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

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

COMMUNITIES AND LOCAL GOVERNMENT COMMITTEE

NEW HOUSING SUPPLY (FINANCING)

MONDAY 19 DECEMBER 2011

WAQAR AHMED, COUNCILLOR PAUL ANDREWS, STEVE BINKS, SIR STEVE BULLOCK, MARK BUTTERWORTH, DAVID EDWARDS, CHLOE FLETCHER, MARK HENDERSON, DAVID ORR and NIGEL TERRINGTON

Evidence heard in Public

Questions 153 - 274

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Communities and Local Government Committee

on Monday 19 December 2011

Members present:

Mr Clive Betts (Chair)

Heidi Alexander

Simon Danczuk

Stephen Gilbert

David Heyes

George Hollingbery

Mark Pawsey

Heather Wheeler

Examination of Witnesses

Witnesses: Councillor Paul Andrews, Member, Planning and Housing Commission, Association of Greater Manchester Authorities, Mayor Sir Steve Bullock, Housing Portfolio Holder, London Councils, David Edwards, Executive Director, Housing and Regeneration, Oxford City Council, and Chloe Fletcher, Policy Manager, National Federation of ALMOs, gave evidence.

Q153 Chair: Good afternoon. Welcome to our third evidence session of the inquiry into the financing of new housing supply. Thank you for the written evidence that you have given so far and for coming this afternoon. For the sake of our records, could you begin by saying who you are and the organisation that you represent? It would be helpful, and we will just move along from there.

Sir Steve Bullock: Steve Bullock, representing London councils.

Chloe Fletcher: Chloe Fletcher, representing the National Federation of Arm’s Length Management Organisations.

Councillor Paul Andrews: Councillor Paul Andrews, Manchester city council, representing AGMA.

David Edwards: David Edwards from Oxford City Council.

Q154 Chair: In the evidence that you have given us so far, there is quite a bit of reference to the reforms of the Housing Revenue Account, which was a policy of the previous Government that is being implemented by this Government. It has generally got a reasonably good welcome from most housing organisations. How do you think it will help, if it will, to increase the amount of new housing that will be provided?

May I say, right at the beginning, that if you feel that you are in general agreement with something that has been said before, you do not have to repeat it? If you are clearly in disagreement, tell us so, otherwise we will probably move along with a general view that what has gone before is acceptable to you.

Sir Steve Bullock: Potentially, HRA is a very significant aid to local authorities beginning to secure the additional housing to be built either directly or through partners. There are a number of questions about how that will happen. To make it work in London, we have had a report done for us that indicates that boroughs will need to work together, but also that it would be helpful if central Government looked at some of the issues, such as swapping the headroom that it may create for us. Different boroughs will be in different positions, and if we all work together and are able to swap that around over time, we may be able to secure even larger numbers of new supply.

Chloe Fletcher: For the vast majority of councils, self-financing will be a very good deal and will allow them properly and efficiently both to manage their assets more positively to help maintain their stock and to deliver some new build, but unfortunately for some, the debt cap being introduced at the same time as self-financing will limit the amount of new build that they will be able to deliver. The previous Government had looked at increasing that debt cap to allow some extra new build, and the coalition has currently decided not to do that. To some, that will be a big barrier to engaging in new build in the future. We would like to see that reviewed with a view to allowing additional investment, based on the rents and a decent business plan that shows that a well managed organisation such as an ALMO can deliver that return and deliver some new build for that investment using the rental income. We would like to see that.

We have done some work around new models if that debt cap will not move. For those ALMOs that are looking at a significant gap in their investment, we have developed three models that we would like to see the Government support. Changing the ownership of the ALMO from 100% controlled by the local authority to a shared company that the local authority has a stake in but does not control any more would allow the ALMO to borrow additional moneys privately, which would not count on the public sector borrowing sheet. Therefore it would allow some ALMOs to complete decent homes if that is what is necessary, maintain stock, do regeneration but also significantly add to the new build properties in the country.

Councillor Paul Andrews: Nothing to add.

David Edwards: I would just add that, from an Oxford perspective, where we welcome the HRA, the borrowing cap would still allow us to undertake some development, but certainly if that was raised we would wish to take the opportunity to increase stock.

Q155 Chair: Has anyone managed to quantify or look at what it might mean if authorities were able to swap? Some authorities that have borrowed money that they may not use could give it to an authority with no capacity to borrow for new build. It might be easier in London than in the rest of the country. If we had a prudential limit rather than a more restrictive cap, what might that do to increase the supply?

Sir Steve Bullock: The first thing we have to say is that there are a lot of uncertainties around working these figures out and there is much more work to be done. We are estimating, potentially, £1 billion borrowing headroom in London. I have to say that some of that will also have to be used for finishing off decent homes programmes. That will not all be there for new build, but a significant part of it will. Again, that will vary depending on where individual boroughs are with their programmes. I think that is a conservative estimate, but we don’t want to get carried away with figures which prove not to be sustainable at this stage.

Q156 Chair: Has that been looked at by any authority?

David Edwards: Yes, but because of the peculiarities of AGMA and the 10 district councils it is early days yet and we are still getting through the politics of this.

Chloe Fletcher: We come at it from a slightly different angle as London councils are having to do more work on this. We would obviously have to do more work on this to firm up the numbers. We have looked at how much our ALMOs are developing at the moment and then potentially what sort of numbers of units they might be able to produce in future, given the sites that are there if the finance was available. At the moment we have 23 developing ALMOs across the country, roughly looking at possibly a development programme of between 50 to 100 properties each. That is what they are aspiring to at the moment. If all those 23 were enabled financially to do that, it would deliver up to 7,000 by 2015. If we then looked to the other 37 to join in, we would be considering a longer time scale because they would need a lead-in period but you could look at up to an additional 30,000 over the further five years, so another eight years. But you would obviously have to make sure that things were in place to support those ALMOs and local authorities to make them confident to start a significant development programme.

Q157 George Hollingbery: This sounds extremely interesting and I get the vague outline but can I just give you a scenario and you could describe to me how this might work? Council A has no land but lots of borrowing headroom and council B-Lewisham-has lots of spaces to build but little in funds. How would the agreement work? Who agrees to what? How does sovereignty transfer? I am not quite sure how this works.

Sir Steve Bullock: In that scenario, it is probably the other way around. Lewisham is a bit short on land. But in essence, what you would need to do is come to an agreement between the two boroughs that, effectively, you have a joint development in the borough that has the land, but with the funding from the borough that does not. You would then share the nomination rights: you would have to apportion it, even if the land and the money were not even-you would work all of that through.

We have actually got quite good at working together over the past decade. Certainly, in the past couple of years under the financial pressures that we face, local authorities have been developing very rapidly ways of working together, so it would not necessarily be an alien concept. It also would not have to be boroughs that were immediately adjacent to each other-it would be easier, but it would not have to be.

Q158 George Hollingbery: Presumably, reducing housing benefit rates, LHOs and so on mean that having links between widely separated boroughs might actually be quite useful, if you stop and think about it for a second.

Sir Steve Bullock: Yes, and certainly in London. It depends on the scale of the development, but if it was a relatively small-scale development, you would be looking at issues around employment patterns and whether you actually had residents who needed to be relocated across the city. Probably, it would end up being a much more complicated arrangement with more than one borough involved-so that you were able to get the nominations to the places that they needed to work-but the principle would remain the same.

Q159 George Hollingbery: This sounds to me as if we could easily separate this out. We could separate out where the housing is needed and who needs it from the banking element. Is there any particular reason why you could not have a national pool of headroom?

Sir Steve Bullock: We have looked at it only in the context of the London boroughs, so I do not actually know how the figures stack up outside London. That is partly because London has some very particular housing issues-the land values in London are so dramatically different from elsewhere. I am not saying that it would not work, but what we have looked at is specific to London.

Q160 George Hollingbery: I will comment and just perhaps invite a comment back: it sounds very complicated. It seems to me rather like any financial transaction-if you do it too small, you might end up eating up all the benefits in transaction costs. Is there a danger of that?

Sir Steve Bullock: You would want to look at the scale. I am conscious that, drawing on my own authority, over the past seven or eight years we have learned huge amounts about big complex programmes. We were in phase 1 of Building Schools for the Future, so we have actually got capacity among our officers for doing relatively complicated programmes that involve a number of agencies. We could transfer that learning across fairly readily to housing. Indeed, that is what I have tasked my people with doing at the moment.

Q161 George Hollingbery: Which brings me neatly on to, probably, Mr Edwards. In Oxford, is this something that can work at your sort of scale, or would you have to transfer this or use it with another conurbation close by or with another place with appetite close by?

David Edwards: I think we would have to scale up, you are right. We could not do it, particularly at the local level. Also, if you look across areas and counties with a similar distribution to Oxford-you have one major urban conurbation-a lot of the other surrounding districts will be rural in character, and therefore will not have capacity or, indeed, the appetite to promote major social housing, I am afraid.

Q162 George Hollingbery: Councillor Andrews, presumably Manchester is looking at this. We visited Manchester on a previous inquiry, and it felt like it would be the ideal sort of place for this to work. Is that true?

Councillor Paul Andrews: Yes, and within the AGMA authority it probably would be. Just picking up your point around that national stuff-I think housing subsidy account is the phrase-the danger with that, from our perspective, is that it would all be skew-whiffed towards the south-east. There is no problem with actually looking at something like that, so long as we have some guarantees and benefits-that it is going to stay in the area where it is generated.

Q163 Simon Danczuk: I want to ask about Right to Buy. Do you think a sizeable proportion of people move into council properties in anticipation of then taking up the Right to Buy in purchasing the council property? If yes, what proportion do you think do that?

David Edwards: I do not believe that is the case, but I believe very firmly-it was evidenced in Oxford last time we had significant Right to Buy discounts-that people who had been there for some time, even if they could not raise the money for the mortgage themselves, were assisted by friends and relatives or financial intermediaries to come in and secure property at discount. This then revolved around, usually into private letting again, and gave us very significant problems. It is a major concern where I come from. We have very high property values, but in fact wages are fairly low overall, so it is Midlands wages and London prices. There is a significant financial incentive for people to come in and use the system if they are offered a major discount.

Q164 Simon Danczuk: What do other people think about the possibility that some people are moving into council properties in anticipation of using Right to Buy?

Sir Steve Bullock: In the demand that we are dealing with in most London boroughs, it is not a question of people setting out their stall. We are housing people off the waiting list pretty much only if they are in extreme housing need. It is not currently something that I would be concerned about. We are conscious that a lot of the best stock went, anyway. Most of the stuff built in the last 10 years was built by housing associations, not by the council. We are holding our breath on this one. We are not sure that this is going to be a major issue for us. If it is, clearly it would be of concern.

