House of Commons
Communities and Local
Government Committee
Financing of new
housing supply
Eleventh Report of Session 2010–12
Volume I: Report, together with formal
minutes, oral and written evidence
Additional written evidence is contained in
Volume II, available on the Committee website
at www.parliament.uk/clgcom
Ordered by the House of Commons
to be printed 23 April 2012
HC 1652
Published on 7 May 2012
by authority of the House of Commons
London: The Stationery Office Limited
£24.50
The Communities and Local Government Committee
The Communities and Local Government Committee is appointed by the House
of Commons to examine the expenditure, administration, and policy of the
Department for Communities and Local Government.
Current membership
Mr Clive Betts MP (Labour, Sheffield South-East) (Chair)
Heidi Alexander MP (Labour, Lewisham East)
Bob Blackman MP (Conservative, Harrow East)
Simon Danczuk MP Rochdale (Labour, Rochdale)
Bill Esterson MP (Labour, Sefton Central)
Stephen Gilbert MP (Liberal Democrat, St Austell and Newquay)
Mr David Heyes MP (Labour, Ashton under Lyne)
George Hollingbery MP (Conservative, Meon Valley)
James Morris MP (Conservative, Halesowen and Rowley Regis)
Mark Pawsey MP (Conservative, Rugby)
Heather Wheeler MP (Conservative, South Derbyshire)
Steve Rotheram MP (Labour, Liverpool Walton) was also a member of the
Committee during this inquiry.
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Financing of new housing supply 1
Contents
Report
Summary
1 Introduction
The challenge
Barriers to housing supply
The Government’s strategy: Laying the Foundations
Focus of report
Our inquiry
2 Private investment
Investment from pension funds and large financial institutions
Private rented sector
Institutional investment and housing associations
Investment vehicles
Real Estate Investment Trusts
Self invested personal pensions
Housing Investment Fund / Housing Investment Bank
3 The private rented sector
Smaller landlords
Issues in the private rented sector
The private rented sector: conclusion
4 Affordable housing delivery
Affordable Rent
Letting housing benefit take the strain?
Affordable Rent: the longer term
Affordable Rent: conclusion
Affordable housing delivery: possible risks
Section 106 agreements
Welfare reform
5 The future financing of housing associations
Bond finance
Historic grant
Writing off the historic grant
Historic grant and equity
Historic grant: the Government’s view
The Dutch experience
Future financing of housing associations: conclusion
6 The role of local authorities
Reform of the Housing Revenue Account
HRA reform: maximising the benefits
Page
3 5 5 8 9 10 10 12 12 12 15 17 17 20 20 23 23 23 25 26 26 28 29 31 31 31 33 36 36 37 37 38 41 41 42 44 44 45 2 Financing of new housing supply
Sources of finance
Local authority land
The Right to Buy
The Right to Buy: concerns
Extension of the Right to Buy to housing associations
Conclusion: the role of local authorities
7 Financing new build for owner occupation
NewBuy Guarantee scheme
‘Intermediate’ products
Government land
Other models
Self/custom build housing
8 50 51 52 53 56 57 58 58 60 61 62 63 Conclusion
67 Conclusions and recommendations
68 Formal Minutes
75 Witnesses
76 List of printed written evidence
77 List of additional written evidence
77 List of Reports from the Committee during the current Parliament
79 Financing of new housing supply 3
Summary
A basket of measures, covering all tenures of housing, is needed if enough finance is to be
made available to tackle the country’s housing crisis. There is no one ‘silver bullet’ with
which the housing deficit can be removed. Many of the measures in the Government’s
housing strategy will provide a welcome boost in the short to medium term. However,
further action and a longer term approach will be needed if we are to see a sustainable
change in housing supply. The country has not come close to delivering the number of
homes it needs for many years, and this has been exacerbated by the recent financial crisis.
Institutions and structures that have traditionally ignored housing should be encouraged to
invest. Increased investment from large financial institutions and pension funds may not
be a panacea, but could make a significant contribution to the building of new homes in
both the private and social rented sectors. Public sector bodies and housing associations
should take steps to encourage institutional investment. Vehicles such as Real Estate
Investment Trusts should be revamped to encourage investment in housing. The
Government should also consider whether the remit of the Green Investment Bank can be
expanded to cover housing and, potentially, wider infrastructure projects.
While institutional investment could play a greater role, the private rented sector will
continue to be dominated by smaller landlords. The Government should bring forward
proposals to simplify tax and regulatory structures to encourage private landlords to
expand their portfolios and invest in new build housing.
The Affordable Rent model is the Government’s flagship policy for affordable housing. We
have concerns: how it will play out in different parts of the country; whether it is a decision
to ‘let housing benefit take the strain’; and whether it is sustainable over the longer term.
The Government should address these issues in bringing forward proposals for the future
delivery of affordable housing. There are also wider questions about the future financing of
housing associations, as lending from traditional sources becomes less readily available. In
particular, the Government should consult on the future role and status of the historic
grant that sits on housing association balance sheets and is potentially an untapped
resource.
Local authorities have a vital contribution to make to the delivery of new housing supply,
by working in partnership with developers and housing associations, and by making land
and finance available for new development. The recent reforms to the Housing Revenue
Account are welcome and could potentially increase the finance available for new housing
supply, if they allowed local authorities, within prudential limits, to safely increase their
capital borrowing. We are concerned about the impact of the Government’s proposals to
revive the Right to Buy upon the social housing stock. In the longer term, in line with the
spirit of localism and moves to self-financing, we recommend that the Government give
councils greater freedom to decide on the best housing solutions for their communities.
The Government can also support the building of new homes for owner occupation: it
should ensure the NewBuy Guarantee scheme is achieving its aims and maximise the
opportunities for the involvement of smaller builders and lenders; it should take steps to
4 Financing of new housing supply
encourage investment in shared ownership and shared equity mortgage products and
make them understandable; and it should continue to make public land available for
development, whilst ensuring that the best deal is secured for the taxpayer. There is
particular merit in public bodies contributing their land to a joint venture model.
If the gap between housing supply and demand is to be met, other models of housing
delivery should also be promoted. Self and custom build schemes in particular have
significant potential to deliver a major contribution to housing supply from a new source,
but we should not underestimate the institutional change necessary to achieve this. The
Government, local authorities and lenders should take action to overcome the barriers to
self and custom build development, and there should be a commitment to getting pilot
schemes underway very quickly.
Financing of new housing supply 5
1 Introduction
1. Ensuring that there are enough homes available to meet the nation’s needs should be a
key priority for any government, but for many years house building levels in England have
been far too low. The Minister for Housing and Local Government, Rt Hon Grant Shapps
MP, himself told us that he did “not think we have been building enough homes in this
country for a very long time”.1 It is clear that we need to see a step-change in housing
supply, but the new homes the country needs will not be delivered unless there is sufficient
money available to pay for them. This report considers the steps that can, and should be,
taken to make more finance available for the building of new homes.
The challenge
2. Mr Shapps stressed that predictions of housing need were “hellishly difficult to make”,
pointing by way of example to the impact that the Government’s immigration policy could
have on the number of homes required in England. He said that, according to the “last
study” he had seen, 232,000 new homes per year were needed.2 This is the average annual
figure for the projected growth in the number of households in England between 2008 and
2033.3 Levels of household formation are determined by a range of social and economic
factors. The Chartered Institute of Housing (CIH) told us that this household growth
figure had to be considered on top of the “assessed backlog at any one time”.4 The CIH
referred to a study that estimated households in housing need commissioned by the
previous Government and published in November 2010.5 This study set out projections
that showed “backlog need peaking in 2009 at around 1.99 million households—equivalent
to 8.8 per cent of all households, before falling back gradually until 2021”. The forecast was
based “on continuation of relevant existing policies and on judgements about the likely
path of the wider economy going forward”.6 The CIH referred to a reconsideration of
assumptions and suggested that “the forecast of an easing backlog is now much less likely
to apply, because of the likelihood that the market will not recover rapidly and that the
rented sector will grow little in gross terms”.7
3. Table 1 below shows provisional house building completion figures in England for 2011.
Such figures would suggest that England is currently building less than half the number of
homes it needs to meet levels of household growth. Mr Shapps, however, pointed to the
provisional New Homes Bonus figures for England for the more recent period, October
2010 to October 2011,8 which showed that the Bonus was paid in respect of 159,000
1
Q 320
2
Q 322
3
Department for Communities and Local Government, Household Projections, 2008 to 2033, England, November
2010, p 1
4
Ev 110
5
As above
6
Glen Bramley, Hal Pawson, Michael White, David Watkins and Nicholas Pleace, Estimating Housing Need, research
commissioned by the Department for Communities and Local Government, November 2010, p 10.
7
Ev 110
8
Q 321
6 Financing of new housing supply
properties.9 This figure includes 22,000 long-term empty properties brought back into
beneficial use.10 In a Written Answer to Rt Hon Nick Raynsford MP in February 2012, Mr
Shapps said that the remaining 137,000 included new build and conversions. The source
data did not distinguish housing converted from existing stock from the newly-built
housing that is the focus of this inquiry.11 Moreover, while these New Homes Bonus figures
may paint a somewhat more positive picture of the total number of homes being delivered,
they would still suggest that there is a deficit of over 70,000 homes when compared with
levels of household formation. If the backlog is also taken into account, the deficit becomes
even greater.
Table 1: Permanent dwellings completed, England, by tenure, 201112
Private Enterprise
82,170
Housing Associations
24,530
Local Authorities
2,320
TOTAL
109,020
Figures are provisional and subject to revision.
4. Table 2 below shows house building completion figures in England for the last two
decades. It shows that completions, in particular those by private enterprise, have fallen
dramatically since the ‘boom’ years of the mid 2000s. The data also suggest, however, that
even during those years, when it can be argued that there was plentiful finance available,
the figures never came close to delivering the levels of housing the country now needs.
Moreover, they show that in the last twenty years, the private sector has never delivered
more than 150,000 homes per year. This suggests that potentially radical changes of policy
and alternative sources of finance will be needed if housing supply is ever to reach levels of
demand. Indeed, as owner occupation has been falling as a percentage of total tenure since
2003, some of these new approaches will need to be targeted at rented housing.13 Increasing
housing supply would also provide an important economic stimulus.14
9
HC Deb, 1 February 2012, col 66WS
10
As above
11
HC Deb, 27 February 2012, col 36W
12
Department for Communities and Local Government, Live tables on house building: Table 244: Permanent dwellings
completed, by tenure, www.communities.gov.uk
13
Department for Communities and Local Government, English Housing Survey: Headline Report 2010–11, February
2012, p 47
14
See, for example, Ev w32 [Riverside], Ev 154 [National Housing Federation].
Financing of new housing supply 7
Table 2: Permanent dwellings completed, England, by tenure and financial year15
Year
Private
Enterprise
Housing
Associations
Local
Authorities
TOTAL
1990–91
132,500
14,580
12,960
160,030
1991–92
132,050
15,970
7,110
155,130
1992–93
115,910
23,970
2,580
142,460
1993–94
116,050
30,210
1,450
147,710
1994–95
125,740
31,380
850
157,970
1995–96
123,620
30,230
760
154,600
1996–97
121,170
24,630
450
146,250
1997–98
127,840
21,400
320
149,560
1998–99
121,190
18,890
180
140,260
1999–00
124,470
17,270
60
141,800
2000–01
116,640
16,430
180
133,260
2001–02
115,700
14,100
60
129,870
2002–03
124,460
13,080
200
137,740
2003–04
130,100
13,670
190
143,960
2004–05
139,130
16,660
100
155,890
2005–06
144,940
18,160
300
163,400
2006–07
145,680
21,750
250
167,680
2007–08
145,450
23,110
220
168,770
2008–09
108,010
25,510
490
134,020
2009–10
89,540
25,180
370
115,080
2010–11
81,980
22,760
1,310
106,050
Mean
122,960
20,902
1,447
145,309
15
Department for Communities and Local Government, Live tables on house building: Table 209: Permanent dwellings
completed, by tenure and country, www.communities.gov.uk
8 Financing of new housing supply
Barriers to housing supply
Finance
5. Our evidence indicated that the availability of finance was one of the biggest current
barriers to increasing housing supply. In particular, witnesses were concerned about
limitations on mortgage finance. Regenda Group, a housing association, argued:
Increasing the availability of mortgage finance is critically linked to the issue of
housing supply as building rates will only increase if there is confidence that sales will
take place post completion.16
Peter Williams, Director of the Cambridge Centre for Housing and Planning Research,
said that there was “clearly a capacity constraint in the mortgage sector now and going
forward for at least five years, and possibly longer, which really has a big implication for the
shape of UK housing provision”.17 The Council of Mortgage Lenders anticipated “only a
gradual progressive improvement in affordability pressures and credit availability, and
therefore much slower recovery in property transactions” than had been projected by the
Office for Budget Responsibility.18 Some witnesses also pointed to issues raised by the
availability of development finance. The Home Builders Federation (HBF), for instance,
said that “funding is very restricted for many SMEs [small and medium enterprises] in the
sector who often rely on project-based bank funding”. It added that “if funding remains
restricted, this could restrict the industry’s ability to meet expanding demand”.19 Given that
the financing challenges are likely to continue,20 new sources of finance will be important
both for making up the housing shortfall and providing longer term solutions. Our report
will consider whether there are alternatives to traditional sources of debt finance that can
help to fund the building of new homes.
6. We also heard from witnesses that there were various constraints preventing them from
accessing the finance that was available. Representatives from various sectors—local
authorities, housing associations, private landlords and investors—all pointed to particular
regulatory, legislative or governmental issues that made it harder for them to finance house
building.21 We will consider in more detail some of the key constraints and how they might
be eased or removed.
Availability of land
7. Some of our evidence considered the availability of land to be a barrier to housing
supply. G15, a group of London housing associations, for example, said: “The supply of
16
Ev w46
17
Q2
18
Ev 123
19
Ev 89
20
See, for example, Bank of England, Financial Stability Report, Issue No. 30, December 2011 and Financial Services
Authority, Retail Conduct Risk Outlook, March 2012.
21
See, for instance: Ev 95 [Local Government Association on the cap on local authority borrowing]; Evs 144, 145
[Residential Landlords Association on taxation in the private rented sector]; Ev w46 [Regenda Group on how the
treatment of historic social housing grant constrains housing association borrowing]; Ev 107-108 [British Property
Federation on barriers to the establishment of Real Estate Investment Trusts].
Financing of new housing supply 9
genuinely developable land is low and action is needed to increase the supply”.22 In
particular, the evidence emphasised the importance of public bodies—central government
departments and agencies and local authorities—making their land available for
development.23 In this report we will consider as a recurring theme the ways in which the
public sector can support the financing of housing development through the provision of
land; in doing so, we will be mindful of the assertion made by Shelter that:
new approaches to both land and finance will be required. Increasing the supply of
either land or finance in isolation will not work: additional land supplied without
finance will not be developed, and additional finance without land will simply inflate
prices.24
Planning
8. It is important to consider finance and land availability in harness. These issues may also
link in with planning. We heard from some witnesses that the planning system was a
constraint upon housing development. John Stewart, Director of Economic Affairs at the
HBF, said that planning was “a major obstacle”, pointing to the findings of Kate Barker’s
review of housing supply and his experience of talking to house builders.25 Other witnesses
took a different view about planning, with Cllr Clyde Loakes, Vice Chair of the Local
Government Association’s Environment and Housing Board, saying that it was “certainly
not” a key barrier to increasing housing supply.26 We have already examined the planning
system in this Parliament, in particular through our inquiries into the Abolition of Regional
Spatial Strategies27 and The National Planning Policy Framework.28 In this report, we do not
propose to look in detail at planning issues, except where they have an impact on the
financing of new homes.
The Government’s strategy: Laying the Foundations
9. On 21 November 2011, the day we held our first oral evidence session, the Government
published Laying the Foundations: a Housing Strategy for England. Giving evidence to us
on 30 January 2012, Mr Shapps told us that the strategy set out “over 100 different ways in
which we intend to fix the gap”.29 He identified from the strategy four particular measures:
the Right to Buy; plans to build 100,000 homes on government land; the new build
22
Ev w34
23
See, for example, Ev 155 [National Housing Federation], Ev w55 [Place Shapers], Ev w39 [Waterloo Housing Group],
Q 66 [John Stewart].
24
Ev 83
25
Q 45
26
Q 44
27
Communities and Local Government Committee, Second Report of Session 2010–12, Abolition of Regional Spatial
Strategies: A Planning Vacuum?, HC 517; Department for Communities and Local Government, Government
Response to the Communities and Local Government Committee’s Report Abolition of Regional Spatial Strategies: a
planning vacuum, Cm 8103, June 2011
28
Communities and Local Government Committee, Eighth Report of Session 2010–12, The National Planning Policy
Framework, HC 1526; Department for Communities and Local Government, Government response to the
Communities and Local Government Select Committee Report: National Planning Policy Framework, Cm 8322, March
2012
29
Q 320
10 Financing of new housing supply
mortgage indemnity scheme (later branded as the NewBuy guarantee); and planning
reform.30 A further measure in Laying the Foundations related to the establishment of a
“Get Britain Building Fund” to “support building firms in need of development finance”.31
The 2012 Budget announced that this £420 million fund would be increased by a further
£150 million.32 John Stewart said that the fund was “not a panacea [...] but where
development finance is the primary constraint this should help”.33
Focus of report
10. We will examine some of the key measures put forward in Laying the Foundations, but
will also take a longer-term view and consider the potential for broader changes of policy.
As Peter Williams told us:
We all struggle to understand why housing supply does not respond more effectively
than it does. There is clearly a package of issues around that, but it is extraordinary
how the private sector output has remained remarkably constant, all through the
cycles, without responding to what normal markets would respond to.34
There is clearly no ‘silver bullet’ with which the housing deficit can be removed; nor can we
rely solely on private enterprise, which, in recent times—even during the ‘boom’ years of
the mid 2000s—has not built more than 150,000 homes per annum in England. A range of
solutions is needed, across all tenures of housing.
11. Our report will focus on identifying additional sources of finance to support house
building. It will consider whether there are constraints on housing finance that can be
removed, whether there are ‘traditional’ approaches to financing that can be given greater
support, and whether there are new and innovative ways in which new housing can be
funded. It will look at the contributions to be made by the public and private sectors, as
well as not-for-profit housing associations. It will also consider the ways the various sectors
can work together to make the most effective use of the finance available.
Our inquiry
12. We received over 60 written submissions, from housing associations, local authorities,
academics, think tanks, charities and representative bodies, amongst others. We explored
the themes emerging from our written evidence in four oral evidence sessions between
November 2011 and January 2012. In the course of the inquiry we visited Birmingham and
Dudley, to see at first hand the steps being taken to address the challenges of housing
supply, and the Netherlands, to consider whether there were lessons from the Dutch
approach that could usefully be applied within England. We are grateful to those who
supplied us with written and oral evidence, and to those people we met on our visits.
30
Q 320
31
Department for Communities and Local Government, Laying the Foundations: A Housing Strategy for England
[referred to hereafter as Laying the Foundations], November 2011, p 9
32
HM Treasury, Budget 2012, March 2012, para 1.221
33
Q 47
34
Q3
Financing of new housing supply 11
Particular thanks are due to Birmingham City Council, Dudley Metropolitan Borough
Council and the British Embassy in the Hague for arranging the visits, to the Royal
Institution of Chartered Surveyors who held a briefing session for us at the start of the
inquiry, and to our specialist advisers, Professor Christine Whitehead OBE of the London
School of Economics and Political Science,35 and Philip Jenks of Phil Jenks Consultancy
Ltd.36
35
Professor Christine Whitehead declared the following interests: Advisor to the Board of the Housing Finance
Corporation; independent research for Shelter, RICS, JRF, the Housing Futures Network; Project for the European
Investment Bank on housing finance for affordable housing; fellow of the Society of Property Researchers; Member,
RICS.
36
Philip Jenks declared the following interests: NED, Chartercourt Financial Services—New non bank lender and
mortgage servicer; Phil Jenks Consultancy Ltd—current clients with housing links: Mill Group, UKAR; recent previous
clients: CLG, HCA, Lloyds Banking Group, Metro Bank, Pocket and NPS, plus unpaid support to both FSA and BSA;
Board Member, Leeds Building Society.
12 Financing of new housing supply
2 Private investment
13. Given current limitations on both debt finance and public funding, there is inevitably a
need to look to other sources if we are to raise sufficient finance to meet the country’s
housing needs. This chapter will consider the potential for investment by large financial
institutions, both in the private rented and housing association sectors. It will then examine
possible vehicles that could be used to channel investment into rented housing.
Investment from pension funds and large financial institutions
Private rented sector
14. Some of our evidence suggested that large financial institutions and pension funds
could make a significant contribution to new housing in the private rented sector. Ian
Fletcher, Director of Policy (Real Estate) at the British Property Federation considered that
the conditions were “all there for large-scale institutional investment in the sector”, adding
that it was “now or never”.37 The Resolution Foundation, an independent research and
policy organisation, discussed the potential for a “new approach to build-to-let
development using institutional investment”, arguing that such an approach could help to
meet “the housing needs of individuals and families on low-to-middle incomes who are
unable to buy a home in the medium to long term”.38
15. Not all witnesses were so enthusiastic about the prospect of “build-to-let” investment.
Paragon Group, which provides mortgages to investors in the private rented sector, warned
that investment from institutions might not produce the right type of housing:
The kind of properties that institutional investors are likely to invest in through
“build-to-let” schemes, such as two-bedroom flats, in large purpose-built
developments are unattractive to tenants and there is already an over-supply of this
type of property caused by pre-credit crunch property developer and investment
club activity.39
The housing charity, Shelter, said that institutional investment “would clearly be welcome,
if it can provide additional sources of financing for high quality homes, but we should not
expect a revolution in housing finance to come from this source”. It added: “Even in
countries with much larger private rented sectors and significant institutional investment
in housing, it remains the case that the bulk of landlords are small scale investors, and
particularly individuals, much as in the UK”.40
16. In Laying the Foundations, the Government announced that it would be “putting in
place an independent review of barriers to investment in private homes for rent”.41
37
Q 56
38
Ev w88
39
Ev 151
40
Ev 87
41
Laying the Foundations, p 33
Financing of new housing supply 13
Subsequently, Mr Shapps, the Minister, announced that this review would be led by Sir
Adrian Montague, non-executive chairman of the private equity firm 3i.42 On 21 February
2012, Sir Adrian issued a call for evidence. He set out two “fundamental questions” upon
which he wished to focus: “Will the changes that the Government has introduced go far
enough to generate significant new flows of investment? And, if not, what can be done to
accelerate things?”43
17. Professors Tony Crook of Sheffield University and Peter Kemp of Oxford University,
discussed attempts over the last 30 years to bring in institutional investment. They
considered that successive governments had sought to adapt “existing schemes designed
for other purposes” rather than bringing forward initiatives “with the specific needs of
private renting in mind”; moreover, governments had not addressed “the fundamental
barriers preventing the emergence of larger companies and institutional investment”.44 In
the view of Nick Jopling, Executive Director of Property at Grainger plc,45 the three main
barriers were “scale, suitability of stock and yield”.46 He explained:
An institution wants to invest in scale; it is not interested in buying buy-to-let
property. There is no stock for it to go and buy. There are no portfolios of rental
stock for it. There may be some distressed portfolio, but they are not interested in
that, because there is often a reason those properties are distressed in the first place.
Suitability of stock: we address that through building purpose-built stock for rent.
That is the multi-family housing US model. And then the yield. Yield has always
been a challenge, because the cost of entry, against the rent and the net rent that
comes off the bottom, has always been too high. In particular in London, the net
yield is so small, so one has to deal with the cost of entry, and that is the cost of
construction and the land.47
Alan Benson, Head of Housing and Planning at the Greater London Authority, expressed a
similar view, saying that, for him, “the yield question” was “the absolute crux [...] of why
institutional investment has not got off the ground in the UK”.48
18. Grainger plc’s submission gave details of institutional investment schemes in which the
company had been involved. The G:res fund, which it said was the “UK’s largest private
rented sector residential investment fund”, and in which it held a 22% stake, had
approximately £400 million of residential assets in the UK.49 Grainger’s submission also
described a partnership it had established with the construction company Bouygues
Development Ltd, “with the aim of creating and co-investing in a new Build-To-Let
42
“Review to examine institutional investment in private rented homes”, DCLG press release, 23 December 2011,
www.communities.gov.uk
43
“Sir Adrian Montague calls for evidence on barriers to institutional investment in private rented homes”, DCLG press
release, 21 February 2012, www.communities.gov.uk
44
Ev w51
45
Grainger plc is a property company involved in a number of institutional investment build-to-let schemes.
46
Q 130
47
As above
48
Q137
49
Ev 120
14 Financing of new housing supply
Fund”.50 It was anticipated that this fund would “provide institutional investors with the
opportunity to invest in scale into the Private Rented Sector [...] which to date has been
relatively inaccessible”. The fund had “a dedicated portfolio of purpose built PRS
development sites in London and [the] South East of England”.51 Nick Jopling said that to
address “cost of entry” issues, all four of the sites put forward were “on public land”.52
19. Building on public sector land is a useful way of overcoming the key barriers to
institutional investment: the release of large sites can enable the development of purposebuilt stock at a viable scale. If public bodies are prepared to defer payment or enter into a
partnership, this can reduce the costs of entry for the investor. Richard Hill, Deputy Chief
Executive at the Homes and Communities Agency (HCA), told us about its work to make
land available. He said that the HCA had a role in using “public sector land where possible
for a variety of developments”; the agency would “be prepared to defer the return for a
longer period, take some of the rental during that period, and look for capital return
further down the line”.53
20. We heard from the Association of Greater Manchester Authorities (AGMA) about a
pilot scheme being developed by Manchester City Council with the Greater Manchester
(GM) Pension Fund:
Discussions with the GM Pension Fund have been taking place to develop a Housing
Investment Model in Manchester that will deliver both low and high rise mixed
tenure options, capable of being applied across GM. The basic premise is very simple;
there are two investment partners, the council with land to invest and the pension
fund with cash to invest. Together the investors procure a house-builder, sales and
marketing function and a housing managing agent with which it enters into a
minimum 10 year lease. Through the lease, both investors are able to take a
guaranteed revenue return on their investment and both share in any capital return
on the sales properties. The new build housing is targeted at economically active
households.54
AGMA identified a number of barriers and challenges, not least the need “to demonstrate
to all partners that the model works”.55 While it is too soon for us to make a judgement on
the scheme, it does raise some interesting issues, including the possibility of public sector
pension funds investing in housing. Andy Hull, Senior Fellow at the Institute for Public
Policy Research (IPPR), considered that local government pension funds could be an
important source of finance “because they have in excess of £150 billion worth of funds,
because they can be quite patient to see the return over time and because they have
councillors on their management boards who should understand [...] what a crisis we are
facing in terms of housing need”.56
50
Ev 119
51
As above
52
Q 133
53
Q 316
54
Ev 131, 132
55
Ev 132
56
Q4
Financing of new housing supply 15
21. Another way in which local authorities could support institutional investment was to
take a flexible approach to affordable housing requirements in section 106 agreements.57
Grainger plc suggested that “reducing or altogether removing affordable housing
requirements on [private rented sector] developments would greatly increase the viability
of the scheme and improve yields”.58 John Stewart, Director of Economic Affairs at the
Home Builders Federation (HBF), however, referred to “glib comments about, for
example, making private rented sector schemes work by waiving affordable housing”,
adding: “I am always rather concerned when there is talk about reducing the regulatory
burden for one source of capital or one particular provider within one tenure. I am much
more a believer in a level playing field”.59 Responding to these comments, Ian Fletcher said
that HBF “members are investing capital for the best part of a year at most, sometimes; my
[British Property Federation] members are investing in capital for 20 years; there is a
greater cost to their doing that and they should be treated more favourably”.60 We consider
that there may be merit in a flexible approach, but this would need to be balanced against
the impact upon affordable housing provision across a local area. The onus should be on
the individual council to assess how best to strike the balance.
22. We heard about a number of steps that public sector organisations can take to
encourage institutional investment in the private rented sector, addressing the key
barriers of scale, suitability of stock and yield. We recommend that all public bodies,
both local and national, consider the potential for contributing their land alongside
institutional finance to support build-to-let initiatives. We urge local authority pension
funds to be alert to the benefits of investment in residential property, whilst ensuring
transparency and security for their investors. We would hope that their doing so would
pave the way for private funds also to invest in residential property. Finally, we
encourage local authorities to consider taking a flexible approach to affordable housing
requirements in planning obligations on a case-by-case basis, where this will help to
stimulate build-to-let investment and will not be to the detriment of the wider housing
needs of the area.
Institutional investment and housing associations
23. An alternative way of overcoming some of the barriers to institutional investment
would be for investors to work in partnership with housing associations. Considering the
prospects for institutional investment, the Cambridge Centre for Housing and Planning
Research said that it was difficult to obtain “a portfolio which is simultaneously sufficiently
diversified but also spatially concentrated (for economies of scale in management) […]
within the short time frame required by investors”. It suggested that housing associations
could offer a solution to this problem:
57
Section 106 agreements, or planning obligations, involve a local planning authority entering into an agreement
with a developer in association with the granting of planning permission. They have been frequently used to secure
a contribution from a developer to the provision of affordable housing.
58
Ev 118
59
Q 60
60
As above
16 Financing of new housing supply
In this regard it can be argued that the most practicable means of creating large scale,
long term, institutional landlords in the private rented sector may be to encourage
housing associations to expand into market renting, since they already exist, are of a
viable scale, and have the necessary expertise. The key issue here would be to develop
regulation to ensure that any cross-subsidisation is from private to public rather than
the other way around.61
David Orr, Chief Executive of the National Housing Federation, said:
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.62
24. The housing association London and Quadrant Group (L&Q Group) set out some of
the potential advantages of partnerships between investors and housing associations:
Housing associations are in a good position to attract private investment. They have
a wealth of experience managing rented accommodation and through this have the
capacity to continuously develop a range of housing products. There is potential in
the future to invest in partnerships with others, including becoming key delivery
vehicles for upstream institutional funders of market rent which would help to
achieve scale. Housing associations also have the ability to act as guarantor of quality
and a degree of security to the benefit of both consumers and investors.63
L&Q Group also discussed the possibility of attracting private finance by developing “a
new form of market rented housing with a differential offer such as longer tenancy
options”.64
25. Another possibility put to us involved institutions investing directly in social housing.
Newark and Sherwood Homes Ltd considered that the social rented sector had “a more
stable long term return potential being less volatile than the majority of market driven
investments”. It gave the example of the insurance company Aviva investing in social and
affordable properties with the Derwent Living housing association.65 The British Property
Federation also commented on this example, stating that while Aviva’s investment did not
contribute “to new stock per se”, it released capital allowing the housing association “to
invest in new build elsewhere”.66 Discussing new ways of providing funding for affordable
housing, the Housing Forum, a membership body for organisations involved in the
construction and repair of housing, said that institutional models might work “on a longer
time span than current financial models (typically 30–50 years)” and called for them “to be
61
Ev 77
62
Q 257
63
Ev 171
64
Ev 170
65
Ev w4-5
66
Ev 105
Financing of new housing supply 17
explored and encouraged”. It added: “This will be a significant catalyst to reshape the
housing association sector”.67
26. We took evidence from Peter Mahoney, Chief Executive Officer at R55 Group, about a
model his organisation had developed to bring institutional investment into social housing.
He explained that his model was “a funding solution and also a modular housing solution”:
The funding solution is very much a lease-backed funding solution where it is
directly targeting housing associations and local authorities who are providing
modular housing that is responding to local housing needs, but it also comes fully
funded. Effectively, the housing association or local authority would provide us with
land. We would work with them, understanding their housing needs and the needs
of the Housing Department, and together a solution is developed.68
He added: “it is not debt funded, it is not reliant upon social housing grant; it is purely
funded by pension funds and life insurance funds that are looking for long-term, stable,
low-risk solutions”.69 The Northern Housing Consortium and North West Housing Forum
also referred to an emerging model of “lease backed funds” under which “ownership of the
scheme transfers to the investor and is leased back to the provider until the loan is made”.
It warned that there were “concerns around this model, particularly its ability to manage
risk given turbulent performance of pension markets in recent [years].”70 Housing
associations should play a role in attracting institutional equity investment, either by
expanding into market renting and providing the economies of scale required by
investors or by using finance from institutions to bring investment into social rented
housing. We encourage housing associations to explore such opportunities and to
establish a dialogue with potential investors. Later in the report, we consider the
possibility of institutional investment being used to support “intermediate” products.
Investment vehicles
Real Estate Investment Trusts
27. Our evidence discussed the role particular vehicles could play in the channelling of
investment into both social housing and the private rented sector. A common suggestion
was that Real Estate Investment Trusts (REITs), which have thus far only existed in the
commercial property sector, could be used to bring investment into housing. Professors
Crook and Kemp discussed the background to residential REITs:
The [...] Real Estate Investment Trust (REIT) initiative (from 2007 onwards) created
the possibility of fully tax transparent residential REITs, notionally able to attract
pension and life funds to invest without a tax loss for them. However, to date this has
not resulted in even one residential REIT being established, although the great
majority of commercial property companies have now converted to REIT status.
67
Ev w11
68
Q 276
69
As above
70
Ev w28
18 Financing of new housing supply
This is partly because, despite the initial impetus to forming REITs being based on
the desire to get institutional funds into the private rented sector, the initiative
became transformed into one addressing investment in all property not just in
private residential property.71
The British Property Federation suggested that residential REITs could also provide a way
of attracting individuals’ investment into housing:
Little of individuals’ money (so-called retail funds) currently goes into collective
investment schemes that are investing in property. Part of the problem is that small
investors like to be able to buy and sell when they wish. That is difficult in a collective
scheme, where most cash will be tied up in buildings that cannot be instantly bought
and sold. The way around that is to invest in companies or Real Estate Investment
Trusts [...] that invest in housing.72
28. Between April and June 2011, HM Treasury undertook an informal consultation on a
range of measures announced in the 2011 Budget “to support the development and growth
of the UK Real Estate Investment Trust market”.73 Following this consultation, the draft
legislation for the Finance Bill 2012 included a measure to address certain identified
barriers to entry and investment.74 The 2012 Budget confirmed that the Government
would legislate “to support entry to and investment in REITs”.75 The Budget also
announced that in 2012 the Government would consult on the REITs regime, including on
“the role REITs can play in supporting the social housing sector”.76 This consultation was
launched on 4 April 2012.77
29. The Chartered Institute of Housing said that potential changes to REITs “could see
housing associations becoming interested in exploring the potential of the model to
increase the supply of affordable homes, as it creates easier access to equity capital markets
and an opportunity for balance sheets to work harder”.78 The housing association, Places
for People, described a proposal it had developed to create a residential REIT:
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
71
Ev w51
72
Ev 106
73
“Informal consultation on REITs measures announced Budget 2011”, HM Treasury webpage, www.hmtreasury.gov.uk.
74
HM Revenue and Customs and HM Treasury, Overview of Legislation in Draft, December 2011, p A89
75
HM Treasury, Budget 2012, March 2012, para 2.178
76
HM Treasury, Budget 2012, March 2012, para 2.177
77
HM Treasury and Department for Communities and Local Government, Consultation on reforms to the real estate
investment trust (REIT) regime, A) to explore the potential role REITs could play to support the social housing sector,
and B) to explore the tax treatment of REITs investing in REITs, April 2012
78
Ev 114
Financing of new housing supply 19
process or cycle could be repeated a few more times until the REIT needs to be
reseeded or restocked with existing residential properties.79
Writing to us after giving oral evidence, Steve Binks, Finance Director at Places for People
said that Places for People anticipated “that the Finance Bill will contain the amendments
to legislation which will facilitate a Social Housing REIT”.80 Places for People estimated
that, if the amendments were made, the REIT could “deliver yields of around 7% to
investors which a number of them have confirmed is acceptable”.81
30. Ian Fletcher, of the British Property Federation, wrote to the Committee following the
publication of the draft legislation. He stated that “the current proposed reforms mark
significant progress in reforming the REIT regime to support residential investment” but
argued that there were “other reforms that we believe are essential if we are ever to see a
significant number of residential REITs”. He proposed two particular additional reforms.
One related “to the way the traditional tax distinction between ‘trading’ and ‘investment’
activities applies in the REIT context”. He explained that a property portfolio could “only
fall within the tax-exempt ring-fence of the REIT rules if it [...] amounts to an ‘investment’
business in tax terms”. There was, however, “a structural tendency in the UK residential
context to rely to a greater extent on regular asset sales” than in commercial property; this
meant that residential property businesses were “generally quite sensitive to the operation
of the trading/investment test”.82 This issue was raised by a number of other witnesses,
including Grainger plc, which had asked the Government to look at the trading versus
investment distinction “specifically in the context of and for the purposes of residential
REITs”.83
31. The second additional reform suggested by Ian Fletcher concerned “the scope for using
the REIT structure without the compliance burden of a listing”.84 He said:
In other countries with REITs a further evolution of their regimes has been the
creation of private REITs that are unlisted. The rationale for only allowing listed
REITs in the UK is understandable, which is that listing provides a degree of
protection for investors, which unlisted REITs would not. However, because most
residential REITs would be started from scratch and therefore be smaller than
existing commercial property REITs there is an argument that allowing unlisted
REITs would particularly be beneficial to the residential sector.85
32. In our view, REITs could be a useful means of bringing investment into the residential
property sector. It is significant that no residential REIT has ever been established in the
UK; it suggests that there are significant barriers to entry and investment. We commend
the Government’s efforts to identify these barriers and put in place measures by which they
79
Ev 167
80
Q 264, footnote
81
Ev 167
82
Ev 107–08
83
Ev 121; See also Ev w53 [Professors Crook and Kemp].
84
Ev 107
85
Ev 108
20 Financing of new housing supply
can be overcome. We also welcome Places for People’s innovation in developing proposals
for a REIT. We agree, however, with the view that further action is needed if the
contribution of REITs to the financing of new housing supply is to be maximised. We
recommend that the Government put in place measures to address concerns about the
distinction between trading and investment specifically in the context of residential
REITs. We further recommend that the Government allow the creation of private,
unlisted residential REITs.
Self invested personal pensions
33. The Residential Landlords Association (RLA) proposed that the Government “allow
self invested pension funds to invest in residential units, up to a maximum purchase price
of £250,000 per unit outside London (with a suitable adjustment for London prices)”.86
Mark Butterworth, Director of the RLA, wrote to us with further information about the
potential for Self Invested Personal Pension (SIPP) investment:
There is £101.7 billion invested into just over 800,000 SIPPs currently. There are
different types and characteristics but of the higher value more flexible type which
would have funds and the ability to undertake the investments required there are
200,000 or 25% of the total number.87
He added that his estimate, given during oral evidence, “of 50,000 that would be interested
or likely to take up such an offer would appear to be on the conservative side”.88
34. Self Invested Personal Pensions could provide another source of finance for rented
housing. We recommend that the Government look in detail at the contribution SIPPs
could make and the risks and benefits for those investing in SIPPs. If satisfied about
these risks and benefits, it should bring forward proposals to facilitate their investment
in residential property.
Housing Investment Fund / Housing Investment Bank
35. The National Housing Federation called on the Government to support the
establishment of a Housing Investment Fund run by housing associations:
Government support and underpinning of a pilot housing investment fund run by
housing associations would enable the development of mixed tenure sector schemes
at scale and would attract investors and create confidence in the market hopefully
acting as a prelude to it increasing in scale. Housing associations could reach an
agreement with government about underpinning the risk and guarantee on investor
return, but the clear backing and support of government would attract and reassure
investors and government could play a role as broker.89
86
Ev 147
87
Ev 149
88
As above
89
Ev 156
Financing of new housing supply 21
36. The Confederation of Cooperative Housing (CCH) described its proposals to establish
a fund through bond financing and institutional investment to finance the development of
co-operative and mutual housing. Under these proposals it aimed to develop “between
1,500 and 2,500 homes through the development of between 30 and 50 new co-operative
and mutual housing organisations”. The CCH said that it had begun to draw a number of
local authorities and housing associations together as “potential partners” and was “seeking
to work with Government to implement the programme”.90
37. Shelter proposed the creation of a National Housing Investment Bank:
A ‘National Housing Investment Bank’ could attract investment funds and provide
loans for the construction of low-cost housing. In European countries such banks
have proved effective at leveraging public funds to channel private finance into both
house building and improvements to the existing stock, a model that RICS [the
Royal Institution of Chartered Surveyors] have called on to be replicated in the UK.
The government has partially adopted this approach through its Green Investment
Bank: we would urge the committee to consider whether this model could usefully be
expanded to include financing house building as well as green infrastructure.91
Roger Harding, Head of Policy, Research and Public Affairs at Shelter, responding to the
suggestion that everybody would be competing for a limited pool of debt finance, said: “If
there is a limited amount of debt, it is vitally important that we channel it towards new
supply rather than inflating the market that we have got and feeding through into
unsustainable loans”.92 IPPR also suggested the expansion of the Green Investment Bank
into a national investment bank.93 Its Senior Fellow, Andy Hull, told us that he and his
colleagues were “arguing for a national investment bank from a number of different
perspectives, not just a housing one”.94
38. We saw for ourselves an example of a publicly-owned bank investing in housing during
our visit to Netherlands, when we met a representative from the Bank Nederlandse
Gemeenten (BNG; the Dutch Municipal Bank). We heard that this bank was 50% owned
by the Ministry of Finance and 50% by the Dutch municipalities. The bank’s lending was
restricted to public and semi-public organisations, with 52% of its lending going to housing
associations. 98% of its loans to housing associations were guaranteed. The bank had a
‘triple A’ rating from two of the three ratings agencies, was the fourth largest and second
most profitable bank in the Netherlands, and, according to Global Finance magazine, the
third safest bank in the world.95
39. Mr Shapps said that he was “all in favour” of a housing association-run housing
investment fund and that his officials “have [worked] and will work with organisations
90
Ev w21
91
Ev 84
92
Q 24
93
Ev 74
94
Q 22
95
“Global Finance names the World’s 50 Safest Banks 2011”, www.gfmag.com, August 2011. Subsequently, Global
Finance has updated its list, and named BNG as the world’s second safest bank, “Global Finance announces a halfyearly update World’s 50 Safest Banks: April 2012”, www.gfmag.com.
22 Financing of new housing supply
who want to bring those types of things about”.96 He questioned whether such initiatives
really needed government support, saying: “If [...] there is something Government could
do, are not doing, and it does not cost a fortune, then come and talk to me, but most of the
time my message out there to housing associations and to councils is, ‘We are giving you
all these flexibilities. Go and use them.’”97 The Minister was unenthusiastic about the call
for a national housing bank, saying that he was “not convinced by that argument at all. I
think the banking system in this country needs to work for all industries and sectors”.98
40. We welcome the Minister’s enthusiasm for a housing investment fund run by housing
associations. Such a fund could help housing associations, and smaller associations in
particular, raise finance for house building. We support the establishment of a pilot
housing investment fund run by housing associations, and recommend that, in
discussions with the National Housing Federation, the Government explore how it can
give its backing. The pilot should consider the viability of a fund, its ability to attract
investment, and any risks to the Treasury arising from Government support. Subject to
the success of the pilot, the fund could be increased in scale. We further recommend
that the Government work with the Confederation of Cooperative Housing on the
Confederation’s proposals for an investment fund.
41. We consider that there is merit in the suggestion that a national housing investment
bank be established. In other European countries such banks have proved effective at
channelling investment into new housing development. The work already underway to
create a Green Investment Bank offers a useful opportunity; there is a clear case for
allowing this bank to invest in housing as well as green infrastructure. We recommend
that the Government consult on proposals for the extension of the Green Investment
Bank’s remit to include the funding of new housing and, potentially, of wider
infrastructure projects. The bank could play a leading role in offering new forms of
finance such as REITs (considered earlier in this chapter) and retail bonds (which we
consider later in the report).
