.

Paul Smee: Yes; they are putting skin in the game in effect for seven years.

Q118 George Hollingbery: Are they?

Paul Smee: Well, they are getting delayed profit, I would suggest to you, rather than actually putting cash in.

Q119 George Hollingbery: If the scheme unlocks a sale, that money would not exist.

Paul Smee: Indeed, but they have to put the money into the sale and it is something that they can claim back if the indemnity is not caused, if there is no default and the property has not fallen by 3.5%.

Q120 George Hollingbery: You understand what I am saying.

Paul Smee: I do understand.

Q121 George Hollingbery: The profit is not there to invest in the scheme if the property has not been sold, so Government’s unlocking a sale, which gives the property, which gives the builders money to put in. It is not money they have to find otherwise.

Paul Smee: Yes, I can see what you are saying. The way the scheme will work though is that the builder will put that money in; the Government will top that up with an additional up to 5.5%, which it is guaranteeing, although the Government itself will not actually physically make the transfer of money. That allows the lender to put in a much higher loan to value, in confidence that he will not be affected by changes in the property price. More particularly, we believe that there will be a regulatory acknowledgement of the way in which the scheme is being backed. At present in a new build property, if you are loaning at a very high loan to value, you have to put eight times as much capital to support that loan as you would if you were lending at 75% to 80%. We believe that, with the guarantee and indemnity arrangements in place, there will be a much lower capital requirement imposed by the regulator, and that that will enable the pot to be extended and shared round, so that more new build property can be purchased, with the economic consequences.

Q122 George Hollingbery: How long are you in for as a developer?

Paul Smee: The scheme will be for seven years.

Q123 George Hollingbery: Does it work on shared-ownership schemes?

Paul Smee: No. From the point of view of the person purchasing the property, it is exactly like taking out an ordinary mortgage.

Q124 George Hollingbery: Here are a few questions for everybody-just general thoughts on this. Are we confident that the assessment process will show sufficient due diligence to stop these being junk loans? You have said that you have confidence that people in the private rented sector can service a loan like this, but we need to be very careful-do we not?-that we do not create new junk bonds. That’s one. Secondly, is it not just a competitive advantage for major builders who can create these funds or deal with these funds very much more easily than an aggregation at local level? Thirdly, if I was a house builder, I would just stick 3.5% on my house price and that way it has cost me absolutely nothing. How is Government going to control valuations? Are they going to have the right to veto valuations and have their own valuer in each transaction?

Paul Smee: Shall I start with answering those questions? Right, I think that the valuation issue is a very important one that is important to everybody in this scheme, because we do not want just to see the value of the indemnity going, in effect, into an increase in a new build premium. The Royal Institution of Chartered Surveyors has guidelines on how these valuations should be done and we will be looking to talk to them about how they can be adapted to the specific circumstances of the scheme. We are requiring that there will be, and this will be required by the Government, absolute transparency about the prices at which comparable properties-for example, on a particular development-are changing hands. There will be a mechanism by which information can be exchanged, so that will give a much higher level of confidence that the price being taken is a reasonable one. I think everybody involved in this scheme realises that the fact the Government is involved gives it a very high level of visibility, which has to be responded to.

Q125 George Hollingbery: Nick, you must be pretty chuffed. Nick and I know each other a little. You are a big builder. You have a big ethical dimension to what you do, but you are going to be able to float these funds and deal with these funds much more easily than others. You have got lots of experience in the financial transaction side of the market, so it is going to suit you down to the ground. Will it not knock other competitors out of the market?

Nick Jopling: Well, it will not suit us, because we are not a house builder. To be clear, we do not build houses; we prepare land and then sell the land to the house builders to build on, so it is a different expertise. I am going to have to really defer to Mr Smee about the mortgage impact. On the valuation thing, I think your point is very important actually about the 3.5%, and it not just being an extra bonus for the house builder; I think it is a particularly important point. There will of course be elsewhere, on any site being sold, comparable evidence, as there is in any form of valuation. I would expect the lender and the Government to have an RICS evaluation backed by a professionally indemnified professional, who is going to ensure that exactly what you are worried about does not happen.