Councillor Paul Andrews: We are not inundated with masses of requests for Right to Buy. As you know, Manchester’s housing is basically handled by the registered providers in the ALMO. Of the registered providers that I deal with, one of their main concerns is that a 50% discount on Right to Buy might encourage a lot more people to apply for it. It is about losing a lot more stock than we are able to build in the areas. However, I am not inundated with masses of requests for Right to Buy, because people are having difficulties getting mortgages.

Chloe Fletcher: It is a cyclical thing. At the moment, we have very low levels across the country, because of the economic situation. We also house some of the most vulnerable families in the country, so I do not think it will be a sizeable proportion. However, I share my colleagues’ concern that were the discounts to be increased to a significant level, you would then find other people attracted to making money through that transaction, and we are quite mindful of that. Also, it would possibly encourage families who are on the edge as to whether they could sustainably afford it. It might encourage them to do it when it would perhaps be unwise to do it. It is about making sure that it is a sensible decision for that family.

Q165 Simon Danczuk: What action do you think the Government should take to ensure that Right to Buy contributes to the supply of new homes?

David Edwards: Several things would help the situation. First, the level of discount. If a very substantial discount is offered, as you have heard, this will potentially lead to people and third parties looking to profit out of it. It would help if we could see the receipts returned to the local authority. We would need a significant proportion of those receipts because, in our context, for example, to provide a two or three-bedroom family house will cost us, the council, at least £300,000. The more we are left short, the more we are not going to be able to finance or replace housing stock.

Also, it needs to be thought about in the context of overall housing supply. We have major issues in terms of land supply and the ability to find alternative sites. We actually find sites for housing associations to develop. The council is proactive in this. It is not left just to the market or just to our housing association partners. The Government might wish to consider alternatives. For example, a more graduated, shared equity approach over a number of years might forestall some of the more dramatic potential profiteering. In other words, tenants or residents could purchase a proportion of the equity of the house over time. Indeed, local authorities might have the right to buy back at the end of the day at value, so we could recycle the unit.

Councillor Paul Andrews: I would go a bit further by suggesting that the local authority should get 100% of the receipts under the Right to Buy. I am not totally opposed to Right to Buy; we just need to ensure that everybody benefits.

Q166 Simon Danczuk: So that you can replace stock?

Councillor Paul Andrews: Yes.

Chloe Fletcher: We support that. It is critical for the self-finance business plan that you are able to retain receipts from assets that are sold at a discount in order to maintain that business and to re-provide locally. The solution for re-providing locally will be different in different areas of the country, but it is critical that the decision is made locally.

Q167 George Hollingbery: Just quickly on that very point, it seems to me that there is a danger that you then just recycle money in higher value places. Actually what you very often need is money in lower value places. If the 100% gets recycled into Oxford or Westminster or Chelsea, it does not get recycled into Manchester.

Chloe Fletcher: There are very high needs in those high value areas as well. We would support the idea of a self-finance business plan being both a revenue and a capital one. That would allow the best use of resources locally and a more positive asset management programme. If you want to encourage low cost home ownership as an option, there are ways that could be found to do that other than increasing the Right-to-Buy discounts and then recycling that locally.

Q168 Simon Danczuk: Do you think there is a possibility that the Right to Buy could soak up the limited mortgage finance that is currently available out there? Is that a worry?

David Edwards: I think it will undoubtedly take up some of that. I do not know whether it will take up all of it. It is a very thin market, but also the number of people buying is pretty low. It will certainly take capacity out, but how much is difficult to say.

Q169 Simon Danczuk: You are among friends here, so you can be completely honest. I get the impression that you are not overly enthusiastic about the Right to Buy. Do you see it as some sort of resurrection of Right to Buy and a sort of throwback to an ideology of the 1980s? It might have been right then, but it is not right now-

Sir Steve Bullock: Fire up the Quattro.

Simon Danczuk: Do you agree with that or not?

Sir Steve Bullock: I certainly do not agree with it, or at least I would not express it in those terms. If the housing crisis that we had was not about supply, I would probably be quite relaxed about Right to Buy. It is because the supply problem is so great that I am very nervous about taking stock out of a pool that is not big enough even as it stands.

Chloe Fletcher: We are very concerned about the impact on the self-finance business plan. We are just about to go into the self-financing future that we have all been waiting for, and if Right to Buy increases dramatically because of the changes, I just think that that is very likely to damage those business plans and make it very difficult for councils and ALMOs to manage that.

David Edwards: I will just add that, the last time that Right to Buy came in, caps had to be introduced in certain areas, including Oxford, because the level of discount was seen as excessive. We have some experience to tell us what happened before.

Q170 Simon Danczuk: Let us hear a northern perspective on this.

Councillor Paul Andrews: I promised faithfully that I would not be political today. I am not opposed to the idea of Right to Buy, but one of the difficulties for me, especially from my part of the world, is that it tends to be all the three-bedroom-and-parlour-type houses and the four-bedroom houses, and if it is not the people who have been living in them for 40 years who are buying them, it is actually the children, who then get the mortgage for the parents, and there is the opportunity at some point in the future to take it over. That takes all the large, family-type houses out of the stock. Unless we get some sort of commitment or some way of actually replacing those larger family houses, it will put the stock in even more difficult positions.

What I tended to find in the past is that it was not bits of north Manchester that were sold; it was actually lots of south Manchester. I sometimes have four four-bedroom houses on one estate that are social housing, because the rest have been bought over the years under Right to Buy. That does not mean that I am opposed to it. It just means that we need to be a bit cleverer in how we replace the stock of houses that we are losing through Right to Buy. The new houses may also eventually come under Right to Buy, but we need that commitment to progress, otherwise you will just end up with the stock in the city, which is not suitable.

Q171 Stephen Gilbert: I am resisting the temptation to fire up the Quattro and go into Simon’s question there. We have had some very mixed evidence on the introduction of affordable rents, and I think that you have all raised concerns about the impact that they will have on the future of house building. Can you briefly explain what those concerns are, and, perhaps more usefully, how it can be made a more sustainable financing mechanism?

David Edwards: To make it more sustainable as a financing mechanism, it needs to be much more graduated and applied to local markets. Starting at 80% and saying that that is the level that we kick off at and that there is not much flexibility presents us with significant problems. We gave you the figures in terms of local housing allowance and where 80% leaves us. We recognise the potential need in some cases to raise more revenue from the system, but applying it this way makes it incredibly difficult.

As a product of that, we also faced some difficult discussions with, for example, our housing association partners. On the one hand, they respect and understand the local market conditions, which mean that 80% isn’t going to work for a lot of people whom we have a duty and an obligation to house. Yet, on the other hand, their business model is being driven firmly in the other direction. That gives them major problems in terms of their relationships with us and in terms of looking ahead and financing for new development. So, for example, we have four housing associations that we work with, firstly, in Oxford. Only one of those has secured grant and it has a very small programme. It is, frankly, finding it difficult to take tactical decisions about whether to maintain social rents that reflect the economic circumstances of many of its tenants or, alternatively, whether to look to house others who can afford at 80%. It is posing a real dilemma in terms of who are they there for.

Councillor Paul Andrews: As a city, when this was introduced, we were asked to have a view of whether or not we were supportive of affordable rents. It was felt by us that we should not actually dictate to the registered providers in the area as to what we think their view should be. What we basically did was leave it up to the registered providers, through their own business plans, to decide whether it actually stacked up. One of the difficulties in our part of the world is the fact that it is not sustainable without some sort of capital input from the providers.

Sir Steve Bullock: We are concerned that it may work for this period of time and deliver the level of properties we are talking about. Although until those properties start to be let, we cannot be quite sure how that is going to work because asking people to take them on at significantly higher rents than they would have been doing a year ago may pose some issues. In the longer term, we do not see how it is sustainable. It is a very debt-hungry approach. RSLs are in different positions, but, certainly, some of them will now have very high gearing. Certainly, in some of the informal conversations we are having, some of the larger RSLs are saying, "Well, we can do it until 2015 but, beyond then, we are going to have to find a very different model."

Chloe Fletcher: Unfortunately, ALMOs have been disadvantaged in the current HCA investment round. The rules changed in terms of what is counted in their value-for-money assessments. Any borrowing that they do on top of the grant received is now counted. So they have not generally been very successful in this round-a few of them have, but not generally. We would like to see a change in those rules to allow them the opportunity to get involved. Some of our members see affordable rent as a very good option for part of their stock. For ALMOs to develop, we would also like to see local authorities being able to transfer voids into the ALMO to help subsidise that delivery model. There is a potential for more affordable rent to be done through the ALMO model if certain regulations and bureaucracy were changed but, again, I do not think it is a long-term solution to all the housing issues. My members would like to continue to develop social housing alongside affordable rent, and to have that as a mix-and-match option.

Q172 Stephen Gilbert: Do you have a comment on Steve’s point about it being quite a debt-hungry and gearing-intensive mechanism?

Chloe Fletcher: Yes. Undoubtedly, it relies on voids in the stock being let at the new increased rents. It would also need a lot more investment from the ALMO land and borrowing. It is something that can be done a little bit more for the short term, but we need to look at a wider range of options for the longer term.

Q173 Stephen Gilbert: On the debt issue, people were talking earlier about the debt cap. Do councils have an appetite to take on, with RPs and other partners, higher leverage in the market?

Councillor Paul Andrews: Yes.

Chloe Fletcher: There is a significant amount of availability based on the rental income. It is unfortunate that this debt cap artificially limits that. We are not as highly geared in the local authority sector as housing associations are, by a long shot.

David Edwards: I would just add one qualification on that, which is that it clearly depends on the type of debt. There were a lot of concerns that were allayed in terms of going through the HRA reform. The offer through the Public Works Loan Board was made, and I think that a lot of local authorities were concerned about entering the debt market, about whether they had the right expertise and how they could calibrate risk. That will not be the same for all local authorities, but managing that debt, in particular at the current time, is pretty critical. If you are talking to banks at the moment, in terms of borrowing finance, I am advised-I happen to be the chair of a housing association as well-that there are only four in the market and the terms are extremely tight. Therefore, there is significant additional risk and potential for failure.

Q174 Stephen Gilbert: I want to move on to the changes to housing benefit but quickly, in your experience, do you think your councils have the expertise to manage the complex debt arrangements that the changes might lead to?

David Edwards: I think we do, but I don’t believe it’s universal.

Councillor Paul Andrews: I think we do.

Chloe Fletcher: I think that across the country it varies.

Sir Steve Bullock: I think many of the London boroughs could, but we would also come back to this working together-it is the areas of expertise-and if one borough doesn’t, I’m sure we can come to arrangements.

Q175 Stephen Gilbert: Some people have suggested that the changes to housing benefit might affect the ability of RPs and others to borrow. Is there any evidence of that that you can point to at the moment?

David Edwards: I can point to the fact that we are having to factor this in to our business plans going forward as a council, and certainly as a housing association, too, we are having to make additional provision for not only managing it but for seeing arrears increase.

Q176 Stephen Gilbert: Sorry David, what percentage arrears do you think there will be an increase from and to?

