Financing the new housing supply

Written submission from Places for People

1.0 Introduction

1.1 Places for People is one of the largest property management, development and regeneration companies in the UK. We own and manage more than 62,000 homes and have assets of £3 billion.

1.2 Our vision is to provide aspirational homes and inspirational places and our approach looks at all aspects of communities rather than focusing solely on the bricks and mortar provision of homes. Places for People’s innovative approach to place management and placemaking allows us to regenerate existing places, create new ones and focus on long-term management.

1.3 The financing of a sustainable housing supply is a crucial issue for the prosperity and wellbeing of the UK and we welcome the opportunity to respond to the Select Committee’s call for evidence. In section 3 of our response we reiterate our proposals for residential REITs and equity funding, which we are currently discussing with the relevant Government bodies. Section 4 contains our detailed responses to the issues raised by the Select Committee.

2.0 Executive Summary

2.1 We believe that the financing of new housing supply needs radical reform in order to promote a long-term, sustainable supply of new homes in a range of tenures. The Government’s Affordable Rent model may be effective in stimulating development in the short term, but due to its impact on gearing ratios, the current scheme can only have a limited lifespan.

2.2 In our view, residential Real Estate Investment Trusts (REITs), as well as Government equity funding, would both be effective models to boost housing development over the long term. We explain both proposals in more detail in section 3 below.

2.3 Specific barriers or more accurately ‘prerequisites’ for equity funding are (1) yield and (2) liquidity levels that are acceptable to investors.

2.4 In more general terms, we believe that models that apply a number of basic principles, as outlined in paragraph 4.2 below, have the best chance of leveraging in private sector finance to build both new affordable and market housing supply.

2.5 Given public sector debt issues, we would recommend that the Government’s focus is applied to providing a guarantee on revenue funding, in order that public capital subsidy is limited to either subsidising specific housing interventions (i.e. mortgage support for intermediate market or environmental improvements), or providing much needed infrastructure in regeneration areas.

2.6 We believe there is a role for public sector bodies to provide support in kind, especially as this could enable them to generate sources of future income (e.g. delayed land receipts).

3.0 Places for People’s proposals financing new housing supply

3.1 Places for People has long argued the case for radical reform to the way social housing is funded in the UK. We formally submitted these proposals to the Homes and Communities Agency (HCA) as an alternative bid to the new Affordable Rent programme earlier this year, and have held discussions with the HCA, as well as CLG and HM Treasury, about our proposals. We believe that the proposals we outline in this section are a viable way to ensure a long-term sustainable supply of homes in a range of tenures.

3.2 Our proposal for a residential Real Estate Investment Trust (REIT) could, provided that that future changes to the UK REIT legislation are made in the 2012 Finance Bill according to our response to the Government’s informal REIT consultation, deliver yields of around 7% to investors which a number of them have confirmed is acceptable.

3.3 Our initial modelling of the REIT proposal works on the basis that around 5,000 existing rented properties are purchased by the REIT, including social rented properties that have been converted into Affordable Rent when they fall vacant. The funds generated by the sale of properties into the REIT would be used to finance additional development of new homes in affordable rented and market rented tenures, and once occupied these new homes would then be sold onto the REIT. This process or cycle could be repeated a few more times until the REIT needs to be reseeded or restocked with existing residential properties.

3.4 The transfer of existing social rented properties into the REIT would be on the basis that any social housing grant attached to the initial properties transferred would be recycled and existing debt would likely to be rolled over.

3.5 Our Equity proposal is based on Government changing the funding of social housing to an equity finance model. Whilst equity funding requires higher yields, it ranks behind debt in terms of priority of payment and so should give debt lenders more confidence to lend into the sector in the absence of grant.

3.6 For the equity proposal to work, Government would need to change the designation of the historic social housing grant that sits on the balance sheets of registered providers in order to create the headroom to release equity into the market. The income payments for equity would be funded by RPs converting the required number of existing social rented void properties through a HCA-led Affordable Rent scheme.

3.7 We estimate that with this mechanism, Places for People alone could attract £750m of equity to fund the production of a further 5,000 new affordable houses, without the need for Government to issue any further grant. We calculate that this level of funding will require around 75% of our existing social housing properties to convert to Affordable Rent. This will enable the £350m equity funding to be introduced in either Year 2 or 3, with the remaining £450m equity funding following three years later in either Year 5 or 6.

3.8 Our modelling of the application of the model to the whole sector shows that it would attract around £25bn of equity funding across at least three tranches and deliver around 160k new affordable homes without the need for Government to issue any further grant.

3.9 In addition to the provision of new affordable housing through the application of either the REIT or equity funding model, we also estimate that this boost in affordable homes development will provide a catalyst for additional market sale houses to be built in a 3:1 ratio in mixed developments across the country, by a combination of registered providers and housebuilders.

4.0 Response to the issues raised in the call for evidence

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

4.1 Places for People has for some time appreciated that over-reliance on Government grant funding is not a sustainable approach in the long term. Our strategy over the last five years has therefore been to, where possible, build affordable housing without the need for grant.

4.2 Initially we achieved this aim through cross-subsidisation from receipts obtained from market and intermediate sales. However, recent and ongoing paucity of mortgage finance means that we will need to adapt our strategy to apply the principles (but not necessarily the exact details) of the current Affordable Rent model, namely:

· A modest uplift in rents to generate running income yield that is inflation-linked (this could be done either in two subsequent increases of 4%, or a one-off increase from social to 80% of market rents);

· Using the incomes derived from the above rental increases to obtain long-term equity funding from investors, in order to build a new supply of affordable housing without requirement for capital grant;

· Using any proceeds either from staircasing of intermediate housing products (i.e. shared ownership or sale of rented properties) to build new affordable housing without a requirement for capital grant;

· The provision of new affordable housing will then enable either RPs or housebuilders to obtain working capital to build additional new market sale/rent houses at a 3:1 ratio.