Alan Benson: On the particular issue about the price, we do worry about prices being added into the costs for a developer, but as these are new builds specifically, they will be almost identical flats in the same block in London, or identical houses in the same road being sold, so it will be very easy to therefore spot if these new build houses are at differential prices for the ones with and without the mortgagebacked indemnity. I would have thought it would be reasonably easy for the Government to check that. The other questions you asked are a bit more difficult, about assessing the individual circumstances. We wait to see a bit more information from the Government about this indemnity scheme and how it will work, because the detail is worth looking at. Again, going back earlier to the question about the Mayor potentially getting involved in mortgage schemes, we want to look at how the Government’s scheme works first and see how we can best work with that one.

Paul Smee: Do you mind if I just add in one point? I got carried away on the valuation point. First is the price will be the price. It is very clear there can be no other hidden discounts or anything to a purchase of one of these properties. The second point, which was on the smaller end of the market, is we have already had some of the smaller lenders active in the mortgage market-some of the building societies-saying that they want to talk through how this could apply to them. You can envisage situations where smaller builders, with perhaps strong regional presences, are talking to lenders with equally strong regional presences, which gives a local flavour to the scheme, which I think will work in favour of some of the points you have been making on the valuation issues.

Q126 Chair : George’s point is very interesting though-what the prices that we are supposed to be monitoring for these deals are going to be-because the advertised price on most new build schemes now is not the price people are actually paying. There is always a bit of negotiation. Is there not a danger that this scheme drives the price back up, so the builders actually do make their 3.5%?

Paul Smee: That is the reason why we are, a, involving the chartered surveyors and, b, insisting on absolute transparency. Not everybody who will be going into one of the properties, for example, will be somebody who is taking advantage of this scheme. There will be other people who have put forward a much more substantial deposit, so the transparency will give the confidence that a price being charged for this new build is realistic.

Q127 Chair : Presumably, in the negotiations you have had with the Treasury, has the issue come up of whether the whole of this underwrite from Government, this guarantee, counts as Government debt?

Paul Smee: I have left that to the Treasury, I am afraid, Mr Betts.

Q128 Chair : They have not raised it as an issue to you.

Paul Smee: That has not been raised with me to date.

Q129 Heather Wheeler: I am very keen on affordable housing and I am interested that there seems to be, from the evidence that we have seen so far, a real gentlemen’s fight going on suggesting for buytolet development that the affordable housing element should be taken out of that. I do not see how you can justify that, but perhaps your argument is that it is about getting another tranche of buildings built and it deals with a blockage there somewhere. Perhaps, Mr Jopling, that might be something you would like to talk about.

Nick Jopling: Yes, you are referring directly to the suggestion that, if we were to be able to perhaps use public land or to build buildings specifically for rent, so not for sale-they are not available to purchase-on a case-by-case basis, it may be looked at that, if these were being built and offered rent for a period of time, then maybe there would be no requirement to build section 106 affordable housing general needs rent or intermediate housing alongside it initially, perhaps, or at a stage. It is a debating point, and the reason it is a debating point is because I talked at the beginning about the growing numbers of people who are renting. These are, in the world we live in, the "inbetweenies". These are the people who cannot afford to buy a home and they do not qualify for social housing, but they need to be housed. That goes without saying. By the fact that they cannot afford to buy a home, I would argue that they just might be needing to have some form of home they can afford, and therefore to be able to offer private rental on a similar basis that the Americans offer, in multifamily housing in purposebuilt blocks that are operated as such, might really be the nirvana to get to, especially if we could fund it institutionally, rather than by Government.

Q130 Heather Wheeler: I was going to say that brings me very nicely, thank you very much, on to my next point. How do you feel that there is a way of getting these big institutional investors into the market, by getting rid of commitments that other normal builders would have to abide by?

Nick Jopling: The question of how we get institutions into the residential market is something that has vexed many people in the sector for a very long time. Those obstacles have ranged from reputational: no Chairman of a pension fund-and when we are talking about institutions, let us be clear, we are really talking about pension funds-wants to receive letters about the service in a block or how a manager might be making decisions about how they operate that block. Those have largely gone away. I think they were political, because remember in the first case this was a Tory Act in 1989, which then had to be tested through 1997, but we then had from 1997 onwards very much a market that was growing and really the institutions were not going to go into it then. We are in a very different market today, so that has gone away.