96
Q 333
97
Q 334
98
Q 333
Financing of new housing supply 23
3 The private rented sector
Smaller landlords
42. We have seen that investment by large financial institutions and pension funds offers a
potential source of finance for new housing in the private rented sector (PRS).99 However,
many consider that the sector will continue to be dominated by smaller landlords.100
Paragon Group described buy-to-let landlords as “the backbone of the PRS”, saying they
accounted for “89% of landlords and 71% of properties”.101 The British Property Federation
said that “probably the most significant source of private sector investment in housing over
the past decade has come from small investors buying standalone property”;102 however, it
added that such investment had “not made such a powerful contribution to new build
stock”.103 The Residential Landlords Association (RLA) agreed that “generally PRS
landlords do not purchase new dwellings”104 but said that the sector made an important
contribution to new housing both by recycling “existing stock enabling owner/occupiers to
buy new properties” and “by converting older stock”, for instance sub-dividing large
houses into flats.105 It also said that “in the boom” before 2008:
the PRS helped to fund many new developments [...] often through off plan
purchases, particularly of new apartment developments. By putting down initial
deposits and pre-purchasing PRS investors gave developers the necessary funding
and confidence to proceed with these developments. This is, of course, no longer
feasible.106
Issues in the private rented sector
43. Paragon Group suggested that the decline in the availability of mortgage finance had
made a significant impact on the private rented sector:
Buy-to-let was significantly affected by the credit crunch with an 81% decrease in the
value of new loans, and the number of buy-to-let products declining by 90% from
July 2007. Although buy-to-let lending has entered a period of recovery, it remains
difficult for private landlords to access finance for property purchases, thus
contributing to the current market dysfunction.107
99
See above, paras 14–22.
100 See above, para 15.
101 Ev 149
102 Ev 105
103 As above
104 Ev 142
105 Ev 145
106 Ev 144
107 Ev 150
24 Financing of new housing supply
Nigel Terrington, Paragon Group’s Chief Executive, referred to buy-to-let having had “a
good year”, saying it was “one of the only growing sectors within the mortgage space”;
however, he added that “it is actually a big percentage on a very low number”.108
44. The RLA argued that the sector was not as profitable as it was perceived to be, and that
the picture of it “doing well” because of rising rents and increasing demand was “highly
misleading”. It suggested that those landlords who had invested during “the boom” now
realised that the capital appreciation upon which the sector’s business model had been
based had been “a mirage”.109 It explained:
Returns are currently too low now that capital appreciation is no longer part of the
equation. There needs to be a significant adjustment to provide a worthwhile return
on investment in the PRS. Otherwise, large scale disinvestment will follow.110
Mark Butterworth, Director of the RLA, considered that yields were “being eroded”
because “the costs of running a property keep going up, the tax take keeps going up and
there is more and more regulation coming in”. He added: “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”.111
45. A number of witnesses suggested that changes could be made to the taxation system to
encourage private landlords to expand their businesses. Paragon Group suggested the
creation of a “business environment more akin to that of countries with comparable
private rented sectors where landlords benefit from more competitive taxation regimes and
are able, in some cases, to offset capital losses”.112 The housing charity, Shelter, considered
that the taxation system hindered growth amongst private landlords because it treated their
rental income “as investment rather than trading income”.113 It argued that “landlords
operating to professional standards should be treated as professionals by the tax system
and offered the same level of encouragement to grow as other small businesses, while being
equally subject to effective regulation”.114 The RLA said that there was need for “a
structural reform of taxation in the PRS” and “an immediate step to be taken by giving PRS
landlords deemed trader status in the same way as furnished holiday lettings are treated”.115
The British Property Federation suggested the creation of “Housing Zones” that offered
“tax incentives to investors in new build”, which:
would have to be designated by local authorities to stop building in the wrong place,
and be approved by HM Treasury to keep costs under control, but could help force
more buy-to-let funds into new build. A capital gain tax relief for example might be
the best incentive as many investors are disappointed the current capital gains tax
108 Q 206
109 Ev 144
110 As above
111 Q 219
112 Ev 151
113 Ev 86
114 As above
115 Ev 147
Financing of new housing supply 25
regime, with a flat 28%, makes no distinction between long-term investors and
property speculators.116
The private rented sector: conclusion
46. While it is right to consider the potential for large institutions to invest in the private
rented sector, it is also important to remember that the sector is, and will continue to be,
dominated by small companies and individual landlords. Although these smaller landlords
tend to invest in existing property, they do make an indirect contribution to new housing
supply, and in the past have provided upfront funding for development by buying property
‘off-plan’. There are a number of issues facing those in the sector: the financial crisis had a
significant effect on the availability of buy-to-let mortgages; many landlords no longer have
the benefit of capital gains; and there is some concern about the levels of return. We have
heard that the burden of regulation and taxation has deterred landlords from expanding
their businesses. While constraints on mortgage finance will continue to affect investment
in the sector, the Government could provide some support by taking steps to address this
burden. We recommend that the Government bring forward a set of proposals to
simplify the tax and regulatory structures that apply to private landlords. These
proposals should aim to create an environment in which small private landlords are
encouraged to expand their portfolios and invest in new build housing.
116 Ev 106
26 Financing of new housing supply
4 Affordable housing delivery
47. Laying the Foundations: A Housing Strategy for England states that the Government
now expects “to provide up to 170,000 affordable homes by 2015, compared with the
150,000 originally estimated”.117 It is anticipated that the Affordable Homes Programme
will play a key role in delivering these homes. On 14 July 2011, the Homes and
Communities Agency (HCA) announced the 146 successful bidders who, subject to
contract, would deliver 80,000 homes for affordable rent and affordable home ownership
under the £1.8 billion programme.118 Giving evidence to us in January 2012, Pat Ritchie,
Chief Executive of the HCA, said that the programme was on track:
We are confident that we have been able to agree a robust set of contracts with
providers; we have 103 providers now in contract and we have committed, through
those contracts, £1.6 billion of the £1.8 billion investment through the Affordable
Homes Programme. We have yet to sign up local authorities, but that will be next
year, once the housing revenue changes are in play. We are on track, as we expected
to be, to deliver on 35,000 completions this year, and starts are on track in the new
programme.119
Affordable Rent
48. DCLG stated that the Affordable Rent model was the “key innovation” within the
Affordable Homes Programme and would allow “providers to set rent at up to 80% of
market value”.120 These providers would be able “to borrow more against the higher
income stream to help meet the cost of new supply”.121 DCLG claimed that the model
represented “a significant shift in the balance of funding for new affordable housing”,
pointing to “initial agreements” which it said showed “that Government investment under
the Affordable Homes Programme will be less than half previous rates”. It added: “This
means it will be possible to deliver more new affordable homes for every pound of public
capital investment”.122
49. Our evidence raised a number of concerns about the Affordable Rent model. Some
witnesses suggested that the model would have different impacts in different parts of the
country. Peter Williams, Director of the Cambridge Centre for Housing and Planning
Research, said: “in some areas social rents are close to market rents already, so the concept
of affordable rent squeezing between the two is quite difficult”.123 Place Shapers, a
117 Laying the Foundations, p 33
118 “HCA announces successful bidders for £1.8bn affordable homes funding”, HCA press notice, July 2011,
www.homesandcommunities.co.uk
119 Q 290
120 Ev 189. The introduction of the Affordable Rent model was announced in the October 2010 Spending Review. Under
the model, social housing providers are able to offer tenancies at a rent of up to 80% of the local market rent. The
additional income raised by the higher rent can be used to fund new affordable housing.
121 Ev 189
122 As above
123 Q 27
Financing of new housing supply 27
representative body for housing associations, also raised the prospect of geographical
differences, stating:
In the Midlands and North the emerging picture suggests some marginal benefit of
charging affordable rents, but not enough to see a stepped change in new supply. The
picture elsewhere in the country particularly London and South East is more
focussed around affordability of the new affordable rents by customers.124
50. The London Borough of Newham was amongst those concerned about the
affordability of Affordable Rent in London, stating that “many ‘affordable rents’, ie ones
that are above 60% of market rent, are unaffordable for Newham residents in larger
homes”.125 Hackney Council said that it had “formally advised providers that 25% of
newly-built homes should be for social renting, with the remaining 75% for AR [Affordable
Rent]”. It explained, however, that the HCA would “only fund the building of new homes
for social renting in exceptional circumstances outside of estate regeneration and some
supported housing”; at the time of its submission (October 2011) there was “no evidence”
of the HCA having “agreed any exceptional cases”. Registered providers had therefore
advised Hackney that it might need to make its own investment if the 25% target was to be
met.126 Pat Richie, Chief Executive of the HCA, said that she understood that investment
would be going into Hackney and Newham and that issues had been resolved “through the
contracted arrangements with providers”.127 Asked whether local authorities had been bypassed, she said:
The boroughs have been involved in the discussions on the contracts in London, and
there has been consultation with each of the London boroughs to help prioritise
those projects that are included in the four-year contracts that we have signed up
through the Programme.128
It is important that local authorities are fully signed up to the delivery of the Affordable
Homes Programme within their areas. The Homes and Communities Agency should
work with councils to ensure that any concerns they may have, for instance about the
affordability of rents, are addressed.
51. Alan Benson, Head of Housing and Planning at the Greater London Authority (GLA),
said that the Mayor of London did not agree that the Affordable Rent model made rents
unaffordable. He told us that the GLA had sought:
to make sure that all sizes of properties would still be affordable to tenants under the
future caps that are being charged. This has meant they have had to suppress the
rents down for the larger family homes, which would have been the ones that were
most impacted by the universal cap.129
124 Ev w56
125 Ev w75
126 Ev w59
127 Qq 292–3
128 Q 294
129 Qq 147–8
28 Financing of new housing supply
Letting housing benefit take the strain?
52. Roger Harding, Head of Policy, Research and Public Affairs at Shelter, suggested that
the introduction of Affordable Rent would lead to a shift from capital to revenue
investment:
it is hard to see how, given that we are cutting back on capital investments and
therefore paying out less per unit, we will not, in effect, end up paying for that in
housing benefit in one form or another over the longer term and therefore continue
the shift from reducing capital investment and putting it into revenue investment.130
Andy Hull, Senior Fellow at the Institute for Public Policy Research, considered that
Affordable Rent represented “a decision to let housing benefit take the strain”.131 The
Building and Social Housing Foundation said that while revenue subsidy, such as housing
benefit, might be appropriate in times of economic prosperity, “such a system inevitably
comes under pressure in times of economic constriction, when upward pressures on
claimant numbers are likely to coincide with downward pressure on government
spending”.132 It added that it “may now be time for supply side ‘bricks and mortar’
subsidies to take more of the strain to ensure that housing support is financially sustainable
in the long term”.133
53. Giving evidence in December 2011 on the Performance of the Department for
Communities and Local Government, Mr Shapps said that he did not anticipate a
significant increase in housing benefit to arise from the introduction of Affordable Rent:
The modelling on Affordable Rent is very interesting, because what it shows is
contrary to what a lot of people immediately think that it might show. [...] people
think [...] that if you are charging a higher intermediate rent—which in London [...]
is an average of 65% of the market rent —surely housing benefit bills are going to go
up. The reality is that a lot of the people who will be living in those new Affordable
Rent homes are at the moment, in the private rented sector, paying 100% of the
market rent. We actually see a reduction in the Housing Benefit Bill in those cases
and overall a few tens of millions’ increase over the Parliament, but it is not a
dramatic shift.134
54. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research,
had a different view about where tenants of affordable rented homes would come from:
There is an assumption in the Government’s own documentation that most of the
people going into affordable renting will come from the private rented sector. That is
not borne out by empirical evidence. Most social renting generates from within
130 Q 27
131 As above
132 Ev 79
133 As above
134 Oral evidence taken on 14 December 2011, HC 1668-ii, Q 145
Financing of new housing supply 29
families. Therefore there are some discords in terms of how the regime is presented
and how it might operate in practice.135
David Orr, Chief Executive of the National Housing Federation, warned that, under the
current proposal to use the social rent allocation system for Affordable Rent, the housing
benefit bill would increase.136 He added that the Affordable Rent model would “have
worked better if we had been able to provide additional social rented homes as well as the
affordable rent”.137
55. Asked whether there was a need to build social rented housing alongside those for
Affordable Rent, Mr Shapps told us that there was “a very large social house build
programme going on right now”.138 This was a reference to the £2.3 billion being spent on
existing commitments, mainly the National Affordable Homes Programme 2008–11.
DCLG estimated that these commitments would deliver 72,000 homes, including 52,000
for social rent.139 The Minister insisted that there would “always be a need for subsidised
social house building in this country”.140
Affordable Rent: the longer term
56. The National Housing Federation stated that the Affordable Rent model “is unlikely to
be sustainable far beyond 2015 in its current form”.141 It referred to modelling it had
carried out which showed that “if the same investment model was used for the
development of new affordable homes post 2015 the security capacity of the sector would
be exhausted after 11 [years]”.142 The housing association, Places for People, also
considered that Affordable Rent had “a limited lifespan”, pointing out that “the reductions
in grant rates require RPs [registered providers] to borrow more money to finance the
development of new affordable housing thereby exacerbating gearing levels”.143 Mark
Henderson, Chief Executive of the housing association Home Group, said that his
organisation was “relatively well-geared” and potentially had “scope to do one more
round”. However, he added: “it is a self-limiting funding cycle that I think we would
find”.144 The Council of Mortgage Lenders said that housing associations’ ability to deliver
further rounds was “questionable and could result in ‘survival of the fittest’”.145
57. The Tenant Services Authority (TSA), which until April 2012 acted as the social
housing regulator, stated that over “the longer term (most likely beyond the lifetime of the
current programme) there may be issues to be managed with Affordable Rent as a model of
135 Q 27
136 Q 233
137 Q 234
138 Q 326
139 Ev 197
140 Q 326
141 Ev 152
142 Ev 158
143 Ev 169
144 Q 228
145 Ev 122
30 Financing of new housing supply
new supply”. It said that “over time participation in the programme will lead to higher
gearing, and where gearing and similar covenants exist reduce borrowing headroom”.146 It
added:
The regulator is analysing the impact of this, which is not straightforward. Some
associations are unconstrained by gearing covenants, for others covenants may prove
a significant constraint by the end of this Spending Review period. Of itself this may
not stop further development by those [private registered providers] affected as there
may be ways they can take on more debt without breaching covenants, although this
could mean taking on risk in other parts of their businesses. The sector is already
diversifying its sources of finance through bond issues but also other innovative ways
of funding including private finance raised through institutional investors.147
The TSA also referred to a further risk arising from the model’s link to market rents “which
may go down as well as up”.148
58. Mr Shapps, when asked whether Affordable Rent had a limited lifespan, said that we
would “never go back to the days [...] of the old-fashioned model of only one offer in the
socially rented sector”, adding that in his view there would “always be a hybrid in
between”. However, he could not tell us how the model “would operate again subject to a
2015–20 spending review”. He stated: “I am pretty confident there is more of this to come;
I cannot predict what will happen in the next Parliament”.149
59. The housing association Moat Group proposed “an alternative model, designed as an
enhancement of the Affordable Rent model”.150 This would consist of three steps:
a review of rent affordability against the income of residents every set number of
years (for example, every two or five years);
where residents are able to pay full market rent for two reviews in succession, their
rents would be increased to full market levels;
when a resident is placed into the full market rental category, we would offer the
opportunity to move to shared ownership—with the normal rent discounts that
apply within this model;
Moat Group said that the additional revenue raised through this model would be
reinvested into the development of more homes.151
146 Ev w99
147 As above
148 As above
149 Q 324
150 Ev w6
151 As above
Financing of new housing supply 31
Affordable Rent: conclusion
60. The Affordable Rent model provides the Government with a means of delivering new
affordable housing at a much reduced level of capital subsidy. To that extent it is to be
welcomed. Nevertheless, the move to Affordable Rent raises a number of issues. There are
parts of the country where the model will not bring in additional funding because social
and market rents are at similar levels. Conversely, there are concerns that in other areas it
will prove unaffordable: we would not want to see a situation in which capital subsidy for
affordable housing is reduced, only for housing benefit to make up the difference. We are
further concerned about the Government’s proposal to use the social rent allocation system
for Affordable Rent properties: if the Minister wants to see more than one “offer” within
the social housing system, he should ensure that the offers have distinct allocation systems.
A longer term issue is whether the Affordable Rent model can be sustained beyond 2015,
given its potential impact on housing associations’ gearing levels. We are disappointed that
the Minister appeared unwilling to look beyond the current Parliament and the current
spending cycle: a longer term vision is surely needed if we are to find solutions to the
country’s housing crisis. We recommend that the Government, before the end of 2012,
bring forward proposals for delivery of affordable housing post 2015. These proposals
should recognise the need for housing available at both “social” and “affordable” rents,
each with a separate allocation system. They should aim for a rebalancing of subsidy
arrangements away from housing benefit and back towards “bricks and mortar”; this
would give rise to a number of immediate problems which the Government would need
to address. Finally, the proposals should consider how housing associations can be
encouraged to invest in new housing without stretching their capacity to the extent that
they do under the Affordable Rent model. In the next chapter, we will consider some
options for the future financing of housing associations.
Affordable housing delivery: possible risks
Section 106 agreements
61. Our evidence commented on the contribution section 106 agreements152 had made to
the delivery of affordable housing in recent years. Richard Hill, Deputy Chief Executive of
the HCA, said: “section 106 has been a big driver of affordable housing over the last few
years. I think in 2010–11 about 29,000 homes were delivered through section 106”.153 A
group of academics from the Universities of Sheffield and Cambridge, and the London
School of Economics and Political Science said that, in a number of ways, section 106 had
“proved to be a very effective means of helping to finance affordable housing as well as to
ensure land is available and mixed communities”.154 Jim Vine, Head of UK Housing Policy
and Practice at the Building and Social Housing Foundation, however, pointed to one of
the “downsides” of section 106, that it was “pro-cyclical: as you see a downturn in building
152 See above, footnote 57.
153 Q 296
154 Ev w63
32 Financing of new housing supply
for the market, you are also losing construction in your social rented or affordable housing
sector”.155
62. There was concern that the introduction of the Community Infrastructure Levy (CIL)
could reduce the number of affordable homes delivered through section 106 agreements.
The housing association, Midland Heart, said that “a large proportion of social housing has
been achieved through section 106 agreements”, but warned that “if CIL were to be set at a
level that is too high, then s106 affordable housing proposals will become extremely
challenging to secure and could lead to a potentially substantial reduction in new
affordable housing”.156 The academics quoted above said that recent research conducted
with local planning authorities “found that whilst CIL is broadly welcomed, there is a lot of
uncertainty about the interface with s106 and the impact on how much affordable housing
will be secured”. They warned that “it may well take a significant recovery in the market
before scaled back s106 can deliver the amounts of affordable homes secured in the past”.157
Peter Williams, one of the contributors to this evidence, told us that there was “a real
concern” about the future of section 106:
In a survey that we at Cambridge have done looking at CIL and 106, authorities are
signalling that they plan to move to CIL, although the numbers are small at the
moment, and 106 will increasingly be residualised, so an important stream of finance
activity for affordable housing, in theory, is reduced and it is unlikely at the moment
that large amounts of affordable housing will be built through CIL, because
effectively it is an infrastructure investment fund. The assumption is that that will
take most of the cake and what is left will be very small in terms of 106
contributions.158
63. At present, the CIL regulations provide that receipts may not be spent on affordable
housing.159 In October 2011, the Government launched a consultation on detailed
proposals for CIL. This consultation invited views “on providing local authorities with an
option to use the Community Infrastructure Levy to deliver affordable housing where
there is robust evidence that doing so would demonstrably better support its provision and
offer better value for money”. It also sought “views on the appropriate balance, or
combination, between the Community Infrastructure Levy and section 106 planning
obligations to best support the delivery of affordable housing”.160
Renegotiation of agreements
64. The 2012 Budget confirmed, following a commitment made in Laying the
Foundations,161 that the Government would “publish a consultation to allow the
155 Q 38
156 Ev w9
157 Ev w72
158 Q 38
159 Department for Communities and Local Government, Community Infrastructure Levy: An overview, May 2011, p 6
160 Department for Communities and Local Government, Community Infrastructure Levy: Detailed proposals and draft
regulations for reform: Consultation, October 2011, pp 19–20
161 Laying the foundations, p 6
Financing of new housing supply 33
reconsideration of planning obligations agreed prior to April 2010 where development is
stalled”.162 Pat Ritchie, Chief Executive of the HCA said that the “alternative [to
reconsideration of s106 agreements] in a number of sites across the country is that they are
just not delivered, because they cannot deliver some of the section 106 requirements within
the current market and because of the changes in the viability of each site”.163
65. David Orr, Chief Executive of the National Housing Federation, suggested that there
was unease about this proposal. He referred to the Government’s aim to deliver 170,000
affordable homes by 2015 and the assumptions under which Affordable Homes
Programme contracts had been signed:
If those assumptions are significantly varied [...] 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 170,000.164
Section 106: conclusion
66. Section 106 agreements have made a significant contribution to the delivery of
affordable housing in recent years. With the introduction of CIL however, there is some
uncertainty as to how great a contribution they will make in future years. While we are
supportive of the aims of CIL, we would not wish it to have a detrimental effect upon
affordable housing delivery. We recommend that the Government, at the earliest
opportunity, clarify the relationship between the Community Infrastructure Levy and
section 106 agreements, and how together they can be used to maximise affordable
housing delivery. It should take care to ensure that the introduction of CIL does not
lead to a reduction in the number of affordable homes delivered through contributions
from developers.
67. The suggestion that developers could require councils to reopen section 106
agreements agreed before April 2010 is one that causes us some concern. There is doubtless
a balance to be struck when developments have slowed down or stalled: in some cases it
will be preferable to reduce affordable housing requirements than see a development
abandoned. This should, however, be a matter for local judgement. Democratically elected
local authorities, accountable to their citizens, are best placed to make these decisions in
accordance with the housing needs of their wider areas. Enabling developers to compel
councils to reopen agreements would run contrary to the Government’s professed
commitment to localism. We recommend that the Government leave local authorities to
decide whether or not to reopen section 106 agreements in cases where development
has slowed down or stalled.
Welfare reform
68. Our evidence highlights changes to the welfare system as posing particular risks to
housing provision. The Highbury Group on Housing Delivery stated that measures
162 HM Treasury, Budget 2012, March 2012, para 2.246
163 Q 300
164 Q 229
34 Financing of new housing supply
included in the Welfare Reform Bill were “likely to lead to lenders being increasingly
concerned as the level of security for their investment in terms of the lack of a guaranteed
revenue stream from which the interest and debt can be repaid”.165 It referred in particular
to “proposals to restrict local housing allowance and housing benefit payments for both
private and ‘affordable rented’ tenants and proposals to terminate direct payments to
landlords”.166 East 7, an informal grouping of housing associations in the East of England,
said that direct payment of housing benefit to tenants would “create funding uncertainty
with lenders at a time of economic turmoil and potentially will increase management costs
and risk for landlords”.167 A number of witnesses suggested that rent arrears would increase
under such an arrangement.168 Waqar Ahmed, Finance Director at the London and
Quadrant Housing Association, said that his organisation had conducted a pilot 10 years
ago to consider the impact of direct payments and that its “experience was that arrears
doubled”.169 Discussing the potential increase in arrears, Mark Henderson, Chief Executive
of Home Group, a large housing association, said:
The cost of covering the arrears and of then managing debt recovery [...] 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.170
David Orr said that the National Housing Federation’s estimate of the combined additional
transaction costs was 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”.171
69. We commented on the proposal to end payment of housing benefit to landlords in our
report last year on Localisation issues in welfare reform:
We are concerned about the potential negative impact of direct payment
arrangements for the Universal Credit on social landlords and the availability of
finance for investment in the social housing sector. We are encouraged by the
Minister's assurance that final decisions have not yet been made on this point, and
recommend that a thorough assessment of the possible impact of direct payment on
housing associations' ability to borrow be undertaken before arrangements are
finalised.172
In response to our recommendation, the Government said that “it is important that the
design of Universal Credit contains safeguards to help protect social landlords’ income
165 Ev w48
166 As above
167 Ev w77
168 See, for example, Qq 176-178
169 Q 236
170 As above
171 As above
172 Communities and Local Government Committee, Fifth Report of Session 2010–12, Localisation Issues in Welfare
Reform HC 1406, para 72
Financing of new housing supply 35
streams, and it is equally important that sufficient support mechanisms are in place for
those who may need help managing their finances”.173 It added:
For this reason the Government will run a number of demonstration projects
(beginning in Spring 2012) to test out elements of a direct payment process and to
gather the information necessary to design safeguards in Universal Credit. The
demonstration projects are an important element in the preparation for the roll out
of Universal Credit and we are taking forward an intensive process of engagement
with local authorities, housing, lending and voluntary sectors in developing their
design.174
70. We remain concerned about the potential impact of direct payment arrangements
on the finances of social housing providers. There is a clear risk that these
arrangements will have a detrimental effect on providers’ capacity to invest in new
housing supply. They could also create uncertainty amongst those providing finance,
leading to increases in the cost of borrowing. We welcome the Government’s
commitment to introduce demonstration projects to consider the issue in more detail.
We recommend that the Government set out clear criteria by which the success of these
projects will be judged, and that it fully involve social housing providers and lenders in
the process. We further recommend that the Government only proceed to direct
payment to social tenants if and when any issues identified by the pilots have been fully
resolved.
173 Department for Communities and Local Government, Government response to the Communities and Local
Government Select Committee’s Report: Localisation issues in Welfare Reform, Cm 8272, para 53
174 Department for Communities and Local Government, Government response to CLG Committee report on
Localisation issues in Welfare Reform, Cm 8272, para 54
36 Financing of new housing supply
5 The future financing of housing
associations
71. The Housing Forum, a membership body for organisations involved in the
construction and repair of housing, considered the possibility of “a radical reshaping of
housing associations”. It said that reduced levels of grant had triggered “a review of value
and priorities within associations”, with some “preparing to build without grant”. It added
that both “board and senior management teams will need to be robust to take their
organisations in new directions, manage financial risk, and develop commercially viable
solutions while retaining their social value and objectives”.175 In this chapter, we consider
the options put forward in our evidence for the future direction that housing associations
might take, and the impact such options could have on their contribution to new housing
supply. We first look at their ability to raise finance on the bond markets before
considering options for more fundamental change.
Bond finance
72. Our evidence has suggested that the bond markets have become an increasingly
important source of finance for housing associations. Home Group said that the bond
market had become more competitive because of the “banking crisis and the resulting cost
of traditional debt finance”. It added that bond finance enabled “providers to diversify
sources of debt funding—an increasingly important consideration given the tightening of
lending from traditional sources”.176 Paul Smee, Director General of the Council of
Mortgage Lenders, told us that the bond markets were “already providing quite a
significant proportion of [housing associations’] income”. He explained that around “37%
of their capital needs were raised [through bond finance], compared to 5% some time
ago”.177
73. Some witnesses saw particular potential in retail bonds. In June 2011, Places for People
issued a retail bond, the first time a housing association had done so.178 Steve Binks, Places
for People’s Finance Director, told us about the experience:
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
175 Ev w11
176 Ev 159-160
177 Q 149
178 Ev 160 [Home Group]
Financing of new housing supply 37
market, certainly for ourselves, and we will be back in that market in the near future,
but also for the wider housing association movement.179
Mr Binks said that retail bonds appealed to “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”, adding: “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”.180 We encourage
housing associations—individually or collaboratively—to consider the potential of
retail bonds which, as well as raising finance, could prove a useful way of enabling
people to invest in their local community. There needs to be a clear regulatory
framework covering retail bonds both to address any risks to housing association
balance sheets and to ensure that the consumer is properly protected.
Historic grant
74. We also heard suggestions that more fundamental changes could be made to the way
housing associations are financed. The Cambridge Centre for Housing and Planning
Research referred to the treatment of “the £40bn of government grant which has been
made to housing associations over the decades to help fund development”.181 It explained:
This [grant] sits as a repayable charge on housing association balance sheets. With
the reduction in new grant funding some large associations have been exploring
whether this grant could be written off so that it increases the balance sheet capacity
of housing associations. Alternatively some have asked if it could become an equity
investment though this raises the question of how big the premium might be and
how this is paid for on top of the current costs/profit structure. It would imply higher
rents. At present the costs of raising equity are probably higher than raising debt.182
Writing off the historic grant
75. The housing association, Regenda Group, argued that a write off of the historic grant
“could positively benefit investment in the affordable housing sector”:
Under current rules, landlords cannot borrow against social housing grant held on
their balance sheets because the government could under certain circumstances ask
for it to be returned. Consideration should be given to the write off of this historic
grant which would enable Registered Providers potentially to borrow against the
value of this grant and potentially contribute to the funding of new affordable
housing supply.183
179 Q 262
180 As above
181 Ev 76
182 As above
183 Ev w46
38 Financing of new housing supply
76. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research,
however, cautioned that the issue of the grant was “a complicated area” and said that for
lenders “evidence of public sector funds sitting behind their loan to housing associations is
quite important”.184 The Chartered Institute of Housing (CIH) agreed, stating that “existing
lenders will have already factored in the existence of this 'comfort factor' in making their
original loans: they are likely to want to re-price the loans in the event of it being used to
raise other finance”.185 The housing association, Home Group, said that the proposal to
write off historic grant sounded “attractive at face value” but raised “many issues
surrounding the accounting treatment of the written-off debt”. It warned:
It is possible that the change in status of the debt could have unintended
consequences through e.g. increased depreciation charges that could leave little or no
advantage in financial terms after write-off. Also, in many cases access to additional
borrowing is not the single limiting factor for housing associations when looking to
build more homes. Increased borrowing could lead to additional costs to I&E [the
income and expenditure account] and interest cover ratios which limit the
development capacity of many housing associations.186
Historic grant and equity
77. The other option put forward for the use of the grant was for it to be converted into
equity. Places for People set out a proposal “based on Government changing the funding of
social housing to an equity finance model”. It said:
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 [RPs] 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 [an] HCA-led Affordable
Rent scheme.187
It estimated that “with this mechanism, Places for People alone could attract £750 [million]
of equity to fund the production of a further 5,000 new affordable houses, without the need
for Government to issue any further grant”. Its modelling further showed that, if applied
across the housing association sector, the proposal could deliver around 160,000 affordable
homes without the need for additional grant.188 Asked about the equity proposal, Steve
Binks, Places for People’s Finance Director, said that in effect it “would be a sale of the
interests of the company and you would end up with shareholders owning the company as
a whole” and that it “would be a for-profit company”.189
184 Q 12
185 Ev 113
186 Ev 160
187 Ev 167
188 As above
189 Qq 250–51
Financing of new housing supply 39
78. The Tenant Services Authority expressed concern about proposals to write off grant
and convert it into equity, warning that they would “not transform the sector’s
development capacity as a whole although a few individual providers may free up more
capacity”. It referred to “unknown consequences in terms of balance sheet valuations” and
“wider ramifications”, for instance:
the system of recycling grant on sales plays an important part in funding new homes
across the sector as a whole, which is facilitated by the regulator’s role in granting
consents to disposals (sales of properties outside of the sector).
There are legislative barriers to converting a not-for-profit PRP [private registered
provider] to a for-profit PRP, which may be relevant to these proposals.
PRPs would need to consider whether the costs of offering an equity return—which
may be higher than conventional debt—outweigh the potential initial increase in
capacity.190
David Orr, Chief Executive of the National Housing Federation, said that it was “absolutely
right that we should be having this kind of discussion [about equity finance], and that we
should be exploring all options” but advised that there were “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.191
Equity stakes in development
79. On Places for People’s proposal, Waqar Ahmed, Finance Director of the London and
Quadrant Housing Group, said that his organisation “would prefer to preserve our social
values and our social mission”. He nevertheless considered that equity could still play 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.192
190 Ev w99
191 Q 257
192 Q 252
40 Financing of new housing supply
Mr Ahmed said that surpluses generated by L&Q Group were converted into an equity
stake and invested in development. Referring to the association’s joint work with house
builders, he said “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”.193
Smaller housing associations
80. Places for People and L&Q Group are two of the countries’ largest housing
associations. Referring to the equity models they discussed, David Orr warned: “this is not
a game for small organisations to play”. He nevertheless considered that smaller housing
associations could “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”. He suggested that there should be “a more encouraging
environment—both in terms of the HCA and the regulatory environment—to try to
ensure that that happens”.194 The CIH also referred to the different financial needs of
smaller housing associations, saying that the discussion about raising finance on the bond
markets was “somewhat dominated by the larger housing associations”:
This view presents risks for smaller housing associations for whom lending
portfolios and risk appetite will be considerably different. The Committee should
note that different housing associations have different financial models so a one size
fits all approach will not work for everyone; size matters in terms of funding options
especially to access bonds.195
The National Housing Federation referred to the role of intermediaries such as The
Housing Finance Corporation (THFC) saying that they enabled “smaller and midsized
housing associations to access the capital markets by aggregating their individual funding
requirements to an amount which is acceptable to the market”.196 The housing association
Midland Heart, also referred to the role of THFC, and said that for smaller associations
“the continuing use of club deals [...] should be encouraged and expanded where
possible”.197 We have already expressed support for a housing investment fund run by
housing associations.198 Such a fund could play an important role in the financing of
smaller housing associations.
193 Q 254
194 Q 257
195 Ev 114
196 Ev 153
197 Ev w9
198 See above, para 40.
Financing of new housing supply 41
Historic grant: the Government’s view
81. A number of witnesses said that it would be helpful for the Government to provide
some clarity on the status of the historic grant.199 We asked Mr Shapps whether he could
clarify his intentions. He replied that there was:
nothing immediate that I am about to spring on you [...] not today or over the next
few days.
[...]
The argument that is made is: if you left [the historic grant] with the bodies that are
there and they could take it off their balance sheets, they could then leverage their
balance sheets and build more.
I have to say, we have tested this several times over in different ways and put those
arguments through the balance sheets, and I have had my officials work on it. I am
not entirely satisfied that would be the upshot. There is a definite issue to negotiate
with the wider deficit in the Treasury. To put you out of your misery, there is
nothing immediate you are about to hear from me on this front.200
The Dutch experience
82. During our visit to the Netherlands, we heard that in 1995 Dutch housing associations
were granted complete financial independence from the Government. A publication
produced by Aedes, the body representing these associations, explained the nature of the
settlement reached:
Briefly, brutering was a huge financial operation in which both the money still owed
to the housing associations by the State (subsidies) and the money that the
associations owed to the State (loans) was settled all at once. So, both parties received
in one lump sum what they otherwise would have got over a period of years. In 1995,
the law regulating this operation was passed by Parliament and all accounts were
settled.201
83. Aedes said that “to a great extent, the brutering operation broke the financial
relationship that existed between the State and the housing associations”. We learned that,
since the brutering process, Dutch housing associations had received no government
subsidy. They had funded the building of new housing through a revolving fund generated
through the sale of existing and new build properties at market rate: they sold around
15,000 properties per year. Loans to housing associations were guaranteed by a special
guarantee fund for social housing; this enabled the banks—for the most part, two publiclyowned banks—to lend at relatively low interest rates.202
199 See, for example, Q 260 [David Orr] and Q 261 [Mark Henderson]
200 Q 330
201 Aedes, Dutch social housing in a nutshell, May 2007, p 10
202 See above, para 38.
42 Financing of new housing supply
84. Some of those we met considered brutering to have been a positive process which had
made housing associations financially independent and strong performers in a tight
housing market. However, we also heard that politicians had recently been looking for
ways in which the state could have access to a share of the increase in value of housing
association stock: this was reflected in recent government policy, including proposals to
remove certain tax advantages and make housing associations pay corporation tax. There
were also concerns that housing associations had strayed too far from their core role: such
concerns are perhaps exemplified in reports that the Netherlands largest housing
association has recently lost over £2 billion in a derivatives deal.203 As a result of this loss,
the Dutch Parliament is reported to have established a full Parliamentary inquiry into the
Dutch social housing sector. This raises issues about the role of housing associations as
financial risk takers.
Future financing of housing associations: conclusion
85. We are not persuaded that the Government should convert the historic grant to equity,
especially if proposals bring housing associations’ not-for profit status into question.
Housing associations’ not-for-profit status and social mission are central to their role, and
it is important that they are preserved.
86. That is not to say that equity cannot play its part in other ways. In Chapter 2, we saw
how housing associations can work with institutional equity investors to cross-subsidise
social housing, and here we have considered how housing associations can take an equity
stake in development. We encourage housing associations to enter into equity sharing
arrangements with local authorities and developers where this can contribute to the
building of new homes. It is also important that financial innovation does not become
the preserve of the larger housing associations. Smaller housing associations should
consider entering into smaller scale joint ventures and also raising finance by working
together or using intermediaries to generate scale. The Government should foster an
environment in which they can do this.
87. There are some advantages to writing off the historic grant on housing association
balance sheets. In particular, it could enable more borrowing and thereby increase the
finance available for new homes. Nevertheless we have heard that lenders consider the
presence of Government grant on housing associations’ balance sheets to be important,
and writing it off could in fact weaken associations’ ability to borrow. The importance to
lenders of this Government grant also raises questions about giving housing associations
too much autonomy. In the Netherlands, we saw some of the benefits of housing
associations being independent of Government: they built significant numbers of new
homes without Government subsidy and were also involved in wider regeneration. The
Dutch experience, however, highlights some of the potential pitfalls of a more independent
approach and emphasises the need for a robust regulatory framework, and active scrutiny
from a fully empowered regulator. The Government needs to consider all these issues in
determining how housing associations will be financed in future.204 We recommend that
the Government consult on proposals for the future financing of housing associations.
203 See, for example, “UK landlords warned as Dutch giant loses £2.1 billion”, Inside Housing, 2 March 2012, p 5.
204 See above, para 60.
Financing of new housing supply 43
This consultation should invite views on the treatment of the historic grant on housing
association balance sheets. The outcomes of the consultation should be used to inform
the Government’s proposals on the future delivery of affordable housing. The
Government must also ensure that appropriate regulation is central to its proposals.
44 Financing of new housing supply
6 The role of local authorities
88. We consider in this chapter the role that local authorities can play in the financing of
new housing. Some of our evidence suggested that local authorities had a direct
contribution to make to the provision of new homes; Cllr Clyde Loakes, Vice Chair of the
Local Government Association’s Environment and Housing Board, for instance, pointed to
research that showed “in every region of the country it is cheaper for the local authority to
build a new build than for a housing association to do it”.205 Other evidence referred to
councils’ role as enablers of housing development, and the important contribution they
could make through the provision of land.206 During our visit to the West Midlands, we
saw for ourselves the direct role the councils in Birmingham and Dudley played in the
provision of new housing supply, and the effective partnerships they had established with
housing associations, developers and other organisations.
89. In this chapter we will first consider how to maximise the opportunities for local
authority house building offered by reform of the Housing Revenue Account (HRA); we
will then examine the contribution local authority land can make to development; finally,
we will look at the implications of the revival of the Right to Buy upon local authorities’
ability to fund new housing development.
Reform of the Housing Revenue Account
90. The Government’s evidence, provided in October 2011, described the reform of the
HRA:
The abolition of the Housing Revenue Account subsidy system and a new system of
self-financing should put councils in a better position to increase their supply of new
homes. These reforms, which are being taken through in the Localism Bill [now
enacted], will mean councils with their own housing stock will be able to keep their
rental income in return for a one-off adjustment of their housing debt (councils will
only be asked to take on extra debt if their rental income will be able to service it after
costs are met). When reforms come into effect in April 2012, councils will have an
average of 14% more to spend on their stock than under the present system. They
will also be able to plan more effectively over the long term on the basis of a reliable
income stream.207
Witnesses supported the reforms of the HRA in principle, and agreed that they could
potentially increase the finance available for the building of new homes, but considered
that there were further steps that should be taken to increase councils’ borrowing capacity
if the reform was to lead to the delivery of significant numbers of new homes.208 In our
view, it is important that councils are able, working in partnership, to maximise their
205 Q 82
206 See, for example, Ev 127.
207 Ev 192
208 See, for example, Ev 95 [Local Government Association]; Ev 133-5 [London Councils]; Q 154 [Sir Steve Bullock, Chloe
Fletcher and David Edwards].
Financing of new housing supply 45
potential contribution to the building of new homes. We consider some of the suggested
steps in the following paragraphs.
HRA reform: maximising the benefits
Lifting the borrowing cap
91. Some witnesses expressed concern that, notwithstanding greater capacity to borrow
under HRA reform, the Government was imposing a cap on local authority borrowing for
housing. Birmingham City Council stated that it, along with a number of other authorities,
would be at the “maximum cap at the start of the reforms and will therefore not be able to
generate more funding for new housing in the short term until such time [as] that debt is
repaid over the medium term”.209 We heard similar concerns when we visited Dudley. The
Local Government Association (LGA) suggested that local government had a “strong track
record of prudent financial management, a strongly positive net worth, and a manageable,
low level of debt” and said that if “councils were to have the cap removed and follow the
principles of the Prudential Code,210 this would enable many councils to borrow to build
additional housing”.211 The Chartered Institute of Public Finance and Accountancy
(CIPFA) stated that the Prudential Code had “clearly proved that Local Authorities can be
trusted to act prudently with regard to borrowing”, pointing out that since 2004, when the
Code was introduced, the Treasury had “never had to use its reserve powers to intervene in
these borrowing arrangements”.212 It added that local authorities’ borrowing for council
housing was “around £7,000 per unit—less than half that of housing associations”, and that
“councils could borrow more than this and still stay within the agreed borrowing rules
under the prudential borrowing framework”.213
92. Asked whether he would reconsider the decision to impose a cap, Mr Shapps said that
the answer was “no, for the time being, but I will keep this under review”. He considered
that the call for the cap to be lifted was essentially “a plea for more borrowing, and more
borrowing means more debt”. The Government was therefore “very hesitant lest we lose
sight of the big national goal of getting the deficit under control and having a convincing
plan in place to do that”.214 The 2012 Budget referred to the Office of Budget Responsibility
forecasts that the HRA reform would “increase public borrowing more than originally
estimated”. It said that while these estimates were “very uncertain”, if they remained the
same, “then the Government will take action to address the increase in public debt”.215
93. We understand the Government’s desire to reduce the national deficit, and nobody
wishes to see council borrowing for housing getting out of control. However, we consider
that the principles of the Prudential Code should provide sufficient safeguards to ensure
209 Ev w16
210 Ev w104 [Chartered Institute of Public Finance and Accountancy] explains that under “prudential borrowing, a local
authority must only borrow when and if the debt repayments and interest are affordable”.
211 Ev 95
212 Ev w104
213 As above
214 Q 337
215 HM Treasury, Budget 2012, March 2012, para 1.223
46 Financing of new housing supply
that council borrowing is affordable. Were the Government-imposed cap to be lifted and
councils allowed to borrow within prudential limits, more finance could be raised for the
building of new homes. We heard that it is cheaper for councils to build new homes than
housing associations. Increasing councils’ ability to do this would therefore secure good
value for the taxpayer. We recommend that the Government lift the cap on local
authorities’ borrowing for housing, and allow councils to borrow in accordance with
the Prudential Code. We are also concerned at the Government’s warning that it will
“take action” if public borrowing increases as a result of Housing Revenue Account
reform. It is important that it does not place any further constraints upon local
authority borrowing for housing. The cap is already unnecessary, and further
borrowing restrictions would have a detrimental impact upon the contribution
councils can make to new housing supply. Later in this chapter, we consider whether
councils’ borrowing for housing needs to be included within the public sector debt
calculation.216
Sharing and pooling headroom
94. We also heard that additional homes could be built if councils were given the freedom
to ‘trade’ or otherwise share the borrowing headroom created under HRA reform. London
Councils referred to research they had commissioned, which had identified the ‘trading’ of
headroom as one option London Boroughs could pursue to increase housing supply. They
suggested that:
it may be the case that some boroughs will have the desire or need to access capital to
invest in their housing stock, but are constrained by their debt cap from doing so.
Similarly, some boroughs will find themselves with some borrowing capacity that
they do not need to use, as their investment priorities can be met without borrowing.
