Financing the new housing supply

Written submission from Southwark Council

Response to Communities & Local Government Committee: Financing of new Housing Supply

Southwark Council is pleased to have the opportunity to submit evidence to the Committee. Our response on the specific questions asked by the Inquiry is set out below.

Summary

The overarching vision and strategic objectives of Southwark ’s h ousing strategy 2009 – 16 are:

"To improve residents’ lives by providing high quality homes and housing services that promote successful and inclusive communities."

1 Improve the quality of existing housing and use it more efficiently

2 Increase the supply of good quality housing

3 Enable choice while meeting housing needs

4 Prevent homelessness and reduce the use of temporary accommodation.

Our response seeks to outline the strategic importance of meeting housing need to this authority largely by focussing on steps the council has taken in recent years to enable the continued development of new housing supply, particularly affordable housing. We have continued to make this a priority despite the challenging economic climate, in terms of general delivery and in continuing to progress the council’s major regeneration projects at Elephant and Castle, Bermondsey Spa, Aylesbury Estate and Canada Water. We therefore feel that many of our approaches can be recommended.

Measures have included:

· Continuing the strategic approach to the use of council assets, as a key driver to enable regeneration.

· Targeting of additional council resources to assist the viability of major regeneration projects.

· Balancing the need for land receipts with achieving wider regeneration objectives.

· Supporting social grant for private development schemes where economic appraisals have shown the need for additional finance.

· Implementing planning policy that requires affordable housing on student housing developments where appropriate.

· Stepping up engagement with development partners, both Registered Providers (RPs) and private developers and the Homes and Communities Agency (HCA).

· Entering into long term strategic developments agreements with developers to secure certainty of delivery and long term vision.

· Setting out clear planning policies and guidance, and updating them where necessary.

· Reviewing the tenure mix of developments.

· Scheme review clauses in S106 agreements.

These measures have enabled the council to ensure delivery of affordable housing in the last few years, as shown below:

	2006-07	2007-08	2008-09	2009-10	2010-11	Total
Social rent	520	460	250	400	390	2020
Intermediate	460	450	280	270	420	1880
Total	980	910	530	670	810	3900

The council has managed to exceed its affordable housing targets in recent years, including the 2008 -11 Local Area Agreement (LAA) target. Southwark’s LAA target for the period was 1,931 affordable homes and in the event, 2,010 homes were delivered. Throughout this period Southwark has consistently been one of the top deliverers of new social housing in London.

The response also highlights the particular characteristics of Southwark as a large stock holding housing authority with high investment needs. The council has agreed a programme to invest a minimum of £326m in the housing stock over the next five years. Capital receipts from disposals have played a significant part in HIP resources for a number of years; consequently the council faces an ongoing strategic choice to balance the need to generate resources through the sale of housing assets to assist in funding this programme, against the need to use land value to assist with the viability of new housing and regeneration projects.

To meet the council’s regeneration objectives and in order to drive renewal of our existing stock to address the high investment needs, there will be a continuing requirement for public sector support, together with investment that can be generated via the private sector and from land value. The regeneration of Aylesbury estate is an example of council’s approach to tackle investment needs by a holistic regeneration to produce 4,200 new homes, a mix of private and affordable, underpinned by an adopted Area Action Plan. However, the response also highlights the need for a flexible and responsive grant regime is needed to address the up front costs of land assembly and infrastructure which need to be met to enable large scale demolition and remodelling of estates such as Aylesbury.

The response also considers the changes to the Housing Revenue Account, borrowing opportunities and ways in which the council could lever in additional resources.

On the effectiveness of the Government’s Affordable Rent proposals, the response outlines the key areas of concern:

· The affordability of the product taking into account the income levels of Southwark residents.

· The effect of regeneration programmes, including the impact of decanting and community sustainability.

· The effect of the proposed welfare benefit changes.

· The affect of the introduction of fixed term tenancies on perceived security of tenure, and the impact on tenancy acceptance rates.

Q1. How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms.