The significant barriers are scale, suitability of stock and yield. Those are long debates, each of them, and maybe we can do them in detail, if you like. An institution wants to invest in scale; it is not interested in buying buytolet property. There is no stock for it to go and buy. There are no portfolios of rental stock for it. There may be some distressed portfolio, buy they are not interested in that, because there is often a reason those properties are distressed in the first place. Suitability of stock: we address that through building purposebuilt stock for rent. That is the multifamily housing US model. And then the yield. Yield has always been a challenge, because the cost of entry, against the rent and the net rent that comes off the bottom, has always been too high. In particular in London, the net yield is so small, so one has to deal with the cost of entry, and that is the cost of construction and the land. Those are the two main constituents and that is what you have to address. The cost of land is directly affected by the requirement for building other types of housing on it as well.

Q131 Heather Wheeler: You use that phrase and you say it has this effect, but could you actually give us an example where you think investors have just said, "No, we cannot do it," and have pulled up the drawbridge, particularly on the affordable housing side of it?

Nick Jopling: Can I be clear that I do not want to go down a route of saying we can only provide this without affordable housing, because that is almost a hypothetical suggestion, if you really wanted to turn the production line up? I can give example of, say, a big site that can deliver 600 units. If 200 of them were to be affordable, 200 were build-to-rent and 200 for sale, actually you could build the first two thirds, because there is such demand out there for social housing and for private rented. You have got to find a way to be able to deliver those. The ones for sale can be built at phase three; they can be built later and a developer can take that profit. You have to be able to allow someone to be able to deliver the first piece as well, at a commercially sensible level, to make a profit of some sort. We all know that delivering affordable housing-the house builders that have done it have always done it at cost.

Q132 Mark Pawsey: Did I hear you rightly say that there were no reputational reasons why institutional funds could not go into the private rented sector? If that is the case, surely yields are acceptable now, given that rental values have been increasingly largely because firsttime buyers have not been able to buy. What really is holding institutional funds back from coming into the private rented sector?

Nick Jopling: There is nothing today for an institutional investor to buy. If you went to any of the major pension funds and they said they wanted to invest £300 million into the private rented sector, there is nothing for them to buy.

Q133 Mark Pawsey: They would not be prepared to develop it; they could not work with a developer and fund something through a developer.

Nick Jopling: Core pension funds look at lowrisk investments. Development and planning risk are both high risks, so they would want no development risk and no planning risk. You need to take those risks out of the equation, and they are only interested effectively in a stabilised asset-an asset that is full of tenants, operating, providing a net income. They would be able to put a value on that.

The exercise, and the one that was referred to in the example, where Grainger had partnered with Glebe, which is a construction company-not a house builder but a construction company-to try to deal with that cost of entry, all four sites that we put forward are on public land. They are in the London Borough of Barking and Dagenham. They are at Thames Gateway. They are in Maidstone. Those are public land sites where Glebe has a development partnership to develop on that land, and then we have teamed up with them to effectively look after them once they are built. The difficult bit is we now have to go and get institutional money to invest alongside it. That is an exercise we are going through at the moment.

Mark Pawsey: We wish you well.

Q134 Chair : Just coming back, the issue is we have land, and there is the public sector land you just mentioned; you have got developers like yourselves who can also manage properties in the longer term; and we have got institutions with money that would like to take investment. The trick is how we can get those together, is it not? What are you saying are the key obstacles to achieving that?

Nick Jopling: They are those three things-scale, suitability of stock and yield-which means buildtolet, rather than buytolet, is providing the scale and it is also dealing with the suitability of stock. Therefore, we have to deal with the cost of entry and that is why we are interested. We and I think other people in the sector for a long time have tried to find a way to bring institutions into this market of the public land initiatives or the partnership with public land to enable these types of properties to be built.

Q135 Simon Danczuk: You were saying that there is potential for buildtorent in the UK. That is a potential solution to some of the housing problems that we have got.

Nick Jopling: Buildtorent in a social side and build-for-private-rental, yes. I think we are at an absolute moment now when the opportunity is here for bringing the institutions into the market.