4.3 In our opinion, models that apply the principles outlined above have the best chance of leveraging in private sector finance to build both new affordable and market housing.

4.4 Given public sector debt issues, we would therefore recommend that the Government’s focus is applied to maintaining a revenue public subsidy in order that public capital subsidy is limited to either subsidising specific housing interventions (i.e. mortgage support for intermediate market or environmental improvements), or providing much needed infrastructure in regeneration areas.

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

4.5 We believe that the principal role of the state should be to provide a guarantee on revenue funding in order that it can attract private equity funding to act in a similar manner to grant funding in repayment terms (i.e. lower repayment priority) and so maintain confidence for debt and bond finance. Any remaining state investment or grant funding would in our view be most effective when spent on specific housing interventions (e.g. environmental improvements) or infrastructure in regeneration areas.

4.6 Over and above that, we think that there is a role for local authorities to effectively become equity investors in their land (see below) and possibly use their prudential powers to provide mortgages to individuals.

The role of the public sector in providing support in kind-for example land or guarantees-as opposed to cash, and any barriers to this happening

4.7 We believe there is a role for public sector bodies to provide support in kind, especially as this could enable them to generate sources of future income (e.g. delayed or deferred land receipts). For instance, an obvious and attractive option would be for a local authority to contribute land into a fund, into which private investors would then provide funding. In return for the land, the local authority would get an equity stake that could later be cashed in (as the sales receipt would start to produce profit) or be carried over and used to fund further development of intermediate/rented homes in the local authority area.

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

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

[The following paragraphs form a combined answer to these questions]

4.8 As stated in section 2 above, we believe that our equity and REIT proposals are the next logical development from the bond market finance we and other RPs have been obtaining.

4.9 Whilst we still believe there is a role for bond finance, especially some further potential for retail bond finance, large financial institutions have indicated to us that they would be interested in providing equity funding on the basis outlined above.

4.10 Specific barriers or more accurately ‘prerequisites’ for equity funding are (1) yield and (2) liquidity levels that are acceptable to investors. In relation to yield, we are likely to target investors such as infrastructure funds who typically seek lower returns over longer periods of time. Liquidity levels would be achieved either through scaling up the conversions of existing social rented properties to affordable rent and/or through consortia of RPs.

4.11 We believe it is possible to achieve yield and liquidity levels acceptable to investors based on our initial modelling and discussions with large financial institutions either from single large scale RPs or from collections of RPs (e.g. REITs).

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

4.12 Subject to the confirmation of the details from Government surrounding the HRA system, especially relating to the Public Works Loan Board (PWLB) and individual borrowing cap arrangements, we believe that the reforms do offer potential for more funding to be made available for new housing supply. This would be the case in particular if the Local Authority were to transfer its housing to a registered provider, so that it could make more use of some of the mechanisms outlined above.

How effective the Government’s ‘Affordable Rent’ proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term.

4.13 The current Affordable Rent model applies some of the principles set out above, which we suggest are required to lever in large-scale private finance. However, the reductions in grant rates require RPs to borrow more money to finance the development of new affordable housing thereby exacerbating gearing levels. For this reason, we believe the Affordable Rent model as currently specified only has a limited lifespan.

4.14 However, we do feel that the principles of the Affordable Rent model can be used to enable RPs to attract equity funding and in so doing avoid exacerbating their gearing levels and act as a ‘proxy’ for grant in terms of priority of payment for debt and bond lenders (as set out above).

4.15 We understand that equity finance is relatively more expensive than debt finance but believe that this is an appropriate mix of finance in the medium to long term, given the situation concerning future Government grant levels and relatively higher costs compared to historic levels of debt finance.

Appendix 1: About Places for People

Places for People is one of the largest property development and management companies in the UK, with more than 62,000 homes either owned or managed in a mixture of different tenures. With over 2,000 employees, it is a unique organisation that provides a diverse range of products and services to build quality, safe and sustainable communities. Places for People is active in 230 local authorities.

Places for People regards itself as a housing and regeneration organisation that puts people first. We provide solutions that not only cover a range of different housing tenures but also offer a range of support services including affordable childcare, elderly care and financial services – all the things that contribute to making neighbourhoods of choice; prosperous, popular and truly sustainable.

Places for People currently has around 40,000 affordable rented properties, over 6,000 properties available for market rent and just under 10,000 properties where we retain a freehold stake as part of either shared ownership or ‘right to buy’ arrangements in a number of developments throughout the UK. We also own and manage around 6,000 homes for older and vulnerable people. Our portfolio is designed to ‘Create neighbourhoods of choice for all’ and covers the following broad mix of products:

· Places for People Neighbourhoods – investment, regeneration and placemaking

· Places for People Homes – neighbourhood and property management

· Places for People Individual Support – support for independent living

· Places for People Property Services – in-house maintenance services

· Places for People Development – master planning and building new developments

· Places for People Financial Services – financial products for customers

· Places for Children – early years childcare

· Cotman HA - managing around 3,000 homes across East Anglia

· Emblem Homes and Blueroom Properties – homes for sale and rent

We want all our neighbourhoods to be places where people are proud to live. To do this, our developments need a mix of homes, easy access to shops, schools, healthcare and leisure activities, safe public spaces, good transport links and job opportunities.

When we create new places for people to live we plan a mix of tenures and house types designed for communities that have people from different social backgrounds. All of our homes whether for sale or for rent are designed and built to the same high standards with the same specification, making different tenures indistinguishable.

October 2011