David Edwards: This is entirely speculative. We’re just doing contingency planning, but we might see our arrears go up by 50%.

Stephen Gilbert: From?

David Edwards: From something like 2% to 3%-something of that order.

Councillor Paul Andrews: Yes, it’s going to increase.

Q177 Stephen Gilbert: The arrears will increase?

Councillor Paul Andrews: Yes.

Q178 Stephen Gilbert: In a similar order? Have you made any analysis of it?

Councillor Paul Andrews: The registered providers are doing their own analysis because each area of the city is different. There will be a cumulative impact across the city, but each of the registered providers does a different one.

Chloe Fletcher: All my members are saying that arrears will increase. I don’t have any details to hand, but they are having to make bigger bad debt provisions within their self-financed business plans.

Sir Steve Bullock: Again, we would agree with that. I don’t have figures. We think that switching to paying the rent directly to landlords is likely to exacerbate the problem.

Q179 Mark Pawsey: I wonder if I might ask you some questions about the Government’s initiative with regard to making public land available. I think, Mr Edwards, you said that shortage of land was one of the big problems. Do you think that the Government’s incentives and direction to make public land available will go any way to help solve the housing problem?

David Edwards: I think they are very welcome, and there is no doubt that there is significant potential in public land. I would also have to reflect that Governments have tried this one before, and getting public land brought forward has proved difficult. As a council, we have gone out and purchased land. We work with developers to bring forward their own sites so we are working proactively, and certainly we are working our own estate to the maximum. We referred in our paper to the fact that we have had a disappointing experience working with a Government organisation in terms of their bringing forward a site, which is a strategic site in Oxford, for housing. They have had it for 10 years, and we cannot get them to partner us and the HCA, which is very disappointing.

Q180 Mark Pawsey: You have done something on a joint venture on your own land. Can you tell us a bit about that?

David Edwards: On our own site we have a big scheme at Barton of 800 homes. We set up a framework and a partnership with the Grosvenor estate-Grosvenor Developments. We are providing the planning, the expertise and the land.

Q181 Mark Pawsey: So, this was previously your land?

David Edwards: Yes. We have brought them on board and shortened the procurement process so that they are providing infrastructure and the technical expertise. They will not actually build the homes themselves; we will then bring in house builders to build out the phases and to ensure that we have a high-quality development. Effectively, we have got a relationship with a master developer and funder for a period of probably five to eight years.

Q182 Mark Pawsey: May I ask the other witnesses how you see the Government’s incentives to release public land having an effect in your areas?

Councillor Andrews: If I may speak about the Wigan exercise that we are going through at the moment, it can only be beneficial as long as it is done in a strategic way. The worst possible scenario would be to hold a fire sale of public land or public buildings without any sort of direction as to what is happening. Wigan is looking at sitting down with all the public bodies that own the land, bringing it all together and asking, "How can this best suit all of us?" We have also created the Manchester model, which will hopefully be rolled out across Greater Manchester. We have gone into partnership with the pension fund and identified five sites in Manchester. The council is putting in the land, the pension fund is bringing in the money, and hopefully we will have 250 new builds on that land. Ideas like that will progress things, but if we are talking with partners about public land or buildings, it is fundamental that that is done in a strategic way and not just by a fire sale.

Q183 Mark Pawsey: And are there any obstacles to public bodies making their land available?

Councillor Andrews: They need to be up for it-that is the best way to describe it.

Q184 Mark Pawsey: How can they be encouraged to be up for it?

Councillor Andrews: Well, usually grabbing them by the nuts gets them-[Laughter.]

George Hollingbery: Is that an official position?

Councillor Andrews: It is easy to turn round and say that you are going to sit down with a lot of people and talk about how best you can cover everything, but you have got to get them wanting to do that.

Chloe Fletcher: ALMOs have been quite good recently in ensuring that parcels of unused land within a council’s social housing estates have been properly developed. They have been particularly useful in grouping those disused garage sites or grassy areas on estates that attract antisocial behaviour and cause problems in terms of management. They have actually provided very useful homes in the community and concentrated on meeting specific housing needs such as large family units or wheelchair-accessible bungalows, or whatever the need might be locally. Unfortunately, the barriers that I alluded to earlier in terms of the HCA programme this time round will prevent a lot of that work from being done. The debt cap on the self-financed business plans will prevent councils from doing that directly. If those sorts of barriers were lifted, it would give an incentive to councils to develop that particular land. Nobody else is particularly interested in it; it is locked away in a council estate. Housing associations have had the opportunity for the past 20 years possibly to develop it, but nobody has wanted it because it is awkward, expensive and not in the right place for them. It makes total sense, however, for the managers of those estates to use that land more effectively.

Sir Steve Bullock: Again, I think London has particular problems because of the high land values that we are dealing with. I sit on the Homes and Communities Agency London board, and we are working closely with the London Mayor who has influence with a number of organisations that have big land holdings. We are conscious that there are currently sites out there that are not being bought out because the schemes are not viable. We are also focusing on trying to find innovative ways to get those schemes-where often the planning permission already exists and the land is in public ownership-actually built. I can see Heidi nodding because there is one of those schemes in her constituency and she is constantly demanding to know how we are going to sort it out. In the longer term, getting land released will be important, but that is probably not the biggest short-term constraint, at least in London.

Q185 Mark Pawsey: Each of you represent public bodies that hold land, and presumably there are occasions when development would be desirable but the finance is not available. What do you think of the Build Now, Pay Later scheme, and do any of you recognise a site in your own areas where you could use such a scheme to get land developed that otherwise would not be developed?

Sir Steve Bullock: That is the kind of scheme that we will have to look at, and how they stack up in detail will be something that we need to work through. In principle, if we can find ways of sharing the risk and getting some funding to begin schemes, we can break into that. I also have to say that there is competition for any land that is out there. You talk to any London borough at the moment, and their education departments are desperately looking for sites for new primary schools. There are other challenges than simply getting hold of the land.

Chloe Fletcher: Certainly some of my members have already identified some sites where that would be very useful.

Q186 Mark Pawsey: So they would be quite happy to see the land go to a private sector developer and let him do that and then get the proceeds as the houses are sold.

Chloe Fletcher: For some sites, yes.

Councillor Paul Andrews: We are not doing Build Now, Pay Later. What we are doing is an equity scheme. We are giving up the land and letting people build on it, but we are then getting equity on the properties.

David Edwards: Build Now, Pay Later is already well established. It was happening two or three years ago and I was doing it when we went into recession. It is not new. It works and our relationship, say on the Barton scheme, is that we, as a council, will not see any money out until houses are built and the developer secures a first return. There are no problems with that at all.

On the public sector land, some of the key issues have often not laid necessarily with the agency or the owner, but with the Treasury. Those issues are to do with securing an adequate return or what the Treasury sees as the best return, rather than staying in some of these schemes for the longer term.

Q187 Mark Pawsey: But would your success with Build Now, Pay Later mean that you would recommend it to other parts of the country that may not have considered it?

David Edwards: Absolutely.

Q188 Heidi Alexander: Councillor Andrews, I think that you just touched on something that I want to ask a couple of questions about, which is your equity scheme and investment into new private rented housing. In your submission, you spoke a little about it. Can you just tell us how that is progressing and how close to actually seeing homes coming out of the ground it is?

Councillor Andrews: It’s a report going to the January executive.

Q189 Heidi Alexander: Can you tell us who the investors are in the scheme?

Councillor Andrews: Yes. It is the GM pension fund.

Q190 Heidi Alexander: Okay. So the discussions with them have gone well, if it is going to your executive in January.

Councillor Andrews: We have an executive in January, and hopefully, if it gives us the approval-I can never guarantee what the executive will decide-we will then be going out on procurement. Once that is in place, we will hopefully get a builder building by November 2012.

Q191 Heidi Alexander: How many homes will that deliver?

Councillor Andrews: The pilot’s 250.

Q192 Heidi Alexander: Is there interest in the Greater Manchester area in rolling that pilot out further?

Councillor Andrews: Since we have launched the pilot, there has been contact from other investors, who are very interested in what we are doing around there. People basically want to see whether it works, so if, within the other nine authorities, they see it working in Manchester, they are more than happy, through the AGMA set-up to pick up on it and run with it.

Q193 Heidi Alexander: What sorts of issues have you had to address with your investor to come to an agreement about how to move forward? Did they see potential pitfalls? Did they have concerns?

Councillor Andrews: We are more than happy to provide the technical report to the Committee, with the detail, because, as you will appreciate, I deal with the big stuff. If you need a technical report and how it is happening, with all the potential pitfalls, if there are any, I am sure that we can provide that.

Chair: That would be helpful.

Q194 George Hollingbery: Just to add to that, when we were in Manchester, we had a dinner with the council and various other property developers. There was some feeling around the table, I think the Committee recalls, about the problems of procurement and EU rules on procurement and how much that was stopping everything happening in Manchester. If and when you address that report, I would want a little section on this particular development, to see whether it might be an issue.

On the New Homes Bonus, your paper suggested that there were better ways of distributing it by calculating all payments at band D, rather than across the spectrum.

Councillor Andrews: An average across the bands.

Q195 George Hollingbery: That is an interesting idea, although there are issues with it. Clearly, there is 125% of council tax available at the bottom and, actually, if there is a limited marketplace for all sorts of houses, you might as well finance the most expensive ones that you can get built, so why would you not aim to build lots and lots of four-bedroomed, high-value, social houses, so that you can get two bangs for your buck? I am not too worried about that, although you may want to comment on it a little, but generally, to you first and then more generally across the panel, does the New Homes Bonus make you, as a council, build more homes? Does it incentivise you?

Sir Steve Bullock: That’s almost a pure Catch-22, because I would not want to say that it did not, because it is useful to have the money, but in my part of London, that is not what will decide whether we get more houses built. We want to get as many homes built as we can, so it simply does not work as an incentive for us, because we do not need any greater incentive. It will be an interesting question to pose to some outer London boroughs that are very precious about not having much building in their areas, however.

Q196 George Hollingbery: Councillor Andrews?

Councillor Andrews: Maybe. It does not put us off building new homes.

Q197 George Hollingbery: Do you make any calculations based on it, saying, "Right, we better give the planning department a kick up the backside and get on with strategic planning, because we are going to need this cash because we have lost so much from central help."?

Councillor Andrews: No.

Q198 George Hollingbery: You do not think about it that way. No one plans that way.

Councillor Andrews: No.

David Edwards: I can give you a practical example of where it works the other way. We have a site that the city council owns, just in the adjoining district-4,000 homes. It was allocated for residential development as soon as the regional spatial strategies were abolished. That site was taken out of planning. Now, 4,000 homes would mean an awful lot of new homes bonus for an adjoining council, and it clearly did not persuade them-and we desperately need those homes.

