Financing of new housing supply

Written submission from the R55 Group

1. R55 Group (R55) welcomes the opportunity to submit written evidence to the Department of Communities & Local Government (CLG) select committee on the Financing of New Housing supply.

2. R55 are construction innovators, urban strategists and financiers of complex real estate assets not suited to traditional debt funding solutions. R55 offer pension fund backed long dated funding solutions to both Registered Providers and Local Authorities.

3. Summary

· Alternative funding structures to Bond finance & traditional banking debt

· VAT Exemption in areas of unaffordable housing

· Equalisation of VAT on new & refurbished buildings for housing

· Retaining public sector land banks

4. Our evidence presents both observations from our experience of unlocking brownfield sites for housing in some of Britain’s lowest income areas and from our recent activity in developing pension fund investment structures for social housing finance.

5. "The problem that we have is that lenders aren’t lending, builders aren’t building and people can’t get their deposits together to buy, so we’ve got a triple problem in the housing market." Housing minister Grant Shapps MP

6. Since the economic crises banks have gradually and significantly withdrawn from funding all aspects of the housing cycle; People are unable to secure affordable mortgages without having a substantial cash deposit to contribute, lending criteria has also become significantly stringent even for individuals with good credit profiles. Subsequently the acquisition of new homes and the fluidity of the housing market generally has almost ceased, with such obvious lack of demand housing developers are unable to fund such risk.

7. Under the Basel III accord banks have had to introduce significant additional capital buffers, increase their capital base, introduce minimum leverage and liquidity ratios. Given such increased cash reserve requirements banks have sought to reduce their exposure in many ways some of which have impacted significantly on the of the housing cycle.

8. Registered Providers have witnessed banks seeking to re-price existing long term low cost debt facilities at any opportunity where the RP requests an amendment of an existing loan. The few remaining banks willing to lend to the sector will now only enter into 5 year loan agreements or agreements with 5yr re-pricing options, this does not allow Registered Providers to manage their risk profiles long term as they have previously been able to do under the traditional facilities. The majority of the main lenders have subsequently withdrawn from the market.

9. Alternative Social housing Funding.

"The funding community to the social housing sector takes great comfort from the strong regulatory framework and implicit Government revenue support in the form of social housing grants and housing benefit. Investors and rating agencies believe these two elements in particular have underpinned the default free history of the sector." Moodys

10. Several of the larger Registered Providers have accessed the Capital Markets through a Bond issuance, smaller RP’s have also accessed such funds through umbrella brokers. The inflation linked nature and long term Rental Income streams from social housing similarly reflect the annuity obligations of pension funds making the marriage of both RP and Pension Fund a comfortable fit.

11. Pension Funds through their obligations seek much lower risk profiled assets and stringent regulatory environments compared to other investors. The mechanism by which Housing Benefit income flows from the Government to the Housing Association is fundamental in effecting the perceived risk to an investor. Currently Housing Benefits flow from Government directly to the RP, with the Provider being regulated this environment often enables them to obtain excellent credit ratings of AA2, with such good ratings institutional and pension fund investors have considerable appetite to invest in the sector.

12. A recent bond issued by a large RP for GBP45m was 185% over subscribed. Since a bond issuance by Peabody early last year and the issue by Moat RP more recently the pricing increased by 100Bps, the cost of bond finance is on the rise.

13. Should a policy change allow for Housing Benefits to be paid to the Tennant and not directly to the RP, this will create a perceived increased risk of default, the introduction of such an additional risk layer with respect to rent collections will likely result in a rating agency issuing a much lower rating, this will subsequently reduce investor appetite and increase the cost of funds to the Registered Provider and impact on the delivery of new social housing.

14. VAT breaks – stamp duty exemption in rundown areas –

Lord Rogers’ Urban Task force report made several excellent contributions towards assisting the funding of housing. In particular the exemption of stamp duty in urban regeneration areas had a significant positive impact on the ability for developers to fund projects. The exemption from such areas was short-lived, where stamp duty was reintroduced many of such rundown areas failed to kick start their housing delivery. We encourage Government to observe the benefits such exemption made and reintroduce the policy but expanding it to all regions where homes are deemed unaffordable.

15. Equalisation of Vat on construction materials between old homes and new

Many existing buildings can be converted into homes cheaper in many cases than the construction of new buildings. VAT chargeable on existing buildings for residential conversion can often make the delivery of housing cost prohibitive and subsequently unviable, many opportunities for converting existing buildings to homes are lost due to this policy. We encourage Government to equalise VAT on existing buildings to 0% inline with that of new build schemes.

16. Public sector land bank disposals

The credit ratings of Government and its risk profile of default are highly attractive to the pension fund investment community. The lack of institutional investment into the sector other than through a Bond instrument (which they are most comfortable with) is often due to the lack of a familiar transactional structure providing the low risk profile environment they require. The significant over subscription of RP bonds is testimony of pension fund appetite for investing in the sector and demonstrating that through finding an appropriate structure such channelling of pension funds is a viable option.

17. An estimated 40% of large housing development sites are in the ownership of Government and public sector departments; the high credit rating of Government coupled with the billions of pounds in pension funds seeking a secure home, legal frameworks suited to both Government as Landlord and Pension fund as investor could be put in place allowing Government to kick start a housing delivery programme on its own redundant land.

January 2012