It is important that return on investment is considered in a qualitative way in output terms. Obviously, the number of units delivered overall is key, but issues of design quality, bedsize, affordability, sustainability etc are also central to the success of developments.

We welcome the introduction of New Homes Bonus as an additional source of funding for new homes, although it is important to highlight that there are potentially other high priority services / commitments which could benefit from this funding source to meet a range of community needs. Therefore the development of other funding opportunities is still needed to assist Southwark to address the major regeneration aims often arising from the quality and condition of the existing council housing stock. On the positive side, these provide opportunities to develop new housing and create more mixed and balanced communities and lever in private sector investment on a scale unique to Southwark in the light of its landholding.

As outlined in the introduction, for schemes such as the Aylesbury regeneration, to allow the council to realise the value of land to generate resources, a key challenge is funding the necessary site assembly (decanting, leaseholder buybacks and demolishing large scale blocks) and developing new infrastructure. Consequently, we would suggest that the grant regime has to be flexible and responsive to allow for the provision of up-front funding for regeneration, with the understanding that in the long term the need for public funding will be reduced and allow for the private finance cross subsidy to be maximised.

Regeneration

We recommend the use of innovative and flexible approaches as adopted in previous and ongoing major regeneration projects in Southwark. The key elements have been working pro-actively with developments partners - both Registered Providers (RPs) and private developers, to unlock the value in the council’s own land thereby levering in both private and public finance. In addition, the council’s excellent working relationship with the Homes and Communities Agency has enabled substantial resources to be attracted to the borough, and development outputs to be maximised. However we recognise that in the current economic climate these possibilities will become increasingly challenging.

Two excellent examples of partnership working to deliver major regeneration are the council’s major projects at Canada Water and Bermondsey Spa.

Bermondsey Spa SE1: This scheme combines new primarily residential developments on both private and public sites with investment in the existing housing stock. The overall aim being to rebalance the local community, to provide diversity and a greater mixture of housing types. S106 resources have been used to enhance local facilities and the public realm to complement the regeneration, and investment from the Homes and Communities Agency (HCA) has assisted in delivering increased levels of affordable. In net terms, the levels of affordable homes have significantly increased, with approximately three times more affordable housing gained than lost.

Canada Water SE16: With the particular challenges faced in this area and with the resources available to the council, it was decided that a strategic development partner would be sought through an EU procurement process. British Land Canada Quays (BLCQ) was selected and signed a strategic ten-year development agreement with the council in 2005. This was done with a view to creating a vision, by way of a master plan, for the core area near the transport nodes of Canada Water and Surrey Quays stations.  

Parallel work has included extensive on-going public engagement and specific relationship building with the key strategic land owners in and around the area. There are relatively few land owners in control of around 60 acres of land, with some recent changes of ownership of major land holdings.

  

As the first phase of the development in Canada Water is coming to an end, there are opportunities to proactively use council’s land holdings to drive further regeneration of the area. British Land has recently entered into the joint venture ownership of the Surrey Quays shopping centre. The council owns the freehold of the site with the British Land Tesco partnership owning a long lease. The shopping centre is a key part of the next phase of development in the area, providing important infrastructure for residents. There are opportunities for expansion of the retail offer with around 30,000 ft2 new retail space, together with capacity for around 600 new homes within that expansion proposal.

In addition, to assisting with the viability of the regeneration, the council has also allocated funds from its Affordable Housing Fund (AHF), arising from in-lieu payments. The presumption throughout the council’s Core Strategy is that affordable housing will be delivered on site as part of the development. The Affordable Housing SPD sets out the process which must be followed for the council to consider an in-lieu payment.

We have some more general suggestions to generate the best return on investment as follows:

Mixed delivery approaches

The council is investing resources in unlocking important schemes, for example at Elmington Estate in Camberwell where a mixed scheme of redevelopment and investment to Decent Homes standard is being delivered, in the next phase of a longer term regeneration scheme. This mixed solution provides an important model to assist the balance between stimulating new development on the one hand and investment in Decent Homes and landlords’ obligations in our own stock on the other. Neither a full refurbishment or a full redevelopment were viable; the mixed approach will ensure the delivery of the maximum amount of new housing.