Q199 David Heyes: Chloe Fletcher, at the beginning, you outlined the NFA’s proposals for new models for ALMOs, and some interesting ideas. What do the Government need to do-what action must they take-to get some movement on this?

Chloe Fletcher: We do not need new legislation or anything; what we really need is CLG and the Treasury to engage in the detailed discussions with a couple of the councils that are very interested, with their ALMOs, in moving this forward. We need things like Secretary of State approval for either the long management contracts or the stock transfer, if tenants vote for that and that is the way they want to go under the new proposed model. We need Treasury to be engaged in the discussions to ensure that it is off the public sector accounts and that it is all done to their approval.

Q200 David Heyes: Are there any indications of Government interest along the lines that you describe?

Chloe Fletcher: We have had some very warm discussions with DCLG and I know that one of our members, who wants to take this forward, has also been discussing this with BHCA and CLG, so we are very optimistic at this stage, but we do need Treasury to engage in those discussions.

Q201 David Heyes: That’s the problem, is it-lack of Treasury involvement?

Chloe Fletcher: At the moment. We have not been told that it is not interested; it is just that we are waiting for a meeting.

Q202 Chair: Presumably, with the new models that you are looking at-we have heard very interesting ideas about that mock-up arrangement-in terms of finance and what we were looking at before, about moving the headroom around between different authorities, all that would be unnecessary if borrowing by housing bodies was not counted against the PSBR and was counted as a trading activity.

Chloe Fletcher: Yes. We would urge the Government to take the opportunity of self-financing to review how council housing borrowing is classified in the accounts. If you have the new, self-financed, ring-fenced, well managed business plans that are based on rental income, we see that perfectly fitting into the European definition of a trading activity rather than something that is dependent on taxation.

Sir Steve Bullock: I agree. If you could shift the Treasury, we would be delighted.

Chair: That may be the final challenge that you are going to issue us this afternoon. Thank you all very much indeed for coming to give your evidence to us.

Examination of Witnesses

Witnesses: Mark Butterworth, Director, Residential Landlords’ Association, and Nigel Terrington, Chief Executive, Paragon Group, gave evidence.

Q203 Chair: Welcome to our third evidence session. Could you indicate at the beginning who you are and the organisation you represent for our records?

Nigel Terrington: I am Nigel Terrington, and I am the chief executive of Paragon Group. I have been chief executive for the last 16 years, and we are the largest independent buy-to-let lender in the UK. I am also deputy chair of the Council of Mortgage Lenders, and I sit on the Treasury’s home finance forum as well.

Mark Butterworth: I am Mark Butterworth, and I am director of the Residential Landlords Association and a private landlord from Manchester. We have engaged in a lot of construction and delivery of properties over the years. I am responsible for policy at the RLA, and we have had a recent report done by Professor Ball, whose conclusions may well figure today. If anybody wishes to have a copy because they have not already been circulated with one, I have several with me.

Q204 Chair: To what extent is the private rented sector in future going to contribute to the supply of new housing? Have circumstances so changed that it is not going to do that directly in future, or do you think possibilities are still there to be explored?

Nigel Terrington: The private rented sector and the funding thereof of new build construction has not really been a particularly large component of that market. From our experience at least, landlords tend to buy secondary market properties, rather than new build. So of the financing going in, there is probably an indirect benefit that comes through to that. I think the principle reason is that there is usually a new build premium, and, as a consequence of that, landlords are a little reluctant to want to pay 5% or more extra for the added benefits of the new build only to think that they could buy it as a cheaper or better value investment in the secondary market once it is a few years old. So I think it is of limited benefit to the new build construction market.

Mark Butterworth: The private rented sector can contribute very greatly with the division of smaller units and by providing infill development in existing areas. There is nobody better at doing that, and the very reason why they achieve the best value for money conversions, provision of smaller subdivision of properties and provision of infill new build are as Nigel quite rightly says.

But we do have a role in enabling development. Where there is a development, particularly in a good residential area that is likely to let, very often landlords will help the development by providing some deposits, or have done in historical terms, that allow a development to go ahead that might otherwise not have been viable. So if you have a fairly expensive plot in a reasonable location without some forward funding or some support from investors, those buildings or developments may never have got off the ground.

Q205 Chair: In general terms, are you assuming that the demand for private renting will continue to grow but that it will mainly grow from existing stock?

Nigel Terrington: Yes, very much so. We are in the middle of a transformational stage in housing in the UK. It probably started in the 1980s with a change in the outlook of Government policy and has then moved on to social and demographic change as it has fed through to population movements, either immigration movements in or the way in which the population wants to house itself today. That has been compounded because of the credit crunch by the lack of availability of finance for first-time buyers. I think all of those components are set to continue for some time to come, so the current share of the housing stock that the private rented sector holds, which is one in six properties across the UK, we see set to continue. I can see it comfortably going through 20% of the UK housing stock, which on an international basis does not put it out of line, frankly, with many other countries.

Mark Butterworth: We have had a report done, and the findings have really concerned us. We are concerned that there is going to be quite a lot of disinvestment in the private rented sector because there is so little return. The costs keep going up and the tax base for providing the property keeps going up. Without some hope of capital gain, it is very difficult to justify investment in PRS property at the moment. We appreciate the actual costs of funds are high, but the increasing regulation costs and the increasing tax base make it more and more difficult to provide accommodation there.

We have concerns that the PRS has had a high level of supply and that has continued for the last three years, because a lot of people have chosen not to sell, or are unable to sell, at the prices they would realise, and therefore, when prices rise, there might be a considerable amount of disinvestment. This is one of the major findings of Professor Ball, which we were concerned about, and he has independently assessed this very much the same.

One of his other findings is with the difficulties in the balance between the sectors, because you have a social sector that is subsidised with building costs and with land, and a private rented sector that has a high tax take from it, so the seesaw is quite imbalanced at the moment. As rents would gradually rise with inflation, so the tax rise is going up. This has been a big concern, and about £3.5 billion is taken out of the private rented sector every year in tax. We appreciate it has to pay its way, but when owner-occupiers and social renters do not pay anything, the private rented sector is shouldering a large burden of the tax, to the tune of around £1,000 per annum per tenancy, which is something that really has not been realised much before.

Q206 Heather Wheeler: I am interested in the availability of mortgage finance and whether that has affected the private sector area; are they able to come into the market? Are mortgages out there for them?

Nigel Terrington: This is very much on our patch, in that the availability of finance for landlords has been heavily constrained because of the general conditions of the financial markets and the general availability of finance as a whole. Compared to where life was in 2007-that may not necessarily be a good benchmark; it may have been a little frothy perhaps-you can see lending today is around 70% lower than where it was in 2007, and product availability itself is around 80% lower than where it was, so in real terms, buy-to-let has had a good year. It is one of the only growing sectors within the mortgage space, but it is actually a big percentage on a very low number.

The key aspect is that the lenders before 2007 in this space were dominated by specialist lenders. It is a niche product, so it tends to play into their hands. So with organisations like our own, where we do not take deposits and fund ourselves very prudently for 25 years at a time through the securitisation markets, overnight, that access was denied. If there is one single, most important funding route to support the mortgage market as a whole, including the private rented sector, it is to enhance the availability of securitisation funding. For far too long, it was regarded as one of the causes of the credit crunch, which I think is very unfair on what the UK had done about that source of funding, whereas you see today that it is probably the single most important piece of finance that will be available to banks and lenders generally to support the mortgage market into the future, and including, within that, the private rented sector. It really is crucial.

Mark Butterworth: I agree with that. One of the things that generated so much growth in the private rented sector was the rise in profit, and people would realise those profits or take out that investment to reinvest in the PRS. That is not something that can happen now. We appreciate things are very different in London from where they are in the rest of the country. With valuations, if you have the same property valued now from 2007, there is probably a 30% drop, so a lot of landlords are very constrained by high loan-to-values and therefore, the professional sector is unable to expand.

There are more medium-sized landlords than the CLG statistics show. There is quite a wide variation, but-the surveys found, and Professor Ball’s report, and the numbers of larger landlords-with the costs of bank finance having gone up, loans have gone from base to LIBOR, which effectively means twice the base rate payable at the moment. Margins have gone from 1.25% or 1.5% to 3%, 4% or 5%, so the cost of finance is very high for that middle tier of larger private or smaller corporate landlords. That is a professional sector that really is completely constrained at the moment.

Q207 Heather Wheeler: Is that to do with the price that is available or is it to do with risk, which is why the price has gone up?

Mark Butterworth: We have not even gone into the risk factor. The valuations have gone down considerably, so there is no equity to release to generate deposits for new properties. As far as the cost of that money is concerned, whereas you were paying 5% on base rate before, you are probably paying 5% on the base rate of 0.5% now for many of those middle-ranking businesses.

Q208 Heather Wheeler: Do you feel that if there is going to be an influx of Right to Buys, it will constrain what you can do because there is only so much money out there in the market?

Mark Butterworth: Right to Buy is different, because it is at a reduced valuation, so it would not be comparable to the private rented sector. Buy-to-let is very different.

Q209 Heather Wheeler: I was really just thinking about how much money there is available out there for people to borrow from.

Nigel Terrington: There is a general level of constraint. The banking sector as a whole is-to use the term that it uses-deleveraging. It is shrinking, which literally means that there is less money available. If it is rationed, it will be rationed at a higher price as a consequence.

Going back to your earlier point, it is important to make it clear that the cost of finance to landlords has gone up, but the cost of finance to banks and lenders has gone up commensurately. Today, if Lloyds bank or Barclays were to issue an unsecured bond they would have to pay LIBOR plus 400 basis points. We did a deal recently-the first securitisation of buy-to-let loans since 2007, not only for us but for anyone in the UK-and it cost us LIBOR plus 275 basis points, compared with maybe LIBOR plus 10 or 20 basis points four years earlier. The costs have gone up generally, and banks are also having to hold a lot more capital than they ever did before, so in order to generate a return-not necessarily a great one, but a return-there is a cost to pass on to customers.

Q210 Heather Wheeler: Are you not looking for money from alternative sources, and going into partnership with pension funds or whatever? Could you not do it as a straight deal that way, so that they are an equity partner in your group?

Nigel Terrington: Equity is not the problem; debt is the problem. We could have access to plenty of equity. We are a public company and we have many pension funds and insurance companies as our shareholders, and they have been ready suppliers of equity to us. The world is short of debt, not only in our market but in the banking sector as a whole, and not only in this country. That is because, a little bit like first-time buyers are being required to have bigger deposits, banks are being required to hold larger amounts of equity. If we want to borrow from the banks or from the pension funds and insurance companies, they require larger amounts of equity. The availability of the ability to leverage-borrow against your capital- has gone down across the world.

Mark Butterworth: There is one large untapped source of capital, which we and others have mentioned to the Treasury, namely the money in pension funds that could be invested via SIPPs. If it were quite easily constrained to cover any Treasury requirements, so that a SIPP could only invest in one property to rent out, for example, which would then be let through a letting agent, and the gearing rules were that it can only be geared up to 50% so it would pass any affordability test-

Q211 George Hollingbery: Self-invested personal pensions?