Q136 Simon Danczuk: You do a lot in Germany. What is the experience there in terms of institutional investment and the opportunity to do what we are talking about?

Nick Jopling: The German market is very different from the UK market. We do have a portfolio of 7,000 properties in Germany, but they are on our own balance sheet, so we do not have an institutional investor or partner. They are all ours, as it were. Institutional investment in the Germany property market is actually less than one thinks. I am not an absolute expert on the German market, so I will be steady as far as I go. A lot of it is a very large private rented sector and it is a highly regulated sector. It is largely owned by metropolitans and regional ownership and corporations that were created after the War. There was a time when a number of institutional investment funds went into Germany in the mid-2000s with the hope that they could take advantage of the arbitrage between the rental value and the open market value, in a way of breaking those properties up and encouraging Germans to own their property. That is not the German culture, on the whole, with the exception of one or two cities where there is a bit more of that culture. That is a very flat incomedriven regulated market, very similar to our own social housing market actually, but not heavily institutionally invested into.

Q137 Simon Danczuk: David Lunts used to work at the HCA, did he not? Is there still potential in the HCA Private Rental Sector Initiative, in terms of London? How important is it?

Alan Benson: I think the Private Rental Sector Initiative has been formally terminated. What they are looking at now is the HCA coming into London, and ourselves looking at how the model would work. I would disagree slightly with Nick perhaps on a couple of things, inevitably, being a person responsible for the spatial planning in London. I think he is completely right in terms of his analysis of what the key problems and most of them seem resolvable. The problem around scale is resolvable; there are lots of developers in London and internationally that could come in. We have met many of them over the last few years, who have come in and built the scale to let at scale, and do so in other countries. Their problem in terms of reputation and longterm management and costs can be resolvable. They talk about working with a housing association, for example, as a management agent, or working with someone like Grainger, who has a very good reputation. The reputation issue can go away; the management ones can. What is very difficult to make go away is the yield question. How do they make the yield stack up? That is the absolute crux, in my mind, of why institutional investment has not got off the ground in the UK and that is the crux of the discussion about whether it should be allowed to not have an affordable element, and whether it should have free land to be able to have underwritten rent guarantees, etc. There are various tweaks that are other forms of subsidy.

If you accept, as it is, that section 106 affordable housing requirements are a tax on the house building-if you did not have them, you could build more homes-we have section 106 affordable housing requirements because of our desperate need for affordable housing. You would need a compelling reason for taking those affordable housing requirements off a particular type of housing development. We do not have an affordable housing requirement for student housing, for example. If you build student housing, you do not also need to build affordable housing, but there has yet to be a compelling case made for why private rented housing should be exempt from the affordable housing requirement. Given that the last research we did into what happens to market housing in London, which showed that two thirds of it goes into private rental housing, we do not have a problem producing private rented housing, if we go for the market model, which would give us the affordable housing requirement.

Although we would very much welcome and like to see buildtolettype models come in, because of that quality it would potentially give in London, we do not think that that, in itself, is a compelling case in London to move away from an affordable housing requirement. It is very difficult for the yield for an institution to stack up, when they are competing with the dominant model of private renting, which is somebody who owns one or two or has a small handful of properties, and puts in an awful lot of spread equity, who in the end is reliant much more on the longterm capital uplift of that property, not on the returns to capital on an annual basis. It is very hard to compete against that in financial terms, for the institutions.

Q138 James Morris: The Government has made quite a big play about trying to get as much public sector land released as possible. How significant do you think public sector land is in terms of trying to solve this problem that we have in terms of housing development and supply?

Nick Jopling: I think in the South East and in London it is a very significant opportunity. It will not be suitable for every piece of public land. I think we perhaps went down a bit of a red herring about not having affordable housing in the private rented sector. As I said, I have not come here to argue or to debate, really, to push or debate that. Really, we should all be focused on just cranking up the delivery rate because, as was said right at the beginning, those numbers are compelling.

I gave another example about how we have partnered with the MOD at Aldershot to deliver a very significant number of houses. The Government still owns that; we have not bought it off them. We are not a landbanking company. That is an exercise where the Government has said, "We have a piece of land. We have a company out here and this is what they do. Partner up and bring us the maximum benefit, with the intention of delivering a significant number of homes, as well as providing a-"

Q139 James Morris: That is an example of build now, pay later, or is it similar?