Effective partnerships

We recognise that we cannot achieve these ambitions without partners. In addition to the partnership working with the HCA, Southwark also has a number of successful partnership groups and forums in operation. These include the Southwark Housing Strategic Partnership, which is a multi-agency partnership between the council, RPs, private sector developers, tenants, leaseholders, private sector landlords and residents. In addition the council works with the Southwark Housing Association Group which provides the primary interface with RP partners, and also the South East London Housing Partnership.

We have an active dialogue with the RPs that develop in the borough, meeting with each of them formally on a quarterly basis to review their delivery pipeline, to discuss new opportunities and address any issues impeding delivery. We also maintain a site register, which is regularly viewed to ensure potential development sites are being progressed.

Review Clauses

Southwark was one of the first authorities to build reviews into S106 agreements, so that if end values in developments increase beyond an agreed baseline, there is scope to improve the affordable proportion. The council has also adopted the practice of granting short consent periods on smaller schemes where concessions are made on the affordable proportion, to encourage their early delivery. In all cases the review mechanisms permit only an upward revision of the affordable housing provision. Two examples of these clauses in use in Southwark are:

Case study 1

The principal feature of this scheme/mechanism is if the developer has not started particular phases by a particular time, it could not commence construction works unless it had submitted a viability review of that phase.

It was determined at the point of consent that 114 affordable dwellings would be provided (representing 28.3% of the development). Any extra on-site provision (for all phases) triggered by this mechanism would be a maximum of 95 habitable rooms (amounting to 6.7% of the development) which, added to the affordable provision that the developer is obliged to deliver, would represent the council’s policy requirement that 35% of residential development is affordable.

Case study 2

A viability assessment at the point of consent determined an affordable housing provision of 25% (125 units). Similar to the scheme described above the developer would submit a viability scheme for each phase. Negotiation with the council would determine whether any extra affordable housing, up to a maximum of 10% is justified by the viability assessment. In the event that any extra provision amounted to less than 10 habitable rooms, the contribution would take the form of a payment-in-lieu.

Appropriate Planning Policy

Southwark’s Local Development Framework helps enable high quality housing. As set out in the above sections, the council has been flexible where appropriate, to ensure housing continues to be delivered during the recession.

The Local Development Framework provides clear planning policy, based on a robust evidence base to ensure the delivery of more and better homes. Setting out clear up-to-date policies and guidance means that the council are clear and transparent in what we expect from new development, and where we expect new development to be located. The adopted Core Strategy sets out policies on density, housing targets, affordable housing, student housing and gypsies and travellers. A housing implementation strategy was developed as part of the Core Strategy, looking at sites and timescales where housing could come forward. The Core Strategy introduced a new policy requiring an element of student housing to be affordable housing, which will help meet Southwark’s need for more affordable homes. The Council has also prepared/is in the process of preparing a number of area action plans and area based supplementary planning documents. These provide more detailed policies and guidance for specific areas including Canada Water, Elephant and Castle, and Peckham and Nunhead.

The council also has two housing supplementary planning documents on affordable housing and residential design standards. These set out detailed guidance on how to ensure the maximum amount of affordable housing and good quality new homes.

Q2. What is the role of state lending or investment, as opposed to grant funding, and the appropriate balance between them?

Borrowing is useful as part-funding for the building costs of rented stock, up to the debt level where repayment and interest can be met from the surplus of rent over running costs. Future rental levels are relatively risk free but local authorities can only borrow within HRA self-financing debt caps.

Borrowing or investment for stock for sale introduces significant risks in terms of future market values. State lending via PWLB is easier to access and usually more flexible than bank/bond borrowing but at current rates may be more expensive.

Affordable housing cannot usually support borrowing of the full capital cost and grant or other funding is also required.