Mark Butterworth: Yes. There is an awful lot of money sat there on cash and deposit earning very little, and it could generate so much momentum in the private rented sector into the economy as a whole. Every £1 that gets invested into property or construction generates a return of £3.50 for the economy. Okay, there are complaints, and people say that there would be some tax loss. There would not be, however, because there is no tax gain; that money is largely sat there. If it were for a time-limited period, it would provide a boost to construction, support jobs and provide more homes. It does not really matter where homes come into the sector; if there are more available, they will move up and down the ladder to go where the demand is.

Q212 Mark Pawsey: We have seen the private rented sector grow, and I think one of you quoted that it was up to 20%. There was a fear that, because of low rates of return, disinvestment was taking place and, therefore, there might be pressure on the size of the private rented sector. Mr Butterworth, you said the reason disinvestment was taking place was the lack of capital gain. By implication, people up until now have been willing to accept a low rate of return because of the possibility of capital gain. If we take away the capital gain element, which does not currently exist in the market, what kind of rate of return do private landlords expect to achieve?

Mark Butterworth: The calculations in the report indicate that we need a return of between 8% and 10% to generate a sustainable yield, to be able to run the property to a decent standard and to cover the increased tax take. If you have had a property for some time, there are no capital allowances for depreciation. As the property wears out, after 10 years it is going to need quite a bit of refurbishment work. That comes as a capital gain, but you cannot claim it against income.

If there isn’t a suitable return, property will deteriorate, as it did after the war, because there was no money available to reinvest in it. So, you get a withdrawal of capital by lack of reinvestment, as well as any further investment. The tax take rises with the tax-with the rental burden-in addition to the take over recent years from SDLT, increased income tax and increased VAT, which of course you cannot reclaim.

Q213 Mark Pawsey: Okay. That is an historical problem, because capital values were higher.

Mark Butterworth: The tax take is increasing all the time.

Q214 Mark Pawsey: In the current climate, capital values are falling, but we know that, because of the difficulty of getting hold of mortgages, rents are increasing, as there is more demand in the rental sector. Why is there not sufficient return? With lower capital values and higher rental values, why are people not piling in to the rental sector?

Mark Butterworth: Because rents have not increased. They have decreased in real terms quite considerably over the past three or four years because there has been quite a heavy sort of supply. If you go back 10 years, the actual real return on rents has dipped quite considerably.

Q215 Mark Pawsey: The actual amount of rent paid has increased. We have had witnesses sit in front of us and say, because young people cannot get mortgages any more, they are having to rent properties, and that is putting pressure on rental demand and rents are increasing.

Mark Butterworth: But in many areas of the country they have not increased much in three years, and they have not kept up anywhere near inflation. If you think that we have had inflation of 5% in the past year, there might have been 5% rent increases in London, but you certainly haven’t had that in the rest of the country. You might have had 1% or 2%. That has been going on for a while.

Q216 Mark Pawsey: All right, but let me put it to you that capital values have fallen, so that in turn, even if rents remain the same, if the capital value falls the yield improves. Why is that not enough for your members?

Mark Butterworth: Because their capital is invested in property that has depreciated in value, so they haven’t got any further funds to be able to invest.

Q217 Mark Pawsey: How about people considering entering now? The yield must be much better today than it would have been.

Mark Butterworth: It is.

Q218 Mark Pawsey: Why are those people not coming to the market as things stand?

Mark Butterworth: Because it is perceived as a risky business, and there is uncertainty in the market. Values are edging down, if anything, so people may be sitting it out and waiting.

Q219 Mark Pawsey: The yields are continuing to go up at a fixed level of rent.

Mark Butterworth: Not necessarily because costs are going up so much more, so yields are being eroded. The costs of running a property keep going up, the tax take keeps going up and there is more and more regulation coming in. If you think of inner city landlords: they have got selective licensing costs to do, article 4 regulations, they have had a lot of hangover from the Housing Act 2004, the costs of deposits impact heavily on running a business. Those margins are being squeezed all the way through, so your actual return is very low and it is not having sufficient impact on the yield. Just because rents are going up the odd per cent here or there, or a few per cent in London, that is not generating enough to cover that loss of yield.

Q220 Mark Pawsey: So, do you see the size of the private rented sector shrinking over the next few years?

Mark Butterworth: That is the conclusion of the report, and it is a very real concern and one we are very worried about. Because looking at the number of buy-to-let mortgages that have been taken out-and we can only guess at the amount of bank finance-there are about 300,000 properties that should not necessarily be in the private rented sector. The presumption that Professor Ball has come up with is that they may well be trapped, that they may be unwilling renters but they are in the private rented sector.

Q221 Mark Pawsey: They may be accidental landlords.

Mark Butterworth: Yes, and if prices do rise, or as age takes over they start to disinvest, then those properties may well be lost to the private rented sector.

Q222 Chair: To come back to the tax point briefly. You mentioned SIPPs and the possibility there for creating an environment that might encourage people to put their money into the private rented sector. You also mentioned the idea of a private rented sector expansion scheme, but when we had the business expansion scheme previously, there was some criticism that it was very short-term focused and it did not get long-term finance into the industry. Are you worried that the same effect could result from the sort of scheme you are proposing?

Mark Butterworth: There are more than 200,000 SIPPs. If 25% of those SIPPs elected to make an investment into a rented property, that would still be 50,000 properties, which would be a significant increase. It would also boost the market and help to generate more investment if stock was sold. It would get things moving and encourage house builders to build more if stock was being sold. The business expansion scheme did not generate the figures that were hoped for in 1989. There was a big depreciation in the market then, but it did have an effect. There were enough units to make it very viable and it was a useful contributor to the economy and the housing stock.

Q223 Chair: Have you any figures you could give us on your forecast of the effect of the measures you are proposing in terms of taxation changes?

Mark Butterworth: I would certainly be prepared to pick up more figures on the number of SIPPs. Professor Ball has not gone into too great a detail with this, but, anecdotally, a lot of people come to us and say, "Why can’t we invest in this?" You get a lot of inquiries where people say, "Why can we not invest in private rented property?" It is an anomaly. Other countries can invest pension funds into rented stock. Of course, there is a big move towards institutional funds being able to get into private rented stock and the Treasury is, indeed, making some dispensations in terms of REITs. That may allow some pension funds into private rented stock. With Manchester, previous witnesses were happy to invest their council funds-the Greater Manchester pension fund-into the private rented sector. Why is that not good enough for others?

Q224 David Heyes: Precisely. Evidence from various parties has suggested that the conditions are there for large-scale institutional investment. From your evidence, I guess that you-both of you-are more sceptical about the scope for that.

Nigel Terrington: I have some observations on a number of points, but, on the specific aspect there, I am very sceptical that the institutional money has a very big role to play. The housing market is very fragmented and dominated by individuals who buy property very much on a local basis. We will probably know from our own experience that, when buying in one town, you can get things right in this part of the town compared with that part of the town. That is true of landlords as well.

The other aspect is, when you have a large institutional approach, you will have the fund management structure. You will have corporate governance requirements and a localised network within which that property needs to be sourced, managed and dealt with. So, by the time you load all of those costs on, you have to compete with what Professor Julie Rugg called the "sweat equity" of the local landlord, which means that they do it for free. They do not charge themselves the cost of managing that property. It is not an easy opportunity for institutions to compete effectively, with the local landlord doing it for nothing.

If you look at other countries, sometimes Germany gets pulled out of the hat and it is said, "Look, Germany is an institutional market." What goes on there is very mis-stated. In Germany, the small, private landlord is four times the size of the institutional money that is in that market. Going back to the pension point, the average age of the private landlord in Germany is very much in the pension category. They are very much at the older end of the spectrum. They are doing this because they are generating a yield and an income for their retirement and it seems a long-term and safe form of investment, particularly when trust in the City is at a low point. Do you really want to put your money into equities or bonds at present? Or would you rather put it into property, where you feel you can kick the tyres on the investment that you make? I am very much backing the idea that money should be allowed to be invested via a SIPP or some form of pension wrapper.

Q225 David Heyes: Or bonds? You mentioned bonds.

Nigel Terrington: Bonds backed by property, yes. That is the same thing. I do not think that property should be a viewed as a short-term investment. It should never be looked at as that. The typical investment hold period that our customers have is between 15 and 20 years per property. That is not unusual. It is expensive to get in, it is expensive to get out and it is illiquid as an asset. Therefore, do not take a short-term view on things. I would be a little nervous about a rerun of the Business Expansion Scheme that could suddenly see people investing in the sector purely for a tax advantage, as they did back in-whenever it was, the early 1990s-only for them to exit at the first possible moment. It should be a long-term game.

Mark Butterworth: But that exit was generally into the PRS, so the property very often stayed within the sector.

Just one or two things on the institutional investment-we have been going to the British Property Federation for 20 years, and of course it has many big members who have been very keen to get into, or to pick up, large-scale investment in residential property, but it has never actually sort of happened. Some figures-4.5% of properties in London were bought in 2006 by institutional investors, so it is only a small part of the market.

The corporate part, as Nigel says about Germany, is about the same ratio in England-about four to one of private landlords to corporate landlords. Yes, we welcome investment from them, but it is not likely to make much of a difference, and they would be more interested in London, where there is a much greater prospect of a capital return to boost their yields, than they would have in many other areas of the country where property is perhaps needed at least as much.

Q226 David Heyes: What would need to happen to make it more attractive?

Mark Butterworth: The most useful thing that could happen would be roll-over relief for capital gains, so if people were disinvesting they could move their portfolios, they could update and they would not have to lose so much of their investment through capital gains tax. There is a bit of an anomaly, because valuations have gone down, but very often there is still a capital gains tax bill. A lot of landlords do not have enough equity in their property to be able to sell and pay the capital gains tax, so that is a major problem. If they could reinvest that property, it would allow many to perhaps update their portfolios.

The other thing would be indexation of capital gains relief. As you get a depreciation of property-as it goes down in value, as it is rented out over a period-it will require reinvestment. If you have the value of a flat that was done 10 years ago and one now there is a difference between them. The difference between them is the depreciation. That goes into profits, and is taxed as profit for the landlord currently, because he has no allowance for depreciation. It artificially boosts margins, and landlords get taxed on that, so some restoration of that via capital gains taper relief would be a very useful addition to that.

Chair: Thank you both very much indeed for coming here this afternoon.

Examination of Witnesses

Witnesses: David Orr, Chief Executive, National Housing Federation, Mark Henderson, Chief Executive, Home Group, Steve Binks, Group Director, Finance and IT, Place for People Group, and Waqar Ahmed, Group Director of Finance, London and Quadrant Group, gave evidence.