In these circumstances, there is the potential for the authority with higher needs but
no borrowing headroom to access the borrowing headroom of the ‘better off’
authority. The lending authority could charge a fee for providing this capital [...].217
Another option put forward by London Councils involved boroughs with a shortage of
land but a high borrowing capacity working in partnership with those in the opposite
position to make best use of the limited financial and land resources available.218 London
Councils also suggested that in the longer term HRA reform could see councils “combining
their HRA operations”, potentially “even pooling or aggregating the debt caps of a number
of authorities”.219 They said “that these options would require consent if not legislation
from Government permitting them”.220 Birmingham City Council also expressed support
for “a mechanism to allow the transfer of any headroom across local authorities” but
216 See below, paras 102–103.
217 Ev 134
218 As above
219 Ev135
220 As above
Financing of new housing supply 47
warned that “this would be complex to administer and require an ongoing national
framework to be maintained”.221
95. Mr Shapps said that the Government was not minded to support pooling or swapping
arrangements between local authorities. He welcomed “more innovation and creative ways
of their working together” but explained that:
This is a settlement that has taken many years and a piece of primary legislation to
work out. I have looked through all the figures and the percentages available to each
authority, and although there is movement it is not that some authorities only have
2% more and some have 25% or something. There is not that much of a range in
there. I think the average is 15%. I am satisfied that authorities can work within those
means to make sure that they provide the best possible service to their tenants.222
96. We are disappointed that the Minister has ruled out allowing local authorities to
pool or swap Housing Revenue Account borrowing headroom. Such arrangements
could help to make best use of councils’ borrowing capacity, enabling more homes to be
built. In our experience, the Government is usually enthusiastic about local authorities
collaborating, sharing services and pooling resources to achieve better value for money;
we consider that it should take a similar attitude to joint working on housing finance.
We recommend that the Government consult on proposals to enable local authorities
to ‘trade’, swap and pool borrowing headroom. This should be subject to councils’
agreeing that any borrowing under these arrangements will still be in accordance with
the Prudential Code.
Changing the constitution of Arm’s Length Management Organisations
97. We heard that borrowing capacity could also be boosted by enabling Arm’s Length
Management Organisations (ALMOs)223 to change the way they are constituted. In June
2011, the National Federation of ALMOs (NFA) produced a report setting out a series of
options for the future of ALMOs.224 The Chartered Institute of Housing (CIH) said that
“the approaches explored would all require ALMOs to be reconstituted so that their
majority ownership passes from the LA to tenants”.225 Chloe Fletcher, Policy Manager at
the NFA, said that the models would “allow the ALMO to borrow additional moneys
privately, which would not count on the public sector [balance] sheet”. Therefore,
changing the ownership would enable ALMOs, amongst other things, to “significantly add
to the new build properties in the country”.226 She also indicated that such models would
not be necessary in financial terms if council borrowing for housing was classified as a
trading activity and did not count towards public sector debt.227
221 Ev w16
222 Q 340
223 An ALMO is a not-for-profit company established by a local authority to manage its housing stock.
224 National Federation of ALMOs, Building on the potential of ALMOs to invest in local communities, June 2011.
225 Ev 114
226 Q 154
227 Q 202
48 Financing of new housing supply
98. The NFA’s report set out three models. The first model involved “the ALMO having a
much longer contract and on the local authority having a one-third (rather than sole)
interest in the ALMO’s ownership”. The second model was similar but also involved the
transfer of some vacant properties or land, thereby giving the ALMO an asset base. The
third, and most radical, model involved a transfer to a “Community- and Council-Owned
Organisation (CoCo)”. This model would see the ALMO becoming “the owner of the
stock, but on a different basis to current stock transfers”.228 The report set out some of the
key legal implications of these models:
In Models 1 and 2, the ALMO is primarily still a management vehicle, but no longer
majority-owned by the local authority. The authority could no longer award the
management contract to the ALMO without a tendering process that complies with
EU procurement rules. They would need to assess the risk that potentially another
housing management provider could be awarded the contract. However, steps can be
taken to reduce this risk while still complying with the rules.
In Model 3, where the ALMO takes ownership of the stock, there is no requirement
for a tendering process. But it would mean that tenancies would no longer be secure
council tenancies. However, legal steps can be taken which effectively give all tenants
the same security in future as they enjoy now.229
99. We asked Mr Shapps for his view on the NFA proposals:
This could be the so-called CoCo model in particular. [...] actually, I like all this
innovation. Colleagues in the House sometimes come to me with a chief executive or
housing boards and put these ideas to me. I am always keen to explore them. Some of
them stack up and some of them do not. They all have the same test, which is:
number one, is it good value for the public purse; and number two, are the tenants
going to be better off? Are they going to get better quality housing and more say over
their housing? I am very keen to promote the interests, or allow tenants to, on all of
these things. They are always subject to tenants being happy and voting on it, and I
think it is absolutely right it should be that way.230
Chloe Fletcher confirmed that the NFA had held “very warm discussions with DCLG” but
that it also needed the engagement of the Treasury.231 She stated: “We have not been told
that [the Treasury] is not interested; it is just that we are waiting for a meeting”.232
100. In March 2012, Inside Housing magazine reported that the ALMO, Gloucester City
Homes, was “set to become the first ‘community owned, council owned’ organisation”,
subject to its tenants approving the change in a vote later in the year. The report said that
ALMO representatives had met with Mr Shapps the previous month “and he was
228 National Federation of ALMOs, Building on the potential of ALMOs to invest in local communities, June 2011, p 22
229 National Federation of ALMOs, Building on the potential of ALMOs to invest in local communities, June 2011, p 23
230 Q 341
231 Q 200
232 Q 201
Financing of new housing supply 49
reportedly ‘positive’ about the move”.233 A slightly different example can be seen in
Rochdale. In December 2011, tenants of the ALMO Rochdale Boroughwide Housing
(RBH) voted in favour of transferring ownership of 13,700 homes from Rochdale Borough
Council to RBH, creating “the largest housing mutual in the country”.234
101. We consider that Arm’s Length Management Organisations should be free to
adopt one of the new ownership models, subject to approval from the council and
tenants. As well as promoting the involvement of tenants in the management of their
housing, these models could also enable ALMOs to raise additional finance for the
building of new homes (although any borrowing should continue to be affordable and
sustainable). We are encouraged by reports that Gloucester City Homes will be
consulting its residents on proposals to establish a ‘community owned, council owned’
organisation. We recommend that the Government give its support to those ALMOs
wishing to adopt the new models, which would enable them to borrow prudentially to
build more homes.
Changing the classification of debt
102. Some witnesses suggested that another way to increase councils’ borrowing capacity
would be to change the way their debt was classified, so that it was not included within the
national debt figures. Jim Vine of the Building and Social Housing Foundation explained:
In the UK we work on the public sector net cash requirement, similar to the old
public sector borrowing requirement, where all the debts of local authorities are
treated as public sector debt. Pretty much everywhere else in Europe they use the
GGFD—general government financial deficit—model, which means that trading
activities, such as housing, are viewed as off-balance sheet, off the national debt
figures. It would be a relatively simple step to move to that, because in terms of the
perception of our national debt on international markets, which like to compare like
with like anyway, they are probably looking at our GGFD figures anyway.235
Mr Vine said that he could not “see our moving on to the same accounting system as is
used across the rest of Europe causing too much of a problem”.236 Westminster City
Council proposed that local authority housing be “regarded as an activity outside the main
public sector debt so councils would be brought into line with housing associations in their
ability to borrow”.237 The CIH stated that, when four councils made this case for this
change in 2011, it was rejected by HM Treasury.238
103. The Government argues that a cap on local authority borrowing for housing is
necessary because of the need to reduce the deficit; by implication, a cap would not be
233 “Gloucester ALMO to form first COCO”, Inside Housing, 9 March 2012, p 7
234 “Tenants say ‘Yes’ to co-operative”, Rochdale Boroughwide Housing website, December 2011,
www.rbhousing.org.uk; see also “Rochdale joins staff and tenants together as biggest mutual in housing”, Guardian
online, 17 February 2012, www.guardian.co.uk.
235 Q 28
236 As above
237 Ev w26
238 Ev 115
50 Financing of new housing supply
necessary under the GGFD rules as such borrowing would be outside of the national debt.
We are not convinced that the existing accounting treatment, or the cap, is justified. A
change of rules would bring the UK in line with other European countries and enable
councils to borrow on the same terms as housing associations. As we have already
established, the provisions of the Prudential Code should be a sufficient control upon
council borrowing. We recommend that the Government thoroughly examine a move to
the General Government Financial Deficit rules and then consult on proposals.
Sources of finance
104. Birmingham City Council suggested that local authority bonds could provide a new
source of finance for house building,239 as well as an alternative to the Public Works Loan
Board. It said that bonds had been used by councils in the past, pointing to its own use of a
bond to finance to National Exhibition Centre. It pointed out, however, that “central
government tightening of financial regulations on the use of public sector debt have made
this much harder since the 1980s”, and called on the Government to ease restrictions on
bond finance.240 The LGA told us that it was investigating the development of “a financing
institution owned and run by the local government sector which would issue bonds on
behalf of all participating councils”. It considered that “this has the potential to deploy the
sector’s considerable financial strength to good effect and will manage risk in a collective
manner”.241
105. The New Local Government Network (NLGN) recently produced a report
considering the potential of retail bonds in local government capital finance. The NLGN
suggested that in some circumstances bond finance might prove cheaper for councils than
borrowing through the Public Works Loan Board. It said that while the focus had
previously been on wholesale bonds, “retail bond issuance could provide some unique
advantages alongside the potential for a cheaper cost of credit”: it could take place “on a
smaller scale than wholesale issuance and as such would allow far more authorities to
access bond markets”; it would allow for a “stronger, more local connection between
citizen, council and housing investment”; and would enable authorities to “significantly
widen their investor base”.242 We have already considered the potential of housing
associations to issue retail bonds and established the need for robust regulation both to
address any risks to balance sheets and protect the consumer.243
106. The bond markets could offer local authorities an alternative source of finance
from the Public Works Loan Board. We welcome the Local Government Association’s
work to explore the possible establishment of a financial institution to issue bonds on
behalf of councils. There are also good arguments in favour of local authorities issuing
retail bonds to raise finance for housing: as well as potentially giving more authorities
access to the bond market, they could also enable people to invest their money in a way
that brings social benefits to their local area. We recommend that the Government
239 Ev w17
240 As above
241 Ev 94
242 Ev w113
243 See above, para 73.
Financing of new housing supply 51
work with local government to enable councils to raise finance through the issuance of
retail bonds; in doing so, it should establish whether there are any current restrictions
on bond finance that can be eased.
Local authority land
107. Councils could support the building of new homes through the release of their land.
On the provision of land by public bodies, Andy Hull, Senior Fellow at the Institute for
Public Policy Research, said that it was important to bear in mind that “51% of the publicly
held land that is fit for residential development is owned by local authorities, not by central
Government”.244 Cllr Clyde Loakes, Vice Chair of the LGA’s Environment and Housing
Board, said that local authorities were “doing a lot already” to bring land forward for
development. He explained:
In the scenario where they cannot build because they cannot borrow the money, they
are working in partnership with housing associations, private developers, adding
their land to a piece of land that a private developer has got to create a better
scheme.245
On the suggestion that a local authority might contribute a site for housing alongside
privately-owned land, John Stewart, Director of Economic Affairs at the Home Builders
Federation, said:
Surely the local authority should work with the developer and if the two sites
combined make a critical mass and give a good scheme, the two of them together can
come up with a good scheme that meets the needs of local people.246
Cllr Loakes said in response that this was what tended to happen but that there were
“instances where you cannot necessarily bring the two sides to agreement”.247 We urge
local authorities and developers to work together wherever possible to make land
available for development in a way that meets the needs of local people. We encourage
councils to enter into partnerships with developers, and to maintain equity
involvement in the development to secure best value for the taxpayer.
108. We heard that there were many examples of local authorities using their land to
support development. Birmingham City Council, which had a programme to build 1,340
new homes for both rent and sale, said that it had established an “innovative model for
derisking development and attracting private sector developers to build in challenging
market conditions”.248 It stated that its model—branded as the Birmingham Municipal
Housing Trust (BMHT)—demonstrated how councils could “use their land to incentivise
development”.249 The Council explained that under the model:
244 Q 34
245 Q 68
246 Q 78
247 As above
248 Ev w12
249 Ev w13
52 Financing of new housing supply
The Council enters into a profit sharing arrangement with the developer through
which instead of receiving the land plot premium at point of sale the Council
receives a percentage of the overall development profit.250
109. Oxford City Council told us that it had established a joint venture partnership to build
around 1,000 homes on its own land. It said that this project aimed “to deliver the greatest
number of affordable homes at social rent as is possible in the current economic
circumstances”.251 David Edwards, Executive Director of Housing and Regeneration at the
City Council, said that it effectively had “a relationship with a master developer and funder
for a period of probably five to eight years”.252 We have already established that the
investment of public land into “build to let” projects can play an important role in securing
investment from large financial institutions.253
110. The provision of local authority land can make a contribution to the financing of
new housing supply by helping to reduce the risks of development and to make it viable
for the private sector developer and social landlords. It can also help ensure that the
maximum number of affordable homes is delivered. We encourage all councils to
consider how they can release land to support the delivery of new homes, whilst
securing full value from the development. There are a variety of ways to do this, in line
with the localism agenda.
The Right to Buy
111. The Government plans to “reinvigorate” the Right to Buy. Laying the Foundations set
out proposals to raise discounts to make the Right to Buy more attractive to tenants and
included a commitment to “replace every additional home sold under Right to Buy with a
new home for Affordable Rent”.254 This has implications for the supply of housing.
112. In December 2011, the Government launched a consultation on Reinvigorating Right
to Buy and One for One Replacement. As well as a proposal to increase the cap on discount
entitlement to £50,000 throughout England, the consultation set out options for how the
replacement programme could be delivered. These options ranged from local delivery,
where receipts would be left with the local authority, to national delivery, where receipts
would be brought together centrally and then allocated by the Greater London Authority
and the Homes and Communities Agency.255
113. On 12 March 2012 in its response to this consultation, the Government announced
that it would increase the discount cap to £75,000. It also stated that the best option for
delivery would be “a version of the ‘Local Model with Agreement’”. It explained how this
would work:
250 Ev w14
251 Ev 137
252 Q 181
253 See above, para 19.
254 Laying the Foundations, p 26
255 Department for Communities and Local Government, Reinvigorating the Right to Buy and one for one replacement:
Consultation, December 2011
Financing of new housing supply 53
The Government expects that, if it were to retain the net receipts, it would be able to
provide one-for-one replacement homes while restricting the contribution made
from the net Right to Buy receipts to 30% of the cost of the replacement homes.
Where a local authority is satisfied that it can match this (in other words, that it
could apply the remaining receipt—after deducting the cost of covering the debt,
administration costs etc—to new affordable rented housing, while restricting the
contribution made from the net Right to Buy receipts to 30% of the cost of the
replacement homes), the Government will be willing to enter into an Agreement that
the authority may retain the remaining receipts.256
The Right to Buy: concerns
114. We heard a number of concerns about the Government’s Right to Buy proposals. In
particular, some witnesses questioned the Government’s ability to achieve one-for-one
replacement. Peter Williams, Director of the Cambridge Centre for Housing and Planning
Research, said that the “idea that it will allow one-for-one replacement seems highly
questionable” and considered it to be “a policy that has been advanced in advance of the
evidence”.257 Hometrack, an independent property analytics business, had carried out
analysis of the Right to Buy proposals, on the basis of a £50,000 discount cap. This analysis
found “that to deliver one new home would require an average of 1.4 RTB sales”, ranging
“from a 1.1:1 rate in the North West to 1.6:1 in London”.258
115. There was some unease amongst witnesses that social rented properties sold under
Right to Buy would be replaced with housing for Affordable Rent. David Orr, Chief
Executive of the National Housing Federation, was concerned that one-for-one
replacement differed from “like-for-like, because we would be selling social rented homes
and replacing them with near market rented homes”.259 Some witnesses also said that the
impact of the policy on the availability of social housing stock would be particularly acute
in certain areas. Cllr Paul Andrews, representing the Association of Greater Manchester
Authorities, said that past experience in Manchester had suggested that Right to Buy took
“large, family-type houses out of the stock”; he considered that there had to be a way of
replacing this type of housing in particular.260 The Highbury Group on Housing Delivery
considered that there had to be “one for one replacement in qualitative as well as
quantitative terms: i.e. the receipt from the sale of a low rent social [three] bedroom house
in inner London should be sufficient to fund the provision of a replacement low rent social
[three] bedroom house in central London”.261
116. Mr Shapps accepted that there was a difference between “one-for-one” and “like-forlike” replacement, but suggested that the need to get the figures “in proportion”. He said
that of the 2.5 million homes to which the Right to Buy would apply, “this policy looks to
256 Department for Communities and Local Government, Reinvigorating Right to Buy and One for One Replacement:
Consultation: Summary of responses, and Government response to consultation, March 2012, p 12
257 Q 32
258 Ev w92
259 Q 268
260 Q 170
261 Ev w49
54 Financing of new housing supply
take 100,000 of them over a period of time”. He thought that this was “unlikely to decimate
the stock of social housing”.262
117. We heard some concern about the interaction between Right to Buy and the moves to
self-financing resulting from the reform of the HRA. Oxford City Council said that the
“ability of councils to repay the substantial housing debt that they will take on as part of the
HRA reforms would be significantly undermined as the size of their stock is reduced
through RTB purchases”. It continued:
This would in turn limit Councils’ ability to fund new house building and, in a
location such as Oxford where land values are high and developable land in short
supply, would mean that value taken out of the council’s stock would most likely be
used to build affordable homes in other locations where easier and more profitable
development conditions obtain.263
118. Many of those submitting evidence argued that councils should be able to retain all
their receipts at the local level. David Edwards, for example, said that in Oxford the City
Council “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”. He argued: “The more we are left short, the more we are not going to be able to
finance or replace housing stock”.264
119. In its analysis of consultation responses, the Government stated that 80% of those
responding to the question about the delivery of replacement housing—the majority of
whom were local authorities—favoured either the “local model” or the “local model with
direction” (under which the local authority retained all receipts but restrictions were placed
on their use); 64% favoured the “local model” in particular.265 However, the Government
considered that these models did “not give sufficient assurance of one-for-one replacement
for England as a whole” and, because of this, it had opted for the “local model with
agreement” as described above.266 The initial consultation document stated tellingly that
this model added “a layer of administrative complexity and cost for both local authorities
and this Department” and that it “would require local authority proposals to be assessed,
specific arrangements to be drafted, and monitoring and enforcement arrangements
implemented”.267
120. In March 2012, following the publication of the Government’s consultation response,
the LGA expressed concern about the “single centralised” £75,000 discount cap, which it
said failed “to take into account local housing demand and the cost of building new
homes”. It said that its consultation with councils had indicated that “different models
262 Qq 342–3
263 Ev 137; see also Ev 140 [National Federation of ALMOs].
264 Q 165; see also Ev 95 [Local Government Association].
265 Department for Communities and Local Government, Reinvigorating Right to Buy and One for One Replacement:
Consultation: Summary of responses, and Government response to consultation, March 2012, p 20
266 Department for Communities and Local Government, Reinvigorating Right to Buy and One for One Replacement:
Consultation: Summary of responses, and Government response to consultation, March 2012, p 12
267 Department for Communities and Local Government, Reinvigorating the Right to Buy and one for one replacement:
Consultation, December 2011, p 21
Financing of new housing supply 55
would provide optimal levels of demand for right to buy and receipts for re-supply in
different areas” which reinforced “the argument that councils are best placed to set the
discount locally”.268 It was also disappointed by the Government’s opting for the “local
model with agreement” which would “make it difficult for many councils to retain receipts
to reinvest locally because of constraints on alternative sources of funding, like land and
borrowing”.269 It called on the Government to ensure that the “criteria ‘agreement’ required
for councils to retain receipts is light-touch, does not require burdensome monitoring or
reporting and allows councils reasonable timescales to reinvest receipts”.270 It also proposed
that the Government review the discount in April 2013, and that “newly built properties
should be automatically exempt from pooling arrangements rather than requiring councils
to apply for exemption”.271
121. There were also concerns that Right to Buy, along with the NewBuy scheme, would
lead to a reduction in the availability finance in other parts of the mortgage market.272 Paul
Smee, Director General of the Council of Mortgage Lenders, said, however, that he thought
that the scheme could be “be accommodated”. He added that lenders would “want to look
at the properties that are being purchased to ensure that those who are applying under the
scheme can afford the payments under their mortgages and do not get into financial
difficulties with them”.273
122. We are not convinced that the Government will deliver on its plans for “one-for-one”
replacement of additional properties sold under the new proposals, especially if the
discount cap is set as high as £75,000. We are also concerned that the proposals will lead to
a reduction in the country’s social housing stock, with social housing being replaced by
homes for Affordable Rent. Moreover, without a commitment to “like for like”
replacement, there is a risk that more expensive family homes could be replaced by cheaper
flats. We recommend that the Government ensure “like for like” replacement of homes
sold under Right to Buy, so that each socially rented property is replaced by a new home
of the same type for social rent. In order to achieve this, we further recommend that the
Government commit to making additional resources available in the event that “likefor-like” replacement cannot be delivered under the proposed levels of discount.
123. We are concerned about the Government’s proposals for the distribution of receipts,
which, by its own admission, will be costly and complex for both local authorities and the
Government. Moreover, even if the proposals succeed in delivering “one-for-one”
replacement at the national level, they are unlikely to do so at the local level. They could see
replacement homes concentrated in parts of the country where it is cheaper to build,
leading to significant reductions in social housing stock in some higher value areas. There
is a risk that social housing stock could disappear altogether from places, such as rural
villages, where it is already limited. Along with the majority of respondents to the
Government’s consultation, we favour a local model under which all receipts are retained
268 Ev 100
269 Ev 100
270 Ev 101
271 As above
272 Qq 40 [Peter Williams, discussed further in para 132, below] and 168 [David Edwards]
273 Q 102
56 Financing of new housing supply
by the local authority. We recommend that the Government reconsider its decision not
to opt for a local model for the replacement of additional homes sold under the new
Right to Buy arrangements. We further recommend that the Government grant
exemptions from increased discounts to places such as rural villages and other areas
where social housing is limited and cannot easily be replaced. These places could
otherwise be left with no social housing stock if there is significantly increased take-up
of the Right to Buy.
124. Some councils will be unable to meet the Government’s requirement that Right to
Buy receipts only fund 30% of the cost of the replacement homes, and will therefore not
have the option of local delivery. This is especially true for those authorities with
limited borrowing headroom, either because they have taken on debt under the
Housing Revenue Account reform or because, often through no fault of their current
administration, they are burdened with historic debt. The Government must ensure
that these authorities are not precluded by their debt from replacing properties sold
under the Right to Buy.
125. In the longer term, in line with the spirit of localism and moves to self-financing,
we recommend that the Government give councils greater freedom to decide on the
best housing solutions for their communities. The Government should consult on
allowing local authorities to apply to the Government for an exemption to the Right to
Buy where the council can demonstrate that housing is limited and cannot easily be
replaced.
Extension of the Right to Buy to housing associations
126. Some housing association tenants also have the right to buy their property under the
Preserved Right to Buy.274 The housing association, Home Group, has suggested that the
Right to Buy should be extended more widely. It set out a proposal, involving the use of the
historic grant discussed in the previous chapter:
[Registered provider] homes could be offered to tenants at a sale price which would
cover the build cost of a new affordable home of a similar size locally. The sale
proceeds generated would be used by the RP to build a home of equivalent size
within the same local housing market area wherever possible. In order to help the
tenant move into home ownership, Government would gift some of the grant that
was utilised when building the original home to the tenant to use as a deposit when
seeking a mortgage.275
Mark Henderson, the Chief Executive of Home Group, said that he would welcome “clarity
about the former grant that would allow us to take it to the next step to model that through
274 The Preserved Right to Buy is the Right to Buy enjoyed by a secure tenant where their home is transferred to a new
landlord (usually a housing association). The “Right to Acquire” scheme also gives some housing association tenants
the opportunity to buy their property. This scheme operates different discount arrangements and is not affected by
the current Right to Buy proposals.
275 Ev 161
Financing of new housing supply 57
and, perhaps, potentially look at some pilot local authority areas where we could see
whether it actually works and how it might be implemented”.276
127. When we asked Mr Shapps about the extension of the Right to Buy to housing
associations, he replied:
I would love to do it, if I am blunt. The trouble is, again back to Government debt, if
we were to do that, these are housing associations who have gone out, borrowed the
money or taken some subsidy from us and built the things, have a 30-year income
projection, and would quite rightly turn around to the Minister and say, “We are
happy to sell this house. Now you need to pay us per home that is sold for the
privilege.” Guess what? We do not have the money.277
Home Group, however, stated that its proposals “would not require ‘new’ Government
money but the innovative recycling of historic grant”.278
128. For some housing associations giving tenants the Right to Buy might be a useful
means of raising funds for new housing. We are not convinced that it needs to cost the
Government any money. We recommend that the Government work with housing
associations wishing to introduce the Right to Buy to explore how their proposals
might work in practice. If it is satisfied about levels of risk and value-for-money for the
taxpayer, it should allow housing associations to run pilot projects. Any introduction of
the Right to Buy should be a matter for individual housing associations.
Conclusion: the role of local authorities
129. We have seen that local authorities, working in partnership, have the potential to
make a significant contribution to the financing of new housing supply. There is,
however, a risk that local government will not be able to make the most of this potential
because of constraints placed upon it by central government. The moves towards selffinancing under Housing Revenue Account reform are positive and could significantly
increase the finance available for housing supply. However, the cap upon borrowing,
the refusal to allow councils to share headroom, and the centrally-imposed Right to
Buy proposals will all place restrictions on councils’ ability to finance the building of
new homes. The local government sector should be trusted to manage its own finances
in accordance with the Prudential Code. We urge the Government to give councils the
freedoms they need to provide finance for new housing supply.
276 Q 270
277 Q 346
278 Ev 165
58 Financing of new housing supply
7 Financing new build for owner
occupation
130. In this chapter we will consider possible ways of funding the building of new homes
for owner occupation. We will begin by considering the Government’s proposals for the
NewBuy guarantee scheme. We will then examine the funding of shared ownership and
shared equity mortgage schemes, followed by the potential for building new homes on
Government land. Finally, we will consider some alternative models for housing delivery,
focussing in particular on the contribution self or custom-build schemes can make to new
housing supply.
NewBuy Guarantee scheme
131. Laying the Foundations announced the introduction of a “new build indemnity
scheme”, led by the Council of Mortgage Lenders (CML) and the Home Builders
Federation (HBF). It said that the scheme would:
provide up to 95 per cent loan to value mortgages for new build properties in
England, backed by a housebuilder indemnity fund. Housebuilders will deposit 3.5
per cent of the sale price in the indemnity fund for each home sold through the
scheme, and the Government will provide additional security for the loan in the form
of a guarantee. In the event of repossession, the lender will be able to recover any
losses on mortgages to the maximum covered by the scheme.279
The scheme, which has been branded as the NewBuy Guarantee, was launched on 12
March 2012.280
132. Peter Williams, Director of the Cambridge Centre for Housing and Planning
Research, giving evidence in November on the day the scheme was first announced,
warned that the lending enabled by this scheme would “be netted off against an aggregate
volume of mortgage finance, which is still very limited”.281 He explained: “Both this and the
right to buy are new priorities, but actually it will mean less mortgage finance out there in
the rest of the market to support other things”.282 Since the launch of the scheme, concerns
have been expressed in the media about the risk of buyers falling into negative equity.283
The CML’s guidance for potential buyers explains that some “new build properties include
an extra premium on the sale price that can reduce as soon as someone moves into the
property” and warns potential buyers that were house prices to fall they “may not have
enough money from selling the property to repay the mortgage”. It adds, however, that
negative equity is “a risk of high loan-to-value borrowing [...] not of the NewBuy scheme
279 Laying the Foundations, p 8
280 “Grant Shapps: Unlocking aspiration for a new generation of home buyers”, Department for Communities and Local
Government press notice, 12 March 2012, www.commmunities.gov.uk
281 Q 40
282 As above
283 See, for example, “NewBuy borrowers risk negative equity”, Financial Times online, 16 March 2012, www.ft.com.
Financing of new housing supply 59
itself”.284 We recommend that the Government review the NewBuy Guarantee after the
first year of its operation, to assess its impact upon mortgage finance in other parts of
the market. It should also consider how many properties sold under the scheme have
fallen into negative equity, and the impact this has had on buyers.
133. We asked Paul Smee, Director General of the CML, how the Government planned to
control valuations, so that builders did not increase the sales price to cover the cost of their
3.5% deposit into the indemnity fund. He pointed to the Royal Institution of Chartered
Surveyors’ guidelines on conducting valuations and said that the CML and the
Government would require “absolute transparency about the prices at which comparable
properties—for example, on a particular development—are changing hands”.285 Nick
Jopling of Grainger plc considered this issue to be “a particularly important point”, saying
that he “would expect the lender and the Government to have an RICS evaluation backed
by a professionally indemnified professional, who is going to ensure that exactly what you
are worried about does not happen”.286 The HBF guidance for builders states that those
valuing the properties “will be very sensitive” to concerns about artificial price increases,
“and will not allow the valuation to incorporate any inflation of the new build premium,
other than any general movement in local house prices”.287
134. Igloo Regeneration submitting evidence on behalf of the Local Developers’ Forum
(LDF), a group of small volume residential developers, expressed the LDF’s support for the
NewBuy scheme, but raised concerns “that the implementation will discriminate against
small volume builders”.288 It stated that to establish a “cell” with a lender on its own, a
builder would have to build “an absolute minimum volume of 100 units per annum”. It
claimed that, as a result of this, around 40% of builders could be excluded. Although there
was a proposal for smaller builders to share in a cell, this would be more complicated to
establish, take longer and involve builders “sharing risks and returns with their
competitors”. Igloo also suggested that the costs of joining the scheme should be “on a per
home basis rather than fixed amounts” and that a “lack of transparency” in the process of
setting up the scheme had further disadvantaged smaller builders.289
135. Paul Smee, giving evidence to us in December 2011, said that there was already
interest in the scheme from smaller lenders and that it was possible to “envisage situations
where smaller builders, with perhaps strong regional presences, are talking to lenders with
equally strong regional presences, which gives a local flavour to the scheme”.290 We
consider it important that local builders have the opportunity to be involved in the scheme.
We recommend that the Government bring forward changes to the NewBuy Guarantee
to allow smaller builders to become fully involved in the scheme. In doing so, it should
work closely with the Local Developers’ Forum and other smaller builders to ensure
284 “NewBuy, what you need to know before you go ahead”, www.cml.org.uk
285 Q 124
286 Q 125
287 Home Builders Federation, Guidance for home builders thinking of applying to join NewBuy, March 2012.
288 Ev w105
289 As above
290 Q 125
60 Financing of new housing supply
that the changes address their key concerns. It should also promote opportunities for
smaller builders and smaller lenders to work together.
‘Intermediate’ products
136. Our evidence suggests that one way of supporting the building of new homes is
through the use of ‘intermediate’ products such as shared ownership and shared equity
mortgages.291 The National Housing Federation stated that it had “recently called for
Government to invest £1 billion in building shared ownership over the next three years”;
this investment would deliver 66,000 homes, create jobs and bring some wider economic
benefits.292
137. The Chartered Institute of Housing (CIH) suggested that shared ownership products
“clearly have a role but suffer from a number of handicaps such as the often narrow gap
between the costs of shared and full ownership, unfamiliarity by buyers, etc”. It added that
in the past governments had “not succeeded in raising levels of shared ownership much
above 100,000 nationally at any one time (given that units eventually move out of shared
and into full ownership)”.293
Private sector models
138. We heard from a number of private sector organisations developing shared
investment models, some of which involved investment from large financial institutions.
David Toplas, Chief Executive of Mill Group, told us his organisation’s “co-investment”
model was “seeking to bring long-term investment money to people so that they can buy
homes through co-investment in the mainstream housing market”.294 Graeme Moran,
Managing Director of Assettrust, said that his organisation was developing a “shared
ownership version of right to buy, which is aimed at helping social rented tenants get on
and meet their home ownership aspirations and purchase their existing social rented
home”.295 We also heard from Sean Oldfield, the Chief Executive of Castle Trust; his
organisation, subject to authorisation from the Financial Services Authority,296 planned to
introduce a shared equity mortgage product alongside an investment product for savers
through which the mortgages would be funded.297 We received written evidence about a
number of further intermediate schemes.298
139. Castle Trust suggested to us that the Government “should make clear its strong
support for privately financed shared equity for the housing market, as a complement to
291 In shared ownership schemes, the individual takes out a mortgage to buy a share of a house and pays rent on the
remaining share (which is often owned by a housing association). In shared equity mortgage schemes, the
mortgagor buys 100% of the home but funds part with a traditional mortgage and part with an equity mortgage.
292 Ev 154
293 Ev 111
294 Q 276
295 As above
296 Castle Trust indicated that it was “not yet open for business and has applied for but not yet received authorisation
by the FSA to undertake regulated investment activities “,Q 275, footnote.
297 Ev 171–176
298 See, for example, Ev w61–63 [Nigel Grainge], Ev w95–97 [Gentoo Group].
Financing of new housing supply 61
the Government’s own shared equity offerings”.299 Sean Oldfield told us that such “support,
not the financial support, does provide a very real impetus to the ongoing growth of such
solutions”.300 Mill Group expressed similar sentiments saying that in the absence of cash,
“the State can have a significant influence in gaining traction for new models by declaring
publicly that it can see merit in the concept and would like to see it in action”.301 In written
evidence, David Toplas referred to the NewBuy Guarantee scheme and asked “that
Government provide a similar financial encouragement to institutions to provide
investment finance to enable consumers to buy homes and simultaneously initiate a new
investment market for institutions”.302
140. Mr Shapps said: “I really like shared equity and shared ownership products”.
However, he added that he felt that such products “suffer a little bit through complexity”.
He added that there were “some very interesting ideas coming down the track that I will
back to the hilt, assuming they do not require taxpayer subsidy”.303
141. There are benefits to investment in shared ownership schemes, which can help those
people looking to get on the housing ladder, and can make an important contribution to
new housing supply. They allow housing associations to recycle funding in that they
receive a proportion of the price immediately on sale and further inflows as “staircasing”
occurs. We have heard, however, concerns about the complexity of both shared ownership
and shared equity mortgage products.
142. There is a case for the Government enabling the growth of private sector shared
ownership and shared equity mortgage products, through, for example, a clearer regulatory
framework. In giving its endorsement to such products, however, the Government should
not be perceived as providing a guarantee. It therefore needs to be clear about its
intentions.
143. We have also heard suggestions that the Government could go further by providing
financial encouragement to private shared investment schemes. There may be some merit
in introducing a version of the NewBuy Guarantee to underwrite investment in shared
ownership and shared equity mortgage products as long as the individual risks are
clearly recognised. We recommend that the Government bring forward proposals to
establish such a scheme, making clear that it will only be provided if a number of steps
are followed to make the product more transparent for the consumer.
Government land
144. We have established that the release of publicly-owned land has a role to play in
supporting development,304 and have considered in particular the release of local authority
land.305 Mr Shapps identified plans to build 100,000 homes on land currently owned by the
299 Ev 175
300 Q 282
301 Ev 183
302 Ev 184
303 Q 362
304 See above, para 7.
305 See above, paras 108–110.
62 Financing of new housing supply
Government as one of the key measures in Laying the Foundations.306 He stated that “very
good progress” had been made with this initiative and that he considered the Government
to be “ahead of where we thought it might be by this stage”.307 He referred in particular to
the “Build Now, Pay Later” initiative, through which developers could build on certain sites
and pay for the land at a later date.308
145. Alan Benson of the Greater London Authority said that one of the challenges in
releasing public land was a difference between land owned by departments and agencies
with a housing objective and that owned by those “responsible for something very different
indeed”. He explained:
If you are the Ministry of Defence and you are required to replace your missiles, and
are given the option instead of handing over some land at a less-than-best-cost deal
to build some homes, that is not a compelling case to make to the Ministry of
Defence. They would rightly say back to you [...] that if you want to build housing,
you should put the money into the housing budget and pay the Ministry of Defence
for that land.309
Abigail Davies of the CIH suggested that in some cases an alternative to Build Now, Pay
Later might be “some kind of joint venture model [...] to enable the public sector to keep a
stake in it and to benefit from the uplift in that value”.310
146. Grainger plc said that it had established a partnership with the Defence Infrastructure
Organisation (DIO) “to develop up to 4,250 houses on under-used military land” in
Hampshire. Nick Jopling, Grainger’s Executive Director of Property, said that the
partnership was intent on “maximising the value” of the DIO’s asset. Grainger was
responsible for master-planning the site and putting infrastructure in place. When it was
ready for sale to developers on the open market, Grainger would “take a small share of the
receipt; the Government will get the vast majority of it”.311 By enhancing the value of the
land before sale, partnerships of this kind could secure better value for taxpayers’ money.
147. We welcome the Government’s commitment to release land for development and
the progress it has made so far in doing this. We support the Build Now, Pay Later
initiative and recognise that it has an important role to play in stimulating
development. We would also, however, encourage the Government to be mindful of
other approaches to making land available—such as joint ventures or partnerships with
developers—where these offer a better deal for the taxpayer.
Other models
148. The Building and Social Housing Foundation (BSHF) suggested that the
“Government should investigate the barriers to adequate finance being available for a
306 See above, para 9
307 Q 354
308 Qq 356–7
309 Q 140
310 Q 67
311 Q 139
Financing of new housing supply 63
diverse range of housing models”, including sweat equity, community land trusts, self build
and housing cooperatives.312 It said that models such as these “account for only a fraction
of the housing stock in the UK, unlike some other countries in Europe or North America
where they are much larger, both in terms of total numbers and as proportions of the
stock”.313 Jim Vine, Head of UK Housing Policy and Practice at BSHF, said that such
models could make a significant impact given “the right following winds”.314 Andy Hull,
Senior Fellow at the Institute for Public Policy Research, referred to community land trusts,
saying that they had “worked okay in rural settings in this country so far, but we have not
really pulled one off in an urban setting”. He explained: “it is notoriously difficult to
upscale those sorts of models. Part of what we are exercised by here is scale”.315
Self/custom build housing
149. During our inquiry, we heard in particular about the potential of self or custom build
housing, in which prospective home owners buy a plot of land and either build a house
themselves or employ contractors to build it for them. We visited the city of Almere in the
Netherlands, home to Europe’s largest self build project: since the project’s inception, 800
self build homes had been built on publicly-owned land reclaimed from the sea. The
municipal authorities played a number of important roles, including designating plots,
putting in place purchase arrangements, and providing roads and other infrastructure.
They had taken a relaxed approach to regulating the design and construction of buildings;
which had led to some of the homes having innovative designs. Nevertheless, they still
enforced building regulations, including ones relating to safety and energy conservation.
We heard that it was on average €50,000 cheaper to build a house than to buy one on the
market: a number of residents had opted for modern system-build houses, which had
enabled them to dramatically reduce the cost. We were also told that demand for plots had
been high and that, so far, lenders had been willing to provide finance for self build. It was
intimated to us that the Netherlands would be aiming to deliver 40,000 to 50,000 self build
homes over five years; similar numbers per head of population in England could result in
up to 150,000 self build homes being built over the same period.
150. Laying the Foundations included a section on what it described as “custom build”
housing, which included the case study of the Almere project. It referred to “huge
untapped potential”, pointing out that currently only one in ten homes were custom built,
“a very low proportion by international standards”. It said that over 100,000 people were
looking for plots to build on and added: “we know from recent market research that one in
two people would consider building their own home if they could”. It also set out a number
of steps the Government would take to support custom build, including making “up to £30
million available to support provision of short-term project finance to this sector on a
repayable basis”.316 Giving evidence to us, Mr Shapps was very enthusiastic about self and
custom build housing. He said that the self and custom build market had “accounted for
312 Ev 81
313 As above
314 Q 25
315 Q 26
316 Laying the Foundations, pp 14–15
64 Financing of new housing supply
13,000 houses built last year”, making it the “nation’s biggest builder”. He said that it was
the Government’s intention “to double that marketplace in the next 10 years”.317 We
welcome Mr Shapps’s enthusiasm, but consider that the Government needs to assist
further in addressing some of the barriers to self and custom build development.
151. The National Self Build Association (NaSBA) considered the “biggest hurdle” faced by
self build projects to be “finding a suitable building plot”, although it noted that the
Government was taking steps to assist, in particular through proposals in the draft
National Planning Policy Framework requiring councils to assess demand for self build,
and through the Homes and Communities Agency’s release of five large sites.318 BuildStore
Financial Services, an organisation providing support to self builders, agreed that finding
land was a major problem and referred in particular to the need to make “land available in
the major conurbations”.319 It further noted that land accounted for a third or, in some
cases, half of a self builder’s budget and suggested that “if land were to be offered at a
reduced price as a means of assistance, this would have a substantial impact on the
accessibility of self build housing”.320
152. The second major barrier in NaSBA’s view was the availability of finance. It said that
mortgages were “still available for individuals hoping to build their own homes” but that
they would “still need a sizeable deposit for the land and the construction cost (around 25%
of the total is typical)”. It did not consider that incentives such as the NewBuy Guarantee
would “ever be practical to help one-off self builders”.321 Paul Smee of the CML said that
there was:
limited availability of self build mortgages among mainstream lenders. Where
finance is available, there are often a number of conditions attached to it—for
example, no lending against the first stage of the build or lending only up to the value
of the part-build rather than against a projected valuation of the completed build. In
addition, self build often requires specialist underwriting. This is a resource that, at
this stage, cannot be justified by many lenders given the relatively low demand for
self build finance coupled with its inherent risk.322
BuildStore said that the self build mortgage market was dominated by small regional
building societies.323 It noted that the “tightening of lending criteria across the mortgage
market has hit self funding harder, due to the majority of self builders needing to fund two
mortgages simultaneously, for at least a part of the build period”.324 It considered that
lenders would often “shy away from the self build lending market” because of the perceived
risk that borrowers would not complete their projects when “in reality, that risk is very low,
and the incidence of loss is minimal”. It had seen an average repossession rate of 0.46%
317 Q 364
318 Ev w101
319 Ev w111
320 As above
321 Ev w101
322 Ev 124
323 Ev w111
324 Ev w112
Financing of new housing supply 65
since 1998, and the average percentage of mortgages in arrears between 2002 and 2008 had
been 0.41%, compared to the CML average of 1.11%.325
153. We also heard about the possibility of self build development taking place at a larger
scale. NaSBA referred to “groups of people trying to get a community self build project off
the ground—say 10–15 families”, noting that they would have difficulty getting finance to
buy a large plot. It suggested that the Government’s £30 million fund would be helpful for
such groups and would “enable them to bid for sites (against the more nimble land buyers
from the major housebuilders)”.326
154. On the potential of “volume self build”, Buildstore described proposals it was
developing to enable individuals “to purchase land on larger sites specifically for self build”:
The model is very flexible and can be tailored to suit different types of people in
different areas. Grouping individual builds together on larger sites removes the
requirement for large scale development finance that has been so difficult to obtain
in recent years, while creating significant numbers of new homes.327
It argued that such an approach could suit shared ownership and shared equity schemes,
suggesting that a council could provide the land “at no initial charge” and the participant
could “buy out their plot over an extended period of time via staircasing”.328 NaSBA stated
that it would welcome projects similar to the one in Almere being established in the UK,
but noted that they would “require a mind-shift from some people in the planning world”.
It considered that the key challenge would be “finding a local authority with the vision and
enterprise to give it ago”, although the initial cost of the land would also be an issue.329
155. We fully share the Government’s enthusiasm for self and custom build development,
which provides a very different model for the delivery of owner-occupied homes. It enables
homes to be built a lower cost and brings economic benefits to an area by creating
opportunities for smaller builders and other local businesses. It already delivers significant
numbers of new homes in England but does not come close to fulfilling its potential. We
were impressed by the large scale project underway in Almere. A similar, high-profile
scheme in England could help to kick-start a new enthusiasm for self build across the
country. There are clearly a number of barriers, including land supply, the availability of
mortgage finance, and planning constraints. We welcome the steps the Government has
taken so far to address some of these issues. However, it will need to take further action if it
is to succeed in its aim of doubling the self build marketplace in the next ten years. We
recommend that the Government work with mortgage lenders to identify and
overcome the barriers to lending to self builders. We further recommend that the
Government establish a fund to incentivise local authorities to support pilot “volume
self build” schemes by allocating sites and taking a flexible approach to planning (whilst
ensuring continued compliance with energy and safety regulations). We see no reason
325 Ev w112
326 Ev w101
327 Ev w110
328 As above
329 Ev w101
66 Financing of new housing supply
why the first pilots could not be up and running in two years’ time and ask that the
Government report back to us in 2014.