For local authorities, grant via HCA eg for new build is useful but it would be simpler if deadlines were loosened and there was increased flexibility – there is pressure to start on site perhaps before all risks are analysed and a lot of interchange is generated over minor changes to completion dates. It would also help if annual grant programmes were established so that site assembly could commence with some prospect of funding for eventual new builds for example by the use of pre-allocations. In addition, the requirement to charge Affordable Rents to attract social housing grant causes concern, as outlined in the response to question 7.

Grant levels per dwelling have been reduced through changing the outputs to affordable rented homes but LAs may still wish to prioritise the provision of social rented homes. Market rented developments might provide cross-subsidy and hence reduce grant need for LA or RP social rented schemes but may be difficult to balance whilst meeting affordable targets for each site.

Q3. What the role is of the public sector in providing support in kind-for example land or guarantees-as opposed to cash, and what the barriers are to this happening.

Some examples of the LA role in funding support can be provided by experience in Southwark. Due to the scale and nature of the council’s own housing stock, the potential resources derived from the sale of assets provides a key source of funding to reinvest in the housing stock. The council is planning to invest a minimum of £326m over the next five years, with an element of this funding projected to be resourced from disposal proceeds. Therefore, the ability to explore options for disposing of land at less than best consideration is reduced.

Therefore, it has proved challenging to explore such as Community Land Trusts, where the presumption is that land will either be provided free or at a considerable discount.

However, the Council has been flexible in recent years during the economic downturn, especially in order to keep regeneration projects moving forward, for example at the Elephant & Castle.

To enable the development of housing sites on the council land in partnership with RP partners, as part of the regeneration of the Elephant & Castle, the council agreed to forgo land receipts to advance the wider objectives of the programme. This decision, along with investment from the HCA and a flexible approach to tenure, switching private units to affordable ensured that the schemes were delivered, enabling commitments made to existing residents to be met.

Other examples of the council’s flexibility in using its own land to enable development in the economic downturn have included:

· Allowing for phased payments, structuring payments as opposed to requiring full payment on purchase of the site.

· Overage or underage arrangements.

· Agreeing to land disposal on a subject to planning basis rather than unconditional.

Q4. How long-term private finance, especially from large financial institutions, could be brought into the private and social rented sectors, and what the barriers are to that happening.

Pension funds are showing interest in investing in social rented homes, where their return could be linked to RPI. This could be in the form of bond lending. Local authorities have caps on borrowing and may not be sure enough of marginal income increases to enter into arrangements that involve RPI increases each year; however these deals could offer lower initial debt charges in the early years of self-financing, when finances are tight.

A charge on new property might be offered as security for private finance providers but there may be a conflict between enabling potential handover of a liquidisable asset and security of tenure for social housing tenants.

Other barriers are around perceptions of risk and strategic fit within portfolios of lending and business activity.

Taking these issues into account we would suggest that the development by the government of a national framework to support institutional investment, therefore allowing for volume and packaging to maximise the risk / reward ratio could help overcome the existing barriers.

Q5. How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply.

We have discussed this question with our RP partners and two key issues have been highlighted;

· Increasing grant as it leverages in more private finance by helping with RP gearing.

· Work with lending institutions to agree to amend existing RP covenants so that borrowing is based not on the lowest gearing ratio, but the highest.

Also, we have concerns that the model is not sustainable in the long term. For example, the benefits of converting current stock to affordable rent can only be realised once, and means the stock of social rented housing is continually reduced at a time of increasing demand. Furthermore, RP are having to reach the limits of their lending covenants and may not be able to secure further increased leverage for future funding rounds.

Q6. How the reform of the council Housing Revenue Account system might enable more funding to be made available for housing supply.

LAs expect to generate revenue surpluses in the medium and long term as they will keep the proceeds of real terms rent rises under HRA self-financing. Before that there is an early year’s deficit to meet because the self-financing model allocates debt affordable from rents over 30 years and their initial level is well below the average for that period. Once LAs move into surplus there is the possibility of increasing investment, either by direct revenue contribution of available surpluses each year or by Prudential borrowing (subject to the self-financing debt caps), with the surpluses paying the debt charges incurred. Investment in new-build may be favoured as replacement for older stock or as extra stock but this will depend on land availability.