Q227 Chair: Good afternoon. Thank you very much for coming to our final evidence session before Christmas-someone had to be in this slot-on the financing of new housing supply. You are all most welcome. Could you, for our records, just indicate who you are and the organisation you represent?

David Orr: David Orr, Chief Executive of the National Housing Federation.

Waqar Ahmed: Waqar Ahmed, Finance Director for London and Quadrant housing group.

Steve Binks: Steve Binks, Finance Director for Places for People.

Mark Henderson: I am Mark Henderson, Chief Executive of Home Group.

Q228 Chair: Thank you very much indeed for coming. As I said right at the beginning of the first lot of witnesses, there are four witnesses and if you find that one of your colleagues has said something that you are content with, there is no need to repeat it. Of course, if you disagree profoundly, then please do not hesitate to tell us.

You have just signed new contracts with the Homes and Communities Agency under the affordable homes programme. Could you just tell us whether you were content with that process, and the position that you and your organisations are at in that regard? Are there any particular issues arising out of that which you think we should be aware of?

Mark Henderson: I’ll start then, if I may. I think we would be content with the process in that it is the only game in town in terms of providing finance to provide new affordable housing in the country. Therefore, I think the process was relatively sound. We have now signed with the HCA for a programme of circa 4,000 new homes, both in the north and in the south of the country. As earlier evidence givers have said, though, this process based on affordable rent is a debt-hungry model. For us as an organisation, and I think across our sector, we are relatively well-geared-something like 55% or 56% at the moment. This round will take us to mid-60s gearing. Potentially, we’ve got to do one more round, but it is a self-limiting funding cycle that I think we would find.

Steve Binks: There’s no reason why it shouldn’t work. I agree with everything that has just been said, but it does open up the opportunity maybe to expand the model to get equity into the sector, which is something that we put into our submission.

Chair: We probably will come on to that bit later.

Waqar Ahmed: We are content with the model. We recognise that it provides additional grant funding to much-needed housing supply in London. It has created some affordability issues for local authorities. What we’ve done is develop our own affordability test based on an average income for households in London, which has resulted in an average rent being somewhere between 55% and 80%, averaging around 60% across London. That then means that we will have to raise more debt, become more commercial and take more outright sales risks, but that’s what we expect to do.

Q229 Chair: In general terms-perhaps David, you can help us with this-do you expect that the Government’s aim to provide 170,000 affordable homes by 2015 will be realistic? Do you think it’s going to be delivered?

David Orr: I think it’s realistic. Ever since the programme was announced, we’ve believed that it is possible to deliver that number of new homes. The potential problems may be that a whole series of assumptions have had to be made about the terms under which the contracts have now been signed. If those assumptions are significantly varied-we may want to discuss this further-that will make it more difficult. For example, with the renegotiation of section 106 consents, there is a whole lot of delivery that is contingent on section 106 as part of that 170,000. There are other factors, such as the way it relates to the welfare reform agenda. Yes, it is absolutely possible to deliver 170,000 new homes, but there may be factors that will make that difficult to do. They weren’t really part of the original thinking, but will inevitably have an impact.

Q230 Chair: Do you think that some of those concerns will be bigger issues for smaller associations than for the larger associations that we’ve got here today?

David Orr: They will be concerns for everyone, to a greater or lesser extent.

Q231 George Hollingbery: I’d like to examine a little further the geographical differences coming to, perhaps, some of the northern counties. Could you tell us how this works differently in different parts of the country?

Mark Henderson: I think it’s probably more inconsistent in the north. For example, an 80% affordable model will work in, say, central Newcastle, but 500 metres away, doesn’t work within that local community. There are some significant inconsistencies. Again, we’ve applied the affordability test to look at its suitability in a local area. Again, by regions or by county areas, for example, in Cumbria, to go to 80% of the market rent is almost a reduction in terms of the current rent that we charge, which is a reflection on the quality and nature of the private sector rented market in Cumbria.

Steve Binks: To some extent, it depends on the supply of housing in the region. It works best in London, the south and south-east, where market rents are much higher. I agree with Mark that there are areas where the social and market rents are the same, and in those areas, it clearly doesn’t work. It will produce a differential result in different parts of the country.

Q232 George Hollingbery: The Minister was telling us last week, when we talked with him, that the impact assessment suggests that there will only be a little extra finance required in housing benefit on the whole to finance this model, because they are going to be attracting people down from the LHA rates. Do you see that?

Steve Binks: I would agree with that. We’ve got a housing supply problem in the UK. We’ve got a particular problem in affordable and social housing supply, which is too small. I think the more you build at subsidised or sub-market rents, the more possibility there is of people moving out of higher-rent areas, then moving within a regulated sector, where rents are regulated and generally lower than they are in the marketplace.

Q233 George Hollingbery: You can see that working, you can believe that that is probably going to be the case, so there can be a model here where we can get new housing and it does not have to cost us a great deal more in housing benefit? We are not having this change from grant to benefit.

Waqar Ahmed: Although our experience is that the number of households that are deemed vulnerable or on low income is increasing in London, and therefore that will potentially have an impact on housing benefit.

David Orr: This depends entirely on how these new properties are allocated and who they are allocated to. Certainly, we have argued in the past that we need to have a much more varied housing market, with a much wider range of different rental options-near-market intermediate rent as well as social rent. The difficulty arises in this case if the affordable rent product-at some 80% of market rent-is overlaid with an allocations process that is designed for social rent. At the moment, the Government’s expectation remains that a social rent allocation system will, in the main, be used. If that happens, then the housing benefit bill will go up.

Q234 George Hollingbery: So what we are talking about is that, for this to work, you have to have a preference for those who can afford it. I know that that sounds daft, but the people coming down from the top had to be the people who get these new homes, therefore-net, net-at the bottom of the market, there is no additional social housing produced. Is that roughly where we end up?

David Orr: That is exactly the case. This model would have worked better if we had been able to provide additional social rented homes as well as the affordable rent. We are now in an environment in which the affordable rent is the only game in town, and to make it work, it leads to a net reduction in the number of socially rented homes. The potential problem about that is that if the people who need social rent go into the higher rented stock, then that will have a long-term impact on housing benefit. The nature of the supply problem is such that my guess is that, although in some markets it may work in the way Steve was suggesting, overall my expectation is that the housing benefit bill will indeed go up.

Q235 George Hollingbery: But in any event, because of the leverage issue we have just talked about, there is a time limit on how much of this can be done?

David Orr: Absolutely.

Q236 Simon Danczuk: What effect do you think that the move to paying housing benefit directly to tenants will have on housing associations’ ability to borrow?

Mark Henderson: There are probably a number of implications of universal credit and direct payments. Certainly in terms of arrears and covering arrears, we are investing in a customer service centre to manage our arrears. We have some concerns about the ability to manage that in real time, particularly for our customers who are changing employment type and moving between different kinds of benefit on a fairly regular basis, and how we would be able to keep a real-time assessment of any level of arrears. Would that suddenly manifest itself as 12 weeks in arrears, with very little notice for people? The cost of covering the arrears and of then managing debt recovery, again, would be quite significant. We were estimating that even if debt increased by 2%, the cost of covering that plus the management would cost our organisation circa £2 million. Then, I guess, there is the cost of our borrowing and whether there were any impact on our ability to borrow or on the rates at which we would borrow as a result of this knowledge of a lack of blue-chip revenue coming into the business.

Steve Binks: It certainly does not make it any easier or cheaper to borrow, but in the context of the amount that we borrow, and we currently have debts of £1.7 billion, our arrears would rise by probably the same as Mark’s-I guess, £2 million to £3 million. Our bad debts might be £0.5 million a year. So, in the context of the totality of the business, it is something that we ought to be able to manage. However, it will increase our costs of managing-we will have to have extra staff to manage that process-so probably £0.5 million to £1 million of cost increases, if you include staff costs. But in the context of the amount of borrowing, I think that we are confident that, while our costs will go up and therefore our surpluses will go down, we can manage the process.

Waqar Ahmed: Just to add, we did a pilot 10 years ago in L&Q, looking at the impact of direct housing benefit, and our experience was that arrears doubled. Doubling of arrears in L&Q would probably be about £5 million or £6 million-a one-off hit, but, again, overall within our cash flows that could be manageable, it can be argued. In addition to the additional staff that would be required to actually manage the process, we might be looking at a leakage of quite a significant, but manageable, amount of capacity. I have had a conversation with our rating agencies and they view London differently. Their view is that the overall rating of well-managed housing associations in London could be protected, because there is huge demand for housing. Therefore, in the event that arrears result in a potentially higher level of evictions, they still see a no increase in vacant properties. Nevertheless, that is likely to have an increase on spreads. So the net position is, we won’t affect borrowing capacity, but it is likely to increase borrowing costs.

David Orr: There is going to be considerable demand on housing association capacity across the board for this and for other reasons. Our estimate of the combined additional transaction costs-nothing else, just purely the transaction costs of getting the rent in and processing it-is about £90 million a year. That is £90 million of capacity that has been taken out to do something that is less efficient than the present system. That just seems like a very strange use of resources to us at a time when everyone is under very considerable pressure. It is worth restating that this is about a denial of choice to people. We have argued that people should continue to have the choice to have their rent paid direct to their landlord-not an imposition or an obligation on them, but to have that choice. Even just to do that would significantly reduce future additional transaction costs.

Q237 Simon Danczuk: You guys are the cream of the housing association sector. In a word, is moving to direct payments good or bad?

Mark Henderson: A high 80% of our customers say they want to maintain a direct payment to the landlord.

Simon Danczuk: So it is bad?

Waqar Ahmed: Yes.

Steve Binks: Yes.

David Orr: In a properly researched survey that we did across the country, 95% of residents wanted to retain the ability to choose to have their rent paid direct. I think it is bad to take that choice away.

Q238 Simon Danczuk: What other factors could affect the security of borrowing for housing associations?

Steve Binks: We have to deliver on our returns. We are a business, so we have to generate the revenues. We have to manage the business properly. There are external influences that we have to take account of. We are seeing relatively low general interest rates, but-I think it was mentioned earlier-margins are increasing considerably. We are all suffering from that. A whole host of economic factors are having an impact on us, but we have to manage the business as well to make sure that we do so it effectively.

Waqar Ahmed: My take is that the sector is hugely regarded by the investment community-very highly rated. Within that rating, some associations have higher ratings than others. There is an enormous appetite to lend. Lending conditions may be affected by what is happening in Europe and the spreads of investors, but that does not take away from the fact that there is an appetite to lend.

Q239 Simon Danczuk: Anything else, Mark?

Mark Henderson: I share those views entirely. It is seen as stable.

Q240 Mark Pawsey: Like Simon, I am going to flatter you. He has just described you as the cream, but between you, you represent the biggest suppliers of social housing in the UK. This is an inquiry about the financing of new housing to buy. Who exactly provides the finance? Who do you guys go talk to when you are looking to finance a new project?