Financing of new housing supply 67
8 Conclusion
156. England is suffering from a major housing shortage and urgently needs to build more
homes. There is currently not only a major shortfall between housing supply and housing
demand, but also a significant backlog, and it is clear that finance is a major constraint.
Traditional debt finance is in short supply, and alternatives will need to be found, both to
provide a short term catalyst and to deliver longer term change. We welcome the
publication of the Government’s housing strategy; many of the measures it sets out should
provide a welcome boost for house building in the short to medium term. However,
further action and a long term approach will be needed if we are to bring in enough finance
to see sustainable change in housing supply.
157. There is clearly no panacea and a range of solutions is called for. We have, however,
seen that there is plenty of scope for new approaches to housing finance. The Government
has to look to new forms of investment and foster an environment in which innovation can
be taken forward. It also has to be mindful that the private sector on its own cannot deliver
all the homes the country needs. Housing associations have a vital role to play, and the
Government has to take some important decisions if they are play their full part in future.
Local authorities should be given greater freedom, to enable them to drive housing delivery
within their areas. Moreover, the scaling-up of alternative models, such as self build, can
help to plug the gap between supply and demand. We hope that, taken together, the
package of measures we have set out will make a significant contribution to delivering the
number of homes the country needs.
68 Financing of new housing supply
Conclusions and recommendations
Private investment
1.
We heard about a number of steps that public sector organisations can take to
encourage institutional investment in the private rented sector, addressing the key
barriers of scale, suitability of stock and yield. We recommend that all public bodies,
both local and national, consider the potential for contributing their land alongside
institutional finance to support build-to-let initiatives. We urge local authority
pension funds to be alert to the benefits of investment in residential property, whilst
ensuring transparency and security for their investors. We would hope that their
doing so would pave the way for private funds also to invest in residential property.
Finally, we encourage local authorities to consider taking a flexible approach to
affordable housing requirements in planning obligations on a case-by-case basis,
where this will help to stimulate build-to-let investment and will not be to the
detriment of the wider housing needs of the area. (Paragraph 22)
2.
Housing associations should play a role in attracting institutional equity investment,
either by expanding into market renting and providing the economies of scale
required by investors or by using finance from institutions to bring investment into
social rented housing. We encourage housing associations to explore such
opportunities and to establish a dialogue with potential investors. (Paragraph 26)
Real Estate Investment Trusts (REITs)
3.
We recommend that the Government put in place measures to address concerns
about the distinction between trading and investment specifically in the context of
residential REITs. We further recommend that the Government allow the creation of
private, unlisted residential REITs. (Paragraph 32)
Self Invested Personal Pensions
4.
Self Invested Personal Pensions could provide another source of finance for rented
housing. We recommend that the Government look in detail at the contribution
SIPPs could make and the risks and benefits for those investing in SIPPs. If satisfied
about these risks and benefits, it should bring forward proposals to facilitate their
investment in residential property. (Paragraph 34)
Housing Investment Fund/Housing Investment Bank
5.
We support the establishment of a pilot housing investment fund run by housing
associations, and recommend that, in discussions with the National Housing
Federation, the Government explore how it can give its backing. The pilot should
consider the viability of a fund, its ability to attract investment, and any risks to the
Treasury arising from Government support. Subject to the success of the pilot, the
fund could be increased in scale. We further recommend that the Government work
Financing of new housing supply 69
with the Confederation of Cooperative Housing on the Confederation’s proposals
for an investment fund. (Paragraph 40)
6.
We consider that there is merit in the suggestion that a national housing investment
bank be established. In other European countries such banks have proved effective at
channelling investment into new housing development. The work already underway
to create a Green Investment Bank offers a useful opportunity; there is a clear case
for allowing this bank to invest in housing as well as green infrastructure. We
recommend that the Government consult on proposals for the extension of the
Green Investment Bank’s remit to include the funding of new housing and,
potentially, of wider infrastructure projects. (Paragraph 41)
Private Rented Sector
7.
We recommend that the Government bring forward a set of proposals to simplify
the tax and regulatory structures that apply to private landlords. These proposals
should aim to create an environment in which small private landlords are
encouraged to expand their portfolios and invest in new build housing. (Paragraph
46)
Affordable Housing Delivery
8.
It is important that local authorities are fully signed up to the delivery of the
Affordable Homes Programme within their areas. The Homes and Communities
Agency should work with councils to ensure that any concerns they may have, for
instance about the affordability of rents, are addressed. (Paragraph 50)
9.
We recommend that the Government, before the end of 2012, bring forward
proposals for delivery of affordable housing post 2015. These proposals should
recognise the need for housing available at both “social” and “affordable” rents, each
with a separate allocation system. They should aim for a rebalancing of subsidy
arrangements away from housing benefit and back towards “bricks and mortar”; this
would give rise to a number of immediate problems which the Government would
need to address. Finally, the proposals should consider how housing associations can
be encouraged to invest in new housing without stretching their capacity to the
extent that they do under the Affordable Rent model. (Paragraph 60)
Section 106 Agreements
10.
We recommend that the Government, at the earliest opportunity, clarify the
relationship between the Community Infrastructure Levy and section 106
agreements, and how together they can be used to maximise affordable housing
delivery. It should take care to ensure that the introduction of CIL does not lead to a
reduction in the number of affordable homes delivered through contributions from
developers. (Paragraph 66)
11.
We recommend that the Government leave local authorities to decide whether or
not to reopen section 106 agreements in cases where development has slowed down
or stalled. (Paragraph 67)
70 Financing of new housing supply
Direct Payments
12.
We remain concerned about the potential impact of direct payment arrangements
on the finances of social housing providers. There is a clear risk that these
arrangements will have a detrimental effect on providers’ capacity to invest in new
housing supply. They could also create uncertainty amongst those providing finance,
leading to increases in the cost of borrowing. We welcome the Government’s
commitment to introduce demonstration projects to consider the issue in more
detail. We recommend that the Government set out clear criteria by which the
success of these projects will be judged, and that it fully involve social housing
providers and lenders in the process. We further recommend that the Government
only proceed to direct payment to social tenants if and when any issues identified by
the pilots have been fully resolved. (Paragraph 70)
Housing Associations
13.
We encourage housing associations—individually or collaboratively—to consider the
potential of retail bonds which, as well as raising finance, could prove a useful way of
enabling people to invest in their local community. There needs to be a clear
regulatory framework covering retail bonds both to address any risks to housing
association balance sheets and to ensure that the consumer is properly protected.
(Paragraph 73)
14.
We encourage housing associations to enter into equity sharing arrangements with
local authorities and developers where this can contribute to the building of new
homes. It is also important that financial innovation does not become the preserve of
the larger housing associations. Smaller housing associations should consider
entering into smaller scale joint ventures and also raising finance by working
together or using intermediaries to generate scale. The Government should foster an
environment in which they can do this. (Paragraph 86)
15.
We recommend that the Government consult on proposals for the future financing
of housing associations. This consultation should invite views on the treatment of the
historic grant on housing association balance sheets. The outcomes of the
consultation should be used to inform the Government’s proposals on the future
delivery of affordable housing. The Government must also ensure that appropriate
regulation is central to its proposals. (Paragraph 87)
Local Authority Borrowing
16.
We recommend that the Government lift the cap on local authorities’ borrowing for
housing, and allow councils to borrow in accordance with the Prudential Code. We
are also concerned at the Government’s warning that it will “take action” if public
borrowing increases as a result of Housing Revenue Account reform. It is important
that it does not place any further constraints upon local authority borrowing for
housing. The cap is already unnecessary, and further borrowing restrictions would
have a detrimental impact upon the contribution councils can make to new housing
supply. (Paragraph 93)
Financing of new housing supply 71
17.
We are disappointed that the Minister has ruled out allowing local authorities to pool
or swap Housing Revenue Account borrowing headroom. Such arrangements could
help to make best use of councils’ borrowing capacity, enabling more homes to be
built. In our experience, the Government is usually enthusiastic about local
authorities collaborating, sharing services and pooling resources to achieve better
value for money; we consider that it should take a similar attitude to joint working
on housing finance. We recommend that the Government consult on proposals to
enable local authorities to ‘trade’, swap and pool borrowing headroom. This should
be subject to councils’ agreeing that any borrowing under these arrangements will
still be in accordance with the Prudential Code. (Paragraph 96)
18.
We consider that Arm’s Length Management Organisations should be free to adopt
one of the new ownership models, subject to approval from the council and tenants.
As well as promoting the involvement of tenants in the management of their
housing, these models could also enable ALMOs to raise additional finance for the
building of new homes (although any borrowing should continue to be affordable
and sustainable). We are encouraged by reports that Gloucester City Homes will be
consulting its residents on proposals to establish a ‘community owned, council
owned’ organisation. We recommend that the Government give its support to those
ALMOs wishing to adopt the new models, which would enable them to borrow
prudentially to build more homes. (Paragraph 101)
19.
We recommend that the Government thoroughly examine a move to the General
Government Financial Deficit rules and then consult on proposals. (Paragraph 103)
20.
The bond markets could offer local authorities an alternative source of finance from
the Public Works Loan Board. We welcome the Local Government Association’s
work to explore the possible establishment of a financial institution to issue bonds on
behalf of councils. There are also good arguments in favour of local authorities
issuing retail bonds to raise finance for housing: as well as potentially giving more
authorities access to the bond market, they could also enable people to invest their
money in a way that brings social benefits to their local area. We recommend that the
Government work with local government to enable councils to raise finance through
the issuance of retail bonds; in doing so, it should establish whether there are any
current restrictions on bond finance that can be eased. (Paragraph 106)
Local Authority Land
21.
We urge local authorities and developers to work together wherever possible to make
land available for development in a way that meets the needs of local people. We
encourage councils to enter into partnerships with developers, and to maintain
equity involvement in the development to secure best value for the taxpayer.
(Paragraph 107)
22.
The provision of local authority land can make a contribution to the financing of
new housing supply by helping to reduce the risks of development and to make it
viable for the private sector developer and social landlords. It can also help ensure
that the maximum number of affordable homes is delivered. We encourage all
councils to consider how they can release land to support the delivery of new homes,
72 Financing of new housing supply
whilst securing full value from the development. There are a variety of ways to do
this, in line with the localism agenda. (Paragraph 110)
The Right to Buy
23.
We recommend that the Government ensure “like for like” replacement of homes
sold under Right to Buy, so that each socially rented property is replaced by a new
home of the same type for social rent. In order to achieve this, we further
recommend that the Government commit to making additional resources available
in the event that “like-for-like” replacement cannot be delivered under the proposed
levels of discount. (Paragraph 122)
24.
We recommend that the Government reconsider its decision not to opt for a local
model for the replacement of additional homes sold under the new Right to Buy
arrangements. We further recommend that the Government grant exemptions from
increased discounts to places such as rural villages and other areas where social
housing is limited and cannot easily be replaced. These places could otherwise be left
with no social housing stock if there is significantly increased take-up of the Right to
Buy. (Paragraph 123)
25.
Some councils will be unable to meet the Government’s requirement that Right to
Buy receipts only fund 30% of the cost of the replacement homes, and will therefore
not have the option of local delivery. This is especially true for those authorities with
limited borrowing headroom, either because they have taken on debt under the
Housing Revenue Account reform or because, often through no fault of their current
administration, they are burdened with historic debt. The Government must ensure
that these authorities are not precluded by their debt from replacing properties sold
under the Right to Buy. (Paragraph 124)
26.
In the longer term, in line with the spirit of localism and moves to self-financing, we
recommend that the Government give councils greater freedom to decide on the best
housing solutions for their communities. The Government should consult on
allowing local authorities to apply to the Government for an exemption to the Right
to Buy where the council can demonstrate that housing is limited and cannot easily
be replaced. (Paragraph 125)
27.
We recommend that the Government work with housing associations wishing to
introduce the Right to Buy to explore how their proposals might work in practice. If
it is satisfied about levels of risk and value-for-money for the taxpayer, it should
allow housing associations to run pilot projects. Any introduction of the Right to Buy
should be a matter for individual housing associations. (Paragraph 128)
Local Authorities: Conclusion
28.
We have seen that local authorities, working in partnership, have the potential to
make a significant contribution to the financing of new housing supply. There is,
however, a risk that local government will not be able to make the most of this
potential because of constraints placed upon it by central government. The moves
towards self-financing under Housing Revenue Account reform are positive and
Financing of new housing supply 73
could significantly increase the finance available for housing supply. However, the
cap upon borrowing, the refusal to allow councils to share headroom, and the
centrally-imposed Right to Buy proposals will all place restrictions on councils’
ability to finance the building of new homes. The local government sector should be
trusted to manage its own finances in accordance with the Prudential Code. We urge
the Government to give councils the freedoms they need to provide finance for new
housing supply. (Paragraph 129)
NewBuy Guarantee
29.
We recommend that the Government review the NewBuy Guarantee after the first
year of its operation, to assess its impact upon mortgage finance in other parts of the
market. It should also consider how many properties sold under the scheme have
fallen into negative equity, and the impact this has had on buyers. (Paragraph 132)
30.
We recommend that the Government bring forward changes to the NewBuy
Guarantee to allow smaller builders to become fully involved in the scheme. In doing
so, it should work closely with the Local Developers’ Forum and other smaller
builders to ensure that the changes address their key concerns. It should also
promote opportunities for smaller builders and smaller lenders to work together.
(Paragraph 135)
“Intermediate” Products
31.
There may be some merit in introducing a version of the NewBuy Guarantee to
underwrite investment in shared ownership and shared equity mortgage products as
long as the individual risks are clearly recognised. We recommend that the
Government bring forward proposals to establish such a scheme, making clear that it
will only be provided if a number of steps are followed to make the product more
transparent for the consumer. (Paragraph 143)
Public Land
32.
We welcome the Government’s commitment to release land for development and
the progress it has made so far in doing this. We support the Build Now, Pay Later
initiative and recognise that it has an important role to play in stimulating
development. We would also, however, encourage the Government to be mindful of
other approaches to making land available—such as joint ventures or partnerships
with developers—where these offer a better deal for the taxpayer. (Paragraph 147)
Self/Custom Build
33.
We recommend that the Government work with mortgage lenders to identify and
overcome the barriers to lending to self builders. We further recommend that the
Government establish a fund to incentivise local authorities to support pilot “volume
self build” schemes by allocating sites and taking a flexible approach to planning
(whilst ensuring continued compliance with energy and safety regulations). We see
74 Financing of new housing supply
no reason why the first pilots could not be up and running in two years’ time and ask
that the Government report back to us in 2014. (Paragraph 155)
Financing of new housing supply 75
Formal Minutes
Monday 23 April 2012
Members present:
Mr Clive Betts, in the Chair
Heidi Alexander
Bob Blackman
Simon Danczuk
Mr David Heyes
George Hollingbery
James Morris
Mark Pawsey
Heather Wheeler
Draft Report (Financing of New Housing Supply), proposed by the Chair, brought up and
read.
Ordered, That the Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 157 read and agreed to.
Summary agreed to.
Resolved, That the Report be the Eleventh Report of the Committee to the House.
Ordered, That the Chair make the Report to the House.
Ordered, That embargoed copies of the Report be made available, in accordance with the
provisions of Standing Order No. 134.
Written evidence was ordered to be reported to the House for printing with the Report,
together with written evidence reported and ordered to be published on 31 October, 9
November, 21 November, 28 November, 14 December 2011, 16 January, 30 January and 27
February 2012.
[Adjourned till Monday 30 April at 4.00 p.m.
76 Financing of new housing supply
Witnesses
Monday 21 November 2011
Page
Andy Hull, Senior Research Fellow, Institute for Public Policy Research, Peter
Williams, Director, Cambridge Centre for Housing and Planning Research,
Jim Vine, Head of Programme, UK Housing Policy and Practice, Building and
Social Housing Foundation and Roger Harding, Head of Policy, Research and
Public Affairs, Shelter
Ev 1
John Stewart, Director of Economic Affairs, Home Builders Federation, Cllr
Clyde Loakes, Vice Chair, Environment and Housing Board, Local
Government Association, Ian Fletcher, Director of Policy (Real Estate), British
Property Federation and Abigail Davies, Assistant Director of Policy and
Practice, Chartered Institute of Housing
Ev 12
Monday 28 November 2011
Nick Jopling, Executive Director of Property, Grainger plc, Paul Smee,
Director-General, Council of Mortgage Lenders and Alan Benson, Head of
Housing, Greater London Authority
Ev 22
Monday 19 December 2011
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
Ev 32
Mark Butterworth, Director, Residential Landlords’ Association and Nigel
Terrington, Chief Executive, Paragon Group
Ev 40
David Orr, Chief Executive, National Housing Federation, Mark Henderson,
Chief Executive, Home Group, Steve Binks, Group Director, Finance and IT,
Places for People Group and Waqar Ahmed, Group Director of Finance,
London and Quadrant Group
Ev 44
Monday 30 January 2012
Sean Oldfield, Chief Executive, Castle Trust, Graeme Moran, Managing
Director (Portfolio & Acquisitions), Assettrust, David Toplas, Chief Executive,
Mill Group and Peter Mahoney, Chief Executive Officer, R55 Group
Ev 53
Pat Ritchie, Chief Executive and Richard Hill, Deputy Chief Executive, Homes
and Communities Agency
Ev 57
Rt Hon Grant Shapps MP, Minister for Housing and Local Government,
Department for Communities and Local Government
Ev 62
Financing of new housing supply 77
List of printed written evidence
Assettrust
Ev 177
Association of Greater Manchester Authorities
Evs 127, 131
British Property Federation
Evs 101, 106
Building and social Housing Foundation
Ev 77
Cambridge Centre for Housing and Planning Research
Ev 75
Castle Trust
Ev 171
Chartered Institute of Housing
Ev 108
Council of Mortgage Lenders
Department for Communities and Local Government
Evs 121, 123, 124
Evs 187, 193, 196, 197
Grainger plc
Evs 116, 120
Greater London Authority
Ev 124
Home Builders Federation
Ev 89
Home Group
Ev 158
Institute for Public Policy Research
Local Government Association
Ev 74
Evs 91, 96, 100
London and Quadrant Group
Ev 169
London Councils
Ev 133
Mill Group
Evs 179, 184
National Federation of ALMOs
Ev 138
National Housing Federation
Ev 151
Oxford City Council
Ev 136
Paragon Group
Ev 149
Places for People Group
Ev 166
R55 Group
Residential Landlords Association
Ev 186
Evs 141, 149
Shelter
Ev 83
List of additional written evidence
(published in Volume II on the Committee’s website www.parliament.uk/clgcom)
Birmingham City Council
Ev w12
BuildStore Financial Services
Ev w106
Chartered Institute of Public Finance and Accountancy
Ev w102
Coalition for Economic Justice (CEJ)
Ev w1
Confederation of Co-operative Housing
Ev w20
Professors Tony Crook and Peter Kemp
Ev w50
Professors Tony Crook and Christine Whitehead, Drs Ed Ferrari and Gemma Burgess
and Ms Sarah Monk
Ev w63
East 7
Ev w76
G15
Ev w34
78 Financing of new housing supply
Genesis Housing Association
Ev w80
Gentoo Group
Ev w95
Nigel Grainge RIBA
Ev w61
Hackney Council
Ev w56
Highbury Group on Housing Delivery
Ev w46
David Holliday
Ev w1
Hometrack
Ev w91
The Housing Forum
Ev w10
Igloo Regeneration
Ev w104
Dr Tim Leunig
Ev w89
London Borough of Newham
Ev w73
Newark and Sherwood Homes Ltd
Ev w3
Moat
Ev w6
Midland Heart
Ev w7
National Association of Estate Agents and Association of Residential
Letting Agents
Ev w22
National Self Build Association
Ev w100
New Local Government Network
Ev w113
Northampton Borough Council
Ev w19
Northern Housing Consortium and North West Housing Forum
Ev w26
PlaceShapers
Ev w53
Regenda Group
Ev w45
Resolution Foundation
Ev w88
Riverside
Ev w29
Scottish Government
Ev w83
Southwark Council
Ev w40
Tenant Services Authority (TSA): the social housing regulator
Ev w97
Waterloo Housing Group
Ev w35
Westminster City Council
Ev w24
Financing of new housing supply 79
List of Reports from the Committee during
the current Parliament
The reference number of the Government’s response to each Report is printed in brackets after the
HC printing number.
Session 2010–12
First Special Report
Beyond Decent Homes: government response to the
Committee’s Fourth Report of Session 2009–10
First Report
Local Authority Publications
Second Report
Abolition of Regional Spatial Strategies: a planning
vacuum?
HC 517 (CM 8103)
Third Report
Localism
HC 547 (CM 8183)
Fourth Report
Audit and inspection of local authorities
HC 763 (CM 8209)
Fifth Report
Localisation issues in welfare reform
HC 1406 (CM 8272)
Sixth Report
Regeneration
HC 1014 (CM 8264)
Seventh Report
Pre-appointment hearing for the Government’s
preferred nominee for Chair of the Homes and
Communities Agency Regulation Committee
Eighth Report
The National Planning Policy Framework
Ninth Report
Taking forward Community Budgets
HC 1750
Tenth Report
Building regulations applying to electrical and gas
installation and repairs in dwellings
HC 1851
HC 746
HC 666 (HC 834)
HC 1612
HC 1526 (CM 8322)
Communities and Local Government Committee: Evidence Ev 1
Oral evidence
Taken before the Communities and Local Government Committee
on Monday 21 November 2011
Members present:
Mr Clive Betts (Chair)
Heidi Alexander
Bob Blackman
Simon Danczuk
Bill Esterson
Stephen Gilbert
George Hollingbery
David Heyes
James Morris
Mark Pawsey
Heather Wheeler
________________
Examination of Witnesses
Witnesses: Andy Hull, Senior Research Fellow, Institute for Public Policy Research, Peter Williams, Director,
Cambridge Centre for Housing and Planning Research, Jim Vine, Head of Programme, UK Housing Policy
and Practice, Building and Social Housing Foundation, and Roger Harding, Head of Policy, Research and
Public Affairs, Shelter, gave evidence.
Chair: Thank you very much for coming. Welcome
to the first evidence session in our inquiry into the
Financing of New Housing Supply. Thank you for the
written evidence you have so far provided and for
coming this afternoon and being early enough for us
to start a little bit early, which is always helpful. Could
you just begin by indicating who you are and the
organisation that you represent?
Peter Williams: I am Peter Williams, director of the
Cambridge Centre for Housing and Planning
Research.
Jim Vine: I am Jim Vine, from the Building and
Social Housing Foundation.
Andy Hull: I am Andy Hull, a senior research fellow
at the Institute for Public Policy Research.
Roger Harding: I am Roger Harding, Head of Policy,
Research and Public Affairs at Shelter, the homeless
and housing charity.
Chair: If you do happen to agree with something
somebody else has said, there is no need for all the
rest of you to repeat it. We will make more progress
and will cover more ground if that does not happen.
George Hollingbery: May I draw Members’ attention
to my entry in the Register of Members’ Interests?
Q1 Chair: Myself and Bill Esterson also have items
registered there and I draw attention to them for the
public record.
How big a housing problem does the country face? Is
it a here-and-now problem, is it created by the
immediate economic problems that the country is
facing, or is there a real long-term challenge that we
need to address?
Peter Williams: There is a very, very, very substantial
and immediate problem and an ongoing problem in
terms of scale, structure of the market and
Government policy, so yes is the answer to all of the
questions you have raised. There are serious issues
confronting the UK, with huge implications for social
mobility, economic development and opportunity.
Jim Vine: I would concur with that. As well as the
economic and social issues, there is the undersupply
of housing that we face, which also affects individual
households. We must not forget that. I think it is
probably to be welcomed that, in the strategy
published today, the Government seems to be
indicating that it acknowledges that housing
undersupply is an issue.
Andy Hull: I think you will all know from your
surgeries that there are some fairly acute, immediate
short-term pressures on housing, but there is a chronic
crisis underway as well. It affects all the different
sectors. Social housing has been residualised;
meanwhile,
owner-occupation
is
becoming
increasingly unaffordable unless you have access to
the bank of mum and dad to get hold of the deposit,
so people are being funnelled into a private rented
sector that is, in large part, unprofessional and
insecure and often indecent. Our calculations suggest
that, all other things being equal, by 2025 we will be
750,000 homes short of what we need as a country.
Roger Harding: It is worth stating that, because this is
a long-term problem that has in effect been potentially
created by successive Governments, or at least
successive Governments have dropped the ball on the
issue of housing, the onus is on all parties to come
together to start looking at solutions for the long term.
It is also important to state that one of the problems
that we have with housing is that high demand and
high prices have not fed through into supply in the
way that you would tend to see in other markets. It is
clear that something is fundamentally broken in the
market. It is also clear that this problem was occurring
before the credit crunch. It is important that we do
not get caught up in some of the short-term pressures
unnecessarily and feel that just by working on those
we will address the longer-term problems, too.
Q2 Chair: As things stand at present, including the
announcement today, how do you see the supply of
new housing going up to the end of the Spending
Review in 2015? Do you think the Government will
hit its target of 170,000 affordable new homes in that
period?
Peter Williams: It has a possibility of meeting that
target of 170,000 new homes. The affordable rent
Ev 2 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
regime will clearly have some impact. A number of
the other initiatives announced today will lever in new
supply of affordable housing. There is a major
question about whether overall housing supply will
ramp up as quickly as the Government imagines.
Then, as Roger and others have touched on, there is a
huge backlog that has yet to be dealt with. If we are
talking of 230,000 new households per annum,
170,000 affordable homes over that period is only a
partial contribution to a long, substantial backlog and
ongoing requirement. We are struggling to see how
the numbers that are likely to come through will
address some of the problems. That relates back to
affordability in the home ownership sector, access to
the expanded affordable rented sector as well as
provision of social rented housing of a sufficient scale.
Andy Hull: We have said we need 250,000 new
homes each year, moving forward through the next 15
years, to avoid that 750,000 gap I talked about. For
the last 20 years the average has been 160,000 new
homes each year, and last year it was 106,000—the
lowest since World War Two—so it is not looking
rosy; but even if planning reform works and even if
you take into account public land release and so on,
there is another side to this coin, which is about
whether we can get the developers to develop the sort
of houses we need in the places we need them. I think
today’s housing strategy is something of a bonanza
for those developers, with “Build Now, Pay Later”
giving them land, “Get Britain Building” giving them
money, and the mortgage indemnity scheme
underwriting some of the house-buying borrowing
that they rely on, but there are big question marks
about whether they will be able to deliver their side
of the deal, or whether they are going to want to meet
their side of the bargain.
Roger Harding: Although I will not make predictions
about what will be built in the next few years, it is
very clear that that will not meet the demand that we
face, which is around the 250,000 mark per year. We
are going to fall substantially below that; we are only
building about 100,000 a year at the moment.
Therefore, although today’s strategy is welcome in the
profile that the Prime Minister and the Deputy Prime
Minister have given the issue and some of the
stimulus that they have brought forward in the short
term, it is clear to us at Shelter that it is a not a longterm strategy for how we will get to the 240,000 to
250,000 homes per annum mark.
It is important to consider in this area that there is a
clear role for the state, in overall principle terms,
because the private market has not delivered over the
post-war period, particularly. Private construction has
been remarkably stable and very consistent during the
whole post-war period, despite widely differing
financial arrangements and planning rules. The big
difference has been state investment during that
period, which ramped up the figure to more than
250,000. Clearly we are in different economic
circumstances now, so some of the levers that we used
before we may not be able to use now and in the
future; nonetheless, we need to look at how the state
can intervene in this market to ensure that we can
channel investment into supply, because it is clear that
the market is not getting that through to supply at
the moment.
On finance, because we are not going to get to that
supply in this Parliament, we will have further pentup demand, which will mean that many fewer people
are becoming home owners—home ownership has
been decreasing since 2003 and that is likely to
continue. Social house building will not increase
dramatically, so not too many people are going to end
up there. That means that many more people are going
to end up in the private rented sector. The number of
families living in that sector has increased by 77% in
the last two years, and it is not a sector that is well
suited to young families: it is not a particularly stable
foundation for their family home and, unfortunately,
people face unpredictable rent rises. Although it is
welcome that there is a chapter on the private rented
sector in today’s strategy, it is not particularly
welcome that there is not more of a discussion about
how it can better be fixed to work for families.
Jim Vine: In your question you referred to the
affordable housing target. It is notable that the
Government will not lay out a target for housing
building overall, which would be okay if the strategy
that they presented had some sort of strategic vision
against which house building or the supply of housing
could be measured in broader terms. The closest the
strategy gets to that is in referring to stability in the
housing market, although I would be looking first for
a bit more indication about what stability means. It is
not precise about whether that means stable house
prices or steady increase in house prices. If the
Government set a target, “We won’t tell you how
many homes will be built each year, but we do want
to see house prices steady in the long run,” that would
be an acceptable alternative.
Peter Williams: The new constraint in all of what has
been said is the shortfall that we will face in terms of
mortgage finance. There is clearly a capacity
constraint in the mortgage sector now and going
forward for at least five years, and possibly longer,
which really has a big implication for the shape of UK
housing provision.
Q3 George Hollingbery: You just said, I think, this
is about housing finance rather than anything else, but
I think we need some context. If we are going to make
real progress towards building the number of houses
that we want, where does the problem lie? Is it
finance? Can you split it between public and private?
Are there other factors out there we need to
understand before we can get on with the idea of
raising finance for housing?
Roger Harding: Finance is clearly an important
aspect, because in a typical free, well functioning
market you would expect the rising prices and rising
demand that we have seen to feed through into greater
supply, and that has just not happened. We need to
unpick that a lot further, so it is good that the
Committee is looking at that. Other factors should be
considered as well, such as the structure of the
construction market and the land supply market.
Over the longer term, it is key that the Government
set out how that finance will come on stream and
consider the state’s facilitation of it, because the
Communities and Local Government Committee: Evidence Ev 3
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
market has not delivered. It is clear that public
financing will not get to the levels that are required
over the next 10 years, unfortunately, but the state can
do many things to facilitate private investment getting
to the housing supply that we need. Those
mechanisms are used in many other European
countries—for example, many allow their local
authorities to borrow on the back of potential capital
or houses that they have to generate new supply. There
are also examples in many European countries of
national housing banks being used, treating housing
as a very different asset class, because it provides both
a capital unit and a very predictable long-term supply
of revenue. It is something far more secure to base
lending on the back of than just typical Government
spending, so it is something that is treated differently
in tax and accounting rules on the European level. We
really need to consider that.
Chair: We will probably move on to some of these
issues in later questions.
Peter Williams: Can I just add a point to that? We all
struggle to understand why housing supply does not
respond more effectively than it does. There is clearly
a package of issues around that, but it is extraordinary
how the private sector output has remained
remarkably constant, all through the cycles, without
responding to what normal markets would respond to.
Q4 Mark Pawsey: I should like to ask about the
potential for bringing institutional investment into
housing. The IPPR have drawn attention to the fact
that there is a pot of money in the City on the one
hand, going into all sorts of types of investment but
not housing; and on the other hand, Mr Harding, you
just referred to rising demand and rising prices. Why
have institutions, historically, not put money into
housing?
Andy Hull: Basically, they do not think that they can
get the right yield and they think it is too high hassle,
which is why in our report that we sent to this
Committee we suggested that one source of
institutional investment that might work would be
local authority pension funds, because they have in
excess of £150 billion worth of funds, because they
can be quite patient to see the return over time and
because they have councillors on their management
boards who should understand, as MPs do through
their monthly surgeries, what a crisis we are facing in
terms of housing need.
Q5 Mark Pawsey: Should that be an altruistic
objective for those pension funds, or should they
consider it as a best investment return policy?
Andy Hull: I do not think altruism will work here; it
needs to be hard-headed and it is right that it should
be.
Q6 Mark Pawsey: If it is hard-headed for local
authority pension funds, why should it not be hardheaded for others?
Andy Hull: It should be. There are ways around some
of the problems that are often posed in terms of local
authorities getting involved with their pension funds:
people would often say, “You can’t afford to invest in
your own back yard with your own pension fund,” but
there are examples in Manchester, for instance, of
local authorities teaming up to spread some of that
risk. We found, and detailed in the report, a few
emerging precedents of local authorities beginning to
look to invest their pension funds in new-build
housing.
Peter Williams: We should not imagine that
institutional investment is going to be the solution for
the private rented sector. It will always be a sector
dominated by small landlords, but it can be much
more significant than it is—of course, historically, in
the 1930s to the 1960s, it was quite significant.
Institutional investment has its place and the issue
now is partly about how we get there. It is unfortunate
that the Government has announced yet another
review. Institutional investors will wonder, “When
does review cease and when does action actually take
place?” There are a number of individual elements
that investors and others in the Treasury review have
asked for, which the Government really could
respond to.
Q7 Mark Pawsey: What do you think the
Government could do to encourage the institutions?
Peter Williams: There are loads of little detailed
points. There is no single silver bullet.
Q8 Mark Pawsey: Give us a few.
Peter Williams: The trading requirement, for example,
on institutional investment—you cannot sell more
than 25% of the stock, I think. Some people who want
to invest in that want the capacity to turn over the
stock if they need to. These restrictions on businesses
that are set up to do the job that people want them to
do, but need the freedom to do it in the way that they
choose, conflict with the view that if this private
rented sector is providing homes for a large number
of people, we have to control that tendency. The
difference here is that institutional landlords, we hope,
would behave in different ways than maybe landlords
that are only there to trade.
Roger Harding: As Peter says, it is important to keep
the potential scale of institutional investment in check.
The Rugg review has commented on the private
rented sector and a Treasury review also looked into
this last year. Looking across Europe, even in
countries that have managed to get a lot of private
institutional investment on stream, those landlords
still do not become majority landlords. Even in
Germany, where a lot of institutional money has been
channelled into the private rented sector using a lot of
state incentives, still just over 60% of private
landlords are individuals and couples.
Q9 Mark Pawsey: Are you suggesting that this is
something that is not going to happen?
Roger Harding: It can be an important part of the
mix, but we should not overlook the other chunk of
the sector, which is individuals and couples. As Julie
Rugg suggested, we should look at ways to enable
them to increase their quite small portfolios into
medium-sized portfolios. In Europe, there are often
interesting tax breaks for landlords staying in the
sector—for example, they can have depreciation
allowances against the income they get from rent.
Ev 4 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
They also get allowances whereby they do not have to
pay capital gains tax provided they have had a single
property in the sector for more than 15 years, which
encourages landlords to take a long-term view and
therefore tends to feed into landlords giving more of
a stable tenancy to tenants.
Q10 Mark Pawsey: Shelter have reported that 70% of
landlords only have one property. Would you like
existing landlords to increase their portfolios and take
it more seriously and become bigger holders of private
rented property?
Roger Harding: Potentially, yes, absolutely. There is
certainly no guarantee that a bigger landlord is a
necessarily a better landlord—there are plenty of
individuals who are landlords who are very good
landlords indeed—but we would like to see a lot of
landlords with small portfolios become more
professional in their business dealings.
Q11 Mark Pawsey: You would like to see the
accidental landlord become a deliberate landlord?
Roger Harding: Absolutely, yes. Or even if you do
become an accidental landlord, you then very much
consider yourself to be a landlord and to be a business
and to run your operation as a business, which is not
necessarily the case at the moment.
Jim Vine: Another recent review1 into this conducted
by academics at the LSE, among others, identified one
country—Switzerland, I believe—that did achieve the
goal of having institutional investors as the largest
sector in the PRS. I am happy to pass on a copy of that
paper afterwards, if it helps. I think one of the factors
there was legislation requiring single ownership of
residential blocks, avoiding things like leasehold
enfranchisement, because that makes management
easier, but it also obviously favours larger-scale
institutions taking on that lease.
Q12 George Hollingbery: It has been mentioned that
huge amounts of Government grant are capitalised in
the property market—£40 billion or so. Could you
enlarge on how that £40 billion could be used and
leveraged to provide more housing?
Peter Williams: The £40 billion of grants? This is a
complicated area, without doubt, and is an ongoing
debate. It sits as a charge behind private sector lending
and in theory Government has the right to reclaim it
and, indeed, if you sell a property with grant, the grant
returns to the housing association under the Recycled
1
Towards a sustainable private sector edited by Kath Scanlon
and Ben Kochan,
www.lse.ac.uk/geographyAndEnvironment/research/London/
research.
The witness added: “the publication identifies that
Switzerland has a majority of housing being private rented
(“about 56%”, p19) but does not say that institutional
ownership of private rented housing is in the majority in the
country. It does note that “pension funds play a particularly
important role because they are required to hold real estate
as part of their portfolios, and private rental apartment
buildings are a popular asset class for pension fund
managers.”
The requirement that I mentioned on multi-unit buildings
remaining in single ownership is or has been present in
Denmark, Sweden and Switzerland, and in Denmark and
Switzerland they can only be converted into co-operative
dwellings or remain privately rented (p37).
Capital Grant Fund and they have three years to spend
it. For lenders, though, evidence of public sector funds
sitting behind their loan to housing associations is quite
important. Of course, the issue then of taking it away
and converting it into equity does have implications
about the mainstream lending—the debt lending—to
the sector.
Conversion from grant to equity clearly has some
momentum, but it carries with it certain pressures, not
least of which is that you will probably need higher
rents to ensure that there is a premium payment to the
investor. Government could oversee higher rents
through the affordable rent regime, with a premium
payment to the Government as an equity investor, the
question then is: as equity investor, what implications
does that have for governance of the structure? Then the
Government could sell its equity holding to the private
sector, release the cash that is inside that equity
investment and, in theory, put it back into the social
rented sector to generate new development. That new
development could then, of course, add to the capacity
of the housing association, which would then itself
underpin some of the private sector borrowing that has
been made against this sector.
There is a virtuous circle here, in some degree, but it
does require Government, ultimately, to pass the cash
realised back to the sector as one of the options. That
then raises the question: where would a private rented
sector investor sit in the governance of the housing
association and what long-term implications would a
hybrid sector with public and private investors involved
have for the shaping of the sector? It probably would
begin to generate more competitive tensions and more
normal plc-like behaviour, with mergers and takeovers,
which many people would argue could be positive, But
I think there is unknown territory here with regard to
how the conversion of grant to equity could ultimately
play out.
Q13 George Hollingbery: Can we just have a little bit
more on that issue about the covenant—the reduction in
the strength of the covenant of the borrower by
equitisation of the value in housing?
Peter Williams: It is simply that there is something like
£60 billion of private finance sitting behind housing
association finance. It is worth reminding ourselves that
that is where a lot of institutional investment in renting
has already taken place. Something like £15 billion of
that investment is from institutions into the social
rented sector. Back on the previous question, if we
divert lots of activity of institutions in the private rented
sector, we do not want them extricating themselves
from the social rented sector. That sets as a comfort, in
two ways. Government has its own money in there,
which shows that it is committed to the sector and in
some senses it stops Government tinkering with the
sector to the extent that it might threaten its own
investments, so it is seen as reassurance to the lender,
as well as the fact that the lender has first charge and
Government has second charge.
Q14 George Hollingbery: As you were addressing
the previous question, can I just ask other members of
the panel about liquidity?
Communities and Local Government Committee: Evidence Ev 5
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
Roger Harding: It is sensible to look at all the options
here, because a lot of Residential Social Landlords are
quite well leveraged at the moment. The signals coming
from the sector seem to be that they cannot do another
iteration of affordable rents; they could it for this one
term, but the leveraging would tip them over an
acceptable level in future. I would welcome a look at
these kinds of options, but I am particularly nervous
about the prospect of this potentially raising social rents
to meet the return that equity investors would need.
Some important safeguards would be needed, both on
rents and the governance of RSLs, given the private
sector involvement.
Q15 George Hollingbery: I am interested in the
liquidity for the private investor. This is not like buying
stocks and shares. Bricks and mortar is a much less
liquid investment, is it not?
Peter Williams: It is a point that Andy and IPPR have
made about institutional investment in the PRS; there
are real issues about liquidity in the housing system.
Typically, when you want to exit, the market is in a
difficult position and there is not an easily tradeable
position: it is not quoted daily in the markets and you
are not necessarily easily able to liquidate it in the way
you might a conventional investment.
Q16 George Hollingbery: Are all of you convinced
that the governance issues are complex but
surmountable, or are they going to produce real
problems about how this asset is managed in the long
term?
Andy Hull: Roger is right. Affordable rent is just that:
an attempt to sweat the housing associations’ assets.
The majority, but not all of them, are saying that they
will have reached their gearing limit by 2015, so
another iteration of that will be very difficult.
I want to flag up that behind some of these problems,
there is tension between housing associations having a
social purpose that is best delivered locally and housing
associations merging, syndicating, collaborating and
becoming big, quasi-private businesses. The two are
sometimes in tension.
Roger Harding: Whether it is surmountable or not is
very difficult to know. As Peter highlighted, this will be
new territory in the UK, and it carries a lot of risks with
it, so we would need a thorough assessment of it before
we were comfortable with that being taken forward.
Q17 Chair: Something like it has happened in the
Netherlands, hasn’t it?
Peter Williams: Yes.
Chair: Do we have information about how has it
worked there?
Peter Williams: They effectively privatised the housing
association regime and the grant was converted into
housing association equity investment. I think the
Government parked the equity with the housing
associations; they did what people here would like them
to do. There is also ultimately an issue about the balance
between the cost of equity and the cost of debt. Some
associations would take the view that, at the moment,
debt is cheaper than equity.
Q18 Bill Esterson: Between you, you have raised a
number of issues already: affordability of rents; lack of
surplus for landlords; difficulty in buying; reluctance to
lend; and liquidity. Those all seem to be linked to the
high prices and the high valuations, which again is
linked to the fact that the housing market has become
very, very high compared to incomes historically. I do
not know which comes first: do we need to cut prices in
order for supply to increase and for people to be able to
buy or rent, or is it the other way round? Is that at the
heart of this discussion?
Andy Hull: If you want to stabilise house prices,
whatever stabilise might mean, we have to pull multiple
levers simultaneously, and supply is certainly one of
them. I do not think that you can discuss housing these
days without mentioning increasing supply. There are
also fiscal levers one could pull, and monetary levers
too. The one that we flagged up most emphatically in
a previous report was credit control. We think, and the
Organisation for Economic Co-operation and
Development (OECD) and the International Monetary
Fund (IMF) agree, that loose lending was a primary
driver of the trebling of house prices that we saw in a
decade and that a return to loose lending is not what
first-time buyers need. “Let them eat credit” is not the
answer.
Roger Harding: It is not what first-time buyers want,
either. We, at Shelter, surveyed them and they would far
prefer prices to become more affordable than simply to
be offered larger loans, frankly. Therefore it is really
important that the Government commits to the
Financial Services Authority’s mortgage market review
on this, to keep that lending in check.
Q19 Bill Esterson: Neither of you sound keen on the
95% mortgages, even with all the support.
Andy Hull: We are not particularly keen on that, no.
Roger Harding: There have to be incredibly rigorous
affordability checks in place. Also, it must be ensured
that this money feeds through into supply. An awful lot
of lending was flowing into the housing market in the
boom years and that did not translate into supply. The
Government needs to be really clear that when it is
getting involved in the market and putting in place
policy interventions, that will feed through into new
supply, because the market has proved that it does not
channel it itself particularly effectively.
It is important to note that the number of first-time
buyers has been dropping for a couple of decades. A
financing model based on residential mortgages
channelled towards first-time buyers is very unlikely to
get the kind of financing that we will need for new
supply. While I can see why it might be politically
important to talk about first-time buyers, in terms of
getting housing built, indemnities and so on are not
going to be particularly important in the scale of things,
given the numbers involved.