The caps on HRA debt may inhibit the level of new build, as will the starting level of interest on 2012 debt, which will vary between authorities. The PWLB recently announced a reduced interest rate for authorities taking on extra debt (at historically low rates). It would have been helpful to see similar relief for those carrying over existing debt at high rates.

In the short-term, local authorities may start in 2012 with substantial commitments that are short of funding, e.g. decent homes backlog and fire safety works, and these may use resources that would otherwise go towards new-build.

In general, more flexibility on how authorities spend HRA receipts and deal with debt redemption would be desirable.

Q7. How effective the Government’s ‘Affordable Rent proposals are likely to be.

The council is committed to enabling the delivery of truly affordable housing throughout the borough, in line with the aims and objectives of the newly adopted Core Strategy. The council is not supportive of the rent and tenure implications of the new Framework, which we feel run counter to the demonstrable needs of our community. That said, we consider that enabling some development is preferable to ceasing altogether; we therefore encouraged the submission of offers from RPs to the HCA for funding from the 2011-15 Affordable Housing Programme to continue the delivery of new affordable housing in Southwark. It was emphasised that RPs should tailor the offers to enable the delivery of schemes which address the housing needs, affordability and regeneration priorities of the borough. In addition, RPs were advised to give particular consideration as to how offers, including for ‘Affordable Rent’, would address the issue of affordability, taking into account that the Housing Requirements study 2008 for Southwark found that the median income for council tenants is £9,100 pa and for HA tenants £14,300. Southwark has challenging targets to meet to deliver affordable housing; therefore, having an active development pipeline is crucial.

RPs were encouraged to bring forward with proposals that addressed Southwark’s objectives, including delivering larger homes, providing decant and option to return opportunities for residents in regeneration schemes, alleviating overcrowding and tackling under occupation.

Subsequently, we have carried out assessment of the impact of affordable assessing the income levels required based on the following factors:

· Income levels in the borough

· Potential rent levels as varying percentages of market rent, across the borough

· Impact of increases in Private Rent

· The level of gross income spent of housing costs

· Universal credit

The study has backed up the initial view that there are affordability problems arising from the Affordable Rent model, even at less than 80% of market rent. This particularly affects family units i.e. 3 bed plus. For example, based on the current policy definition of affordability (25% gross income spent on housing costs), even at 60% of market rent would require an annual income of c33k (1 bed), 38k (2 bed), 49k (3 bed) and 66k (4 bed) in SE17, the location of the Aylesbury Estate.

Taking these findings into account, we are exploring the following options for development of an emerging strategy on Affordable Rents, and to inform our Affordable Housing SPD:

1 bed 2 bed 3 bed 4 bed plus

Option 1 80% 80% social social

Option 2 80%* 70%* social social

Option 3 80%* 60%* social social

* or capped at LHA rates.

A 4th option is also proposed for consideration:

For Section 106 schemes with no grant, developers to be asked how much housing at social rent they can provide, in return for waiving the 35% affordable contribution if necessary.

The council has commissioned an independent review on the viability of these options.

We would add that in the framework for the Affordable Rent programme, the opportunity was missed to cap the rent levels at Local Housing Allowances levels. This has already been the cause of concern in that RPs have suggested rents above LHA levels.

In addition, there are concerns about the long term sustainability of the Affordable Rent programme, in that conversion of relets can only unlock resources on a once and for all basis, as noted in response to Question 5.

The introduction of flexible tenancies in conjunction with Affordable Rent also provides concern, in particular that short term tenancies will provide a barrier to movement in the social sector. For example, residents being decanted to enable regeneration are likely to resist giving up a secure tenancy, for one of only five years and at rent levels far in excess of what they currently are charged. This would have major implications for the delivery of regeneration projects, because delivering decant programmes are the key to effective development.

October 2011