Financing of new housing supply

Written submission from the Greater London Authority

Summary

· Investing in London makes sound economic sense.

· London’s devolution settlement post-2012 will provide a great opportunity for maximising the return on housing investment in the capital.

· While there are barriers to attracting institutional investment into the private

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.

1 For the Mayor, the key question is how to achieve optimal value for money with the very limited public investment that is made available for housing.

2 Even during an economic downturn, London continues to offer significant opportunities.  Seven out of the eight largest regeneration projects are in the capital.  All of these have significant housing components, or are housing led.  The projects have been planned alongside major infrastructure investment, such as Crossrail and the Olympics, that increases the capacity for new homes. 

3 London remains the economic powerhouse of the UK, and there are significant spillover benefits to the rest of the country. The capital continues to contribute more to the Exchequer - between £14 billion and £19 billion per annum - than it receives in public expenditure. Failing to invest in London's housing will run the danger of choking off London's economic growth and with it, the growth of the UK.

4 A recent study by Professor Mike Ball of Reading University identified that more than 200,000 professionals, essential to the capital’s economic future, are expected to join the London job market over the next decade. However, as the residential market becomes increasingly constrained, it is possible that 50,000 of these professional workers will not be able to find appropriate housing and may be forced out of London. The report identifies that the future economic viability of the capital depends fundamentally on the right type of housing being available. This is backed up by surveys of London’s business community, with over 70 per cent of London’s businesses citing the lack of affordable housing as one of the most important constraints on the labour market.

5 Similarly, a recent report by the London School of Economics finds that affordable housing investment in the capital is used more intensively than elsewhere, as developments in London use less land per home and they lever in more private funding to supplement the available public funding.

6 The post-2015 investment round will be the first time in which London’s affordable housing settlement will come under the direct control of those who are democratically accountable to Londoners – the Mayor and London boroughs. This new landscape will provide an unparalleled opportunity to find new ways of maximising affordable housing delivery. It will be essential to make the best use of the full range of the newly devolved and existing powers of the Mayor and the assets that have been devolved, alongside the existing powers and resources of the boroughs and their new freedoms and flexibilities.

7 The Mayor is keen to review the extent to which the landholdings of the GLA group can create the keystone of a wider land release pool. This would bring together public sector land for development in London, including that of the GLA, government departments and agencies, and the boroughs. It would become the joint responsibility of the Mayor and boroughs to deliver these sites, under the auspices of the London Housing Board. To reduce procurement costs and speed up development, the GLA would develop a new set of development partner panels, building on the experience of the LDA and the HCA. There are already schemes on GLA family land that are helping to deliver significant numbers of homes, including Olympic legacy land through the Mayoral Development Corporation, LDA land at the Royals and some Transport for London land at Earls Court.

8 The Mayor is also keen for a radical rethink on how investment should work in the future, generally moving away from the old grant-based investment models and towards equity-based investments. The assets currently locked up in existing homes, in both the housing association and council sectors, could be made to work much more effectively, and the Mayor will work with partners to see how to make better use of these. In particular, the Mayor will work with boroughs to determine how the freedoms that HRA reform will bring can be optimised to better meet local need and London’s housing challenges. Alternative methods of finance will also be explored, with London making the most of the attractiveness of its housing market to major investment funds, alongside emerging finance options that the Mayor may consider for the GLA, including the potential for a Mayoral bond and Mayor’s mortgages.

9 But this radical rethink will only have the transformative impacts on London that the Mayor wishes to see if housing and infrastructure investment is joined up with wider social and economic regeneration. To make certain that it does, the Mayor will ensure that decisions on capital investment are made in partnership with the local authorities that know their areas best - and that can make the necessary connections with local employment and community development initiatives. The Mayor will also ensure that investment is fully aligned with the work of the London Local Enterprise Partnership, the Mayoral Development Corporation and other initiatives such as the Royals Enterprise Zone.

10 Apart from the economic benefits of investing in London, at a time of reducing public expenditure, public subsidy should be targeted at those geographical areas where housing need is most acute. London has, by far, the most pressing housing need in the UK: two thirds of all households in temporary accommodation, the highest levels of overcrowding, and the greatest disparity between average incomes and house prices. 

11 While building new housing costs more in the capital in terms of grant per unit, there is greater value for money from building in London because the measures to deal with housing need also cost a lot more.  For instance, investing in London's affordable housing will significantly reduce the cost of housing benefit by reducing the number of households in temporary accommodation and in the private rented sector, where rents are higher than in the social sector. This level of saving would not accrue in other parts of the country, as there is not the same disparity between private sector and social sector rents, or as many households in temporary accommodation. By focusing funding on the highest concentrations of deprivation and need, investment in London does more to reduce the wider social costs and impacts associated with poor housing than is the case in any other part of the country.