Jim Vine: Ultimately, cheaper homes would be
preferable to cheaper credit. Unfortunately, with the
level of supply that we are talking about, even the
250,000 that Andy mentioned, the best econometric
modelling that has been done of what housing supply
does to house prices suggests that even at those levels
we would still see increases in house prices. Those
researchers did not put a number on how many homes
Ev 6 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
you would need to build each year to constrain house
price increases, but it was somewhere in excess of
250,000 a year—maybe 350,000 or 450,000—which is
an awful lot if you are trying to constrain it through
supply-side alone
Peter Williams: At the National Housing and Planning
Advice Unit—long-lamented, perhaps—when we
modelled the impact of housing supply on price we had
to push up supply an enormous amount, well beyond
the capacity of the industry’s historic record, to secure
any noticeable mitigation in house price increases. This
is the territory into which the Financial Policy
Committee is planning to step forward. One of the
issues here is that a new agenda is being set out by the
Government and the authorities in terms of financial
stability and price control in the housing market. How
that will work through, what signals it will try and send
to the market and how it will intervene, are important
new components of the housing landscape going
forward, which will be very demanding.
Andy Hull: Even after the onset of really loose lending
in 2000—01—110% loan to values, self-certification
and interest-only mortgages—the number of first-time
buyers actually dropped; it did not go up. It was
enabling people who had houses to trade up. I am a bit
worried, given today’s announcement, about any talk of
Government-backed sub-prime mortgages, because we
have heard of that before.
Peter Williams: But 95% is not sub-prime; it is,
historically, the mortgage product that supported the
first-time buyer market in the UK.
Bill Esterson: It might be if prices fell.
Q20 Heidi Alexander: I have a question about how
housing developers will behave, going forward.
Obviously you are not soothsayers, but it is not in
developers’ interest, is it, to flood the market with lots
of new homes in order to reduce prices? What is your
take on how you deal with some of that behaviour?
Andy Hull: Too often, the approach taken by the
industry in this country has been to make large profits
off small volumes—in fact, they have become land
traders rather than house builders. We need to introduce
some competitive pressures into the development
industry.
Roger Harding: Regardless of their motivations and so
on, the fact is that over the past 40 or 50 years, the
private developer market or industry has not built
enough homes, so clearly we will need other
interventions within the market to get to the supply
levels that we need. That will probably have to be statefacilitated. Another important area we can look to in
order to generate some choice and competition would
be to encourage more self-build and community selfbuild options, because some estimates suggest that selfbuild is already generating about 10% of the new supply
that we bring forward in the UK, and in many other
countries you can get that up to about 20%. Those
smaller-level developments are classic Big Society in
action, with the community coming together,
generating the finance together, setting up their own
plans and getting things built. It also gives people the
choice to not pick the classic design of a private
developer; they can pick and choose their own, and
therefore we get a bit more diversity in design and size.
Q21 Bill Esterson: One way that you are proposing to
do that is through a national investment bank. Will you
tell us how that would work?
Roger Harding: Absolutely. It is a model that has been
used in many other European countries, because
housing is a different asset to many others, and we are
now starting to use that model increasingly in the UK
with regard to green technology and green investment.
We have the Green Investment Bank and I do not see an
argument against us extending that to housing as well,
so using some public finance to leverage in more private
finance off the back of it. The National Housing Bank
could potentially intervene in areas where scale is
needed for things to get off the ground, whether that be
new towns or new industries, as with institutional
investment in the PRS. A lot of institutions are nervous
because it is an immature market and they need to start
out.
Q22 Bill Esterson: Not just housing?
Roger Harding: It could cover more than housing. It
could cover infrastructure and other things as well
which bring on housing, but it could particularly help in
areas where scale is needed from the off to get private
investors interested.
Andy Hull: We at the IPPR are certainly arguing for a
national investment bank from a number of different
perspectives, not just a housing one, but we do draw
attention in the paper we sent in to other national
investment banks or their equivalents that are investing
in new-build housing.2
Q23 Bill Esterson: How would you fund it? How
would you capitalise the bank to start with?
Roger Harding: You could start off with a typical
grant—the affordable housing grant that you use
typically. It is important to note that although the
additional £400 million funding stream we have seen
today is welcome, the overall grant funding was cut by
over 60% just a year ago. If we brought more of that on
stream, because that was a disproportionate cut to
housing over many other issues, as has been done with
the Green Investment Bank—we have a precedent set
up here in the UK already—we could leverage private
finance on the back of that, invest it in housing, recycle
that public money back into the system and then
potentially get some quite scaleable, interesting new
products going.
Q24 Bill Esterson: There is a limited amount of debt
available. I think Peter mentioned the balance between
debt and equity earlier. Is there a risk that everybody is
going to be drawing on the same resources and
competing for the same money?
Peter Williams: This is where bringing in investors is
important. The Government has significant assets in the
housing sector. Shared equity loans, for example, could
be liquidated and sold out to the market, and there is a
number of pots of money sitting out there that
potentially have capacity to replace Government
funding with long-term institutional investment, which
2
See Ev 74 and Build now or pay later?
www.ippr.org/publications/55/8116/build-now-or-pay-laterfunding-new-housing-supply
Communities and Local Government Committee: Evidence Ev 7
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
you might argue matches quite well with some of
those products.
Jim Vine: I echo what Roger said about the diversity
that you could bring into places. As well as self-build,
that might be done through community land trust
models or freeing things up more for small private
sector builders. One model that we have discussed in
terms of how a lot of small things might be brought
together is through a local authority taking a lead on a
joint vehicle. The output of that and where that ends up
depends on whether they can parcel out the land and
make certain proportions available to self-builders and
to whichever models make sense in that local authority
area.
That model has worked in various places across
Europe. If we look back to our own history, although it
probably works better on large-scale new
developments, we have had examples of this happening
both in the private and public sector—for example, the
new towns were public developments and the original
garden cities were developed privately and the
Rowntree-type developments would have been private.
Looking to Europe, there is an example of a large
extension to the town of Amersfoort, called Vathorst, in
the Netherlands, created using a hybrid model between
public and private, where they brought together the
council, the local authority—so ensuring there was a
strong democratic mandate for that model—and five
private sector operators. That model merits being
looked at in this country. If the local authority is taking
a title of the land, perhaps, or striking a deal with the
land-holder that they are only going to take a moderate
amount of the uplift that would come through granting
planning permission and building the site out, we might
see that that is able to generate the funding to put in the
infrastructure and put in the roads, which all points to
being able to parcel this out in a reasonable fashion.
Roger Harding: If there is a limited amount of debt, it is
vitally important that we channel it towards new supply
rather than just inflating the market that we have got and
feeding through into unsustainable loans. That is a key
role for the state.
Q25 David Heyes: To pick up from what Jim Vine was
just saying, can these alternative models, some of which
you have mentioned, ever make more than just a
marginal contribution to boosting housing supply, or
are you saying that this is a new way forward to make
massive change?
Jim Vine: Given the right following winds, they
certainly can. We have seen in the past the new towns
delivered substantial amounts of housing. The example
in the Netherlands that I have described extended a
town by 40%—they had substantial housing need in
that area and they managed to grow the town
substantially. That does not mean it is trivial, of course.
You need the right support to be put in place.
Q26 David Heyes: What does that need to be? What
should the Government be doing to make sure that
support is in place?
Jim Vine: The first thing I would say is that this solution
will not necessarily work everywhere. Government
should be supporting local areas that want and are
capable of doing it. They might be able to do some
things—if Government signalled to local authorities, or
if Eric Pickles wrote a letter to every local authority
saying, “I’d be minded to grant you the powers under
the urban development corporation powers, or if you
approach me with proposals I would be minded to do
this.” I do not think it is about central Government
instructing local areas to be doing this.
Peter Williams: There is an issue here about leadership.
In essence, one of the problems—the strategy
document published today symbolises it perfectly in
many ways—is that there are a large number of
initiatives, but the Government has avoided, and said it
has avoided, setting down the scale of the task. I think
markets are informed by understanding the scale of the
task. That is not an admission of failure; that is setting
out some sense of what is required and saying, “We can
do so much and other people should do a lot more.”
That is where Government at the moment is confusing
leadership and responsibility. If it takes a leadership
role in some of these areas, people assume that it will
therefore own it. Actually, it does not have to own it, but
it does have to lead it.
Andy Hull: I think we need to see some success stories
as well. Community land trusts have been mentioned,
and they have worked okay in rural settings in this
country so far, but we have not really pulled one off in
an urban setting. I think the work that London Citizens
are doing on the St Clement’s Hospital site is an
interesting test study, but it is notoriously difficult to
upscale those sorts of models. Part of what we are
exercised by here is scale.
Roger Harding: This is not an issue that will be dealt
with by a silver bullet. We have quite a few options that
could potentially, if done in unison, add up to an awful
lot of finance and therefore an awful lot of supply.
Ultimately, building on Peter’s point, we have to face
up to the fact that this is a political choice as well.
Certain issues have priority over others. Clearly,
Shelter’s perspective is that housing should be given
more of a priority. Some of the recognition today is
welcome, because politically and at governmental
level, people are starting to understand that housing is
an important economic driver in itself in terms of
construction and it is vitally important in terms of
stimulating the economy and allowing people to live
where the jobs are, which is a significant problem in
certain parts of the country. The crisis is now getting to
a state where it is really starting to bite down on higherincome groups in particular parts of the country. This
really is a squeezed-middle issue. Many people who
would understandably aspire to own will now not be
able to own and now see themselves living in the private
rented sector for 10 or 20 years. While political rhetoric
has tended to focus around some of the older debates
about home ownership and so on, the market is
changing quite dramatically and it is important for all
politicians to catch up with that and start focusing on a
long-term plan.
Andy Hull: Part of the reason that owner-occupation
has become a primary manifestation of aspiration in this
country is that the alternatives have been so poor. The
private rented sector has not offered a decent alternative
Jim Vine: Peter’s comment on leadership reminded me
of something. One of the huge success factors in the
Dutch example was a very strong local leader, a former
Ev 8 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
alderman in the town council there, who was a fairly
savvy political operator and was able to work around
and build bridges between the different layers. In local
government in this country there are excellent examples
of authorities that have strong leadership, but others
may not have so much experience of using a lot of these
powers over recent years, so a bit of signalling from
central Government that they can step up to the plate
and take up that role would be welcome.
Q27 Heidi Alexander: Can I return to increasing the
supply of social rented housing? We have already
referred to the affordable rent model in our discussions.
Of course, over the next three years Government grant
going into the building of social rented accommodation
will be £4 billion less than in the previous three years.
In your view, how effective is the affordable rent model
going to be at encouraging the new supply of social
rented housing?
Roger Harding: One difficulty of this is that the
affordable rent model would be okay and would be
acceptable if it came as part of a package of new supply
options—part of a portfolio that included social rented
homes. The difficulty at the moment is that it is hard to
see how, given that we are cutting back on capital
investments and therefore paying out less per unit, we
will not, in effect, end up paying for that in housing
benefit in one form or another over the longer term and
therefore continue the shift from reducing capital
investment and putting it into revenue investment.
Either these properties will go to people claiming
housing benefit or who could claim it in future—
because the rents are higher their housing benefit will
be higher—or, alternatively, they will go to people who
are not claiming housing benefit and are not on the
waiting list and so on, and so therefore those who are
will end up in the private rented sector where again
rents are higher and we are therefore likely to be paying
out more in housing benefit. In the short term this will
give us more numbers, but in terms of finance over the
long term we will again end up paying for it in housing
benefit. The Government needs to look at many more
options and not just have this one option that you can
have if you take grant from a national level.
Peter Williams: It will clearly play out in different ways
in different areas, because in some areas social rents are
close to market rents already, so the concept of
affordable rent squeezing between the two is quite
difficult; in other areas, such as London, there is lots of
capacity, so the capacity of landlords and housing
associations to respond will vary hugely. Some will
have a very short window of opportunity to supply the
affordable rent requirement in that locality and that will
be it, so the amount of extra cash that they will receive
is limited. In others it could be played out over a long
period of time. Clearly, of course, you are creating new
assets that give you more borrowing capacity over the
long term.
It is not absolutely clear yet how far lenders will
recognise the uplift in value on affordable rents in terms
of the borrowing power of an organisation because of
the uncertainty about how the affordable rent regime
will play out over the long term. Some of the benefit of
that new regime is at the moment uncertain, because it
will not necessarily give increased borrowing power in
the way that people hoped.
There is an assumption in the Government’s own
documentation that most of the people going into
affordable renting will come from the private rented
sector. That is not borne out by empirical evidence.
Most social renting generates from within families.
Therefore there are some discords in terms of how the
regime is presented and how it might operate in
practice. I think all of us probably—I am guessing
here—would take the view that, yes, it is welcome and
it may be useful, but it certainly is not a solution in itself
and there is a question about the long term.
Andy Hull: Developing what Peter said, affordable rent
does represent a decision to let housing benefit take the
strain. That is not a decision that we at IPPR would
make, because we think you need to be reversing the
proportions of HB versus bricks and mortar back to
where we were 40 years ago, when 85% of Government
spend was on bricks and mortar, not on HB. Today it is
85% HB.
Jim Vine: I only had similar headlines to say: I am sure
that over this Parliament it can deliver roughly the sort
of numbers that they have talked about, but it is a
different product to social renting and, like everybody
else, I do not have much of a view that it would
necessarily be able to deliver past this Parliament.
Q28 Heather Wheeler: I am very interested in the
changes to the housing revenue account, because I am
an anorak and I understand these things. With the
changes, how do you think that councils are going to be
able to build new houses? What support do you think
the councils will physically have to build new council
houses?
Peter Williams: There are question marks about how
far the reformed system will feed large numbers of new
homes in local authorities. There is already a debate
going on about the level of rental uplift, about whether
it is Consumer Price Index (CPI) or Retail Price Index
(RPI), and whether the constraining of that will take
away extra borrowing power that would have been
generated.
The expectation in terms of the numbers of new homes
that local authorities can support through increased
borrowing power is quite limited; 5,000 would be a
high number on an annual basis. Although it is a
welcome step forward and it will evolve over time and
become more powerful, much turns on how the rentsetting regimes around local authorities are
conditioned. Also, do not forget that this goes into the
general coffers of the local authority. There will be
other demands on how the local authority spends its
money and housing will only be one of those potential
demands. I think there is a fairly sanguine view out
there in terms of the likeliness of the new regime
providing the new cavalry coming to the rescue of the
housing undersupply problem.
Jim Vine: In terms of local authorities delivering on the
back of this, if we look back 30 years one thing that
stopped authorities delivering much housing was the
right to buy. We have had recent announcements that
the right to buy is likely to come back in a fairly
substantial form. It will be interesting to see what the
interaction of those two policies is.
Communities and Local Government Committee: Evidence Ev 9
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
The other thing that, broadly speaking, puts a damper
on local authorities being able to supply housing is the
treatment of their debt. In the UK we work on the public
sector net cash requirement, similar to the old public
sector borrowing requirement, where all the debts of
local authorities are treated as public sector debt. Pretty
much everywhere else in Europe they use the GGFD—
general government financial deficit—model, which
means that trading activities, such as housing, are
viewed as off-balance sheet, off the national debt
figures. It would be a relatively simple step to move to
that, because in terms of the perception of our national
debt on international markets, which like to compare
like with like anyway, they are probably looking at our
GGFD figures anyway. I cannot see our moving on to
the same accounting system as is used across the rest of
Europe causing too much of a problem.
Q29 Chair: You could reduce Government debt at a
stroke.
Jim Vine: You would reduce the number. You would
alter the treatments of some of it. It would be perfectly
reasonable to say, “Well, we’re going to carry on
publishing the old numbers in the interests of
transparency. We’ll still show as a secondary measure
what our other measure is.” It is a perfectly reasonable
treatment that a lot of other countries use.
Q30 Heather Wheeler: Would those controls be
enough, just publishing the GGFD figures as a corollary
to the national debt figures?
Jim Vine: There would always remain a requirement on
all public sector bodies to borrow in a prudential
fashion. If we can trust our housing associations to
borrow and not go bust, would we be able to trust them?
Maybe some Committee Members do not think that we
can trust local authorities to borrow.
Roger Harding: Within this you can always
importantly add checks and balances and certain caps
on these things to keep things more prudential. On
general support for local authorities, clearly a lot of
local authorities understandably have lost their
capacities and skills for development that they would
have had previously, because they were no longer
required. That is not necessarily a bad thing, because it
will force a lot of them—if they are using funding under
the HRA reform—to work in partnership and to use
other developers to get a diversity of development
going on in their area. I think that is very welcome.
There will need to be some support for councils that
transferred their stock and therefore do not have an
HRA to get development going in their area, because
they will not have that financing.
Q31 Heather Wheeler: We are talking about 137
councils, aren’t we?
Roger Harding: Exactly. Finally, just to reiterate points
that have been made already, we will need some kinds
of safeguards on rents, which is important for
affordability for tenants and also important to ensure
that any changes here do not end up back on a housing
benefit bill, meaning that we are paying for it in a
revenue way again, rather than in a capital way.
Q32 Heather Wheeler: One of you did start to talk
about the issue around right to buy and the amount of
financing that that will give to local authorities, albeit
that it might be reduced to 50% of the property value,
or something. How much of a threat or a promise is this
extra cash coming through? Will they really be able to
push that through into building again, because that
would be a priority, wouldn’t it?
Peter Williams: The idea that it will allow one-for-one
replacement seems highly questionable. This seems to
me to be a policy that has been advanced in advance of
the evidence.
Q33 Heather Wheeler: It is a southern thing,
compared with a northern thing?
Peter Williams: Maybe. There is a question mark about
that replacement capacity, which is obviously an issue.
Clearly, at 50% discount there is a risk that we take
some people into home ownership who should not be
there. Citizens Advice published a very important
report in 2007 called Set up to Fail, showing that people
were lured into home ownership, not given proper
financial advice and ended up with a backstreet loan at
high interest rates, buying what might have been seen
as a poor property in a poor location. It would be
obscene if that was the outcome of the new
right-to-buy programme.
Roger Harding: If I could just add to that from a
consumer perspective, other research from Consumer
Focus highlighted that right-to-buy borrowers were
twice as likely to get into mortgage difficulties as a
typical borrower. We have to remember that the average
household income of a social tenant is around £15,000.
There are a lot of tenants in the social sector whose
circumstances are not well suited to becoming a home
owner, so it is vital that proper affordability checks are
done to ensure that any change of right to buy does not
become a failure for a lot of borrowers and consumers.
Finally, on an important related point, the Government
is asking for right-to-buy sales to ramp up significantly.
Last year they were under 3,000. To get to the 100,000
figure, sales are going to have to go up ninefold very
quickly if the Government is going to make its 100,000
target. That makes me concerned, from a consumer
perspective, about whether the right decisions are being
made in the interests of the consumer and their ability
to sustain a loan.
Andy Hull: A number of us were at CLG this morning
and heard that the reinvestment mechanism for right to
buy was up for grabs, so it is not as simple as local
authorities getting the cash and reinvesting it one-forone.
Q34 James Morris: The Government has made quite
a play of getting as much public sector land released as
possible. On Friday I was talking to a local authority,
part of which I represent, and they were expressing
some frustration with central Government, specifically
the Department for Education. They have a housing
project that is ready to go and they have identified a site
that was previously a school, which was knocked down
three or four years ago, but that Department is still
reluctant to release the land for housing development. I
just use that as an illustration. I want to get a feel for
the extent to which you think getting more public land
Ev 10 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
supply would have an impact on the problem that we
are addressing. Secondly, given the example that I have
just given, how do we make sure there are incentives
for central Government to release land, and how do we
make that beneficial to taxpayers?
Andy Hull: Releasing public land has an important part
to play, particularly where you can make it available in
return for an equity stake that means you get public
benefit for it, but in this discussion we need to bear in
mind who has it: the answer is that 51% of the publicly
held land that is fit for residential development is owned
by local authorities, not by central Government. In fact,
central Government Departments own 2% of it, and
people like the NHS and maybe schools have some
more. A good Office of Fair Trading report from 2008
breaks down who has that land. It is worth remembering
that the vast majority sits with local authorities, not
central Government.
Roger Harding: It is worth bearing in mind as well that,
again, there will not be a silver bullet in this area. It can
make an important contribution, but probably not a
majority or a significant contribution over the longer
term. There have been an awful lot of announcements
about public land over the last few years—a significant
number of them by different Housing Ministers—and
we have not necessarily seen so much come on stream.
Where it does, it is important, as Andy says, that local
authorities, or others, take an equity stakes to make sure
that value is retained. It is important to remember that
schools and the NHS will be looking at that asset in the
light of market value at the moment, and they also have
incentives, in respect of the Government, to make sure
that they realise that entire value. In that sense, they are
no different from private holders of land. It therefore
becomes a political decision.
Q35 James Morris: It is a particularly acute problem
in areas of urban density. I take the point about local
authorities owning a lot of land, but in areas where there
might not be appropriate local authority assets to
dispose of, it becomes particularly important that we
find a model that incentivises central Government to
release land.
Jim Vine: The word you have used there that is key to
me is “appropriate”, that “appropriate” land should be
released, because ultimately I would hope we are all
aiming to build homes in places where people want to
live and where they can form sustainable communities.
As we have heard, it should not be treated as a silver
bullet that just because the state—the public sector—
owns some land, that that will necessarily be in the right
place to build new homes.
In terms of the specific question about incentivising
people to divest themselves of this land, an idea that we
have discussed—although it will certainly need further
consideration—is to require public bodies to reflect in
their accounts what is known as a shadow market rent:
what the market rent on that land or asset would be. I
am led to believe, although I was never able to find a
reference for it, that the Treasury undertook this
exercise on their own office space a few years back and,
as a result, slimmed it down considerably, because they
said, “We’re using a lot more office space than we ought
to be.” It is an idea worth investigating, although it is
not one that we necessarily say is worth taking forward.
Q36 James Morris: Mr Vine, in your submission you
talked about a proposal to create local ventures for
large-scale strategic sites. Will you elaborate a little bit
on what you meant?
Jim Vine: This is the idea I was discussing earlier. We
think that there is probably more of a role for a
partnership approach to delivering large-scale sites than
necessarily either the fully private models that we saw
in some places in the past or the fully public models,
such as the new towns. This would be, I think, reliant
on having strong local leadership and these bodies
potentially taking substantial powers, including the
ability to take title to sites, to promote the sites, grant
planning permission, put in the infrastructure, which is
an important part, and then, if it appropriate, to parcel
that out so that you get a range of different developers,
potentially using a range of different models—whether
that is community land trusts, small and big builders or
self-builders—all working on one site.
Q37 James Morris: So the local authority is a
facilitator in that? Are they the pivot around which that
happens?
Jim Vine: I would not look to be too prescriptive about
how to design this; it is about what suits the local
situation, but yes, I would envisage a model where the
local authorities play a very important role in that,
alongside other actors as well.
Q38 Simon Danczuk: Can section 106 agreements
continue to play a major role in supporting new
affordable housing?3 What do you think of the
Government’s proposal today to review or reconsider
planning obligations that were made in this regard
before April 2010?
Peter Williams: Section 106 has been very important: a
significant volume of affordable housing has emerged
from it and significant value has been extracted through
section 106. The move to the Community Infrastructure
Levy (CIL) regime has overshadowed the future of
section 106. I am afraid that I have not caught up with
today’s announcement on 106.
There is a real concern. In a survey that we at
Cambridge have done looking at CIL and 106,
authorities are signalling that they plan to move to CIL,
although the numbers are small at the moment, and 106
will increasingly be residualised, so an important
stream of finance activity for affordable housing, in
theory, is reduced and it is unlikely at the moment that
large amounts of affordable housing will be built
through CIL, because effectively it is an infrastructure
investment fund. The assumption is that that will take
most of the cake and what is left will be very small in
terms of 106 contributions. We expect this route of extra
investment, done through land and planning
permission, to shrink.
Roger Harding: As Peter says, it is vital to consider,
as you are doing, in the housing finance mix, because
in effect it supplies about £2 billion worth of housing
finance for affordable housing per year in kind.
3
Section 106 agreements, or planning obligations, involve a
local planning authority entering into an agreement with a
developer in association with the granting of planning
permission. They have been frequently used to secure a
contribution from a developer to the provision of affordable
housing.
Communities and Local Government Committee: Evidence Ev 11
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
Importantly in addition to that it delivers affordable
housing on site. When done well, it genuinely delivers
good, affordable mixed communities, and councils are
increasingly getting better at it, as well. It is becoming
increasingly bedded down. Council officers, while not
perfect in all areas—far from it—are getting better at
negotiating this with developers.
One other potential threat to it is the definition of
affordable housing within the National Planning
Policy Framework (NPPF). It will be vitally important
that that is tightened up, so that the housing built
through section 106 agreements is genuinely
affordable for the people who live in the
neighbouring area.
Jim Vine: Not to argue against the use of section 106,
but to note one of its downsides, it is pro-cyclical: as
you see a downturn in building for the market, you
are also losing construction in your social rented or
affordable housing sector.
Q39 Simon Danczuk: Just a final quick question.
Asking you to step outside your think-tanks for a
moment, things are pretty tough out there.
Homelessness is increasing, there is lots of
overcrowding and people cannot get on the housing
ladder. Do you not think that there is a sense among
the public that there is something quite ugly about
Government making more concessions to private
house builders and throwing more of British
taxpayers’ money at house builders in a desperate
attempt to try to convince them to build houses? What
do you think the public think about all this?
Andy Hull: I do think that. I think the public might
say, “We bailed the bankers out without sufficient quid
pro quo and there’s a danger we’re going to do the
same with the builders.”
Roger Harding: If I can add, not as a think-tank but
as a service provider providing to homeless people
at the moment, I am not going to be called on this
Government’s work on that versus the last
Government’s as well, because there is a danger of
getting into a tit-for-tat on what this Government has
done and what the last one did not do, when in fact
both main political parties have dropped the ball on
housing. Therefore, rather than us focusing on some
of the downsides of specific policies, we really need
now to develop a genuine consensus about a longterm vision for housing, which frankly has been
lacking so far.
Another area where both parties could really come
together, which was missing from the strategy and was
only belatedly covered by the last Government is, as
I have mentioned, the private rented sector. The public
are aware that the market is changing, particularly in
pressurised areas, such as London and the south-east,
and are adjusting their aspirations accordingly—They
now do not, for example, expect to become home
owners. Therefore they are wondering—in fact they
know—what the offer is for them in the private rented
sector and they are not particularly happy with it and
do not see it as the kind of place where they can spend
the next 10 or 20 years and raise a family. All three
main political parties have not really paid attention to
that and they need to do so in future.
Jim Vine: Building and Social Housing Foundation
(BSHF) is not necessarily what you would
traditionally call a think-tank, either. It is a housing
research charity.
Simon Danczuk: Just a good, simple answer I was
looking for.
Jim Vine: We have not researched what public
opinion on this is. Ultimately, we as an organisation
would like to see more decent homes being built in
places where people want to live. Then it becomes a
case of using whichever tool sees that delivered in a
way that is most effective for the public purse and for
delivering the right outcomes at the end of the day.
Peter Williams: This Government has delivered a
huge amount of support for the house-building sector.
Reasonably, therefore, our expectations of what that
sector should do, now and into the future, are
massively increased. We look forward to seeing a new
level of performance, competition and output from the
house-building industry. If that is not achieved, the
British public could rightly be angry.
Andy Hull: We are going to publish a report next
month, which I am happy to send you, which is all
about what sort of reform we need to see in that
development industry. I will happily send it to you.4
Q40 Heidi Alexander: Following on from Simon’s
question, we discussed earlier the Government-backed
mortgage schemes that have been announced today.
Peter, you just said that the public will expect to see
something back for that. How confident are you that
that particular initiative would get the housing
supply moving?
Peter Williams: It will clearly help, because there has
been difficulty in the first-time buyer market and the
resale market for getting 95% mortgages, and this will
increase the incentive for lenders to provide them.
Unfortunately, and rightly in a sense, it does not deal
with the underlying problem, which is the shortage of
mortgage finance. I would be concerned that although
this will help propel more money into the 95%
territory, which will help builders and first-time
buyers, it will be netted off against an aggregate
volume of mortgage finance, which is still very
limited. Both this and the right to buy are new
priorities, but actually it will mean less mortgage
finance out there in the rest of the market to support
other things. Expectations for 2012’s mortgage
lending are no better than this year and are possibly
down on this year, so this is netted off that total. So
yes, it is a new priority, but it will have implications
for the mortgage market more generally, which have
not been resolved.
Q41 Heidi Alexander: How big an impact do you
think the Government-backed mortgage scheme will
have? How would you characterise the impact that
you think it will have?
Peter Williams: I understand that the expectation is
that 50,000 to 75,000 households will be helped
4
We must fix it: Delivering reform of the building sector to
meet the UK’s housing and economic challenges.
www.ippr.org/publications/55/8421/we-must-fix-itdelivering-reform-of-the-building-sector-to-meet-the-UKshousing-and-economic-challenges
Ev 12 Communities and Local Government Committee: Evidence
21 November 2011 Andy Hull, Peter Williams, Jim Vine and Roger Harding
through this programme over a period. We have talked
about right to buy being up to 100,000, so that is
175,000 over, let us say, three to four years, which is
50,000 a year over a base of 200,000 first-time buyers.
It is obviously quite a significant step forward, but it
is 50,000 loans the market capacity to supply
elsewhere is probably reduced.
Andy Hull: It is important to note that it is not just
for first-time buyers; they were very clear about that
at CLG this morning. You have to ask who will
benefit, not just how much.
Roger Harding: Absolutely. Finally, it is important to
note that this protects the risk of the mortgage lender;
it certainly does not protect the risk of the borrower.
It will be vital for new and existing borrowers that
proper affordability checks are made.
As was helpfully pointed out by a blogger this
morning, in 2008 Mervyn King highlighted an
important point about mortgage guarantees when
talking about the experience in the US, saying that it
reduces the risk for the lender and therefore could
have the consequence of increasing the lender’s risktaking behaviour, because it knows that certain parts
of the risk will be picked up by the state.
Peter Williams: I am less concerned about that, in the
sense that inside lenders there will be a real struggle
about the risk profile of those borrowers and how this
can be done in a proper and appropriate way. I am less
worried about lenders chasing down the risk curve in
terms of funding this, but clearly there are tensions
around this that we will need to keep an eye on.
Q42 Chair: In terms of this guarantee, in the past
there has been this problem, not merely about the
whole of local authority borrowing for housing
counting as Government debt, but actually any
guarantee a local authority makes against borrowing
by another party counts in totality as Government
debt. Do we know how this guarantee will be treated
by the Government?
Peter Williams: My understanding is that this is
counted as 100% of the value of the guarantee,
whereas my understanding of local authority mortgage
guarantees is that it is the loss given default
experience—in other words, it is the amount you have
lost previously you have to set aside. Central
Government counting may be therefore different in
this sense. If it is the full value of the guarantee—I
understand that it is CLG money backing this—that is
a significant commitment by Government.
Q43 Chair: So it is not the amount that may be lost
that eventually counts.
Peter Williams: It is the total value of the guarantee.
That is my understanding, although I might be wrong.
Roger Harding: That Treasury rule has typically in
the past blocked a discussion of another type of
guarantee that can potentially be more beneficial,
which is investment guarantees for large-scale
projects, but again the risk has had to be qualified as
100% of the risk, rather than a reasonable calculation
of it. It will be interesting for the Government and
this Committee to consider further the idea of bigger
investment guarantees, rather than placing our
guarantees with a series of borrowers who are not
protected by this guarantee.
Chair: Thank you all very much for covering so much
ground for us.
Examination of Witnesses
Witnesses: John Stewart, Director of Economic Affairs, Home Builders Federation, Councillor Clyde Loakes,
Vice Chair, Environment and Housing Board, Local Government Association, Ian Fletcher, Director of Policy
(Real Estate), British Property Federation, and Abigail Davies, Assistant Director of Policy and Practice,
Chartered Institute of Housing.
Chair: Good afternoon to you all. Thank you for
coming and for the written evidence you have
supplied so far, and for being our second panel in the
first evidence session of the inquiry into the Financing
of New Housing Supply. Could you say for the record
who you are and the organisation you represent?
Ian Fletcher: I am Ian Fletcher, Director of Policy
at the British Property Federation, which is the trade
association for the property investment sector.
John Stewart: John Stewart, Director of Economic
Affairs at the Home Builders Federation.
Abigail Davies: I am Abigail Davies, Assistant
Director of Policy and Practice at the Chartered
Institute of Housing.
Councillor Loakes: Councillor Clyde Loakes,
representing the cross-party Local Government
Association.
Q44 Chair: You are all welcome. As a general start,
what do you think are the key barriers at present to
increasing housing supply—presumably, you all agree
that it ought to be increased—and what do you see as
the general solutions to remove those barriers and get
the housing supply moving upwards?
Ian Fletcher: From my perspective—and I am in a
slightly unusual position in that compared with the
broader housing sector—the major barrier is not
accessing debt finance. My members are trying to
encourage equity finance into housing; they tend to be
relatively low-geared—20% to 40%—and are trying
to encourage large-scale institutional investors into the
sector. If they can raise the equity, the debt will be
there. For them, the challenges are, first, finding
sufficient scale of opportunity for those institutions
and, secondly, trying to encourage institutions that are
unfamiliar with the housing sector to invest in that
sector.
John Stewart: On the demand side, since 2007, the
mortgage situation—the availability of mortgages,
particularly high loan to value ones—has been a very
serious constraint. On the supply side, the supply of
permissioned land has been a very long-term problem.
The regulatory burden, both from national
Government and local government, is a significant
Communities and Local Government Committee: Evidence Ev 13
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
issue. And the supply of development finance
probably—it is difficult to pin that one down because
there are no statistics—seems to be a constraint.
Abigail Davies: Finance, of course, and particularly
lack of certainty about what is going to happen to
finance going forward and changes in the financial
markets; I suppose, Government preferences; also
confidence, whether that is on the consumer side or
the business provider and lender side. Those are the
particular issues.
Councillor Loakes: It is certainly not planning or
forming local partnerships; local government has a
good track record when it comes to getting residential
properties through the planning process and working
with housing associations and the private sector to
develop sites in partnership. It is primarily about
giving a level playing field to local government to act
as a house builder in the sector. The schemes that we
have seen and the announcements that we have had
today probably do not go far enough when it comes
to enabling local government to have that level
playing field, where debt is counted as national debt
rather than under prudential borrowing systems that
local government can already borrow under.
Q45 Chair: I saw John Stewart’s eyes light up when
the word “planning” was mentioned. It is the major
obstacle, isn’t it, when all the house builders tell us
that?
John Stewart: It is a major obstacle; it is not just me
saying that. Kate Barker carried out a landmark study
in 2003–04, which was the most comprehensive study
of housing supply, probably since the 1977 Green
Paper. It was very clear that planning was a very
serious constraint. I talk to house builders every day
of the week and it is a very major issue, so, I am sorry,
but I disagree with my colleague.
Q46 Chair: But if the planning regime was
completely liberalised tomorrow, you would not build
any more houses next year, would you? I mean, you
are sat on so much land with planning permission now
that you are not building on. This is the case, isn’t it?
John Stewart: No, that is not the case at all. The
primary constraint at the moment is mortgage finance,
as I said at the beginning. If we could miraculously
wave a wand and tomorrow there was mortgage
finance back, very quickly planning would become a
constraint. House builders have land banks, of course.
Housing is a very long-term activity; it takes many
years to get planning permission and many years to
build out a large site, so they have to have a degree
of land, but there is no evidence they are sitting on
permissioned land that could be developed. The OFT
did a very comprehensive study in 2008—I would not
call the OFT a friend of the industry—and it
concluded that the industry certainly was not sitting
on excess land with permission.
Councillor Loakes: There are 175,000 planning
applications that have been granted for residential
units in London alone. If that is not a bank waiting to
be delivered, I do not know what is. Planning
applications went up to 80% being granted last year—
that is on major applications—and there was a
significant increase on minor applications also. Local
government is doing really well in helping developers,
RSLs and housing associations put through
applications at a pace that represents developers’
frustrations in many experiences, but unfortunately
they are not getting through to being built.
Chair: There are two different views expressed there.
We will come back to finance now, because that is
really what the inquiry is about, and try to focus on
how we can get the money into housing.
Q47 Mark Pawsey: We have heard that mortgage
finance is the biggest issue, but what about the
financial position of the people who deliver these
houses? The Government has brought out today the
£400 million Get Britain Building fund, which some
have expressed anxieties about. Will that help get
more houses delivered, given that a lot of developers,
particular the smaller builders, cannot get finance to
get developments underway? Will this do the job?
John Stewart: It will help them. Where there are
smaller and medium-sized house builders who have
land that they cannot develop because they cannot get
development finance through the banking sector,
assuming they can get access to this money—they will
have to bid for it and be successful—yes, that should
open up those sites. It is not a panacea. There are lots
of reasons why sites do not get developed, but where
development finance is the primary constraint this
should help.
Q48 Mark Pawsey: Has this been a big issue for
your members over the last year or two?
John Stewart: It is less of an issue than it was; back
in 2008 it was certainly a very serious issue and the
Kick Start scheme was aiming to address that, but it
still is an issue.
Q49 Mark Pawsey: Do you think it will support
many of the smaller builders, who are not operating
at the moment? In some cases, smaller builders have
gone bust. Will this prevent builders in the future
going bust and will it keep builders there enabling
additional housing to be delivered?
John Stewart: I think in combination with the
mortgage initiative, which has been announced today,
it will help. Whether it will keep those individual
builders alive depends on their own individual
financial circumstances, competence and so on, but in
principle it should make it easier for companies to
survive than if there were no development finance. If
you bought a piece of land on the expectation that you
were going to be able to develop it and then you
cannot get development finance, you have a bit of a
problem. If you now have development finance and if
there is a possibility that you can get buyers, the
situation is obviously radically improved.
Abigail Davies: There is also a need to consider what
will happen to providers of affordable housing, often
in the not-for-profit sector, not so much at the
moment, when most of them are fully financed and
okay, but for the next couple of years—looking ahead
to that turbulence on the financial markets, the risks
that loans are going to be re-priced and the shortening
of availability of long-term finance to be quite short
to medium-term now. There is a question about
Ev 14 Communities and Local Government Committee: Evidence
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
whether those providers will be able to finance their
developments and how much it will cost them to do
that, going forwards.
Ian Fletcher: My members are larger-scale mixed-use
developers, many of whom have recapitalised during
the credit crunch with rights issues. They have raised
capital and finance and therefore are in a far better
position to be able to raise development finance than
they were, say, two years ago. I cannot speak for the
smaller builder, because I do not have much
experience with them.
Q50 Mark Pawsey: Mr Fletcher, your organisation
spoke about housing zones. How will housing zones
stimulate particularly in the buy-to-let sector?
Ian Fletcher: That is a slightly tangential issue. One
driver of the housing market over the last decade has
been the smaller buy-to-let investor. I think about
£300 billion has come through the buy-to-let sector
into housing. Really, on the suggestion of housing
zones, it is quite surprising that no Government has
ever tried in any way to nudge that in the direction of
particularly policy priorities. To some extent it
supports development, because there is a wider pool
of buyers out there for new-build products, but a lot
more could be done to try to nudge some of that
equity and debt finance. At the moment about 25% of
mortgage loans are to buy-to-let investors, so there is
continuing demand coming from that sector and it is
being met by the lending institutions.
A lot of my members talk fondly about the previous
recession and business expansion schemes and what
that did for the housing sector. I know that was not
widely supported in retrospect, in terms of proving to
be very expensive, hence some of the restrictions we
suggested for housing zones—that they would have to
be designated by local authorities and approved by the
Treasury so that costs did not run out of control—but
in the current economic climate it would be a good
way of stimulating the housing market, particularly in
areas where there is great difficulty in terms of the
housing economics. It would not involve costs now—
you are looking at capital gains tax concessions, for
example. That does not cost anything to Government
now, but obviously it has an impact on Government
revenues downstream.
Lastly, the other stimulus to that idea was that there is
no differentiation in the tax system for investors
between pure speculators and those putting in capital
for 10 or 20 years. I think that is wrong. During the
boom, whether you were investing for three months,
purely leaving a property empty and making a return
on that or a respectable landlord putting capital in for
20 years, the tax system did not differentiate between
the two of you.
Q51 Mark Pawsey: So you would like to see a
capital gains tax incentive?
Ian Fletcher: Yes.
Q52 Mark Pawsey: Councillor Loakes, what do you
think about the £400 million Get Britain Building
fund? In your view, will that stimulate new housing?
Councillor Loakes: It will make a start, maybe, but I
think we have a long way to go. One of the key
missing parts of today’s announcements was that there
was very little in the way of ambition and dates.
Q53 Mark Pawsey: Targets?
Councillor Loakes: Targets, yes. Cards on the table:
I am a fan of targets, especially when it comes to
house building. We know that we have so much
already ready to go in London; in the East Midlands,
85,000 are ready to go. You would have thought that
there would have been a date that says, “Boomph. We
want to get this money out the door, spades in the
ground, foundations laid, by 1 April 2012,” or
whenever. That was not there; that was missing. My
greatest fear is that we end up spending the next 12
months coming up with a complex way of getting that
£400 million out the door, when actually we know
there are some pretty easy ways of doing so.
Q54 Mark Pawsey: Do you think targets have
previously been helpful in housing policy?
Councillor Loakes: Yes, I do, and they are a key
component of going forward.
Q55 George Hollingbery: If the Chair could indulge
me briefly: Mr Stewart, would you be happy, from the
financial point of view of your members at least, if
we allowed anyone to build anything anywhere, any
time, as of tomorrow—if all requirements for planning
permission were removed? Would that suit your
members?
John Stewart: No, I do not think it would.
Simon Danczuk: They would never be happy,
George, I think we have established that.
George Hollingbery: Let me go on to what I am
supposed to be asking.
John Stewart: Can I answer you? I have worked in
the industry for over 30 years and I have never heard
anyone make that claim, so I don’t think that is
plausible.
Q56 George Hollingbery: On the role of large
financial institutions in solving this problem—getting
private finance into new housing—how will that
work? Have they a role? Will it work?
Ian Fletcher: To some extent, institutions are
investing in this sector at the moment. I set out some
examples in our written evidence. An interesting
phenomenon over the last year has been the breadth
of different interventions: both policy interventions
but also players in this market intervening in the
sector. It is not just a case of looking at pure market
renting now and what we call build to let, but is also
about capital finding its way to affordable housing.
I think the conditions are all there for large-scale
institutional investment in the sector. There is
significant demand for renting. In terms of comparable
assets, they compare favourably if you want to invest
in residential property. We are getting the political
support, as I said, that is required. It is now or never.
Over the next year, we need to see that being
significantly upscaled. The one thing that is probably
holding it back, as I said earlier, is the scale of
opportunity in terms of being able to find particular
housing opportunities that the institutions want to
invest in.
Communities and Local Government Committee: Evidence Ev 15
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
Q57 George Hollingbery: What about in the housing
associations and public housing generally? We know
there is £40 billion of outstanding grant out there, and
some appetite in the private sector, in long-term
pension funds, for leveraging that and equitising it.
Any thoughts on that issue?
Abigail Davies: The discussion on this sort of finance
feels like it has changed over the last six to eight
months, from having been a, “This is nice, but we’ve
been talking about it for 30 years,” kind of discussion
to within the last six months people starting to feel
that it is becoming a real possibility.
There is quite a lot of that kind of finance in the social
sector already. I think it is worth having a
conversation about what role that sector could play,
not just in having the money and spending it, but what
role it could play more widely in enabling that sort of
investment to come forward. Obviously, there is a
range of different types of potential investors for
different interests, but for those who maybe do not
want to get involved with development, there is a role
for somebody else to develop it and then sell it to
an investor; for those who are less comfortable about
ongoing management, there is a role, for example, for
associations to wait for a property to be built and then
they could deal with letting and managing it. I think
there is definitely merit in exploring the facilitation
role that could be played in making the money flow
more easily and overcoming some of those concerns
about risks and exit strategies and reputation and so
on, which have been talked about for a while.
Q58 George Hollingbery: Councillor Loakes, in
your evidence you have some interesting ideas about
local government schemes, in particular local
government pension funds and local governmentbacked instruments. Will you tell us a little bit more
about those?