Nick Jopling: No, what we are doing is we are partnered in that case. That is specifically where we are actually partnered with the Government, with the MOD, or the Defence Infrastructure Organisation, with the intention of maximising the value of the asset that they hold today, which is a garrison site that needs to get planning. It needs to be masterplanned; it needs to have a lot of infrastructure put into to make it work for Aldershot’s urban extension, as it were. That is all our risk; we are paying for that. As the partner, that is our sweat equity and that is our real equity. The land, when it is ready for delivery to house builders, will be offered into the market for sale. We will take a small share of the receipt; the Government will get the vast majority of it.

Q140 James Morris: Any other views about the importance of public sector land?

Alan Benson: The potential there is obviously very, very large. There is an enormous amount of public sector land, much of it becoming surplus to requirements for those who own that land. The difficulty is there is a very large difference between land owned, for example, by the HCA, by the Regional Development Agencies as were, in London and by the Mayor, which is land owned for the purpose of building housing regeneration; and land owned by the Ministry of Defence, the National Health Service, local education authorities and all those others, which are responsible for something very different indeed. If you are the Ministry of Defence and you are required to replace your missiles, and are given the option instead of handing over some land at a lessthanbestcost deal to build some homes, that is not a compelling case to make to the Ministry of Defence. They would rightly say back to you-and I have had many conversations with them and many other Government Departments over a number of years-that if you want to build housing, you should put the money into the housing budget and pay the Ministry of Defence for that land. Their compelling case is to sell the land for best return and reinvest in what their job is to do, as defined by their Minister.

If the Government wants to bring land forward in these Departments at less than best value, it needs to make the case very clearly, at the height of the Cabinet perhaps and Prime Minister that this is a priority, which is why where it does seem to work, where this happens, it is at local authority level, where you have a local authority leader and they can have a clear vision of what they want to see as their priority, which would be affordable housing. Not every local authority does, but when they do then they are willing to overturn the fact that you all do not purely seek best return on that land.

Q141 James Morris: On that point about local authority, and it may be a quick question for Nick as well, you talk about your defence initiative. Clearly, local authorities are sitting on a high percentage of the public sector land. Have you seen an appetite, if you like, for local authorities coming forward with land and wanting to do interesting equity deals? Is that something that has potential, do you think?

Nick Jopling: We are partnered with the London Borough of Hammersmith and we are doing something in Haringey. This is a local, regional, sitebysite agenda. You have to take each one as the most suitable way, and to be able to have the flexibility to understand where does one want to get to. If it is a buy now, pay now, you-

Q142 James Morris: It is about the effectiveness or otherwise.

Nick Jopling: Yes, on a deferred equity basis, let us say. What we mean by that is that a piece of land, as a car park or as an unused piece of council land, has no value today because a house builder is concerned about the market he would be selling into, the cost of remuneration, the cost of putting infrastructure in, the cost of getting planning-the receipt for a council might be very unattractive. It says, "Why would we sell it now when the market is so low? These are our crown jewels. Once we have sold them, they are gone." There are suggestions and discussions, and Birmingham has started these, so it is not just Londonrelated. Their discussion is with a company called Evenbrook, where the suggestion is to say, "Actually, if one were to imagine that piece of land with a hundred units built on it that were rented out, for example, and you get the splits, the net operating yield off that has a value. If it is 5%, it is 20 times multiple that. If it is 4%, it is 25 times multiple that." In a very simple way, that is how the institutions value commercial property. That is how they value their shopping centres; how they value their office blocks and the like.

If we could create something there and then say to the local authority, "You enabled this to happen, so you have a share of this. You have a share of something that your partner has delivered and your partners have delivered," back to the Chairman’s point, "being built with money, the construction and the asset and property management." Those are the three bits to join together. Those are the sorts of thoughts that people are having. "Buy now, pay later" sounds as though it is the Government being legged over. That is not what it is supposed to be. This is about responsible and proactive thinking about how to get to an objective in the best way, because everyone has a bit of asset that they can put into that to make it happen.