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.

12 There is considerable private investment in all forms of housing. However, the financial crisis has severely constrained both the availability of finance and the willingness of individuals and institutions to invest. There have been many attempts to attract such investment, but part of the previous failures has related to the challenges of ensuring residential investment delivers the same levels of return as commercial property and other investment opportunities open to them. Also, investor returns contain a significant capital element that cannot be realised without selling the properties, as well as the high management and maintenance costs.

13 Overcoming some of these constraints might require a change in government fiscal policy, for example tax breaks for institutional investors. In the 2011 Budget, the government took its first steps towards encouraging more investment with changes to the treatment of Stamp Duty Land Tax on bulk purchases. It is unclear what impact this will have; in the United States for example, where there is a long standing tradition of using tax credits to stimulate investment in private housing, only about eight per cent of the stock is owned by large scale investors.

14 There are, however, examples of innovative models being developed to encourage institutional investment in the private rented sector (although they do not necessarily fit the traditional models for such schemes).

15 HCA Private Rental Sector Initiative

In May 2009, the HCA launched its Private Rental Sector Initiative (PRSI) to support institutional investment in housing delivery. In September 2010, the Berkeley Group became the first investor to commit to a joint venture as part of the HCA's PRSI. The deal will see the HCA invest £45.6 million in the scheme, which will result in 1,887 new homes built across Berkeley developments in the south west and south east. Of these, 555 will be retained for private rent by a private rental fund. The HCA will retain a 20 per cent interest in the fund, with the option to withdraw at a later date.

16 LB Barking and Dagenham

This east London borough is championing a development model that will see the council enter the build to let market, while continuing to build homes for social rent. The council is using institutional cash to build 500 homes with an unnamed developer and institutional investor to house people on low incomes and on its housing waiting list by charging below market rents. Approximately 50 per cent of the units will be let at 80 per cent of market rent, 20 per cent at 50 per cent of market rent, and 30 per cent at 65 per cent of market rent. The 80 per cent market rent units will be used to house people in work on low incomes and the cheapest rental properties will be used to house people currently on the council housing waiting list.

17 The council has donated two plots of land for the development instead of investing cash, and is planning to guarantee rents on the scheme for sixty years, after which the council will assume ownership of the homes. The scheme, which has been agreed by all parties, is expected to complete in summer 2013.

18 Bouygues Grainger Residential Fund

In October 2011, Bouygues and Grainger announced the creation of, and their co-investment in, a new build to let residential fund. The fund will provide institutional investors with the opportunity for large scale investment in the UK’s private rented sector. The fund is unique insofar as it has a dedicated portfolio of purpose built private rented sector development sites in London and the south east.

19 The development sites are expected to provide over 1,000 residential assets on completion. The assets will be developed and built out by Bouygues in phases over approximately three and a half years, with construction expected to complete in 2013. Bouygues will manage the investment and construction process, while Grainger will undertake the operation of the portfolio after completion, including property management, lettings, facility management, and fund and asset management.

20 The fund has been created with an eight year life, with an option to extend it by up to three years. Bouygues and Grainger will co-invest into the fund upfront, and will seek additional equity investment from institutional investors, totalling up to £150m.

21 Akelius

In November 2011, Akelius, Sweden’s largest private housing company, launched plans to acquire 10,000 UK homes. Akelius appointed CBRE to acquire mid-market apartment blocks in and around London. The company has not said how much it is planning to spend, but it is believed to be in the region of £2bn. Their aim is to create a portfolio of residential properties comprising freehold and investments let on assured shorthold tenancies. Akelius is not looking to buy new build properties, and will instead target existing portfolios from large landlords such as Grainger and the Wellcome Trust.

22 Finally, it is also worth noting that in future years we might well see emerging institutional investors on a smaller scale, in the form of individual landlords who started off with a few properties and have built up portfolios of several hundred properties over the years.

Conclusion

23 The new devolution arrangements will put London in a unique position, with a directly elected Mayor bringing together strategic direction and investment decision-making on housing and the key infrastructure necessary to underpin the delivery of the homes that London needs. These new powers put in one place the public sector landholdings acquired to promote housing development and the public investment necessary to fund these homes, so that this land can be brought forward to enable housing delivery. They also enable a closer alignment of housing delivery with the Mayor’s wider social and economic objectives and other major infrastructure investment opportunities, such as Crossrail, the Olympics and the large opportunity areas across the capital.

24 Investing in London is investing both where need is most intense and where the economic benefits that will accrue are greatest.

November 2011