Councillor Loakes: Housing finance is already
complex. There has been a lot of talk lately about
localism and I think that local government
collectively, as individual councils, can help stimulate
house building and housing growth. It can do that if
it has a level playing field, but there seems to be this
kind of pathological trust issue—a feeling that there
is a need to have a cap on what local government can
borrow. When you think that local government has
access to land, that it potentially has access to use of
pension funds and it already prudentially borrows to
fund all sorts of different schemes, it seems a little bit
weird that we cannot get in on this particular act.
At the end of day, it is local government that is there
long after the developer has built and moved on and it
is local councillors who are knocking on the residents’
doors, finding out what their issues and concerns are.
They have a key stake in developing those sustainable
communities and moving forward. They want to build
houses, whether on their own or with partners in the
private or public sector. Give us the tools and the trust
to be able to go forward and do that. Again, one of
the ambitions lacking today was that trust of localism
and its ability to deliver on this agenda.
Q59 George Hollingbery: Have you had any
conversations with the Government on this theme?
Councillor Loakes: Yes, it is a cross-party
organisation; my colleagues have been doing that.
Q60 George Hollingbery: Can you reveal anything
to us about the attitude?
Councillor Loakes: No.
George Hollingbery: Fair enough.
John Stewart: Could I just make a comment on
institutional finance, although it is much more Ian’s
patch than mine? I am slightly concerned because
institutional finance is just one source of finance into
housing. You often hear glib comments about, for
example, making private rented sector schemes work
by waiving affordable housing. One of my three
constraints on the supply side was the regulatory
burden. I am always rather concerned when there is
talk about reducing the regulatory burden for one
source of capital or one particular provider within one
tenure. I am much more of a believer in a level
playing field.
Ian Fletcher: Let me give my response to that,
because we have sparred on this issue in the past.
John’s members are investing capital for the best part
of a year at most, sometimes; my members are
investing in capital for 20 years; there is a greater cost
to their doing that and they should be treated more
favourably.
Q61 David Heyes: One way to get individuals’,
rather than institutions’, investment into housing
would be through real estate investment trusts
(REITs). They have not been a great success in the
residential investment field, but if the Government are
promising to take action to make them more
conducive to residential investment, what benefits do
you think that might create?
Ian Fletcher: For the investor they address one of the
big issues you were discussing in the previous session,
which is liquidity. Housing is quite a difficult
commodity to get into and to trade, so a REIT
provides that benefit for the investing institutions and
provides what is called tax transparency, so a pension
fund investing through a REIT is getting the same tax
advantages as if it was a pension fund.
There has been—we should acknowledge and
welcome it—progress in terms of a consultation on
liberalising some of the REIT regime. The original
REIT regime was pretty much designed for
commercial property investors rather than residential
investors. Some of the changes that the Treasury is
proposing are welcome. But if you were to push me,
I do not think they will lead to a significant amount
of residential REITs. There are still outstanding issues
that HM Treasury officials have red-lined, one of the
most significant being the ability of a REIT to trade.
In the commercial sector REITs are very much
constrained in terms of their trading, for good tax
reasons, so officials’ cautiousness is understandable in
this area; but in the residential sector, trading is a far
more common thing, from the private rented sector,
even through to the affordable housing sector. If you
were setting up an affordable housing REIT,
right-to-buy sales or a shared ownership staging-out
could all be included in the trading, and potentially
you would lose your REIT status.
Ev 16 Communities and Local Government Committee: Evidence
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
A dialogue still needs to be had between the Treasury
and the industry. It should not be beyond the
capability of policy makers to produce, for example,
a white-list of activities that will allow those sorts of
activities to take place that will only apply to the
residential sector and not open us up to any particular
tax abuses that might happen in the commercial sector.
We are a long way along the road, but we are not
quite there yet in terms of having a residential REIT
regime that would be supportive of residential REITs.
Q62 David Heyes: Is that a shared view on the
panel?
Abigail Davies: Yes, Ian is very much the expert. This
is slightly a step away from REITs, but there is an
issue about enabling access to assets for people who
otherwise cannot. There has been a lot of talk today
about helping first-time buyers, the right to buy, and
so on, but there will always be that core of people
who really cannot buy, and I think that that is going
to grow. That gap between the asset haves and havenots will grow, so some sort of unitised vehicle that
enables the man in the street to have a stake in
housing, and thus a return from it, is quite attractive.
A REIT, I think, is not it, but that idea is worth having
on the table.
Q63 David Heyes: Just going back to Mr Fletcher,
for a follow-up on what you said: is timidity, perhaps,
or over-caution, a way of interpreting the Treasury’s
action on this? If it were less cautious, could this hold
some real prospects for boosting housing supply? Is
that a summary of what you said?
Ian Fletcher: Certainly, for the people who I am
talking about getting into institutional investing in
residential, REITs both provide them with a good
vehicle for getting into the sector and allow them an
exit strategy. Although I have said that our members
invest for 20 years, at some point in future they will
want to divest themselves of that investment and
REITs are the ideal way of doing that as well.
I do not want to be too critical of Treasury officials,
because there are some complex issues here and they
are scared about opening up potential avenues to
commercial property tax abuse. As a result, officials
are tending to be perhaps overly cautious. The last
round of consultation very much said that that issue
was not up for discussion, which was a pity, because
I think a discussion has to be had.
Q64 Chair: We are expecting a Government
announcement on REITs at some point, aren’t we,
maybe in the Autumn Statement?
Ian Fletcher: I believe so.
Q65 Chair: If we do get something before the end of
our inquiry, would it be possible for Mr Fletcher, or
indeed anyone else, to let us have a note on how you
respond to that and what you think the new proposals
may or may not do in terms of housing supply, and
whether there are still barriers existing in those
proposals that need to be removed to get REITs up
and running and delivering?
Ian Fletcher: I will do.5
5
See Ev 106
Q66 James Morris: The Government makes quite a
big play about trying to get public sector land
released. Do you think it will make any significant
contribution to the problem of housing supply that we
are discussing today?
John Stewart: I think what this Government is doing
is very significant. There has been talk for many years
about releasing public sector land. The OFT report
back in 2008 concluded that somewhere between a
quarter and a third of all the land that was potentially
suitable for housing was owned by the public sector,
whether central Government or local government, and
so on. We work quite closely with the Homes and
Communities Agency (HCA) on the public land
programme that is going forward now—we have quite
close liaison with them to find out what is
happening—and I think this Government is really
committed to that, so I think it will make a difference.
It will not solve the housing problem, because it is
multidimensional, but it will make a difference, yes.
Abigail Davies: I think that there is a step further; it
was presented to us this morning as phase 3 of the
public sector land initiative. I think that is the point
you are making, John: we seem to have been stuck in
phase 1 for quite a long time.
Q67 James Morris: Why do you think we are stuck
in phase 1?
Abigail Davies: That was because it was always the
Department responsible for housing that looked at
their own assets. There was always a comment to be
made about local government, and then it was just,
“What does the Department for Communities and
Local Government, or whatever else is responsible for
housing at that time, look at?” Since then we have
gone beyond: we have looked at Health and Defence,
and now we are going again to the agency level,
asking what the police have got, and so on. That work
to get a real, proper picture of what is out there and
can be used has been quite helpful.
There are questions about what you do with the land,
whether that is sold upfront or on the “buy now, pay
later” kind of approach, or whether it is some kind of
joint-venture model, which there has been effort on
over the years, to enable the public sector to keep a
stake in it and to benefit from the uplift in that value.
That is important, because you can only sell a site
once and can only build on it once. Something that
enables some kind of funding for future generations is
important, because all these things will make a
contribution to housing supply but they are never
going to solve the problem. Some potential to keep
reusing that asset would be very valuable.
Q68 James Morris: Councillor Loakes, in the last
session it was clear that local authorities are sitting on
a lot of public sector land—I think somebody quoted
59%. What more could local authorities do to release
their land for housing supply? What are some of the
constraints that you see?
Councillor Loakes: To be fair to local government—
I would say this, wouldn’t I?—they are doing a lot
already. In the scenario where they cannot build
because they cannot borrow the money, they are
working in partnership with housing associations,
Communities and Local Government Committee: Evidence Ev 17
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
private developers, adding their land to a piece of land
that a private developer has got to create a better
scheme. They are doing that and have been doing it
for years and years.
Sometimes there is tension where a private developer
comes along, buys a private piece of land and then
starts eyeing up a council asset and the council may
not be ready to, or may not want to, develop that asset
but comes under some kind of developer mentality,
attitude and pressure to move that particular piece of
land forward. There is no resistance from local
government per se to releasing land that it owns for
housing development.
Q69 James Morris: What more could Government
do to facilitate local authorities doing that?
Councillor Loakes: Well, it can give us the powers to
move our assets forward ourselves, because that will
start to take out a number of players and negotiations
and move to us putting spades in the ground and
foundations being laid, and moving forward a lot
quicker than the current scenarios lend themselves to.
Q70 James Morris: In the Localism Bill there is a
general power of competence, which effectively
allows local authorities to do anything within the law.
Do you think that could be applied to scenarios where
we need to be kick-starting housing developments?
If a local authority has an idea and wants to build a
partnership and do things, and wants to borrow X,
have not the Government given them power to do
that?
Councillor Loakes: And it was doing that anyway.
Don’t over-exaggerate the power of competence.
There are still very many real restrictions in place that
prevent local government and prevent trust in local
government in moving forward and delivering these
sites. The biggest one is that, for some reason, we are
not allowed to borrow the same amount of money as
an RSL can borrow, yet we are the councils that will
be there knocking on doors and finding out what is
wrong with particular housing schemes, if they go
wrong. We can and do do lots, but actually the big
blockages to us doing even more are around the fact
that the financing field is not level, by any stretch.
John Stewart: You asked why things have changed
recently. I think there is recognition that we have a
very serious housing crisis, particularly post-2007,
because numbers have fallen so much; last year had
the lowest completion numbers since 1923. Also,
there are the worries about the economy. House
building can play a significant part in helping that
recovery. The commitment from the Prime Minister
and the Chancellor is extremely important—it was the
Prime Minister who announced the housing strategy
today—and their commitment to that will, I am sure,
encourage the MOD and the NHS, and so on, to be a
little more proactive in releasing land. Whether it
works for local authorities, I am not sure.
Ian Fletcher: The specific issue for my members is
that they are trying to negotiate, what are often very
complex issues: it is not £1 today, but £1.50 in 20
years’ time, and ground rent, and a joint venture and
some sort of equity share. My members often get
frustrated that in particular local authorities that
expertise is not there and it is not brought in at the
start of the discussions; it is some way down the track
before HCA is brought into those discussions.
Although the best local authorities ensure that
expertise is in there from the start, some do not and
everybody gets frustrated as a result.
Q71 Mark Pawsey: Can I just press Councillor
Loakes on the ability of councils to bring that
forward? You said in your evidence that councillors
“overwhelmingly take a proactive and positive
attitude towards development locally”, but we have
just had a review on the NPPF when we have heard
many communities saying, “We want a right to
prevent development in our area.” What evidence is
there that councillors are willing to push for land to
come forward for housing? Will that contravene the
wishes of those people who have put them in their
position?
Councillor Loakes: There have been tensions in that
relationship for years and years and years, so what
comes out of early deliberations about the NPPF are
not new in that respect. Fundamentally, councillors
want to see good development come forward—
development that benefits their existing local
communities as well as communities going forward.
That is about sustainable local communities. Often
that is where the tension comes in, because that is not
what is put forward. Councillors are often therefore in
a difficult position, where they are having to advocate
maybe not for the best development but for one that
is certainly a step in the right direction, although there
is still conflict with existing local communities
already.
Q72 Mark Pawsey: But they are not always
interested in development in the neighbouring ward or
the neighbouring authority.
Councillor Loakes: No.
Q73 Mark Pawsey: What can central Government
do to change their attitude and to bring more land
forward?
Councillor Loakes: I think that is slightly unfair. I
have been involved in many planning committee
decisions about complex schemes in my own ward
that I have championed because I have felt that they
were the best things for my neighbourhood at the
time, and we have delivered and, actually, residents
afterwards have welcomed the scheme. It is like
anything: people often do not like change. That former
garage forecourt being turned into a four-storey block
of flats will be challenging to the residential terraced
streets around it. It is about working with the local
residents, taking them forward, engaging with them,
bringing the developers to the table so the residents
can have that conversation with them and put forward
their challenges and concerns, and acting as an
advocate and facilitator for those tricky negotiations.
That is, by and large, what local councils have done
and will continue to do.
Q74 Bob Blackman: With regard to a private
developer coming along wanting to develop some
private land and a local authority asset alongside, can
Ev 18 Communities and Local Government Committee: Evidence
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
you give us an example of where that has happened,
or indeed why it would be that, given the
circumstances of new homes bonus and lots of
encouragement for local authorities to give up the land
and develop housing—there is a housing crisis, as we
said—a local authority not say, “Wonderful. We’ve
got a great partnership going here”?
Councillor Loakes: Because it may not be the best
scheme for that local place. It may just be about bricks
and mortar. Local councils are ultimately about
building good-quality accommodation that strengthens
communities and does not isolate them and does not,
in five years’ time, start causing lots of housingrelated problems for that local council.
Q75 Bob Blackman: Can you give a prominent
example of where that has happened?
Councillor Loakes: Not off the top of my head, but I
can get officers to provide you with some
examples.6
Q76 Bob Blackman: That would be helpful, because
one of the things that we are looking at today, with
respect to all the announcements made today, is to
encourage local authorities to come forward with land
to encourage development, and if people are stopping
that, we need to know why.
Councillor Loakes: I can also give examples of
innovative approaches to building. We owned the
freehold to the site of the football club in my own
borough, Leyton Orient. We worked with the football
club and the housing developer to put four small tower
blocks in each of the corners, which helped make that
football club sustainable going forward, with some of
the challenges it has regarding the Olympics, but also
created much needed social housing for local
residents. It was an innovative scheme using the
freehold of a site, and that is moving forward.
We are about breaking down barriers where we can,
but I come back to the fundamental principle: give us
that level playing field on how we can borrow money
so we can build houses. Councils want to build
houses. They have the capacity and the willingness to
do it, but we should not just have to solely rely on
developers and should not have to rely, in that
example, on a football club.
Q77 Bob Blackman: You have raised that issue of
borrowing, which is going to come up in a minute.
Right across London, there are local authorities with
billions of pounds of debt, which are created from the
1960s and 1970s developments, and they are
millstones around the neck of any local authority that
wants to develop housing. How would you deal with
that issue?
Councillor Loakes: I think we have got quite a
detailed paper on that response. It would be better that
I give that to the Committee afterwards.7
John Stewart: Perhaps I could make a comment on
your question. You posed the example of a private site
next to a council site. Councillor Loakes seemed to
imply that the council had no control over the scheme
and resisted it being built because it was not
6
7
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See Ev 100
appropriate for the local people. If the council is the
owner of the land and also, ultimately, the planning
authority, is not that an odd view of things?
Q78 Bob Blackman: Control.
John Stewart: Exactly. Surely the local authority
should work with the developer and if the two sites
combined make a critical mass and give a good
scheme, the two of them together can come up with a
good scheme that meets the needs of local people.
Councillor Loakes: I am pleased to say that is what
tends to happen, but there are instances where you
cannot necessarily bring the two sides to agreement.
Q79 Heidi Alexander: I would like to move on to
the reform of the housing revenue account and how
much in effect that would enable councils to increase
the supply of new housing. Certainly from my own
local authority’s perspective we have a very large
Decent Homes backlog of work. One hope is that by
reforming the HRA and bringing it down to that local
level, more of that investment can go into doing the
Decent Homes work. How realistic is it to think that
this could be a really significant way of increasing
supply?
Councillor Loakes: I do not think it is a going to be
a significant way. There is the detail that sits behind
the headline: the fact that an extra £1 billion of debt
was added as a result of fixing the inflation rate figures
in September was not particularly helpful. Until we
can borrow on a level playing field—I will keep
sticking to that point—we are not going to be able to
realise our ambition and do as much as we could
possibly do. The ambition may well simply be about
maintaining the quality of existing housing stock,
rather than necessarily being able to increase stock.
There is of course the issue about the right-to-buy
announcements, which have implications for the
HRA today.
Q80 Heidi Alexander: Before we discuss the right
to buy and how that could result in more housing
being built, are you not concerned in any way about
excessive borrowing by local authorities should the
cap be removed?
Councillor Loakes: No, very simply. It is about trust.
We can borrow for other things; why should we not
be able to borrow for what local authorities and their
residents think are the priorities for them locally? If
housing is a priority for a local council and a priority
for local residents, they should be able to borrow to
do that. That is what the whole localism agenda is
about, surely. That is what trust is about. We are
trusted to do many other things; why on earth are we
not allowed to build houses?
Abigail Davies: I think the reform of the housing
revenue account is absolutely one of the best things
to happen to council housing for years and it is great
to be so close to having it. We do know that having
the cap on borrowing below the prudential borrowing
limit means that there is headroom that cannot be
used. That limits local authorities’ potential
contributions, because although that prudential
borrowing is there for a reason there is space
underneath it and we know from looking in some
Communities and Local Government Committee: Evidence Ev 19
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
detail at councils’ business plans that they could use
that money. It would not be taking risk, but would be
them sweating their assets on the basis of a sound
understanding of their 30-year business. There is room
to explore going a bit further.
We have asked repeatedly for reclassification of
councils’ debt, which you spoke about in the previous
evidence session, to be considered. The idea of
harmonisation in how councils are treated—in line
with Europe—would mean a whole load of money
could be taken off the balance sheet and used in a
better, more creative way in future. We understand the
reasons why the Treasury pushes back against that,
not least the idea of starting to move the goalposts
just when it is advantageous to get your public debt
down, but really that opportunity is there and merits
consideration.
Q81 Heidi
Alexander:
On
this
enhanced
right-to-buy scheme that the Government is talking a
lot about at the moment, how realistic is it that a
property would be lost from the social housing sector
when somebody chooses to exercise their right to buy
it and replaced with the money that the local authority
gets in? Do you think that is a realistic model?
Councillor Loakes: I think the devil will be in the
detail of the consultation responses on the right-to-buy
models that they are announcing today. From the
Local Government Association perspective, we want
local councils to retain all the receipt and for none of
it to go back to central Government; and we want
local councils to be able to set their subsidy, if there
is a subsidy, and to do that locally to suit their own
needs. There are big questions. This will be different
across the country, but in London, have all the good
houses already gone, so that what we have left is very
expensive stock to maintain and there is very little
willingness to buy properties, so having that as a
flagship means you do not get in the sort of money
that is anticipated in other parts of the country?
Q82 Heidi Alexander: Ms Davies, do you think that
all the receipts from right to buy should be retained
locally?
Abigail Davies: We will have to have a fairly robust
conversation about it. The reasons that the Councillor
puts forward are completely valid. There is an issue
about who replaces the houses that get sold, and how
and where, because of course if you keep the money
at local level, does that local authority have the
headroom on its balance sheet to pay for a
replacement? Maybe is always going to be the answer.
There will always be that tension between the localist
agenda and the value or best-possible-return agenda.
It will be attractive to Government to pool all the
money centrally and hand it out, I assume, to housing
associations who would then be able to borrow to
bring that up to a one-for-one replacement, or
potentially it is more than one for one, because if you
take the average value of a property—in London, say,
about £100,000—and give a 50% discount, which is
£50,000, and then pay off the debt that would leave
about £30,000. Obviously, you cannot then just say,
“Here’s £30,000 to build a house”. It is, ‘Here’s
£30,000 worth of grant which you would lever money
against to pay for that total’. We are heading for some
really tricky conversations. I am not, at this point,
advocating any particular solution, because I think it
could get quite heated without the detail.
There is one extra point that I wanted to make, which
is about the sale of social homes to replace with
affordable rent, because it will not be social rent we
are going to get back. It is the new model of 80%,
which will be politically quite a tricky issue, I suspect,
for a number of councillors explaining it to their
constituents, and also looking at what they want to
provide in their local areas. That will be just as tricky
as talking about where the money goes.
Councillor Loakes: Let me just add to that that
research has just been published showing that in every
region of the country it is cheaper for the local
authority to build a new build than for a housing
association to do it, so why on earth would you not
give the local authorities the powers to maximise that
opportunity? We can provide you with that
evidence.8
Chair: It would be helpful if you could.
Q83 Bob Blackman: Mr Stewart and Mr Fletcher,
one issue that has not been raised this afternoon is the
absolute level of rents and where they go in terms of
funding the stream of affordable housing and indeed
any form of private housing. Is it your members’ view
that that rental purpose and rental stream always has
to go up in a steady process? Does that encourage the
investment? Or has the fact of it not necessarily being
the case led to a drop in the investment?
Ian Fletcher: From our perspective, institutions are
investing for yield, so it is not just the rent, but the
price paid for that rent. It is not necessarily the level
of the rent, but the security of that rent certainly does
have a significant attraction. If you are trying to
encourage pension funds to invest in this sector, visà-vis investing in other commercial property or
government bonds, then the thing that both of those
types of assets supply is that security of income.
Things that are likely to affect it are the housing
benefit reforms that the Government is pushing
through.
Q84 Bob Blackman: Is there a fear that the rental
return is going to drop as a result of benefit caps and
other measures? We heard previously this afternoon
that we seem to be moving to a regime whereby
housing benefit will be picking up the strain on
development of housing. Possibly investors may be
thinking, “Rents are going to come down.”
Ian Fletcher: The great thing about residential renting
from the institutions’ perspective is that rental growth
is quite stable, apart from very recent timeframes. If
you look back five, 10, 20, 50 years, rental growth
that is almost compatible with average earnings, so if
you are trying to pay out a pension on the back of that
income, that is a very attractive proposition. At the
moment we are in a slightly odd situation in that rents
are running ahead of average earnings, but so are a lot
of other costs. In terms of real returns they are not
actually that significant.
8
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Ev 20 Communities and Local Government Committee: Evidence
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
Q85 Bob Blackman: So it is not a barrier for people
to invest at the moment?
Ian Fletcher: No. I would say that security of income
is probably the critical thing, rather than some
variations.
Abigail Davies: Changing benefits is causing concern
around those organisations that already do have
finance to provide housing, particularly social rented.
The concern is that if income streams are not
guaranteed, rates of lending will go up; thus, what you
can do with the money is reduced. There are
demonstration projects coming forward to test those
out, which we are happy about and for which we
asked, but that ongoing uncertainty for another 18
months just takes us a little bit further in that uncertain
world, where people do not necessarily make firm
decisions or the most advantageous decisions, because
they are not quite sure what is coming. We have a
housing strategy to take us to 2015, but some of the
decisions that will be made are not coming for another
year. That climate of uncertainty is still quite notable.
councils so that they know what is going on elsewhere
in the country and to replicate, rather than reinvent,
the idea?
Councillor Loakes: It does that all the time, whether
through member-led events or through its regional
networks where it disseminates best practice. In
London, we have London Councils. There are many
different networks with opportunities for best practice
being shared, where support is offered and where
many councils bring in expertise from other councils,
particularly in complex situations, to help them get
the best for that local council and its residents. There
are plenty of examples.
Q86 Chair: You raise the issue about the restrictions
on local authority borrowing, but the same restrictions
were there with the last Government and we had the
same arguments with them—certainly, I engaged in
those arguments at the time. The National Federation
of ALMOs has now come out with a series of ideas
in which local authorities still remain involved in the
ownership of the properties, but the ownership may
be diluted into some form of co-op, with a long-term
management arrangement. That could set local
authority housing managed by ALMOs into a context
where they could borrow for the long term, like a
housing association. How does the LGA view that sort
of proposal?
Councillor Loakes: The LGA meets regularly and has
a network of councils with ALMOs and it engages
with them on the agenda. The bottom line for the
Local Government Association is, whatever models
are coming forward and whatever the intellectual
thinking is around these complex housing finance
issues is, we just really want to see spades in the
ground, foundations laid and houses being built. We
have all got waiting lists with residents on.
Q91 Simon Danczuk: Can you say a few words,
Councillor, about how the place-based pot that the
LGA has been talking about might help to stimulate
the housing market?
Councillor Loakes: I will have to provide you with a
separate note on that. That is not contained within my
brief. I do not want to confuse matters.10
Q87 Chair: Do you think these proposals on ALMOs
are a good idea, which the LGA ought to be selling
among its members as a potential way to get some
more money?
Councillor Loakes: For those councils that have
ALMOs, yes, many are considering how to move their
ALMOs forward. Many do not have ALMOs. Again,
it is a complex landscape, with opportunities, but it is
about maximising those opportunities and not settling
simply with what is on the table at the current time.
Q88 Chair: In terms of these complex options, Ian
Fletcher said quite reasonably a few comments ago
that some of the larger authorities might be able to get
their heads around these quite complicated deals, but
smaller authorities will often struggle to put them
together. How far does the LGA have a role in trying
to disseminate good information and provide support,
particularly to smaller councils, but also to larger
Q89 Chair: Have you a library of interesting ideas
and innovations that are happening?
Councillor Loakes: We certainly do.
Q90 Chair: Can we have one or two examples?
Councillor Loakes: I am sure we can—yes we can, I
have had the nod.9
Q92 Simon Danczuk: One final question, John. You
and your members must be over the moon—
delighted—about the announcements today. Are you
happy with the announcements the Government have
made?
John Stewart: That is a leading question. Yes, we are
very pleased, because the brake on mortgage
availability, or the brake that that causes on house
building, is very serious. I think that this can have a
significant impact on house building.
Q93 Simon Danczuk: Is there anything else that the
Government could do that would make you and your
members even happier?
John Stewart: Yes, there is. If the National Planning
Policy Framework—I know we are not here to talk
about planning, but everything comes back to
planning—is diluted or if changes are made such that
planning permissions will not be available, that would
be a concern. If you have contributed to solving the
demand issue with the schemes announced today,
once that demand kicks in house builders will be able
to gear up production, but if they cannot bring new
sites on and cannot get new planning permissions, the
whole thing will fizzle out. The planning system has
to come in as well.
Q94 Chair: One point for John Stewart. There has
been a traditional model of housing development in
this country in the private house-building sector. Do
you see your sector fundamentally changing if
availability of mortgage supply does not come back
to the pre-2008 levels or, of course, if the Financial
9
10
See Ev 100
See Ev 100
Communities and Local Government Committee: Evidence Ev 21
21 November 2011 John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
Services Authority (FSA) regulates more strictly, or
whatever, which is quite likely to happen to some
degree?
John Stewart: When you say, “fundamentally
changing”, I am not sure what you mean. Do you
mean the nature of the industry?
Q95 Chair: Would you simply build less of what you
have always built, or would you look to build for
different customers in different ways?
John Stewart: House builders will build for
whomever comes along through the sales office door.
Q96 Chair: Are you planning for a change and a
different way of doing things?
John Stewart: There is recognition that some of the
less advisable, less desirable lending that went on in
the peak of the boom will not come back and therefore
the mortgage market will be more difficult
permanently. Peter Williams commented in the earlier
session that 95% used to be the norm—between 82%
and 98%, and 95% was the median, give or take one
percentage point—and that was the way the housing
market worked. If we can get back to that, it would
be good. Does anyone want to get back to 100% or
110%? No, of course they do not; that is an
undesirable situation to be in. If we do get mortgage
funding back—if we have 95% loan to value (LTVs)
for first-time buyers in particular—I think that the
situation will begin to calm down and we will get
supply up.
Q97 Chair: Do you not see a long-term change,
where the percentage of people in this country who
own their own homes falls? Therefore if your industry
is going to carry on building in increasing numbers, it
is going to have to find different ways of building for
different customers.
John Stewart: There is a long-term issue. I have
thought a lot about this. In a sense, the question is in
two parts. What sort of housing numbers do we need?
The house builders will build for owner-occupiers, for
buy-to-let investors, for institutional investors, for
RSLs and for councils. House builders will build for
customers it is profitable to put up houses for. It may
well be that in the future the composition of that
demand will shift compared with the past. It may be
that, for example, there is a higher proportion of
private rented than there was in the past. My real
worry is that there will be constraints on mortgage
availability that will constrain the number of people
who can become owner-occupiers, but they will not
be able to become tenants in another tenure, so there
will be an absolute shortage of housing. The
consequences of that for young people in particular
are clearly very serious. That is a major long-term
issue that we should all be worried about.
It relates to an earlier question about what the
Government could do to solve the housing crisis,
particularly in local communities. I have long felt that
the key to this is that many people in this country are
hostile to housing; I understand that. If there is a
proposal in their community to build housing, they
will be opposed to that. If people could be made to
realise that that has consequences, probably for their
children or grandchildren, and they begin to see that,
they will realise that and will say, “Well, I’m not very
happy about the housing here, but if we don’t build
enough housing my son or daughter, or my
grandchildren, will never have a home.” There is a
very serious long-term issue there.
Chair: There is probably a fair amount of agreement
with that. We will finish there. Thank you very much
indeed, all of you.
Ev 22 Communities and Local Government Committee: Evidence
Monday 28 November 2011
Members present:
Mr Clive Betts (Chair)
Simon Danczuk
David Heyes
George Hollingbery
James Morris
Mark Pawsey
Heather Wheeler
________________
Examination of Witnesses
Witnesses: Nick Jopling, Executive Director of Property, Grainger plc, Paul Smee, Director-General, Council
of Mortgage Lenders, and Alan Benson, Head of Housing, Greater London Authority, gave evidence.
Q98 Chair: Apologies for keeping you longer than
we had intended. I hope at least we have entertained
you while you have been waiting. Welcome and thank
you for coming to our second evidence session in the
inquiry into the financing of new housing supply. For
the sake of our records, would just introduce
yourselves and say the organisation that you
represent?
Alan Benson: Good afternoon. I am Alan Benson
from the Greater London Authority.
Paul Smee: Paul Smee, Director-General of the
Council of Mortgage Lenders.
Nick Jopling: Nick Jopling from Grainger plc.
Q99 Chair: Thank you very much for coming. You
are all most welcome. Also, thank you for the written
evidence you have supplied to us so far. Just as a start
to our discussions this afternoon, what do you think
is the extent, the scale, of the problems that are
currently in housing supply, and what do you think
are the different impacts on the social housing sector
and the private rented sector, which we ought to be
addressing?
Paul Smee: There is a general view that we ought
to be having new build housing totalling around, say,
200,000 to 240,000 new homes per annum. At
present, we are producing housing in excess of
100,000, perhaps up to 120,000, which is rather short
of that target, which suggests that there will be a
continuing constraint on supply, which will inevitably
affect demand and how it is satisfied.
Nick Jopling: The shortfall, which is often written
about under new home build and acquisition, and
first-time buyers is also now starting to draw attention
in the rental market, particularly in the South and
South East, so the private rented sector is becoming
an increasingly important stepping stone of tenure, if
you like, if you use that terminology. It is a choice, as
well as a way of living, for an increasing number of
the population, again particularly in London.
Alan Benson: I can only speak for London rather than
the national picture. Certainly, the Mayor has a target
to deliver just over 30,000 new homes a year in
London, which is very similar to the target of the
previous Mayor in his London plan. We made
progress towards that target for the first 10 years of
this century. There has been now, in the last year,
slippage and we have actually seen a decline in new
house building over the last year, 2010—11, when we
had figures, which mirror the decline in the rest of the
country in the two years prior to that. We are in a
situation where we have not delivered enough homes
to meet London’s need, backlog of need and the
growing population of London. We are in the
worrying position at the moment where we seem to
be slipping slightly backwards rather than forwards.
Q100 Chair: Are the problems in London different
to the rest of this country or simply similar but more
acute?
Alan Benson: In terms of overall supply, they are
similar but more acute. We have the same problem as
the rest of the country, but it is a good deal more acute
in London, which manifests itself in much higher
levels of homelessness, much higher levels of
overcrowding and much greater affordability
problems for the average population, who want to get
on to the housing ladder. It is a more acute problem,
but London does transform to quite different
problems, rather than just being an acute situation of
the same problem as the rest of the country, when
you look at issues around the private rented sector, for
example, in London, where the scale of the private
rented sector is so large and it houses such a very
differentiated group of people, compared to the
majority of the rest of the country. In their situation,
you have a slightly different problem, rather than the
same problem just greater in London.
Q101 Simon Danczuk: How important is mortgage
finance to new housing supply? The Home Builders
Federation was saying it is the most serious constraint.
Is that right? Is mortgage finance the most important
issue?
Paul Smee: Clearly, there has been a reduction in the
amount of loans that have been made available since
the financial events of 2008. There are now attempts
to address that. We would say that there is mortgage
finance available. We are estimating that £137 billion
will be lent over the course of this year, which is a
considerable reduction from 2007, for example, when
£363 billion was lent. The question of the balance
between supply and demand in causing that reduction
is more difficult to estimate. There are clearly
regulatory constraints on banks from lending as they
were doing before, and I suspect that there are also
some demand constraints, with people feeling lack of
confidence in going into the housing market.
Nick Jopling: With regard to mortgage finance, again
it is the cost of sensible mortgage finance, and the
importance of mortgage finance in your question is
the advocacy of sensible levels of mortgage for
Communities and Local Government Committee: Evidence Ev 23
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
anyone. Much of the debate is around first-time buyers
and their ability to be able to afford a deposit. The
indemnity scheme addresses some of that, but setting
that aside, affordability, confidence and sentiment play
such an important part. The housing market is not
purely an investment play of investment markets; it is
often down to sentiment. The mortgage market has an
impact beyond the first-time buyer and the confidence
to move for people who are existing home owners
wanting to change up or down. That cost of stamp
duty, arrangement fees and all of those around
mortgages all have an impact across the market
generally.
Alan Benson: I would say the market generally is
affected. The harshest impacts are on first-time
buyers, because of the deposit requirements for a
mortgage, which are much easier to acquire if you
have equity in the home or you have parents, or
friends or family that can be a bank to lend you the
money to purchase your home. Having said that—and
the mortgage expert sat next to me can tell me if I am
right or wrong on this—as a percentage of overall
house purchase price, the level of deposits required
now are not that dissimilar from the level that were
required throughout the period from the Second World
War until the 1990s. It was only in more recent years
that we have seen very small deposit requirements
comparatively. What has changed is the gap or the
ratio between incomes and house prices. House prices
are so high that a 25% deposit requirement for a house
in London is a very large requirement indeed, whereas
a 25% deposit requirement in 1975 would not have
been anything like the same requirement, but I am
happy to be corrected by my mortgage expert on the
left.
Paul Smee: I would not correct you at all, Mr Benson.
I would add a slight gloss to it, which is to say that I
think that those who have been most hit by the
increased deposit requirement have been those who
are in the position as first-time buyers, where
previously higher loan to value was more traditional,
and where obviously it did rise steeply during the
course of the last decade.
Q102 Simon Danczuk: Paul, do you think revival of
Right to Buy is going to soak up what little finance is
available now?
Paul Smee: No, I think the Right to Buy scheme can
be accommodated. There is a consultation coming out
shortly, which will give us some more of the detail
about how it will operate. Lenders will want to look
at the properties that are being purchased to ensure
that those who are applying under the scheme can
afford the payments under their mortgages and do not
get into financial difficulties with them.
Q103 Simon Danczuk: Alan, the people of London
are eagerly awaiting the Mayoral bond and the
Mayor’s mortgages. When will they come on stream?
Alan Benson: We are pausing a moment and
considering the impacts of what the Government has
announced. We are pausing to look before we make
any formal announcements here. We were considering
the options for a Mayor’s mortgage or a Mayoral
bond, looking at what we could do to help first-time
buyers in particular, in London, deal with the
problems of accessing mortgages, and then the
Government announced its scheme on a national
housing strategy, so we want to look at that very
closely. We are talking to CLG about what we can do
in London to work with that; if necessary, what would
be most beneficial for Londoners to make the most of
that scheme and add on to it potentially?
Q104 Simon Danczuk: So there is no time scale.
Alan Benson: Not at this point, no.
Q105 Mark Pawsey: We have already heard
reference to the importance of the first-time buyer. Mr
Smee, you mentioned that £137 billion of mortgage
finance went out in the last year, but my guess is that
very little of that went to first-time buyers, because of
the need for big deposits. What has been the impact
of that on the supply of new housing over the last few
years and months?
Paul Smee: Between 190,000 and 200,000 loans per
annum are being made to first-time buyers, so there is
still finance available for them once they have got the
necessary deposit. We have got the new build
indemnity scheme, which I think we are coming on
to, which will deal with some of that. The fact that
there are perhaps half as many first-time buyers
getting finance as there were at the peak of the
housing boom will obviously make the market more
sluggish. There will be, for some builders, a question
of whether they want to build particular types of
property.
Q106 Mark Pawsey: What effect has it had, though,
on the types of property that are being brought
forward?
Paul Smee: The evidence is that builders have tended
to build away from starter homes towards more
expensive properties, which would typically be
bought by somebody moving up the housing ladder
and using equity in their existing property to help in
their purchase.
Q107 Mark Pawsey: I wonder if somebody else
could explain why the absence of the first-time buyer
is so important to the effect of the market.
Nick Jopling: I am not a house builder. I used the
term earlier on about the stepping stones of tenure.
What I mean from that is the leaving of home into
university, the sharing with friends and then perhaps
the sharing with a partner, while your relationship or
your jobs settle down. Then that is the point, and a
very sensible point, at which people consider
first-time buying. That has pushed out from 32 to 37
over a period of only four years. It is actually moving
faster than the chronology, as it were, as the years
pass by, because of the credit crunch, because of the
lack of confidence, because of, in some cases, the lack
of the bank of mum and dad as well, because they are
the people lending often on that deposit, and then into
the more traditional home ownership percentage,
which still is the largest percentage in quantum. Once
those dynamics start to move around, they have an
impact on the market elsewhere. That is why it is
important.
Ev 24 Communities and Local Government Committee: Evidence
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
Q108 Mark Pawsey: What is the impact elsewhere?
Nick Jopling: The impact in particular is the
increased demand for rental stock. That is the major
impact that we see as a business: the demand for
renters and rents rising accordingly. Supply and
demand works in the same way.
Q109 Mark Pawsey: I wonder then, Mr Benson, is it
important therefore to find some schemes to get these
elusive first-time buyers back in the market and, if so,
what would you favour?
Alan Benson: It is important if you want to try to
meet the aspirations of people in this country to go
into home ownership to have some schemes to help
first-time buyers enter home ownership. Levels of
home ownership have flatlined from the mid-1990s.
Q110 Mark Pawsey: Is that a problem?
Alan Benson: That is a very big policy question for
politicians to decide, not for an officer like me to
determine. There is no appropriate or correct level of
home ownership, neither in the UK or anywhere in
Europe. Countries all work at different levels and very
effectively at different levels, depending on a whole
series of cultural and social phenomena. In London,
we stopped seeing an increase in home ownership
from the mid-1990s and it has been declining
significantly since the turn of the century. Now that
pattern is being replicated in the rest of the country, so
London led the way. It is not just a UK phenomenon.
Q111 Mark Pawsey: Can we not argue that is a good
thing, because it gives much more labour market
mobility? Why is it so important to have these
first-time buyers getting started on the housing ladder?
Alan Benson: You are right in terms of labour
mobility. There is evidence clearly that the private
rented sector is the most mobile sector. It is the sector
that attracts the most economically dynamic people.
A large part of why London was economically
dynamic over the last 10 years has been the growth of
the private rented sector, which is the route for the
vast majority of people, like myself, who came to
London to seek employment. The private rented sector
does that very effectively, but people have a desire
and an aspiration to go into home ownership, settle
down and have roots. Home ownership itself produces
a huge number of other benefits over and above
having a roof above your head, as a hedge against
inflation, against pensions, against care costs later in
life, etc. There are many financial reasons why people
like to get into home ownership, and yet there is a
groundswell of opinion out there of people feeling
they are locked out of home ownership who, a
generation ago, or even 10 or 15 years ago, would
have felt they have an expectation to be home owners.
Q112 Mark Pawsey: To all of you, given that it has
not been happening over the last few years, what is
the best way, in your view, to get these first-time
buyers into the market?
Nick Jopling: The view is I think we have to start
building. We have to recognise, and there are very
few people who have not recognised, that we have a
shortfall of new build construction. The sensible area
would be to stimulate the supply side of stock.
Q113 Mark Pawsey: How would you do that?
Nick Jopling: I actually think the mortgage indemnity
was a good touch on the tiller. I am not a great one for
government intervention into free markets, and that is
what the housing market is, because you can be the
wrong side of the impact. Very often, they get
unravelled as quickly as they have been put in. What
was recommended last week was, because it is
focused towards new build only and is not necessarily
restricted only to first-time buyers—it is open to
anyone who can prove that they can only gather
together 5% of deposit—I would say that was a
sensible touch on the tiller.
Q114 Mark Pawsey: Mr Smee, is this going to do
the trick?
Paul Smee: I think it will make a contribution; I very
much hope that it will. We have got this imbalance of
supply and demand. There is a lot of evidence that
people who are currently in the rented sector are
paying levels of rent that demonstrate that they could
afford a mortgage. They are in effect waiting to build
up their deposit, whilst paying their rent at the same
time. This scheme will bring forward people who can
quite safely be lent to at a high loan to value, bring
them on to the property ladder and allow them to meet
their aspirations. Nobody is being forced into this
scheme; this is something where we think people’s
aspirations can be met and, at the same time, it will
contribute to a growth agenda, because it is being
focused on the new build sector, with the economic
consequences of that.
Q115 George Hollingbery: Returning to the new
build indemnity, we met last week and we had a fairly
robust discussion, I think, about some potential
problems with it. I worry about several things, but,
first, can you just flesh out for us how this scheme
works? How many years is the Government tied in
and so on and so forth?
Paul Smee: The idea behind the scheme—some of the
details are still being worked out—is that when a new
home is purchased by somebody on a high
loan-to-value mortgage, the builder will put 3.5% of
the value of that house into an indemnity scheme for
seven years.
Q116 George Hollingbery: I made this point last
week and I will make it again. The builder is putting
money in, but they are putting money in that would
not be there if they were not just selling a house,
correct?
Paul Smee: That is correct.
Q117 George Hollingbery: It is not money they are
finding from anywhere else; it is money that is
generated by the profit they are turning.
Paul Smee: Yes; they are putting skin in the game in
effect for seven years.
Q118 George Hollingbery: Are they?
Communities and Local Government Committee: Evidence Ev 25
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
Paul Smee: Well, they are getting delayed profit, I
would suggest to you, rather than actually putting
cash in.
Q119 George Hollingbery: If the scheme unlocks a
sale, that money would not exist.
Paul Smee: Indeed, but they have to put the money
into the sale and it is something that they can claim
back if the indemnity is not caused, if there is no
default and the property has not fallen by 3.5%.
Q120 George Hollingbery: You understand what I
am saying.
Paul Smee: I do understand.
Q121 George Hollingbery: The profit is not there to
invest in the scheme if the property has not been sold,
so Government’s unlocking a sale, which gives the
property, which gives the builders money to put in. It
is not money they have to find otherwise.
Paul Smee: Yes, I can see what you are saying. The
way the scheme will work though is that the builder
will put that money in; the Government will top that
up with an additional guarantee up to 5.5%, the
Government itself will not actually physically make
the transfer of money. That allows the lender to put in
a much higher loan to value, in confidence that he will
not be affected by changes in the property price. More
particularly, we believe that there will be a regulatory
acknowledgement of the way in which the scheme is
being backed. At present in a new build property, if
you are loaning at a very high loan to value, you have
to put eight times as much capital to support that loan
as you would if you were lending at 75% to 80% LTV.
We believe that, with the guarantee and indemnity
arrangements in place, there will be a lower capital
requirement imposed by the regulator, and that that
will enable the pot to be extended and shared round,
so that more new build property can be purchased,
with the economic consequences.
Q122 George Hollingbery: How long are you in for
as a developer?
Paul Smee: The scheme will be for seven years.
Q123 George Hollingbery: Does it work on sharedownership schemes?
Paul Smee: No. From the point of view of the person
purchasing the property, it is exactly like taking out
an ordinary mortgage.
Q124 George Hollingbery: Here are a few questions
for everybody—just general thoughts on this. Are we
confident that the assessment process will show
sufficient due diligence to stop these being junk loans?