Q143 Chair : If the local authority will get value back from the land, it tends to assume it will get a lump sum at some point, which tends to assume that the property would be sold. Is that not a problem when you might be actually looking for a longterm investor to come in and keep the property for many years?

Nick Jopling: It is a good point. If one was to say the land was worth 10% or 15% of the finished product, it can either be done by the institution buying it out at the end of the day and just buying into the whole, because you would structure it into a fund rather than property by property. The worst thing one could do is to break up the actual building and sell 20% of the units off. If the Canary Wharf tower sold off floors 16 to 20 to anyone, you have then broken the investment model. Your point is right: you do not want to crystallise it through a sale of individual units, but you can always value something for what it is worth and sell a stake of it. It might be in shares rather than in property.

Q144 George Hollingbery: You are not saying this could be hugely difficult politically, locally, but that you could derisk the projects further by the planning authority granting permission on its own land for something they consulted with locally, which people want, which fits and which looks right, and have that ready with a neighbourhood development order, have it ready to go. Is that something that we have seen? Is it happening anywhere? Should it happen?

Alan Benson: I cannot say I am aware of it happening anywhere yet; with the Government’s planning reforms, it may well be our target in this area. This is how the Government are looking to rethink the planning system. That kind of readytogo development proposition would be quite effective in taking all the planning risk out of it.

George Hollingbery: It would be huge, would it not? It would make a huge difference. You could get local buyin for it, too. You can actually get it designed by local people for local people. How much better would that be?

Q145 Mark Pawsey: Sticking with social affordable housing, I have a couple of questions probably more targeted at Mr Benson, but what is the longterm impact of the affordable rent model, particularly with what may be happening in London? I wonder also if you could comment on the changes to housing benefit and how they might impact on housing associations’ ability to gain finance.

Alan Benson: The longterm impact of affordable rent: affordable rent does enable us to develop a lot more homes with a lot less Government funding, without a doubt. Government funding, instead of being the lion’s share of the cost and grant of building a new affordable rented home, becomes a very small proportion, and the rest of the money is brought in by the registered partner through the higher rents borrowing against that and using their own resources, etc. It makes less money go an awful lot further for homes. The impact of course is that it does so by having higher rents. You had this discussion with the previous speakers about the impact of that on welfare benefits in the housing benefit system.

Quite clearly, we had a lot of conversations ourselves and an awful lot with CLG, the Treasury and DWP about how this programme would work and the impacts. I do not think there is a turf war going on now or was a turf war going on before the programme was settled, in terms of what the costs would be. A particular concern for the Department for Work and Pensions was the amount of homes they would have to convert from the existing stock of social rent to affordable rent to fund the programme, because each one of those would have a direct housing benefit impact.

Q146 Mark Pawsey: To go back, you think that the higher affordable rent will encourage more social housing to be brought forward. To that extent, you support the idea.

Alan Benson: It will bring a lot more homes forward than would have been done otherwise in the old model with the same funding; that is absolutely the case. It provides more homes. There is a key difference, I think, and this is something that Boris, I remember, remarked upon; it certainly struck him. He was concerned about the impact on benefits when we talked to him, and the key difference between this and the early 1980s "Let the benefit take the strain" model, when we moved to housing benefit rather than social house building, is that at least here, where the benefits are being paid into the sector, they are staying in the affordable housing sector, not going to private rented landlords. Therefore, they will be recycled for further affordable housing development. There is a less negative impact on the housing benefit costs.

Q147 Mark Pawsey: You do not subscribe to the view that the new affordable rent regime makes rents unaffordable.

Alan Benson: No, the Mayor does not subscribe to that view at all. An interesting thing: I had an opinion not too dissimilar to that when I originally looked at the issue. The phrase "80% of median market rents" sounds like something very unaffordable. Interestingly, I could almost do a little chart now to try to show you because this is hard to explain. The graph of market rents, the curve of market rents, is that there are very few at the bottom that are very, very cheap. There is an extraordinarily flat curve and then a very few at the top that are very, very expensive. At the top, you have Roman Abramovich and his friends living at the top. We do not worry about him. At the bottom, you have people who are renting either from friends, from family, some tied accommodation or just really awful HMOtype properties. That is the vast majority of the bottom. In the middle, there is a very flat curve because the private rented sector, unlike house prices, is very supplyanddemand driven. It is very, very sensitive to price signals.