Steve Binks: We go to four banks, principally, that could be clearing banks who are lending to the sector. We have bond issues on the stock market, where we go to wholesale bond investors. We will go on a road show and sell to the bond investors. As a company, we have also got US and Japanese investors, where we have had road shows and sold private placement stock to those sorts of people. We also have a retail bond, where we have sold our bond paper to the general public through a bond issue we did earlier this year. So we have a very wide base of debt investors. We have been seeking in the past few years, along with our colleagues in the sector, to widen and deepen that base.

Q241 Mark Pawsey: Are you all going to the same sources?

Waqar Ahmed: Historically, we have always raised finance mainly from the banking sector, but that has now diminished, because banks are unable to lend long-term. We see ourselves as a long-term investment. Therefore, more recently our approach has been debt capital markets. Two years ago, we issued a bond for £300 million. We were four times oversubscribed in the first hour of trading, demonstrating an enormous appetite for lending. We do not plan to go anywhere else until those opportunities exhaust themselves. If they do, we will look at private placement and other initiatives that Steve has described.

David Orr: It is certainly true that the history of housing associations has been bank debt. As other witnesses have said, that is much more difficult to come by. The terms of it-not just the financial terms-and the times have significantly changed. More and more housing associations are accessing the capital markets, and there has been considerable enthusiasm for housing association bonds. How far that will go, I do not know. There has been a lot of talk about institutional investment. Certainly, for standard bonds, there has been considerable institutional appetite for that.

Mark Henderson: I agree. I have one final comment on bank lending, which has been historically very favourable for our sector. It is clearly now becoming much more short-term money rather than longer-term opportunity.

Q242 Mark Pawsey: If you are all going to the same sources, it is part of the problem. You are all trying to compete with one another for a limited amount of resource. Is that a problem?

Steve Binks: I do not think that we have an issue at the moment. As Waqar said, there is a considerable depth of investor appetite to invest in affordable social housing in the UK. Investors see us as a safe haven, in effect. We have got very strong and stable cash flows.

Q243 Mark Pawsey: So there is no shortage of cash? No shortage of money available? That is the message I am getting from you.

Waqar Ahmed: I suggest there is probably a ceiling on how much investors would be prepared to invest in the social housing sector.

Q244 Mark Pawsey: Have we reached that yet, or is there still capacity out there that you guys can go and access if you have projects that are attractive?

Waqar Ahmed: In our case, I believe those opportunities are out there, but there will be fewer.

Q245 Mark Pawsey: So why aren’t we building affordable houses if the money is there?

Steve Binks: Because, at the moment, affordable and social housing production depend on a level of grant subsidy-

Q246 Mark Pawsey: So what we have established is that the availability of finance from the sources that you regularly use is not the problem right now.

David Orr: That is overstating it.

Mark Pawsey: That is the message that I am getting.

David Orr: I think it is overstating it. The traditional source of providing funding for new housing association borrowing was bank debt. That is much more constrained and much more difficult to come by. There has been a move towards the capital markets, particularly through bond financing. That has been successful and there is still appetite among institutional investors, because housing associations are an extremely safe bet. The issues are about the potential capacity in housing associations to secure that new borrowing, even in the capital markets. We do not at this stage know how deep the well of potential investors is. At present, housing associations are as good a place to invest money as anywhere else in the market.

Waqar Ahmed: Can I just add that there are some constraints? Those constraints are existing covenants with lenders. The main constraint is a gearing covenant. Moving to affordable rent will push up gearing, but gearing can only remain within certain covenants, and that creates issues with existing lenders. We are using our capacity. In our case, we have 10,000 homes currently in the development pipeline. We have more than £1 billion committed to development. We are using that capacity.

Q247 Mark Pawsey: If you could overcome some of the other hurdles, the message is that the financing is not the biggest problem right now.

Steve Binks: If you can make the projects pay and generate a decent rate of return, which at the moment depends on being able to charge affordable rents, and if you can have some Government grant going in, and the company that is borrowing is not approaching gearing constraints, then the answer to your question is yes.

Q248 George Hollingbery: I am intrigued by this. If that is the case, why can we not build any housing anywhere at any time? The answer is because there is effectively a very different situation of under-leveraged assets in the housing associations. They are worth an awful lot more than they are leveraged, and therefore they have not reached their borrowing covenants, and won’t. To put it another way, you were also talking about the lack of grant being an issue, but that is just subsidy. In other words, it is sharing the risk with the Government. The Government take the large part of the risk in hand. What we are saying is that housing associations are not terribly risky at the moment because they do not have a lot of leverage on the books against the capital value of their assets. Correct?

Steve Binks: It depends which housing association you look at.

George Hollingbery: But some do and are approaching that level.

Steve Binks: Yes, we are. We have relatively high gearing. We have been a very active developer over the last 10 to 15 years and so, if you look at the sector as a whole, our gearing levels are relatively high compared with the average.

Q249 George Hollingbery: So, this takes us very neatly into equity, does it not? That is where we can attract people who want a higher rate of return for a greater risk profile. That also raises all sorts of difficult issues, such as governance. Your status is not-for-profit. Where do funds flow in difficult times and so on? Tell us a little more about the equity model.

Steve Binks: There are two versions of the equity model. The one that we have been pursuing for some time goes along these lines. If you increase rents either across the whole of our rental portfolio or implement the affordable rented model across a proportion of our rental portfolio it is possible to create a return sufficient to attract equity investment into the sector. When I say a return sufficient to attract equity investment in-I am talking about the sorts of returns that one of the previous witnesses mentioned-it is around 8%. From talking to investors, we know that if you can deliver 8%, they consider us to be relatively low risk and a defensive stock in effect would be created. You could issue equity into the market and use the proceeds of that equity to build affordable or social housing.

Q250 George Hollingbery: Are we talking about the Government?

Steve Binks: In effect, this would be a sale of the interests in the company and you would end up with shareholders owning the company as a whole.

Q251 George Hollingbery: What you are saying is that it would no longer be not-for-profit.

Steve Binks: It would be a for-profit company.

Q252 George Hollingbery: It would be a floated vehicle on the stock market?

Steve Binks: Yes.

Waqar Ahmed: We would prefer to preserve our social values and our social mission. Our view is that equity has a role. That role is a risk and reward around development. We have done a number of deals with house builders jointly to procure and develop large-scale development in London. We are happy to work with local authorities and share equity models around land. From a finance perspective, we would see purely equity and no additional value as more expensive than what we can currently borrow in the capital markets. Therefore, our preference would be to exhaust our options in the capital markets first.

Q253 George Hollingbery: Is that something that you would contemplate if you wanted to raise more capital?

Waqar Ahmed: It would be. One of the reasons why we aim to generate significant surpluses is to convert that into equity and invest it in our own model and that is precisely what we have been doing. Ever since we have been around, we have always generated high surpluses-around £60 million a year-and every penny gets invested in development.

Q254 George Hollingbery: Have you managed to find a way of sharing some equity-type risks with other partners despite Government difficulties over equity shares? Can you describe that for me?

Waqar Ahmed: We believe that in order to secure successful development, it will require cross-subsidy not just from our own resources but from sale. We are prepared to take sales risk, but there is a limit to how much sales risk we can take on our balance sheet. We have done some very large-scale developments with some of the main house builders-Taylor Wimpey, Barratts, Countryside-in and around London where we not only share construction risk and sales risk, but we jointly put in equity. At the end of the day, our share of the returns will enable us to subsidise the affordable.

Q255 George Hollingbery: Do you recommend that to other housing associations?

Waqar Ahmed: I would recommend that model to housing association that can take that level of risk. In order to take that level of risk, they need to have strong balance sheets and be generating strong surpluses themselves.

Q256 George Hollingbery: So what is it in those instances?

Waqar Ahmed: The size of the partnerships that we have done range from developments of around 800 homes to ones of about 4,000 homes. The partnerships are usually in excess of £100 million.

Q257 George Hollingbery: So, not something for a smaller housing association?

David Orr: I think probably not. What we are getting into here is a discussion about pretty fundamental potential change. It is occasioned by the need to build new homes and the lack of supply that there is in the market and people trying to explore all possible avenues. I think it’s absolutely right that that we should be having this kind of discussion, and that we should be exploring all options. There are some quite important inhibitors. Moving from an industrial and provident society to being a publicly owned company is not an easy thing to do. There are major regulatory inhibitors that stop that happening. I think that a number of housing associations who have explored some of this territory are trying to make some kind of assessment of the relationship between the short-term financial impact that comes from selling equity, and the potential long-term change that that makes to governance, and the potential for people to take value out of the organisation as well as putting it in. So these are pretty fundamental questions.

As you say, this is not a game for small organisations to play, although I think that smaller organisations also have the potential to look at smaller-scale, local joint ventures with local developers and sometimes with local authorities, which try to stretch the way they are able to use the assets they have at their disposal. I think that we need a more encouraging environment-both in terms of the HCA and the regulatory environment-to try to ensure that that happens. I think that there are offers that we could make to smaller housing associations that would allow them to use assets that they have more effectively than is the case at present.

Your previous witnesses were talking about how to get institutional investment into the private rented sector. I think that there is a realistic possibility of housing associations bringing institutional investment into very significant institutions to provide a market rent product, and to help stimulate new supply of market rent, so that we are talking about housing associations expanding the range of things that they do-not replacing the things that they do, but adding to the range of things that they do, in an attempt to respond to the housing market failures at present.

Q258 George Hollingbery: We had someone before who was talking about the sorts of products that I think that you are referring to. It seems to be a very interesting area. The governance issue is certainly a knotty one. What about the whole issue of Government grant and its place on the balance sheet?

Steve Binks: My view of Government grant, I guess, is that it is the Government’s equity in these companies, and at the moment it is earning no rate of return because it is there to keep rents at a particular level. The grant has been paid, it has been invested in bricks and mortar that will be there for some time-let us say 100 years-so it has been spent, and we would say wisely spent.

However, there is a need to examine the status of Government grant on RSLs’ balance sheets. We would argue that that grant, in effect, could be turned into some form of equity and then sold on, in the way that I suggested that we would raise equity within our companies. Again, that would require the creation of a return for investors, but that’s what we would do with it.

Q259 George Hollingbery: Why would you not leverage it?

Steve Binks: We would leverage it, but the issue for housing associations at the moment is that some of the larger ones are getting fairly highly geared, because they have been developing quite a lot for a long time. The affordable rented model will, over time, increase our gearing more rapidly, because we are borrowing, in effect, 80% of the cost of a unit every time we build one and at some stage you run out of borrowing capacity.

Q260 George Hollingbery: I understand that. Perhaps I am misunderstanding the status of Government debt, effectively, on the balance sheet. Is it primary? Is it the first call?

David Orr: The most important problem here is that there is no settled view of the status of that embedded social housing grant, and until we have a settled view about that, it will be very difficult to come to a coherent view about how best we can make use of it. We have invited the Government on a number of occasions to address that issue. Certainly, if one of your recommendations was that that should be done, that would be very helpful.