You have said that you have confidence that people in
the private rented sector can service a loan like this,
but we need to be very careful—do we not?—that we
do not create new junk bonds. That’s one. Secondly,
is it not just a competitive advantage for major
builders who can create these funds or deal with these
funds very much more easily than an aggregation at
local level? Thirdly, if I was a house builder, I would
just stick 3.5% on my house price and that way it has
cost me absolutely nothing. How is Government going
to control valuations? Are they going to have the right
to veto valuations and have their own valuer in each
transaction?
Paul Smee: Shall I start with answering those
questions? Right, I think that the valuation issue is a
very important one that is important to everybody in
this scheme, because we do not want just to see the
value of the indemnity going, in effect, into an
increase in a new build premium. The Royal
Institution of Chartered Surveyors (RICS) has
guidelines on how these valuations should be done
and we will be looking to talk to them about how they
can be adapted to the specific circumstances of the
scheme. We are requiring that there will be, and this
will be required by the Government, absolute
transparency about the prices at which comparable
properties—for
example,
on
a
particular
development—are changing hands. There will be a
mechanism by which information can be exchanged,
so that will give a much higher level of confidence
that the price being taken is a reasonable one. I think
everybody involved in this scheme realises that the
fact the Government is involved gives it a very high
level of visibility, which has to be responded to.
Q125 George Hollingbery: Nick, you must be pretty
chuffed. Nick and I know each other a little. You are
a big builder. You have a big ethical dimension to
what you do, but you are going to be able to float
these funds and deal with these funds much more
easily than others. You have got lots of experience in
the financial transaction side of the market, so it is
going to suit you down to the ground. Will it not
knock other competitors out of the market?
Nick Jopling: Well, it will not suit us, because we are
not a house builder. To be clear, we do not build
houses; we prepare land and then sell the land to the
house builders to build on, so it is a different
expertise. I am going to have to really defer to Mr
Smee about the mortgage impact. On the valuation
thing, I think your point is very important actually
about the 3.5%, and it not just being an extra bonus
for the house builder; I think it is a particularly
important point. There will of course be elsewhere, on
any site being sold, comparable evidence, as there is
in any form of valuation. I would expect the lender
and the Government to have an RICS evaluation
backed by a professionally indemnified professional,
who is going to ensure that exactly what you are
worried about does not happen.
Alan Benson: On the particular issue about the price,
we do worry about prices being added into the costs
for a developer, but as these are new builds
specifically, they will be almost identical flats in the
same block in London, or identical houses in the same
road being sold, so it will be very easy to therefore
spot if these new build houses are at differential prices
for the ones with and without the mortgage-backed
indemnity. I would have thought it would be
reasonably easy for the Government to check that. The
other questions you asked are a bit more difficult,
about assessing the individual circumstances. We wait
to see a bit more information from the Government
about this indemnity scheme and how it will work,
because the detail is worth looking at. Again, going
Ev 26 Communities and Local Government Committee: Evidence
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
back earlier to the question about the Mayor
potentially getting involved in mortgage schemes, we
want to look at how the Government’s scheme works
first and see how we can best work with that one.
Paul Smee: Do you mind if I just add in two points?
I got carried away on the valuation point. First is the
price will be the price. It is very clear there can be no
other hidden discounts or anything to a purchase of
one of these properties. The second point, about the
smaller end of the market, is we have already had
some of the smaller lenders active in the mortgage
market—some of the building societies—saying that
they want to talk through how this could apply to
them. You can envisage situations where smaller
builders, with perhaps strong regional presences, are
talking to lenders with equally strong regional
presences, which gives a local flavour to the scheme,
which I think will work in favour of some of the
points you have been making on the valuation issues.
Q126 Chair: George’s point is very interesting
though—what the prices that we are supposed to be
monitoring for these deals are going to be—because
the advertised price on most new build schemes now
is not the price people are actually paying. There is
always a bit of negotiation. Is there not a danger that
this scheme drives the price back up, so the builders
actually do make their 3.5%?
Paul Smee: That is the reason why we are, a),
involving the chartered surveyors and, b), insisting on
absolute transparency. Not everybody who will be
going into one of the properties, for example, will be
somebody who is taking advantage of this scheme.
There will be other people who have put forward a
much more substantial deposit, so the transparency
will give the confidence that a price being charged for
this new build is realistic.
Q127 Chair: Presumably, in the negotiations you
have had with the Treasury, has the issue come up of
whether the whole of this underwrite from
Government, this guarantee, counts as Government
debt?
Paul Smee: I have left that to the Treasury, I am
afraid, Mr Betts.
Q128 Chair: They have not raised it as an issue to
you.
Paul Smee: That has not been raised with me to date.
Q129 Heather Wheeler: I am very keen on
affordable housing and I am interested that there
seems to be, from the evidence that we have seen so
far, a real gentlemen’s fight going on suggesting for
buy-to-let developments that the affordable housing
element should be taken out of that. I do not see how
you can justify that, but perhaps your argument is that
it is about getting another tranche of buildings built
and it deals with a blockage there somewhere.
Perhaps, Mr Jopling, that might be something you
would like to talk about.
Nick Jopling: Yes, you are referring directly to the
suggestion that, if we were to be able to perhaps use
public land or to build buildings specifically for rent,
so not for sale—they are not available to purchase—
on a case-by-case basis, it may be looked at that, if
these were being built and offered rent for a period of
time, then maybe there would be no requirement to
build section 106 affordable housing, general needs
rent or intermediate housing alongside it initially,
perhaps, or at a stage. It is a debating point, and the
reason it is a debating point is because I talked at the
beginning about the growing numbers of people who
are renting. These are, in the world we live in, the
“inbetweenies”. These are the people who cannot
afford to buy a home and they do not qualify for social
housing, but they need to be housed. That goes
without saying. By the fact that they cannot afford to
buy a home, I would argue that they just might be
needing to have some form of home they can afford,
and therefore to be able to offer private rental on a
similar basis that the Americans offer, in multi-family
housing in purpose-built blocks that are operated as
such, might really be the nirvana to get to, especially
if we could fund it institutionally, rather than by
Government.
Q130 Heather Wheeler: I was going to say that
brings me very nicely, thank you very much, on to my
next point. How do you feel that there is a way of
getting these big institutional investors into the
market, by getting rid of commitments that other
normal builders would have to abide by?
Nick Jopling: The question of how we get institutions
into the residential market is something that has vexed
many people in the sector for a very long time. Those
obstacles have ranged from reputational: no Chairman
of a pension fund—and when we are talking about
institutions, let us be clear, we are really talking about
pension funds—wants to receive letters about the
service in a block or how a manager might be making
decisions about how they operate that block. Those
have largely gone away. I think they were political,
because remember in the first case this was a Tory Act
in 1989, which then had to be tested through 1997,
but we then had from 1997 onwards very much a
market that was growing and really the institutions
were not going to go into it then. We are in a very
different market today, so that has gone away.
The significant barriers are scale, suitability of stock
and yield. Those are long debates, each of them, and
maybe we can do them in detail, if you like. An
institution wants to invest in scale; it is not interested
in buying buy-to-let property. There is no stock for it
to go and buy. There are no portfolios of rental stock
for it. There may be some distressed portfolio, but
they are not interested in that, because there is often a
reason those properties are distressed in the first place.
Suitability of stock: we address that through building
purpose-built stock for rent. That is the multi-family
housing US model. And then the yield. Yield has
always been a challenge, because the cost of entry,
against the rent and the net rent that comes off the
bottom, has always been too high. In particular in
London, the net yield is so small, so one has to deal
with the cost of entry, and that is the cost of
construction and the land. Those are the two main
constituents and that is what you have to address. The
cost of land is directly affected by the requirement for
building other types of housing on it as well.
Communities and Local Government Committee: Evidence Ev 27
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
Q131 Heather Wheeler: You use that phrase and
you say it has this effect, but could you actually give
us an example where you think investors have just
said, “No, we cannot do it,” and have pulled up the
drawbridge, particularly on the affordable housing
side of it?
Nick Jopling: Can I be clear that I do not want to go
down a route of saying we can only provide this
without affordable housing, because that is almost a
hypothetical suggestion, if you really wanted to turn
the production line up? I can give example of, say, a
big site that can deliver 600 units. If 200 of them were
to be affordable, 200 were build-to-rent and 200 for
sale, actually you could build the first two thirds,
because there is such demand out there for social
housing and for private rented. You have got to find a
way to be able to deliver those. The ones for sale can
be built at phase three; they can be built later and a
developer can take that profit. You have to be able to
allow someone to be able to deliver the first piece as
well, at a commercially sensible level, to make a profit
of some sort. We all know that delivering affordable
housing—the house builders that have done it have
always done it at cost.
Q132 Mark Pawsey: Did I hear you rightly say that
there were no reputational reasons why institutional
funds could not go into the private rented sector? If
that is the case, surely yields are acceptable now,
given that rental values have been increasing largely
because first-time buyers have not been able to buy.
What really is holding institutional funds back from
coming into the private rented sector?
Nick Jopling: There is nothing today for an
institutional investor to buy. If you went to any of the
major pension funds and they said they wanted to
invest £300 million into the private rented sector,
there is nothing for them to buy.
Q133 Mark Pawsey: They would not be prepared to
develop it; they could not work with a developer and
fund something through a developer.
Nick Jopling: Core pension funds look at low-risk
investments. Development and planning risk are both
high risks, so they would want no development risk
and no planning risk. You need to take those risks out
of the equation, and they are only interested
effectively in a stabilised asset—an asset that is full
of tenants, operating, providing a net income. They
would be able to put a value on that.
The exercise, and the one that was referred to in the
example, where Grainger had partnered with
Bouygues, which is a construction company—not a
house builder but a construction company—to try to
deal with that cost of entry, all four sites that we put
forward are on public land. They are in the London
Borough of Barking and Dagenham. They are at
Thames Gateway. They are in Maidstone. Those are
public land sites where Bouygues has a development
partnership to develop on that land, and then we have
teamed up with them to effectively look after them
once they are built. The difficult bit is we now have
to go and get institutional money to invest alongside
it. That is an exercise we are going through at the
moment.
Mark Pawsey: We wish you well.
Q134 Chair: Just coming back, the issue is we have
land, and there is the public sector land you just
mentioned; you have got developers like yourselves
who can also manage properties in the longer term;
and we have got institutions with money that would
like to take investment. The trick is how we can get
those together, is it not? What are you saying are the
key obstacles to achieving that?
Nick Jopling: They are those three things—scale,
suitability of stock and yield—which means
build-to-let, rather than buy-to-let, is providing the
scale and it is also dealing with the suitability of stock.
Therefore, we have to deal with the cost of entry and
that is why we are interested. We and I think other
people in the sector for a long time have tried to find
a way to bring institutions into this market of the
public land initiatives or the partnership with public
land to enable these types of properties to be built.
Q135 Simon Danczuk: You were saying that there is
potential for build-to-rent in the UK. That is a
potential solution to some of the housing problems
that we have got.
Nick Jopling: Build-to-rent in a social side and buildfor-private-rental, yes. I think we are at an absolute
moment now when the opportunity is here for
bringing the institutions into the market.
Q136 Simon Danczuk: You do a lot in Germany.
What is the experience there in terms of institutional
investment and the opportunity to do what we are
talking about?
Nick Jopling: The German market is very different
from the UK market. We do have a portfolio of 7,000
properties in Germany, but they are on our own
balance sheet, so we do not have an institutional
investor or partner. They are all ours, as it were.
Institutional investment in the Germany property
market is actually less than one thinks. I am not an
absolute expert on the German market, so I will be
steady as far as I go. A lot of it is a very large private
rented sector and it is a highly regulated sector. It is
largely owned by metropolitans and regional
ownership and corporations that were created after the
War. There was a time when a number of institutional
investment funds went into Germany in the mid-2000s
with the hope that they could take advantage of the
arbitrage between the rental value and the open
market value, in a way of breaking those properties
up and encouraging Germans to own their property.
That is not the German culture, on the whole, with the
exception of one or two cities where there is a bit
more of that culture. That is a very flat income-driven
regulated market, very similar to our own social
housing market actually, but not heavily institutionally
invested into.
Q137 Simon Danczuk: David Lunts used to work at
the HCA, did he not? Is there still potential in the
HCA Private Rental Sector Initiative, in terms of
London? How important is it?
Alan Benson: I think the Private Rental Sector
Initiative has been formally terminated. What they are
Ev 28 Communities and Local Government Committee: Evidence
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
looking at now is the HCA coming into London, and
ourselves looking at how the model would work. I
would disagree slightly with Nick perhaps on a couple
of things, inevitably, being a person responsible for
the spatial planning in London. I think he is
completely right in terms of his analysis of what the
key problems and most of them seem resolvable. The
problem around scale is resolvable; there are lots of
developers in London and internationally that could
come in. We have met many of them over the last few
years, who have come in and built the scale to let at
scale, and do so in other countries. Their problem in
terms of reputation and long-term management and
costs can be resolvable. They talk about working with
a housing association, for example, as a management
agent, or working with someone like Grainger, who
has a very good reputation. The reputation issue can
go away; the management ones can. What is very
difficult to make go away is the yield question. How
do they make the yield stack up? That is the absolute
crux, in my mind, of why institutional investment has
not got off the ground in the UK and that is the crux
of the discussion about whether it should be allowed
to not have an affordable element, and whether it
should have free land, to be able to have underwritten
rent guarantees, etc. There are various tweaks that are
other forms of subsidy.
If you accept, as it is, that section 106 affordable
housing requirements are a tax on the house
building—if you did not have them, you could build
more homes—we have section 106 affordable housing
requirements because of our desperate need for
affordable housing. You would need a compelling
reason for taking those affordable housing
requirements off a particular type of housing
development. We do not have an affordable housing
requirement for student housing, for example. If you
build student housing, you do not also need to build
affordable housing, but there has yet to be a
compelling case made for why private rented housing
should be exempt from the affordable housing
requirement. Given that the last research we did into
what happens to market housing in London, which
showed that two thirds of it goes into private rental
housing, we do not have a problem producing private
rented housing, if we go for the market model, which
would give us the affordable housing requirement.
Although we would very much welcome and like to
see build-to-let-type models come in, because of that
quality it would potentially give in London, we do not
think that that, in itself, is a compelling case in
London to move away from an affordable housing
requirement. It is very difficult for the yield for an
institution to stack up, when they are competing with
the dominant model of private renting, which is
somebody who owns one or two or has a small
handful of properties, and puts in an awful lot of
spread equity, who in the end is reliant much more on
the long-term capital uplift of that property, not on the
returns to capital on an annual basis. It is very hard to
compete against that in financial terms, for the
institutions.
Q138 James Morris: The Government has made
quite a big play about trying to get as much public
sector land released as possible. How significant do
you think public sector land is in terms of trying to
solve this problem that we have in terms of housing
development and supply?
Nick Jopling: I think in the South East and in London
it is a very significant opportunity. It will not be
suitable for every piece of public land. I think we
perhaps went down a bit of a red herring about not
having affordable housing in the private rented sector.
As I said, I have not come here to argue or to debate,
really, to push or debate that. Really, we should all be
focused on just cranking up the delivery rate because,
as was said right at the beginning, those numbers are
compelling.
I gave another example about how we have partnered
with the MOD at Aldershot to deliver a very
significant number of houses. The Government still
owns that; we have not bought it off them. We are not
a land-banking company. That is an exercise where
the Government has said, “We have a piece of land.
We have a company out here and this is what they do.
Partner up and bring us the maximum benefit, with
the intention of delivering a significant number of
homes, as well as providing a—”
Q139 James Morris: That is an example of build
now, pay later, or is it similar?
Nick Jopling: No, what we are doing is we are
partnered in that case. That is specifically where we
are actually partnered with the Government, with the
MOD, or the Defence Infrastructure Organisation,
with the intention of maximising the value of the asset
that they hold today, which is a garrison site that needs
to get planning. It needs to be master-planned; it needs
to have a lot of infrastructure put into to make it work
for Aldershot’s urban extension, as it were. That is all
our risk; we are paying for that. As the partner, that is
our sweat equity and that is our real equity. The land,
when it is ready for delivery to house builders, will
be offered into the market for sale. We will take a
small share of the receipt; the Government will get
the vast majority of it.
Q140 James Morris: Any other views about the
importance of public sector land?
Alan Benson: The potential there is obviously very,
very large. There is an enormous amount of public
sector land, much of it becoming surplus to
requirements for those who own that land. The
difficulty is there is a very large difference between
land owned, for example, by the HCA, by the
Regional Development Agencies as were, and in
London by the Mayor, which is land owned for the
purpose of building housing regeneration; and land
owned by the Ministry of Defence, the National
Health Service, local education authorities and all
those others, which are responsible for something very
different indeed. If you are the Ministry of Defence
and you are required to replace your missiles, and are
given the option instead of handing over some land at
a less-than-best-cost deal to build some homes, that is
not a compelling case to make to the Ministry of
Defence. They would rightly say back to you—and I
have had many conversations with them and many
other Government Departments over a number of
Communities and Local Government Committee: Evidence Ev 29
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
years—that if you want to build housing, you should
put the money into the housing budget and pay the
Ministry of Defence for that land. Their compelling
case is to sell the land for best return and reinvest in
what their job is to do, as defined by their Minister.
If the Government wants to bring land forward in
these Departments at less than best value, it needs to
make the case very clearly, at the height of the Cabinet
perhaps and Prime Minister that this is a priority,
which is why where it does seem to work, where this
happens, it is at local authority level, where you have
a local authority leader and they can have a clear
vision of what they want to see as their priority, which
would be affordable housing. Not every local
authority does, but when they do then they are willing
to overturn the fact that you all do not purely seek
best return on that land.
Q141 James Morris: On that point about local
authorities, and it may be a quick question for Nick
as well, you talk about your defence initiative. Clearly,
local authorities are sitting on a high percentage of the
public sector land. Have you seen an appetite, if you
like, for local authorities coming forward with land
and wanting to do interesting equity deals? Is that
something that has potential, do you think?
Nick Jopling: We are partnered with the London
Borough of Hammersmith and we are doing
something in Haringey. This is a local, regional,
site-by-site agenda. You have to take each one as the
most suitable way, and to be able to have the
flexibility to understand where does one want to get
to. If it is a buy now, pay now, you—
Q142 James Morris: It is about the effectiveness or
otherwise.
Nick Jopling: Yes, on a deferred equity basis, let us
say. What we mean by that is that a piece of land, as
a car park or as an unused piece of council land, has
no value today because a house builder is concerned
about the market he would be selling into, the cost of
remuneration, the cost of putting infrastructure in, the
cost of getting planning—the receipt for a council
might be very unattractive. It says, “Why would we
sell it now when the market is so low? These are our
crown jewels. Once we have sold them, they are
gone.” There are suggestions and discussions, and
Birmingham has started these, so it is not just
London-related. Their discussion is with a company
called Evenbrook, where the suggestion is to say,
“Actually, if one were to imagine that piece of land
with a hundred units built on it that were rented out,
for example, and you get the splits, the net operating
yield off that has a value. If it is 5%, it is 20 times
multiple that. If it is 4%, it is 25 times multiple that.”
In a very simple way, that is how the institutions value
commercial property. That is how they value their
shopping centres; how they value their office blocks
and the like.
If we could create something there and then say to the
local authority, “You enabled this to happen, so you
have a share of this. You have a share of something
that your partner has delivered and your partners have
delivered,” back to the Chairman’s point, “being built
with money, the construction and the asset and
property management.” Those are the three bits to join
together. Those are the sorts of thoughts that people
are having. “Buy now, pay later” sounds as though it
is the Government being legged over. That is not what
it is supposed to be. This is about responsible and
proactive thinking about how to get to an objective in
the best way, because everyone has a bit of asset that
they can put into that to make it happen.
Q143 Chair: If the local authority will get value back
from the land, it tends to assume it will get a lump
sum at some point, which tends to assume that the
property would be sold. Is that not a problem when
you might be actually looking for a long-term investor
to come in and keep the property for many years?
Nick Jopling: It is a good point. If one was to say the
land was worth 10% or 15% of the finished product,
it can either be done by the institution buying it out at
the end of the day and just buying into the whole,
because you would structure it into a fund rather than
property by property. The worst thing one could do is
to break up the actual building and sell 20% of the
units off. If the Canary Wharf tower sold off floors 16
to 20 to anyone, you have then broken the investment
model. Your point is right: you do not want to
crystallise it through a sale of individual units, but you
can always value something for what it is worth and
sell a stake of it. It might be in shares rather than
in property.
Q144 George Hollingbery: You are not saying this
could be hugely difficult politically, locally, but that
you could de-risk the projects further by the planning
authority granting permission on its own land for
something they consulted with locally, which people
want, which fits and which looks right, and have that
ready with a neighbourhood development order, have
it ready to go. Is that something that we have seen? Is
it happening anywhere? Should it happen?
Alan Benson: I cannot say I am aware of it happening
anywhere yet; with the Government’s planning
reforms, it may well be our target in this area. This is
how the Government are looking to rethink the
planning system. That kind of ready-to-go
development proposition would be quite effective in
taking all the planning risk out of it.
George Hollingbery: It would be huge, would it not?
It would make a huge difference. You could get local
buy-in for it, too. You can actually get it designed by
local people for local people. How much better would
that be?
Q145 Mark Pawsey: Sticking with social affordable
housing, I have a couple of questions probably more
targeted at Mr Benson, but what is the long-term
impact of the affordable rent model, particularly with
what may be happening in London? I wonder also if
you could comment on the changes to housing benefit
and how they might impact on housing associations’
ability to gain finance.
Alan Benson: The long-term impact of affordable
rent: affordable rent does enable us to develop a lot
more homes with a lot less Government funding,
without a doubt. Government funding, instead of
being the lion’s share of the cost and grant of building
Ev 30 Communities and Local Government Committee: Evidence
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
a new affordable rented home, becomes a very small
proportion, and the rest of the money is brought in by
the registered partner through the higher rents
borrowing against that and using their own resources,
etc. It makes less money go an awful lot further for
homes. The impact of course is that it does so by
having higher rents. You had this discussion with the
previous speakers about the impact of that on welfare
benefits in the housing benefit system.
Quite clearly, we had a lot of conversations ourselves
and an awful lot with CLG, the Treasury and DWP
about how this programme would work and the
impacts. I do not think there is a turf war going on
now or was a turf war going on before the programme
was settled, in terms of what the costs would be. A
particular concern for the Department for Work and
Pensions was the amount of homes they would have
to convert from the existing stock of social rent to
affordable rent to fund the programme, because each
one of those would have a direct housing benefit
impact.
Q146 Mark Pawsey: To go back, you think that the
higher affordable rent will encourage more social
housing to be brought forward. To that extent, you
support the idea.
Alan Benson: It will bring a lot more homes forward
than would have been done otherwise in the old model
with the same funding; that is absolutely the case. It
provides more homes. There is a key difference, I
think, and this is something that Boris, I remember,
remarked upon; it certainly struck him. He was
concerned about the impact on benefits when we
talked to him, and the key difference between this and
the early 1980s “Let the benefit take the strain” model,
when we moved to housing benefit rather than social
house building, is that at least here, where the benefits
are being paid into the sector, they are staying in the
affordable housing sector, not going to private rented
landlords. Therefore, they will be recycled for further
affordable housing development. There is a less
negative impact on the housing benefit costs.
Q147 Mark Pawsey: You do not subscribe to the
view that the new affordable rent regime makes rents
unaffordable.
Alan Benson: No, the Mayor does not subscribe to
that view at all. An interesting thing: I had an opinion
not too dissimilar to that when I originally looked at
the issue. The phrase “80% of median market rents”
sounds
like
something
very
unaffordable.
Interestingly, I could almost do a little chart now to
try to show you because this is hard to explain. The
graph of market rents, the curve of market rents, is
that there are very few at the bottom that are very,
very cheap. There is an extraordinarily flat curve and
then a very few at the top that are very, very
expensive. At the top, you have Roman Abramovich
and his friends living at the top. We do not worry
about him. At the bottom, you have people who are
renting either from friends, from family, some tied
accommodation or just really awful House in Multiple
Occupation (HMO)-type properties. That is the vast
majority of the bottom. In the middle, there is a very
flat curve because the private rented sector, unlike
house prices, is very supply-and-demand driven. It is
very, very sensitive to price signals.
Actually, if you look at the flat signal and put a point
in of 80% of the median market rent, in every
bedroom size in London and every benefit area in
London, that falls within the lowest 10% in absolute
price terms of what prices would be. So 80% of
median market rents is in the bottom 10%, the bottom
decile, of actual rents that are charged. The only way
you could find a home at that rent level, in any area in
London, is to go to the really poor-quality affordable
homes. This way they are going to get a decent quality
home with a decent landlord. It is actually a
reasonably affordable rent, looking at private rents.
That was actually quite striking when I saw those
figures. It is more affordable than people might think.
Q148 Mark Pawsey: And the impact of the changes
to the housing benefit system in terms of security and
income as far as housing associations are concerned.
Alan Benson: In terms of the interaction with
affordable rent and the housing associations, we have
been very careful with the programme in London. We
have had a lot of negotiations and discussions with
the registered partners; we were very clear what we
wanted. It is that all the rents in the affordable rent
programme in London should work within the
Government’s existing caps that are coming in for
local housing allowance and the proposed caps on the
universal welfare cap. All the rents being charged in
London will be below LHA level, so they would not
have been impacted by those caps anyway, for all
sizes of properties.
We wanted to make sure that all sizes of properties
would still be affordable to tenants under the future
caps that are being charged. This has meant they have
had to suppress the rents down for the larger family
homes, which would have been the ones that were
most impacted by the universal cap. The programme
we have had in London has an average affordable rent
of 65% of market rents, but quite a lot of the one
and two-beds are towards the 80%, and most of the
three-bed-plus home sizes, the larger family homes,
are right down at the bottom level, very close to target
rents for social rented levels.
Q149 Mark Pawsey: One last question for Mr Smee:
do you see that housing associations will be able to
raise funds on the bond markets in future?
Paul Smee: Indeed, I do, because I think the bond
markets are already providing quite a significant
proportion of their income. Some 37% of their capital
needs were raised, compared to 5% some time ago. It
is there. I cannot say on what terms the bond markets
will be open and I suspect that they will be looking
for security of income as well, and that the changes
to the rent systems proposed in the Welfare Reform
Bill will cause some uncertainty until the pilot
schemes are worked through and those impacts are
understood.
Q150 Mark Pawsey: Do you see that as a new sort
of finance that could potentially deliver new homes?
Paul Smee: I am sure that it is a source of finance. I
think the terms on which it is made available is
Communities and Local Government Committee: Evidence Ev 31
28 November 2011 Nick Jopling, Paul Smee and Alan Benson
something that I cannot speculate on at the moment,
because that, of course, will depend on the level of
demand.
Q151 Chair: A couple of points: on REITs, do we
expect the Government’s proposals, when they come,
to actually get them working in a way that we have
not seen any evidence of so far?
Paul Smee: Possibly.
Nick Jopling: I think what you are referring to
specifically are residential REITs or REITs for
residential. Again, the Government’s intention or
indicated intention, listening and consulting around
the residential REIT agenda, alongside the changes
they have made to SDLT and to the stamp duty on the
entry, particularly on these larger scales, could both
only be described as positive interventions, as it were,
to getting institutional money into this market. We
hope on 6 December, which I think is the date that
there will be an announcement about that, that some
of the consulting has been listened to and then we
may find ourselves being able to get some REITs. I
go back to the point: there are not, in the private
sector, large tranches of investment-grade stock out
there. The mom-and-pop business dominates that
market.
Q152 Chair: I would be interested to have a note
about your thoughts about the Government’s
proposals when they actually are announced.1 I
think that would be helpful. Finally just one point: the
private rented sector has more people moving into it
who probably want some security. Investors look for
long-term returns. Why do we not see longer-term
tenancies offered and taken up, or should we be
looking to have a variety of tenancies?
Nick Jopling: That is a very relevant question. The
answer I have often given to that question is: why
would a landlord give a longer tenancy to a tenant if
they were asking for a discount to have that tenancy
agreement? That is what has traditionally been the
case. They say, “If we take it for three years, what
will you knock off—20%?” Once you get into a point
that there is no discount applying or there might even
be a premium, and somebody says, “Actually I am
prepared to pay a little bit more or agree to what the
uplifts will be over a period of time,” then I think
that a longer-term tenancy is something that landlords
would welcome actually. I do not think there is any
resistance. It is a personal view as to why we do not
see so many. There is nothing to stop landlords giving
longer tenancies now and, indeed, some people do
give them.
Chair: Thank you all very much indeed for giving
evidence to us.
1
See Evs 121, 123
Ev 32 Communities and Local Government Committee: Evidence
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 selffinancing 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
Communities and Local Government Committee: Evidence Ev 33
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
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
Ev 34 Communities and Local Government Committee: Evidence
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
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 this
would be similar to the housing subsidy account
which is what is being replaced—the danger with that,
from our perspective, is that it would all be skewwhiffed 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 and 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.
Communities and Local Government Committee: Evidence Ev 35
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
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—
Heather Wheeler: 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. In my area we 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 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
Ev 36 Communities and Local Government Committee: Evidence
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
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 and this is not
sustainable long term.
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
Communities and Local Government Committee: Evidence Ev 37
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
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 from
paying the rent directly to tenants 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, I usually find that when
grabbing them by the nuts, their hearts and minds
follow—[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
Ev 38 Communities and Local Government Committee: Evidence
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
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.
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.
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.
Q189 Heidi Alexander: Can you tell us who the
investors are in the scheme?
Councillor Andrews: Yes. It is the GM pension fund.
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
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.1
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.
1
See Ev 131
Communities and Local Government Committee: Evidence Ev 39
19 December 2011 Councillor Paul Andrews, Mayor Sir Steve Bullock, David Edwards and Chloe Fletcher
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.
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.
Q196 George Hollingbery: Councillor Andrews?
Councillor Andrews: Maybe. It does not put us off
building new homes.
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.
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
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 the HCA and CLG, so we
are very optimistic at this stage, but we do need
Treasury to engage in those discussions.
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, ringfenced, 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.
Ev 40 Communities and Local Government Committee: Evidence
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 principal 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 breaks 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
Communities and Local Government Committee: Evidence Ev 41
19 December 2011 Mark Butterworth and Nigel Terrington
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 value, 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
rate to London Interbank Offered Rate (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% in total including base rate of 4% before, you are
probably paying 5% on the top of 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-tolet 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 Self Invested
Personal Pensions (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
Ev 42 Communities and Local Government Committee: Evidence
19 December 2011 Mark Butterworth and Nigel Terrington
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 currently no tax take;
that money is largely sat there. If it were for a timelimited 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 cost, 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 increase in 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.
Communities and Local Government Committee: Evidence Ev 43
19 December 2011 Mark Butterworth and Nigel Terrington
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 landlords 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
Ev 44 Communities and Local Government Committee: Evidence
19 December 2011 Mark Butterworth and Nigel Terrington
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 money, 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 scope 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
Communities and Local Government Committee: Evidence Ev 45
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
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—nearmarket 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.
Ev 46 Communities and Local Government Committee: Evidence
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
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 bluechip 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 no increase in vacant
properties. Nevertheless, that is likely to have an
increase on spreads. So the net position is, it 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,
Communities and Local Government Committee: Evidence Ev 47
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
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 underleveraged 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?
Ev 48 Communities and Local Government Committee: Evidence
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
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 notfor-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 largescale 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 associations 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 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
Communities and Local Government Committee: Evidence Ev 49
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
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
Ev 50 Communities and Local Government Committee: Evidence
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
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 longterm 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,2 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.
2
On the 10 February 2012, Mr Binks wrote: I met with Chris
Jackson who is Head of Housing Policy at HM Treasury on
10 January to outline our proposals. I am in the process of
arranging a meeting between The Tenant Services Authority
(TSA), the Homes and Communities Agency (HCA) and
Chris at HM Treasury so that we can facilitate a round table
discussion between all the parties who may have an interest
in the development of a REIT. I expect this meeting to take
place in March which will coincide with the publication of
the Finance Bill. We anticipate that the Finance bill will
contain the amendments to legislation which will facilitate a
Social Housing REIT.
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?
Communities and Local Government Committee: Evidence Ev 51
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
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-forlike, 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 highervalue 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.
Ev 52 Communities and Local Government Committee: Evidence
19 December 2011 David Orr, Mark Henderson, Steve Binks and Waqar Ahmed
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.
Communities and Local Government Committee: Evidence Ev 53
Monday 30 January 2012
Members present:
Mr Clive Betts (Chair)
Bob Blackman
Simon Danczuk
Bill Esterson
Stephen Gilbert
David Heyes
George Hollingbery
James Morris
Mark Pawsey
Heather Wheeler
________________
Examination of Witnesses
Witnesses: Sean Oldfield, Chief Executive, Castle Trust, Graeme Moran, Managing Director (Portfolio &
Acquisitions), Assettrust, David Toplas, Chief Executive, Mill Group, and Peter Mahoney, Chief Executive
Officer, R55 Group, gave evidence.
Q275 Chair: Good afternoon. Welcome to the fourth
and final session of our inquiry into the financing of
new housing supply. Could I just begin by apologising
for the fact we are a little bit sparse of Members of
the Committee? There are other things happening in
the House at which the Whips require attendance, and
some of our colleagues have had to leave. They may
or may not return at some point, depending on how
well behaved they have been in the meantime. For the
sake of our records, could you just say who you are
and the organisation you represent?
Sean Oldfield: Sean Oldfield, Chief Executive,
Castle Trust.1
Graeme Moran: Graeme Moran, Managing Director,
Assettrust.
David Toplas: David Toplas, Chief Executive and
shareholder of Mill Group.
Peter Mahoney: Peter Mahoney, Chief Executive,
R55 Group.
Q276 Chair: We are obviously trying to identify new
sources of funding for improving the housing situation
in this country and new ways of delivering housing in
a variety of forms. We have, and have had over the
years, many ideas about how this can be achieved,
and probably far fewer successes. The models that you
are proposing are different from each other in many
respects. Why do you think your particular model is
likely to work and why is it not working now?
Sean Oldfield: Our research on thousands of
households indicates that 50% of those people looking
to buy a home would like to use the Castle Trust
product, a partnership mortgage. We think that is a
very large target market because, when you exclude
the people that we would not lend to, it ends up being
about 1 million households that would like to use our
product. 1 million households in the scheme of the
UK mortgage market is a very large market; it is about
9% of the UK mortgage market. That is the sheer level
of customer demand; they are trying to bridge the
stark divide between renting and home ownership
with a mortgage. I think some of the solutions here
today are very much here to bridge that stark divide.
I will leave it to you.
1
Castle Trust is not yet open for business and has applied for
but not yet received authorisation by the FSA to undertake
regulated investment activities.
Graeme Moran: We have two products. The first one
is a shared ownership version of right to buy, which
is aimed at helping social rented tenants get on and
meet their home ownership aspirations and purchase
their existing social rented home. The reason we think
that has potential is there are circa 4 million social
rented households; of those, there are about 920,000
households who could afford to buy a share of their
home with a discount as proposed under our scheme.
If we were to see a 4% conversion rate of those
920,000, you could potentially release £3.2 billion to
£3.5 billion of historic, locked-up grant and other
capital out of the existing social housing sector to
invest in new supply.
In terms of the number of stakeholders who are
antithetical towards right to buy, we think our product
is saying, “We are helping people meet their home
ownership aspiration, but we are not losing social
housing stock; we are actually adding to it.” There is a
one-for-one and a like-for-like replacement of a social
rented tenancy. We think that certainly meets any
gripes that someone like the Defend Council Housing
lobby might have against it. In terms of the practical
application for the customer, we think there is real
potential there because we actually have a mortgage
in place that can go up to 100% loan to value to
support a customer on a low or moderate income to
achieve that purchase. That is why we think it is
realistic and realisable.
We have some traction; we have a number of partners
on board that are already beginning to explore our
product and rolling it out and piloting it. One of the
barriers that we have had today is that many people
who are providers within the social housing sector
have probably been quite overwhelmed with the large
series of changes to the social housing market and the
consequences of welfare reform. Therefore, they just
have not had the time and capacity to pay attention to
new forms of interesting finance, although we have
seen that change over the last few months.
David Toplas: Perhaps slightly briefer: co-investment
is seeking to bring long-term investment money to
people so that they can buy homes through
co-investment in the mainstream housing market. We
think that this new model will be able to generate
anything up to £30 billion over the next five years,
supported by mainstream, large institutions. It will
provide a critical difference to homeowners, house
Ev 54 Communities and Local Government Committee: Evidence
30 January 2012 Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney
builders and the Government, whilst creating a new
investment asset class within residential. The principal
issue in terms of its future is that it needs to actually
start, so we are seeking a focus on support for
innovation and for piloting.
Peter Mahoney: Our model is effectively in two parts.
It is a funding solution and also a modular housing
solution. The funding solution is very much a
lease-backed funding solution where it is directly
targeting housing associations and local authorities
who are providing modular housing that is responding
to local housing needs, but it also comes fully funded.
Effectively, the housing association or local authority
would provide us with land. We would work with
them, understanding their housing needs and the needs
of the Housing Department, and together a solution is
developed. Then, depending on whether it is a low
cost, for a low-income area and rents are challenged,
effectively the lease then extends or shortens
according to that.
A longer lease will allow a lower income to spread
the costs a lot further and therefore allow the same
quality to be achieved, rather than it being a low cost
area and therefore a lower cost solution. It is
effectively bringing a housing product together with a
funding package. In terms of how that is funded, it is
not debt funded, it is not reliant upon social housing
grant; it is purely funded by pension funds and life
insurance funds that are looking for long-term, stable,
low-risk solutions. Social housing and Governmentbacked housing benefit support and so on are ideally
matched to that.
Q277 Chair: Just before I pass it on, I have just a
last point. Is this money in place? Have you actually
raised money for other schemes before as an
organisation or are you really starting off at first base
on this?
Peter Mahoney: In this space, we have not raised
funds. The reason we have not is there is an
abundance of funds out there in pension funds
allocated. Aviva, for example, did the Derwent deal.
They have £240 billion of funds under management,
£8.5 billion of their own, which they are looking to
allocate to this sector. That is a similar kind of
lease-based structure, so we will work with them on
the development side. In terms of whether we have
raised funds before, we have not raised funds as such;
we have historically targeted urban regeneration
companies such as in Derby, Leicester and Stoke.
There we have used funds from private banks, so it
was straightforward development funding. Generally
in higher risk areas we would de-risk it, and then
prepare it more for the traditional debt funding to
come in afterwards.
Q278 Bill Esterson: I understood what you said,
Peter, and I understood what was written about your
organisation. I am afraid I cannot say the same about
the other three organisations, and that is a concern for
me. I heard terms like “interesting finance” models
and “innovation”. There is not necessarily anything
wrong in those, but we are just coming through a
financial crisis, where the increasing risk in complex
financial products was one of the big causes of
concern and possibly even the cause itself. Why
should these products be a success when they are
untested at the moment?
Sean Oldfield: Being long-established does not
necessarily mean something is the best solution, and I
think the financial crisis in fact points towards that
being the case. What three of us here are offering, I
believe, is something that provides customers with a
real choice in the spectrum between renting and
ownership with a mortgage. Ownership with a
mortgage is a very risky thing to do; most people do
not appreciate that the risk attached to an individual
house is a similar financial risk to that of the FTSE
100 index. When you then go and take a large
mortgage against that, you are taking out a very large
amount of financial risk on your own home. Being
able to de-risk your own home is a very important
way in which to manage your financial future.
Certainly, the partnership mortgage is a very simple
product, and I would be very happy to explain it to
you because it does not take very long at all.
Q279 Bill Esterson: Before you carry on, I suppose
the point is that there are shared ownership products—
if you want to use the word “products”—that have
been around a long time, so it is not a new
development. I think the idea is that the Government
would stand behind these products. Is that right?
Sean Oldfield: Not the case, no.
Q280 Bill Esterson: So Government support is not
needed for these?
Graeme Moran: Certainly, our intention is we are
going to be applying a standard shared ownership
lease, which has been approved and regulated for
many years, and that is what we will be offering to
the customer to buy into. I think the track record of
shared ownership, certainly on repossession rates and
default rates, compares very favourably with ordinary
sales on the open market to first-time buyers. What
we are offering the customer is to buy in through a
very rigorous eligibility and assessment process,
almost identical to what happens in the regulated
sector, which is driving default rates of no more than
0.38% and, probably, people in mortgage arrears for
more than three months of 0.49% or 0.42%, which
is very good performance compared with traditional
well-organised mortgages. We are not in any way
trying to serve a sub-prime sector. There will be very
rigorous tenant eligibility and assessment criteria.
We do expect on our product that goes out that there
would be a 25% discount offered outside of the equity
that is already within a property, so there is some level
of grant. What we are expecting that to do, though, is
turn the average value of a social rented property on
its existing use social housing value from £35,000 into
£85,000, which means you could do a one-for-one and
like-for-like replacement of social rented. Our view is
that we are helping someone responsibly to buy a
share of their home, so we are helping customers who
can afford to buy a property, thereby releasing value
that can be recycled to help people who are more
needy on waiting lists; we think that is an efficient use
of public-grant funding in the future with historic
grant.
Communities and Local Government Committee: Evidence Ev 55
30 January 2012 Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney
Q281 Bill Esterson: Before we come to David, I
think it was your organisation, Sean, in your
submission, that made the point about Government
support.
Sean Oldfield: Yes, Castle Trust requires no taxpayer
support.
Q282 Bill Esterson: You said you believe the
Government should make clear its strong support.
Sean Oldfield: For private sector solutions in the
shared equity, shared ownership space. Such support,
not the financial support, does provide a very real
impetus to the ongoing growth of such solutions.
Bill Esterson: David.
David Toplas: Co-investment is in fact a very simple
joint purchase arrangement between a rich institution
that has money and just seeks an income flow, and an
individual who wants to own a home and has a modest
amount of cash. Therefore, buying a property together
makes a lot of sense without any other mortgages or
anything of that sort being involved. That is the
essence of our arrangement. We have done a
considerable amount of market research and
demonstrated from that that consumers get it; they can
see how it will work very well for them to facilitate
their move away from the rented sector, its
uncertainties and inability to personalise your home,
towards a long-term arrangement in co-investment or,
indeed, if they wished, to go and purchase out in due
course.
You asked about Government support, and we do not
see that this model requires Government support in
the long-term sense. What we are saying is that
innovation, particularly at these times, is a tough thing
to achieve, and that Government has been asking for
innovation to come out to the housing market and for
new models to come forward, yet has done precious
little, if not anything, to actually encourage those to
flourish and be seen through the critical pilot stage.
Ultimately, each of our businesses here is constrained
by an inability to demonstrate that they have actually
got off the ground. That is a role we see as quite
important for Government to focus on: the market
initiation and marketing support for innovation to
come forward, in much the same way that
Government has chosen to support mortgage lenders
to encourage them to lend at higher loan to values
through the new build indemnity scheme. Why does
Government not come forward and help to encourage
investors to come forward, perhaps just for the first
pilots, and then let those models come forward, be
assessed, and demonstrate their track record and so on
through that?
Bill Esterson: Do you have anything to add?
Peter Mahoney: No. No comment.
Q283 Stephen Gilbert: Coming back to that then, do
you see that support that the Government could offer,
as declaratory support, as a statement? In your
evidence, you said, “If cash is not available, the state
can have a significant influence in gaining traction for
new models by declaring publicly that it can see merit
in the concept.” I know the Housing Minister is very
powerful, but do you think a statement from him
would be sufficient to see more people come to these
new models?
David Toplas: Absolutely. I think you underestimate
the power of the politicians’ statements. We would
welcome support for this whole area of co-investment,
whether coming through shared ownership or shared
equity models, in preference perhaps to suggesting
people should go on to buying houseboats.
Q284 Stephen Gilbert: Can I ask about individuals’
risk profiles when they use your products? Obviously,
we have heard a lot over recent months and years
about indebtedness. Using your product, what is the
typical exposure against their home in terms of the
percentage that they will be taking up? What is the
range that your products work from?