Actually, if you look at the flat signal and put a point in of 80% of the median market rent, in every bedroom size in London and every benefit area in London, that falls within the lowest 10% in absolute price terms of what prices would be. So 80% of median market rents is in the bottom 10%, the bottom decile, of actual rents that are charged. The only way you could find a home at that rent level, in any area in London, is to go to the really poor-quality affordable homes. This way they are going to get a decent quality home with a decent landlord. It is actually a reasonably affordable rent, looking at private rents. That was actually quite striking when I saw those figures. It is more affordable than people might think.

Q148 Mark Pawsey: And the impact of the changes to the housing benefit system in terms of security and income as far as housing associations are concerned.

Alan Benson: In terms of the interaction with affordable rent and the housing associations, we have been very careful with the programme in London. We have had a lot of negotiations and discussions with the registered partners; we were very clear what we wanted. It is that all the rents in the affordable rent programme in London should work within the Government’s existing caps that are coming in for local housing allowance and the proposed caps on the universal welfare cap. All the rents being charged in London will be below LHA level, so they would not have been impacted by those caps anyway, for all sizes of properties.

We wanted to make sure that all sizes of properties would still be affordable to tenants under the future caps that are being charged. This has meant they have had to suppress the rents down for the larger family homes, which would have been the ones that were most impacted by the universal cap. The programme we have had in London has an average affordable rent of 65% of market rents, but quite a lot of the one and twobeds are towards the 80%, and most of the threebedplus home sizes, the larger family homes, are right down at the bottom level, very close to target rents for social rented levels.

Q149 Mark Pawsey: One last question for Mr Smee: do you see that housing associations will be able to raise funds on the bond markets in future?

Paul Smee: Indeed, I do, because I think the bond markets are already providing quite a significant proportion of their income. Some 37% of their capital needs were raised, compared to 5% some time ago. It is there. I cannot say on what terms the bond markets will be open and I suspect that they will be looking for security of income as well, and that the changes to the rent systems proposed in the Welfare Reform Bill will cause some uncertainty until the pilot schemes are worked through and those impacts are understood.

Q150 Mark Pawsey: Do you see that as a new sort of finance that could potentially deliver new homes?

Paul Smee: I am sure that it is a source of finance. I think the terms on which it is made available is something that I cannot speculate on at the moment, because that, of course, will depend on the level of demand.

Q151 Chair : A couple of points: on REITs, do we expect the Government’s proposals, when they come, to actually get them working in a way that we have not seen any evidence of so far?

Alan Benson: Possibly.

Nick Jopling: I think what you are referring to specifically are residential REITs or REITs for residential. Again, the Government’s intention or indicated intention, listening and consulting around the residential REIT agenda, alongside the changes they have made to SDLT and to the stamp duty on the entry, particularly on these larger scales, could both only be described as positive interventions, as it were, to getting institutional money into this market. We hope on 6 December, which I think is the date that there will be an announcement about that, that some of the consulting has been listened to and then we may find ourselves being able to get some REITs. I go back to the point: there are not, in the private sector, large tranches of investmentgrade stock out there. The momandpop business dominates that market.

Q152 Chair : I would be interested to have a note about your thoughts about the Government’s proposals when they actually are announced. I think that would be helpful. Finally just one point: the private rented sector has more people moving into it who probably want some security. Investors look for longterm returns. Why do we not see longerterm tenancies offered and taken up, or should we be looking to have a variety of tenancies?

Nick Jopling: That is a very relevant question. The answer I have often given to that question is: why would a landlord give a longer tenancy to a tenant if they were asking for a discount to have that tenancy agreement? That is what has traditionally been the case. They say, "If we take it for three years, what will you knock off-20%?" Once you get into a point that there is no discount applying or there might even be a premium, and somebody says, "Actually I am prepared to pay a little bit more or agree to what the uplifts will be over a period of time," then I think that a longerterm tenancy is something that landlords would welcome actually. I do not think there is any resistance. It is a personal view as to why we do not see so many. There is nothing to stop landlords giving longer tenancies now and, indeed, some people do give them.

Chair : Thank you all very much indeed for giving evidence to us.