Q261 George Hollingbery: That was what I was going to say. So you would make a particular recommendation to us that that is something that needs sorting and that the Government need to issue a position?

Mark Henderson: Getting some clarity about the treatment of that grant is essential. From my experience in other walks of life, something like regional selective assistance was, in effect, a grant given to a business after delivering the outcomes, or on the basis of three years. That grant was then written off for that business and no repayment was required, provided those outcomes were met. That kind of treatment-in terms of grant going into housing associations, and some clarity about that-may be a solution in terms of Right to Buy and how that forward grant could be used as equity, for example, and whether you could leverage against it could also be clarified at that time.

Waqar Ahmed: Our view is that there is more value in the latent capacity that sits within housing associations, whether that is converging target rents, the existing rent formula, to affordable rents, or greater freedoms on asset management. That value could be captured and put into a social equity fund which should then be invested in additional growth.

George Hollingbery: Very useful.

Q262 Chair: There are one or two other ways in which more resources may be brought into the sector. Steve Binks, you have been involved with retail bonds. Has that been successful? Do you think it will spread throughout the sector?

Steve Binks: It is a form of debt finance across retail bonds. So it is another form of debt, but it has been successful for us. We went out with a relatively small issue, or ambitions for a relatively small issue of £25 million to £50 million. That was our initial asking and we were surprised-almost overwhelmed-by the demand. We ended up raising £140 million in two weeks from people who would invest money with us for five and a half years, put it into an ISA at-I think the interest rate was 5%. We also sold quite a lot to wealth managers and brokers. So I think there is an opportunity to develop that market, certainly for ourselves, and we will be back in that market in the near future, but also for the wider housing association movement. There is an appetite out there from people who want to put money into ISAs-ordinary people who have £5,000 or £6,000 to invest and put into something that is being spent perhaps in their local area. There are lots of ways in which this could be used to generate some sort of involvement in your local community and your local housing association and we would see retail bonds as being ideal for that.

Q263 Chair: Are you looking at this?

Mark Henderson: Yes. We will be looking at a bond issue in pursuit of our development portfolio I guess over the next 12 to 18 months as an organisation. It is but one of the things that we need to look at in terms of bringing finance into the development market. It is also beyond bonds. It is about the utilisation of public land and strategic partnership and joint venturing. It is about stock rationalisation. It is about bringing together a whole range of things to increase our ability to provide affordable homes.

Waqar Ahmed: We are looking at raising additional finance. We will be going back to market probably in the next six months, but we believe there is sufficient space in a 20-year or 40-year end of yield curve and therefore our preference is to pay for them to get long-term finance. Longer term, we may consider it, but not immediately.

Q264 Chair: Coming to REITs, again, Mr Binks, you have an idea for a scheme that might involve REITs. REITs are an idea that has been around for so long without actually happening in housing. Have the Government ticked the right boxes in terms of their consultation document?

Steve Binks: We think they have. We think that the legislation that we now anticipate will come forward in the Finance Bill in March will have all the right indicators in it. The proposals are to remove the entry fee and to change some of the terms and conditions. We think that there will be some interest in setting real estate investment trusts, from a private sector perspective and we believe there is something for the affordable sector as well. We have constructed a model. We have been talking with DCLG and with the Treasury about how it might work, and we have constructed a model that, based on the affordable housing model, we believe could raise up to £500 million for our company alone to invest in affordable housing.

The way it works is that Places for People would set up a company, which would become a real estate investment trust. Places for People would effectively sell assets into the real estate investment trust, and those assets would be rented out at affordable rent levels. That creates the 8% return I was talking about earlier, which we believe is sufficient to attract institutional investors into the market so that we could float that company for we think about £0.5 billion. Then that £500 million would flow back, as in effect the purchase price, into the registered social landlord for them to reinvest in affordable housing. We have not bottomed all the details yet. We have finalised our model, and we are about to talk to the Treasury about this early in the new year-we are arranging a visit to get the Treasury comfortable with the idea. But it does depend on affordable rents and being able to create that return for investors.

Q265 Chair: To go back to the point that David Orr was making earlier, the cost of the benefit bill will depend on whether you are getting simply more affordable housing or affordable housing at the expense of some social rented housing. Your model actually depends on that, doesn’t it?

Steve Binks: It does, and we recognise that there will be a small reduction of 10% for this purpose of social housing in our company, but it is re-provided by affordable housing, and the reduction in social housing is equally matched by an increase in affordable housing. Overall, we reckon that we could increase the supply of housing through this model by about 3,000 units in the next five years, in our company alone, by using that £500 million to reinvest in housing. We have constructed this because we are interested in increasing the supply of housing overall, and we are looking to the medium to longer term and are trying to construct a number of models that would work with or without a grant in the future, depending on whether it is available. So, that’s what we have been doing.

Q266 Chair: David, you put forward the idea of a housing investment fund. Do you want to say a bit about that?

David Orr: We are trying to explore different ways of being able to aggregate the capacity that there is, either among investors or in housing associations, and create something big. We think that the proposals in the Finance Bill about REITs create the potential for housing associations to become significant players and to attract that larger scale institutional investment.

If I might just say this: there is an underlying issue here, which is that we are all agreed, I think, that we need subsidised housing in the economy. The market will not provide, and clearly is not providing, for everyone. The question in all of this is: what is the mechanism by which you provide subsidised housing? There are a whole range of them. We have talked at various times about land, capital subsidy and revenue subsidy. I hope that we continue to understand that there are occasions when capital subsidy is much more cost-effective to the public purse, and that we should not just assume that capital subsidy will go. Having said that, I think we have to explore all other possibilities, and the idea of a housing investment fund, that’s really what it’s about. It is trying to bring together the aggregate strength that there is in the sector and among potential investors to create a new fund, supported by Government, that is able to be invested in new homes.

Q267 Chair: And that might help smaller associations.

David Orr: Absolutely. We were talking about bond finance earlier, and the Housing Finance Corporation is able to act as an aggregator, giving smaller housing associations access to the capital markets. We need to find other mechanisms of that kind, which allow smaller housing associations to make a contribution.

Q268 Simon Danczuk: David, are you confident that one-for-one replacement of additional homes sold under right to buy can be achieved?

David Orr: Well, it’s a commitment from the Government, so I should say, "Yes, of course I am," but we have yet to see the financial modelling in detail that allows us to be absolutely confident about it. From the modelling that we have done, at the scale that the Government are talking about, it looks like a big stretch to us. Again, it is worth pointing out that one-for-one replacement is not the same as like-for-like, because we would be selling social rented homes and replacing them with near market rented homes.

Q269 Simon Danczuk: That’s a good point.

Mark, you have put some proposals forward in terms of right to buy in the registered provider sector. Do you want to say a few words about that?

Mark Henderson: It goes back to the earlier question about the treatment of former grants but, if there is a way of smoothing out that former grant, we believe that if the Treasury was in some respects to relinquish that, it could be used as a deposit, as an equity stake that the individual customer had in their home. One of the biggest hurdles that certainly our customer base has is in raising 10%, 15% or 20% of the value, so if that was treated as equity by the bank and allowed to be used as a deposit for their home, they would then take out a straightforward mortgage product. That receipt would then come back to the housing association-ourselves in that particular interest. Then, and there are two caveats to this, provided that we are then able to build on a one-for-one basis and within the local community in conjunction, perhaps, with the local authority working on where this new housing might be provided, that could open a significant gap and genuinely provide a two-for-one-one privately owned and one new, affordable home-utilising this former grant, which requires clarification, but is not actually being sweated by either HMT or RPs at the moment.

Q270 Simon Danczuk: Are Government listening to that? Are you talking to them?

Mark Henderson: We have only very recently started talking with CLG, and I think that they now want to look at doing some of the numbers to see how that stacks up. I think that one thing that we would certainly appreciate is clarity about the former grant that would allow us to take it to the next step, to model that through and, perhaps, potentially look at some pilot local authority areas where we could see whether it actually works and how it might be implemented.

Q271 Mark Pawsey: May I conclude with a question on land? The Government believe that there is sufficient land available for 50,000 new homes to be built on redundant Government land. In your experience, is that a reasonable figure and are the Government doing enough to make that land available to you?

Mark Henderson: There are probably a couple of things that I would say on that. The first is on how that land is brought to the market and then used to be developed. Again, from previous experience as chief executive of a local authority, public land tended to be the most-the greatest value land was then sold for the biggest capital receipts to go into whatever that particular local authority wanted to do. Sometimes, the opportunity to bring forward the more marginal sites is missed.

We currently have a joint venture with Galliford Try and Gateshead council, and we are looking at 19 sites over a 12 to 15-year period, which allows the higher-value land to be used without the receipt or the profit being taken out of that in the early years-that being recycled through as future land being brought to market. Then, various trigger points will allow the value of the land to funnel back into the joint ventures of the local authority. I think that it is about having that more strategic long-term view, rather than dropping a site on a market for the highest possible value. I think that there is more that we can sweat out of it.

Q272 Mark Pawsey: Are these schemes local authority-owned land then? What about other Government Departments? Do you have any experience of bringing land forward from other bodies? Anybody?

David Orr: There is no doubt that the land currently in public ownership is there and would be able to sustain that level of new building, but it is difficult to get it. There has been a long history of Government saying that they want to ensure that that publicly owned land becomes available, but, inevitably, individual Departments have their own views about the value of that land and either what they want to use the land for or what they want to use the value of the land for. Squaring that circle is quite difficult. There is lots of land owned by the Ministry of Defence or the health service, but it does not just sit there with those Departments not having any view about it. Moving from the commitment in principle to making that land available to the actual delivery of it is a very important piece of work that is not yet finalised.

Q273 Mark Pawsey: We had a memorable quote from an earlier witness about how to go about doing that. Do you subscribe to the same theory?

David Orr: Broadly!

Waqar Ahmed: In London, our view is that the preferential partner seems to be the private sector, which is fine, but we believe that we should be at least considered a preferential partner, because we share the same social values and are able to invest every penny that we generate from profit back into the development of land. There is a site in which we are currently involved in London, but not as the preferential partner, and that site is unlikely to be developed because it does not generate a sufficient return for the investor, but if we were the principal partner in that development it would have already been on the ground today, because we would operate a lower margin.

David Orr: There are one or two quite important political issues here. There is land owned by public bodies that has previously been purchased, or at least accounted for, at quite a high value. If that land is sold at its present market value, it will crystallise a loss. That is a problem at present, because no one wants these losses to be crystallised.

Q274 Mark Pawsey: So it is a valuation issue.

David Orr: There is a valuation problem. These are just the boring, mundane details of turning the political commitment into the delivery.

Chair: Thank you very much indeed for having the last slot before Christmas and thank you for coming to give evidence. I want to take this opportunity to wish you all the best for Christmas and the new year.

Prepared 23rd December 2011