David Toplas: We see co-investment working in any
balance between 0% and 100%, but typically starting
off with a consumer putting perhaps 5% down and the
institution funding the balance of that, again without
mortgages. Of course, that has the fundamental benefit
that we have two investments being made in one
property and, therefore, the consumer is not at risk of
negative equity. He is not responsible for the financial
investment and a minimum sum, as he would be in a
mortgage situation. Therefore, if property prices do
fall, as could easily happen over the next few years,
they will lose a little bit of money on the money they
put in, just as the institution will lose the same
percentage.
Graeme Moran: We would be anticipating most
customers to be spending no more than 32% of their
gross income on housing costs. The product is
appraised, pre-marketed and sold very much in line
with the affordability criteria assessment currently set
by DCLG, and implemented and overseen by the
Homes and Communities Agency and Tenant Services
Authority. We think it is a very responsible product in
that sense. The other main protection to really
reinforce is that there is an assessment done by the
registered provider, there is an assessment done by us
and by the mortgage lender and, what is more,
post-sale that customer remains managed and looked
after by a registered provider. In many ways we would
argue that the asset is being sweated, turned over and
worked for best efficiency, but the customer is not
being sweated.
Sean Oldfield: A customer with a partnership
mortgage needs a 20% deposit or more and that,
combined with our shared equity, means that their risk
of arrears or repossessions is reduced by about a third;
their risk of negative equity is reduced by one-half;
and, obviously, it reduces the risk to rising interest
rates by at least one quarter as well. The risk of
negative equity, arrears and repossessions is
something that I think is particularly appreciated by
people here today who live outside London.
Peter Mahoney: Our model does not really deal
directly with individual homeowners. It is very much
funding for housing associations or local authorities
in terms of bringing sites forward.
Q285 Stephen Gilbert: Can I just ask then what the
catch is? What is the risk in your products? You are
bringing in other co-investment partners or institutions
Ev 56 Communities and Local Government Committee: Evidence
30 January 2012 Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney
and sharing the risk; you are minimising the
individual’s potential of default. There must be risk in
the system somewhere, so where does it lie in each of
the models?
Graeme Moran: I think the key risk under our model
is where we are quite often asking a tenant to give up
a lifetime tenancy and move into home ownership.
That is the risk. You have to apply very responsible
controls over that decision to buy, because people are
giving up a huge amount of security in a lifetime
tenancy, but we think we have managed that risk. The
other risk probably for us in terms of how this product
develops is probably for some of the social housing
providers, because if it can release a sufficient amount
of capital, the risk for them is they may be pushed to
only being able to reinvest that in new supply and in
line with the new affordable rent model. This does
pose some different and perhaps increasing risk for
associations, and, from our point of view, some of the
feedback we have had from the registered provider
partners we are working with is that they would like
a bit more flexibility over what they can reinvest any
assets that they manage into. This may include empty
homes, regeneration schemes and some open market
shared ownership schemes, which involve less sales
risk.
Sean Oldfield: David Miles in his speech in Yorkshire
last November talked about the benefits to households
and society more generally of having households issue
equity in essence to external parties. When a company
issues equity, it becomes less risky; when a company
issues debt, it becomes more risky, and if you think
about a household, today it can only issue debt. There
is a significant risk reduction in the system by issuing
more equity and, of course, if you consider the options
against whether you issue debt or equity as a
household, if your house performs very well or the
company performs very well, equity is more
expensive. I think that is the very simple position after
you have gone and issued equity in your own home.
David Toplas: For those seeking a home to live in
on a long-term basis rather than a short-term rental
arrangement, we have already talked about the lack of
negative equity, which is a very large difference.
Equally, the cost of actual occupation we see very
much falling between rental and servicing mortgage
products—at, say, a 90% level—so it is
market-driven, and it would obviously change over
time to reflect that. Enabling a consumer to plug into
an arrangement over a long term actually protects
them from arbitrary price rises—as landlords can
impose as their tenancy is coming to an end—or,
indeed, the uncertainties of interest rate rises, which
must be coming down the line to us some time.
Therefore, diving into the desire from institutions for
long-term RPI-linked income flows would provide
that solution.
There are other facets of risk, obviously, to which
Graeme has alluded. You can get into a home
ownership situation. There our co-investment model
actually provides another exit route of simply selling
out to us, the investors—we represent the investors—
as a very easy way of actually enabling somebody to
move on to a different property as suits their needs,
purchasing in the normal way with a mortgage and so
on, whilst actually taking away their share of the
capital gain, as we all hope it will be. There are a
number of benefits coming forward into a package
that makes a new proposition.
Graeme Moran: I think it is worth arguing that the
affordable home ownership market seems to be
developing quite strongly, not just as an initial sale
but onward selling. You are buying into a product that
does have a marketable resale value and opportunity
because there is so much demand, because no one can
get into the outright market.
Q286 Bill Esterson: I just wonder if there is a
balance here between how people treat their home:
whether they treat it as somewhere to live, as a home,
or an asset to be traded and for money to be made out
of it. I wonder what your views are on that analysis.
Sean Oldfield: When you just take on external debt
you are actually treating it much more like an
investment, because you are leveraged up and you are
hoping very strongly that it rises. If it goes down just
a little bit, your equity gets reduced by the leverage
effect of having a mortgage. Having an equity
buffer—be it shared equity, shared ownership,
co-tenancy or co-investment—is a way to reduce your
financial risk on your own home and reduce the
investment part of the decision that you make when
you buy a home. There is a place to live and there is
an investment, and those two decisions are bundled
together right now. We are helping people to have less
exposure to their own home.
Graeme Moran: We do not necessarily anticipate or
see any change in behaviour or attitudes towards the
management of an asset of an existing tenant who has
a lifetime tenancy and is converting into home
ownership. We have had some anecdotal feedback that
some people might prefer to get into home ownership
now because, although there are attendant risks, there
seems to be an increasing risk that lifetime tenancies
may not be lifetime tenancies forever. So, maybe
purchasing into a home ownership gives people the
guarantee of security that they have always
traditionally associated with social rented tenancy.
David Toplas: It is a very interesting question you
raise, and the essence of the answer is that people
buy and seek homes; they do not, day one, seek an
investment in the property they happen to live in. If it
happens that it goes up in value, that is great and
nobody complains, but that is not the driver for the
purchase. They are looking for the ability to
personalise, to create their own space and to put down
their own roots in a community, each of which
co-investment is focused on and typically are things
that the private rented sector, whether in large-scale
build to rent or the ordinary buy-to-let investor
product, does not give people. That is one of the main
reasons why the CML studies continue to underline a
high level of desirability in the public to actually own
their own property.
Peter Mahoney: Our model really concerns the social
rented side, so we are not really concerned with
shared ownership or shared equity, but in terms of
what David says about opening up the market and
giving people that choice, they are perfectly valid
products. But as I say, our main focus is really on the
Communities and Local Government Committee: Evidence Ev 57
30 January 2012 Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney
funding of housing associations and local authorities
in bringing land forward.
Q287 Bill Esterson: The other question is: how
would you all do this on a larger scale?
Sean Oldfield: We are planning to do this on a
relatively large scale; we have our investment secured
already, and when we launch we will be operating
with large commercial partners on the distribution of
both the investment products and the mortgage.
Graeme Moran: I have probably already discussed
the potential scalability of our scheme, so I do not
think we are lacking in any ambition in that. I do
not think we have necessarily overstated the potential.
Clearly, we see there would be a slow move to the
number of customers who would want to buy their
own home, and that will take a period of marketing,
but we think it could scale up to substantial scales
and, as I say, a minimum probably of £3.5 billion
released from the sector. That is obviously helping the
customer, but more importantly the second benefit of
our scheme is to release money to engineer new
supply.
David Toplas: We see the potential for co-investment
rather larger than the sort of figures that have just been
mentioned, in the sense that institutions currently
invest a reasonable amount of money in the
commercial property market. About £315 billion is
invested in UK commercial property and only about
£4 billion in residential today, despite the fact that the
residential market in the UK is about eight times the
size of the commercial property market. Just from that
simple analysis, if institutions could find a way to
invest and to actually get the attractive income flows
that are available from the residential market, we are
strongly convinced, and have had some discussions
endorsed by investors, that that potential of about
£30 billion over five years is realistic.
To access it, it has to start with a successful pilot that
demonstrates that it works. We know there are
consumers out there; we estimate that anything from
40,000 to 80,000 people per annum would be there;
that is £10 billion to £20 billion per annum in terms
of consumer demand. We think that investors will take
some time to get up to that sort of scale. We do not
think that house building in properties is a constraint
on our model; we are talking perhaps 25,000 units per
annum. That is within the capacity of the
homebuilders to build, particularly as for every one
they build to sell through co-investment, they can
build another one for open market sale. Clearly,
co-investment is also driven into the existing property
market, existing-built properties, as consumers make
their choices as to the sorts of properties they wish to
live in. So, on each scale we think that is fine. In terms
of deliverability of the proposition, we see this as a
generic model that would adopted by others to offer
large-scale activity. Each major institution may have
their own co-investment offering in due course.
Peter Mahoney: Our model is rapidly scalable and it
does not really require just our organisation to do it.
It is a traditional property lease that has been
amended; it responds to the TSA and what you can
do from a regulatory point of view; it brings together
housing associations with the pension funds. Just as
an example of the appetite for pension funds for this
route, the Moat housing association bond that was
issued some months back was 185% oversubscribed
by investors, so there is a clear appetite for this kind
of Government-backed housing association social
housing income. On the housing association side, we
just simply need a supply of land; bring the two
together and it is pure, straightforward development
funding like any other development funding.
Q288 Chair: Do you have any reassurance that, if
you were to give the local authority a deal of this kind,
it would not count as Government borrowing?
Peter Mahoney: It is a lease, so with respect to a
housing association it is generally off-balance-sheet
funding and it is not really affecting current loan
gearing ratios or anything like that. It is purely the
local authority entering into a lease, like they would
any other, so it is not technically borrowing. They are
effectively entering into a landlord and tenant
relationship.
Chair: Okay. Thank you very much indeed for
coming to give evidence to us this afternoon and for
the written evidence you have provided. That is really
helpful to our deliberations.
Examination of Witnesses
Witnesses: Pat Ritchie, Chief Executive, and Richard Hill, Deputy Chief Executive, Homes and Communities
Agency (HCA), gave evidence.
Q289 Chair: Good afternoon, and welcome, both of
you, to our evidence session on the financing of new
housing supply. Thank you for the evidence you have
provided to us in writing. Just for the sake of our
records, could you indicate who you are and the
organisation that you represent?
Pat Ritchie: I am Pat Ritchie; I am Chief Executive
of the HCA.
Richard Hill: I am Richard Hill; I am Deputy Chief
Executive of the HCA.
Q290 Chair: Thank you very much indeed for
coming. Clearly, your mission in life is to deliver the
Affordable Homes Programme, the 150,000 homes, as
it was. I think you have now just been volunteered,
from the Minister’s statements, into providing
170,000. Are you absolutely certain that is
deliverable? Are you having any problems or do you
anticipate any problems?
Pat Ritchie: We are on track to do our contribution to
the 170,000 homes that will be delivered across the
Spending Review period. The contribution we will
make will be through the Affordable Homes
Programme and through our property and regeneration
budget, and one or two other bits of investment, but
the bulk of the work will be through the Affordable
Ev 58 Communities and Local Government Committee: Evidence
30 January 2012 Pat Ritchie and Richard Hill
Homes Programme. We are confident that we have
been able to agree a robust set of contracts with
providers; we have 103 providers now in contract and
we have committed, through those contracts, £1.6
billion of the £1.8 billion investment through the
Affordable Homes Programme. We have yet to sign
up local authorities, but that will be next year, once
the housing revenue changes are in play. We are on
track, as we expected to be, to deliver on 35,000
completions this year, and starts are on track in the
new programme.
Q291 Chair: There have been a number of issues
raised by various organisations, not least local
authorities, regarding their concerns about some of the
problems that might arise. I understand that some
London boroughs, such as Hackney and Newham,
have been arguing very strongly that at least a
proportion of the properties should be at social rent
levels, and that the affordable rents are just so high
that they would exclude many people from being able
to live in those properties. How are you going to deal
with that particular issue?
Pat Ritchie: In London, as with other parts of the
country, we have been working through to sign up
associations on the contracted arrangements that I
described. Within London we have looked at
cross-subsidy from different parts of the programme
to support rent levels that reflect the market across the
city. We have also looked at working with associations
to deliver a range of size of homes within London that
reflects the housing need within the city.
Richard Hill: If you look at the rent levels in London
that we have agreed in the contracts we have signed,
they are about 60% of market rent. If you look in
other regions, we get closer to the up-to-80% level
that we had the flexibility to use. The reason for that
is straightforwardly to make sure that we were able to
provide homes, particularly three-bedroom homes in
London, that were affordable under the regime and
did not hit any of the benefit cap restrictions that
currently operate.
Q292 Chair: Have you resolved your differences
with Hackney and Newham?
Pat Ritchie: We have contracts across most London
boroughs. Some London boroughs have decided that
they do not want to participate in the model, but my
understanding is there will be investment going into
Hackney and Newham through the contracts in
London.
Q293 Chair: So the answer is no.
Pat Ritchie: No, we have resolved those issues
through the contracted arrangements with providers.
Q294 Chair: So you bypassed the local authorities?
Pat Ritchie: The boroughs have been involved in the
discussions on the contracts in London, and there has
been consultation with each of the London boroughs
to help prioritise those projects that are included in
the four-year contracts that we have signed up through
the Programme.
Q295 Chair: I take it that you have signed up
registered providers but the boroughs are probably not
completely on board in some cases. I just want to go
on to the other parts of the country before I ask
colleagues to come in. There are parts of the country
where the market rents are basically no different from
social rents and, therefore, building properties and
letting them at market rents does not bring any more
money in. How do you make the Programme work in
those areas?
Pat Ritchie: The Programme has a good spread across
all parts of the country, so the investment is spread
across each different local authority area. In some
parts of the country where rents are lower,
associations have worked closely with local
authorities, for example, to put land into contracts and
into projects in order to make sure that the overall
contracts stack up. We have seen that across some of
those areas where rents are lower and where the
market is more challenged; there has been a greater
degree of innovation and working locally to bring
forward contracts. Build costs are also lower in some
parts of the country, and that has been reflected in the
way that the contracts have panned out across the
whole of England.
Richard Hill: If you look at the proportion of the
Programme in London, the old Programme was 27%
and the new Programme is 27% of build in London.
Also, if you look at the other regions, the percentages
now are not that different from what we were doing
in the 2008–11 Programme. What you have not seen
is a shift from low-value areas to high-value areas, for
exactly the reason Pat described in terms of people
being willing to put land and other forms of financing
in to make sure that they can keep developing.
Q296 Simon Danczuk: To what extent will the
community infrastructure levy impact upon the
delivery of housing through planning obligations, do
you think?
Richard Hill: Section 106 has been a big driver of
affordable housing over the last few years. I think in
2010–11 about 29,000 homes were delivered through
section 106. Clearly, any changes in the section 106
regime have a potential to impact on delivery of
affordable housing. The core question is the impact
on viabilities, and clearly what has happened as the
market has changed over the last three to four years
is the number of affordable homes generated through
section 106 arrangements generally has moved up and
down, so there is a potential impact. We have been
doing a couple of things: we have been working
nationally with HBF and NHBC and the Local
Government Association to try to agree a framework
looking at viability, both at a plan level and at a site
level, to try to help people understand the context of
that. Our local teams work with individual local
authorities’ teams to make sure we can deliver viable
schemes on section 106 sites and that they deliver an
affordable housing contribution.
Q297 Simon Danczuk: Have you done any
modelling in terms of the impact of the changes to
section 106 and the introduction of the levy? What
reduction do you think will occur?
Communities and Local Government Committee: Evidence Ev 59
30 January 2012 Pat Ritchie and Richard Hill
Richard Hill: It is very difficult to say; it does depend
on market movements. In the numbers Pat talked
about at the start, towards the 170,000, we have
looked at the risk that there is associated with section
106 delivery on the new Programme, and there are
some section 106 delivered units in that new
Programme, but we think they are at a level where that
risk can be mitigated if levels fluctuate up and down.
Q298 Simon Danczuk: Have you made any
predictions in terms of the impact?
Richard Hill: No, I think it is very difficult to predict,
but we have looked at mitigating the risk where we
can on section 106 delivery as part of the new
Programme.
Q299 Simon Danczuk: Re-opening section 106
agreements was something that the Government said
should happen; why do you think that is?
Pat Ritchie: A number of section 106 agreements that
were negotiated before 2010 are now stalled—those
sites are stalled. We have been working with local
authorities to look at ways in which they can
renegotiate those sites to still deliver housing on the
ground but reflect the changes in the market. Our role
has been to support those negotiations and that
development at a local level through our enabling role,
and really to help the local authorities work through
to get a scheme that is viable and deliverable on the
ground in the current market.
Q300 Simon Danczuk: Just for my understanding,
these were negotiated when times were presumably
thought to be good in terms of the commitments of
section 106 money. Now the Government are saying
we should change that; why would you give that
advantage to developers? Why would you allow them
that? That is the market, isn’t it? If that is what they
agreed at the time, why be so helpful to them when
times are not so good? Is that not the risk they take?
Pat Ritchie: The alternative in a number of sites
across the country is that they are just not delivered,
because they cannot deliver some of the section 106
requirements within the current market and because
of the changes in the viability of each site.
Simon Danczuk: The profitability for the developer,
you mean?
Pat Ritchie: Yes—the viability, I think, of the way in
which this would stack up when sales may be slower
and prices may be lower than anticipated. Therefore,
we have looked at each individual scheme to try to
support local authorities who still want to bring
forward supply to look at the ways in which those
individual projects can be renegotiated to reflect the
market.
Q301 Simon Danczuk: But it is about ensuring the
developer makes a profit, is it?
Pat Ritchie: It is about ensuring that they continue to
invest in sites and that, at a local level, local
authorities are able to bring forward stalled sites.
Q302 Stephen Gilbert: Staying on section 106s,
banks do not really understand them, do they? What
kind of engagement do you have with the lending
community? There are cases in Cornwall of perfectly
brilliant homes being brought forward, but because
there is a section 106 on it, tying it to a local use, only
two or so lenders will be in the market to offer those
people funding. Is there a role for the Agency to be
out there working with lenders to try to explain some
of this?
Richard Hill: We talk to lenders quite a lot,
particularly on shared ownership and shared equity
because, clearly, one of the things that historically
lenders have been concerned about—and it probably
is an issue that came up in your last session—is the
complexity of lease arrangements and whether they
were willing to lend against shared ownership and
shared equity. We have been in the market for shared
ownership and shared equity for a long time, so I think
we do understand those issues.
The issue with section 106 is, if the local authority
insists on arrangements within the section 106 that the
lenders think are too bespoke and too restrictive in
terms of people who can access those properties, they
become reluctant to lend on that development because
they do not have what they see as a reasonable
fallback position. I am not saying that this is
something that is straightforward to resolve, but we
have done some work in Cornwall and other places.
We sat down with lenders and local authorities to try
to agree something that looks like a standard set of
terms that lenders can deal with and at the same time
speaks to some of those local issues. What is very
difficult to do is invent a new section 106 arrangement
each time and expect lenders to think it is
mortgageable on each and every occasion.
Q303 David Heyes: The Tenant Services Authority
ends in just a few weeks’ time, and their regulatory
function will be taken into the HCA. We have looked
at this previously and we understand that there are
protocols in place to protect the independence of that
role, but we still wonder, in the context we have been
talking about today, whether there are still some risks
in this. For example, is it appropriate that your
Director of Regulation will be reporting to you, given
the responsibilities that you have for investment in
delivery of the Affordable Homes Programme?
Pat Ritchie: I am the Accounting Officer for all of the
functions of the HCA and, when we take over
regulation in April, I will be Accounting Officer
responsible for regulation along with all of the other
functions of the Agency. The way in which we
manage regulation will be that any decisions about
regulation are not made by the HCA Board but by the
Regulation Committee. I will not be directly involved
in any of those individual decisions in relation to
regulation, but my role will be to make sure that
regulation is properly managed, properly resourced,
that any risks associated with regulation are managed,
and that regulation is properly governed from an
Accounting Officer point of view. We have done a lot
of work in identifying, through the protocol that you
mentioned, the role of the Accounting Officer, the role
of the Board and the role of the Regulation
Committee. I think that dual role of the Accounting
Officer is manageable within the system that we have
set up.
Ev 60 Communities and Local Government Committee: Evidence
30 January 2012 Pat Ritchie and Richard Hill
Q304 David Heyes: You mentioned getting the
resourcing right, and the scale of the regulatory
capacity is going to reduced compared with the
capacity of the TSA. Is that wise at a time when
housing association gearing ratios are going to
substantially increase?
Pat Ritchie: The capacity in regulation will be
focused on the redefined role of regulation, which is
really around economic regulation. The focus of the
HCA responsibility for regulation will be on making
sure that associations are governed properly, that there
is value for money in the way that they operate, and
that they are financially viable in order to ensure that
investors in the sector are able to invest in a properly
regulated sector. The focus will be on economic
regulation, with less of a role than the TSA had on
tenant regulation. That will be a backstop role and
only come into force where there is evidence of
serious detriment.
Q305 David Heyes: The question is whether it is
wise to reduce regulatory capacity at a time when the
housing associations are getting into new areas, doing
things in different ways and, potentially, risks are
greater.
Pat Ritchie: The areas of capacity that have been
protected in the changes that the TSA has gone
through are those that are focused on that new role of
economic regulation. The reductions in capacity
reflect the lesser role in things like tenant regulation
and some of the other broader roles that the TSA have.
I am confident that the team that transferred over, who
are geared towards that economic regulation role,
have sufficient resources to be able to support the
sector through the current economic climate.
Q306 Chair: On the affordable rent model that is
now at the heart of your Programme, quite a lot of
evidence is coming to us saying, “Okay, it might work
for a time, but eventually if it is reliant upon
converting more properties to affordable rent to
generate the income, at some point it runs out of
steam.” Have you started to give any thought as to
what might happen and what the driving policy might
be post-2015 to ensure that we are still building homes
to rent?
Pat Ritchie: In the affordable rent model, we only
funded a proportion of the bids that we had through
the bidding process. Whilst for some organisations the
affordable rent model pushes their gearing up quite
high and they may not be able to repeat the contracts
that they have now, there is evidence that, in some
parts of the sector, there still remains a fair amount of
capacity that could be used through a model similar
to affordable rent that has Government investment
alongside borrowing of the association in using its
assets. There is some capacity around that model
rolling forward.
In terms of giving some thought to the future models
of investment, we have been doing some work with
DCLG, whose real responsibility it is to look at the
future funding of housing supply, to look at different
ways in which you can look at blended finance—
whether or not you can have a mixture of using assets
and gearing alongside Government finance, which is
at the heart of the affordable rent model. We think
some of the ways in which associations have worked
with strategic partners to bring land and to align other
forms of investment, like Regional Growth Funds and
Growing Places infrastructure funding, to bring
forward investment are some of the ingredients of
what a future funding regime should look like.
Q307 Chair: We went to the Netherlands as a
Committee the other week and had a look at their
funding arrangements. They certainly manage to
build, on a per capita basis, quite a lot more social
housing or rented housing than we do. Have you
looked at the basically self-financing model that their
housing associations have, where there is no
Government subsidy at all? Do you see that as the sort
of arrangement that we might end up with in this
country?
Richard Hill: My understanding of the Dutch model
is not desperately full, but my understanding is that
the Government agreed at one point to write off grant
and effectively convert that to equity. My
understanding is that there have been occasions where
that has been revisited, partly because development
has not been as fast as the Government in the
Netherlands wanted. The issue in terms of doing that
is if you convert grant to equity, you potentially
loosen some of the gearing constraints that Pat was
talking about in reference to what you might get to in
2015. Clearly, there are some organisations for which
that would be an advantage, but gearing historically
has not been a constraint on the sector; it has been
cash to service debt that has been the key issue in
making this work.
If you were to convert grant to equity, there are
certainly three issues you would need to address. First,
the Government make a return on grant invested in
properties at the moment through the Recycled Capital
Grant Fund—about £250 million a year flows back to
the sector in terms of disposals. Secondly, investors
would look for a return on that equity, and if that
return was around 8%, you would have a financing
issue to resolve. Thirdly, and most importantly, there
is the issue of principle; you would be moving
organisations from not-for-profit status to potentially
for-profit status, which I do not think is allowed for
in the legislation at the moment. Regardless of that, I
think it is a big question politically. Moving from
grant to equity, I think does potentially relax the
constraint on gearing, but it does run you up into a
list of other quite fundamental questions that you
would need to address before you made that choice.
Q308 Chair: Are you beginning to have that
discussion and conversation about where we might
be?
Richard Hill: It is raised in conversation with us by
associations who have constraints on gearing on a
reasonably regular basis, and we have that
conversation with the Department as well.
Chair: We had better ask the Minister about that
when he gives evidence.
Q309 James Morris: Just on the subject of public
land, the Government have stated that they want to
Communities and Local Government Committee: Evidence Ev 61
30 January 2012 Pat Ritchie and Richard Hill
get as much public land released as possible for new
house building and are trying to take a
cross-departmental view in trying to get departments
to release it. I just wonder what your role is in terms
of trying to make that happen and the extent to which
you think central Government is being receptive to it
and, equally, local authorities.
Pat Ritchie: For the first time, last year, we published
our land disposal strategy for all HCA land, and we
intend to revisit and publish the next version of that
alongside the budget later on this year. We are leading
the way in a number of ways in how you might
structure land to bring forward housing supply. We
have been doing work with Government departments
to identify sites that they have and looking at ways in
which they may then package up or de-risk those sites.
Really, we are providing technical advice and viability
support on prioritising sites and on their disposal. We
have supported a number of different departments to
bring forward sites—for example, the MOD site in
Aldershot, where it has recently been agreed that
Grainger would bring forward investment there.
Q310 James Morris: When you say “support”, what
do you mean?
Pat Ritchie: We provide technical advice and we
provide support to tender. For example, developers
can use our Delivery Partner Panel, which has already
been procured, to bring forward investment in sites,
but we do not have direct responsibility for delivery
of those sites and bringing them to market. That rests
with each of the individual departments. Our role is
technical advice.
Q311 James Morris: Can you make suggestions to
departments?
Pat Ritchie: Yes.
Q312 James Morris: As in, “We think this is a site
which you ought to be considering for disposal.” Can
you be that proactive?
Pat Ritchie: Yes, we have been very proactive in
working with departments to look at their portfolio—
which projects they should bring forward, which are
viable, what sort of investment might be required—or
to bring forward land for development, alongside our
own. That is overseen by a Cabinet committee, and
each of the departmental leads for each of the sites
is responsible to that committee for progress on their
strategy, which each of the departments has published.
Q313 James Morris: Just on that, you also have a
custodianship role around the disposal of Regional
Development Agency assets. Does that open up any
possibility for additional public land for housing in
the assessment you have made of those assets under
your stewardship?
Pat Ritchie: Some of the sites in the former RDA
portfolio are mixed use and housing was already
planned for those sites, and we are working through
the stewardship model to bring those forward for
development. Some, however, have had investment
and are particularly geared for employment use, and
there would need to be a change of use. There are
issues around European investment and other issues
that would need to be taken into account in some of
those that are particularly geared for employment use.
Q314 James Morris: Generally speaking, do you
think Government departments and local authorities
are receptive to the message that we should be
releasing more public land for housing?
Pat Ritchie: Yes.
Q315 James Morris: Or is it patchy? Is it variable
across Government?
Pat Ritchie: I think local authorities, by and large,
are reasonably receptive; there may be some variation
across the country. Each of the major departments that
we have been working with is now publishing their
own land disposal strategy, and we are moving on to
work with some of the smaller departments like the
Home Office, Ministry of Justice, Crown Estates and
others to look at how they may bring forward land for
development for housing.
Q316 Simon Danczuk: Since the Private Rental
Sector Initiative—PRSI—was dropped, what steps has
the HCA taken to encourage large financial
institutions to invest in housing?
Richard Hill: In terms of the private rental sector
specifically, we have seen our role as to do three
things. Firstly, through the PRSI, we spent quite a lot
of time talking to large, institutional investors, such as
Aviva and Barclays Capital, and also developers like
Grainger about the barriers to entry into the private
rental sector. What that did do was encourage a
conversation with Government about some of the
barriers like SDLT on bulk purchases. I think you
have heard evidence from Grainger and others in the
course of this inquiry about where they now are on
investment in the PRS. Secondly, we made our own
equity investment in the private rental sector with
Berkeley Homes as part of the Kickstart programme.
That covers 13 sites across London and the South East
for about 500 units, and that was an example of how
you could get PRS investment to move and is clearly
an investment we will carry forward with the GLA
post-April.
The third role we have is to use public sector land
where possible to encourage a variety of outcomes,
one of which is build for PRS development. We have
a number of sites that will be in our land disposal in
March where we will specifically market to the PRS.
We have one currently out in the market at the
moment,
which
is
Spencer’s
Park
in
Hemel Hempstead. We will still be looking to achieve
value on that site, but we are saying we will be
prepared to defer the return for a longer period, take
some of the rental during that period, and look for
capital return further down the line. It does give you
value on a discounted cash flow basis, but it gives
people the opportunity for a PRS investment on public
land. Those are the three things that we are doing to
support PRS investment.
Q317 Simon Danczuk: Then, just briefly: David
Toplas said earlier that commercial property
investment was £315 billion and residential was
£4 billion. What is your estimate of the sort of private
Ev 62 Communities and Local Government Committee: Evidence
30 January 2012 Pat Ritchie and Richard Hill
financial institutional investment that we are going to
see over the next 12 months to two years?
Richard Hill: In the private rental sector? It is very
difficult to know. I think the main constraint, and Nick
Jopling of Grainger talked about this when he gave
evidence earlier in the Committee’s inquiry, is now
perhaps not yields, as it has been for a period of time,
but just the availability of property portfolios in which
people can buy into the market. That is unlikely to
shift.
Q318 Simon Danczuk: Are you doing anything to
stimulate or encourage that?
Richard Hill: We are around the use of land and other
things that I just talked about.
Richard Hill: If you are asking for a figure over the
next 12 months, I would be perhaps slightly less
ambitious than those numbers you quoted to me.
Pat Ritchie: Just to add a little bit to what Richard
said, we are working with a number of local
authorities, such as Manchester and Leeds. In fact, in
Manchester we have recently announced a fund using
the Greater Manchester Pension Fund to support the
development of private rented sector homes on both
city council land and our other land as part of a joint
deal. We have been having conversations with a
number of other cities, because I think this has to be
done at a reasonable critical mass to make it attractive
to investment.
Chair: Thank you both very much indeed for coming
to give evidence this afternoon.
Q319 Simon Danczuk: You are not making any
predictions or anything?
Examination of Witness
Witness: Rt Hon Grant Shapps MP, Minister for Housing and Local Government, Department for
Communities and Local Government, gave evidence.
Q320 Chair: Minister, you are most welcome, as
always, to our Committee. It is the final evidence
session of our inquiry into the financing of new
housing supply. The supply of sufficient homes in this
country has been a complete failure. Before you see
that as a personal attack on you and your period in the
job, I am talking about several decades; we simply
have not built enough homes in this country to meet
our needs.
If we assume that household formation runs at about
250,000 per year, that is the number of new homes we
ought to be building. Over recent times, social house
building for rent or affordable house building has been
around 40,000 to 50,000, and the private sector has
never built more than 150,000 homes on a regular
basis, which only adds up 200,000. There is a gap
then. How are we going to meet that gap to make sure
we get enough homes built in the future?
Grant Shapps: First of all, thank you very much for
having me here in person. I know when I provided
written evidence to you it was before the Housing
Strategy, so there were some things that have
obviously become updated in the meantime. Secondly,
I entirely agree with the premise of your question; I
do not think we have been building enough homes in
this country for a very long time and there has been a
structural deficit in the number of homes built. There
are many reasons for that, including allowing house
prices to run wildly out of control—doubling in the
space of 10 years and becoming six or seven times
people’s average income, and more, in different parts
of the country. This means that they are out of reach
in many areas.
To answer your question as to how we meet that gap
between the two, it is manifold, and the Housing
Strategy lists over 100 different ways in which we
intend to fix the gap. Perhaps I will not go into all of
those in answer to your question, but let me just
highlight four. First of all, we think that planning
reform is a big, important slug of this. You cannot
build more homes unless you have a planning system
that reacts faster. Even if it was not making any
different decisions, just being quicker would be a huge
help to let the market, developers and communities
know where they are. We hope to have it reformed
both to be faster and also more efficient.
Secondly, plans like the right to buy will put another
100,000 homes in the hands of social tenants who
want to own their council home, but critically we will
be using that money to build another 100,000 homes.
There are the 100,000 homes that we wish to build on
Government land, which is a project that is moving
along very fast, and perhaps we will talk about that
later. I think that is very important in terms of
releasing more land, and, of course, there is the
mortgage indemnity scheme, with which we hope to
help 100,000 people buy properties and make sure
that, as well as building them, people can afford to
buy them as well. The answer is there are 100
different ways. Those are just four of them, and I think
by radically changing our approach, we can bridge
this gap between housing demand and housing supply.
Q321 Chair: Unless the Government is prepared to
see a rise in the building of social rent or affordable
rented housing, the private sector building for home
ownership is going to have to deliver significantly
more than 150,000 homes per year. Is it simply that
funding reforms alone are going to enable them to
produce 200,000 homes? Historically they have failed
even when house prices were a lot more affordable
for people than they are now.
Grant Shapps: The gap might not be quite as big as
you are suggesting. Last year, there were 60,000-plus
affordable homes built in this country. By the way, I
am just about to confirm numbers, but even on the
provisional figures from December there were nearly
160,000 properties for which councils were given
money for the New Homes Bonus for homes built. In
the vast majority of those cases, apart from the smaller
Communities and Local Government Committee: Evidence Ev 63
30 January 2012 Rt Hon Grant Shapps MP
number that were empty homes being brought back
into use, they were new homes being built. The
statistics are interesting, but of course those are
English numbers as well. You have to be really careful
with this debate about housing numbers, because no
one makes the distinction between whether they are
talking about UK figures, English figures, England
and Wales, or England and Northern Ireland. Actually,
when you throw in housing starts, housing
completions or the net difference between the two,
these figures very quickly become confused.
To answer your question: yes, I think we need radical
reform. Planning is a big part of that, but we are not
sitting on our laurels. We have the Get Britain
Building fund, which across the UK is nearly
£500 million and in England alone £420 million; that
is going to help unlock some of those sites. The
Growing Places fund is another £500 million, which
will help to unlock strategic sites that maybe need a
bridge over a stream or something to build whatever
it happens to be. I think the answer to your question
is: no, it is not just planning reform; there are lots of
other things we need to do, including not piling on
costs to the developers, which I think had become a
habit, if I may say so, that was completely counterproductive and led to the lowest house building since
the 1920s. If you keep saying to developers, “Oh, and
by the way, whilst you are building these homes, we
also expect you to deliver X, Y, Z in addition,” then
unsurprisingly you get to the point where it is just
unsustainable for them to build the homes. I have been
trying to loosen the load on developers in order for
them to get the homes built, and there is a
commitment in the last Budget to make sure that we
are not loading on new bureaucracy and red tape.
Indeed, we are cutting it by 2015.
Q322 Chair: With the 100 measures on which you
cannot go into detail, for obvious reasons—
Grant Shapps: I am happy to.
Chair: I believe you that they are there, but is the
Strategy of itself, as it is now, sufficient to deliver the
250,000 new homes?
Grant Shapps: I will want to be keeping a very close
eye on it, and I have not set the figure of 250,000 you
have. The last study I saw suggested 232,000 a year
was the correct figure. One thing we know about this
is these predictions are hellishly difficult to make,
always incorrect in the final analysis and much has
changed. For example, this particular Government
takes the view that we should be reducing net
immigration figures from outside Europe—still 60%
of immigration. I remember the previous Government
issued a projection that by 2016, 70,000 homes a year
would be being built for people who do not yet live
in this country. If we are successful with policy A,
limiting migration from outside Europe, then policy
B, how many housing builds you need to make, will
change your numbers even further.
Q323 Chair: We probably will not get tempted down
the immigration road just at present.
Grant Shapps: It is an important part of the total,
isn’t it? It just shows the unpredictability of projecting
these things.
Chair: We will stick with affordable rents for the
time being.
Q324 Simon Danczuk: Do you think that the
affordable rent model in its current form has a
limited lifespan?
Grant Shapps: Regardless of what happens and
regardless of which Government is in power, I believe
that we will never go back to the days—and here is
my future prediction—of the old-fashioned model of
only one offer in the socially rented sector, which will
be the one that says you are either in a market house
or you are in a house that is amazingly subsidised
by everybody else. That is the old-fashioned way of
building social housing. I do not think we will go back
to those days; I think that there will always be a
hybrid in between.
I cannot tell you, even if we were to win the next
election, precisely how that would operate again
subject to a 2015–20 spending review. The balance
sheets of housing associations and what they can bear
will obviously be an important part of this. What I can
tell you is this: we said we would develop 150,000
affordable homes, many of which will be through the
Affordable Rent programme rather than the old social
one. We then upped it to 170,000 and have put the
vast majority of those contracts in place; we are
confident now of delivering 170,000. You have
probably just had evidence from the HCA and quizzed
them on this. We have seen that there is excess
appetite from housing associations unfulfilled by that
original programme of £1.8 billion, and the right-tobuy receipts being used for another 100,000 affordable
rent homes is a direct response to the fact that we
believe that, if we could fund enough for another
100,000 homes through affordable rent, the market is
there to do it. I am pretty confident there is more of
this to come; I cannot predict what will happen in the
next Parliament.
Q325 Simon Danczuk: Just for my benefit, how will
they be allocated? How will you determine who lives
in the affordable rent properties?
Grant Shapps: It will still be under the normal
allocation system; councils will still be running their
own waiting lists.
Q326 Simon Danczuk: Those that are still living in
social rented properties will be determined in the same
way. Is there a need to build more social rented homes
alongside the affordable rented homes then?
Grant Shapps: It is worth reminding the Committee
that this does not affect anybody who is under an
existing tenancy at all. The other thing to say is there
is a very large social house build programme going
on right now; it is costing £2.3 billion until 2015 and
the Affordable Rent programme has received all the
publicity, but we are actually still building social
homes just as we always did. Again, you were asking
what will happen in the future: I think there will
always be a need for subsidised social house building
in this country, but again I cannot quite predict what
the model will be in another Parliament.
Ev 64 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP
Q327 Simon Danczuk: Could I take a minute to
paint a picture? This is my synopsis of the situation
that we are moving towards in terms of housing. We
have rich, wealthy people in private ownership; they
have inherited wealth, inherited properties and
everybody is well-off. We have what is fashionably
called the squeezed middle: the middle-classes,
mortgaged, owner-occupiers who are already on the
ladder. Then we have other working people who
cannot get on the housing ladder and people are not
lending to them. They are in the affordable rented
properties that you were talking about, or they will be;
some of them are in the private rented sector. Then
the final group that we have is the poorer people, and
perhaps some might describe them as an underclass,
who are living in the social rented sector or private
rented sector that is not very attractive. That is the
impression I get of the housing strategy that you were
pushing: these different strata of people. The poorest
are in that bottom class. Is that a fair characteristic of
your model of homes?
Grant Shapps: Not at all. You have a vivid
imagination and a view of housing in all its forms that
is completely different from mine. I represent 9,000
or 10,000 council house tenants and then several
thousand more in social accommodation through
housing associations, and I absolutely do not
recognise the description that you use. Frankly, I think
referring to people who happen to be in social housing
as an underclass would be offensive to them, and I
know that would not be what you would intend. It is
certainly not my view of the world either. What I see
when I knock on their doors is a bunch of very hardworking people who are keen to strive and do the best
by their family. Many of them, I am sure, would be
attracted to buying their own home under the
rejuvenated right to buy.
Q328 Simon Danczuk: The point I am making,
Minister, is that your housing strategy is creating those
different strata, where you have a differentiation
between those in the social rented sector, those in
affordable rented properties, and they fall into those
broad sociological groups.
Grant Shapps: I would characterise it exactly the
opposite way round. The system since the war has
been that, if you are a social tenant, you will be paying
a smaller percentage of a market rent. In my
constituency, it is about 40% of the market rent. In
many places in London it will be lower, and in the
country as a whole it is about 65% of the market rent.
In between that and the market rent there is precisely
nothing. The definitions between being a social tenant
and being a market tenant at the moment are
enormous.
The way I characterise my housing policy changes is
to create additional levels in here, where we have the
affordable rent product at up to 80% of the market,
which by the way averages at well below 80%—in
London, it is 67% of the market, for example—and
through that programme enable people not to be on
these two distinct ends of the market but somewhere
in between as well. I think that is great; it actually
says there is more of a housing ladder—people like to
talk about the housing ladder. This actually creates a
proper housing ladder, and we are fools as a nation,
both the working population—which includes people
in social housing, who fund all of this stuff through
their taxes—and the people who end up trapped in
this system, to think that you can house everybody
through a system that has seen the housing waiting
list double over a 13-year period. That is
unsustainable and that was with £13 billion of
expenditure on social housing; it kind of proves that
you could spend any amount and still not build
enough of this social housing to satisfy demand.
Secondly, it is not fair on the taxpayers, who will
come from all sectors of society, to pay for a system
that subsidises housing at a level above what people
require. Do you know what the average council rent
is this year in the country? It is £67 a week, and there
will be millions of people living at £67 a week rental
on very nice properties paid for by their taxes, of
course, but also everyone else’s. They will be rightly
saying, “I am paying the market rent. Why am I
subsidising the rent of someone who is in a very nice
position and could afford a little bit more?” This gives
us a product between the two.
Q329 Heather Wheeler: I am interested in the
changes between section 106 agreements and CILs
and how that might affect the number of new social
houses being built. I am also interested in whether in
effect it has a real problem with Universal Credit and
the potential for rent arrears to build up; I am setting
the scene there. Do you actually think that the changes
to CIL will have a big effect on section 106 and will
in effect maybe ask people to renegotiate previous
section 106s, so you will not actually get the number
of affordable houses built?
Grant Shapps: There is a whole complex strand of
different elements to your question, as you would
acknowledge. The exact interaction between CIL,
section 106, the provision of social housing and the
Universal Credit is, of course, something that we are
very busily modelling.
CIL was introduced by the previous Government in
the Housing and Regeneration Act 2008 as a way of
giving a bit more certainty to developers about the
manner in which they will be expected to contribute
to local provision of local infrastructure. I actually
think it is a very sensible idea; it was largely based on
the experience in places like Milton Keynes, where
they were using the roof tax, and I welcome the idea
that a developer should be able to look up the price
list and go, “Okay, if I am going to build in your
patch, this is what I am going to pay.” From that point
of view, there is a bit of certainty that does not exist
through the negotiation on section 106. As you know,
in the Housing Strategy now I have been pretty keen
to make sure that section 106s are realistic because I
believe that, rather than having 40% of housing built
in an imaginary never-to-be-built development of 200
homes, it would be better to have 20% social housing
built in a real development that actually goes ahead.
If these changes to section 106 and CIL help to deliver
that, that is great.
As regards the Universal Credit, as you know we are
very carefully and cautiously modelling the impact of
a number of different things. I know Universal Credit
Communities and Local Government Committee: Evidence Ev 65
30 January 2012 Rt Hon Grant Shapps MP
meets with some cross-party support; everyone
believes that it is important to be able to allow people
to not get trapped into benefits and work their way
back into a job or to more hours if they are already in
a job. One of the great criticisms is the cliff edge that
you reach, where it just does not pay to work, and it
is not the person on welfare’s fault—this is the fault
of the system and we must fix it.
If I accept that, then despite my own concerns, which
are very real, about making sure that landlords know
that they are going to get the income in order to have
the security of projecting their 30-year rent, I think I
have to and do—and I have spoken to the Committee
about this before—genuinely believe, and believe in,
the concept that we need to pay that money direct to
the tenants so that they can manage their own
finances, and it feels like a pay cheque and they can
work back into a job more easily. There is that whole
side of the Universal Credit interacting with these
things. Yours is a very big question and I am not sure
that I have done it justice, but suffice to say on the
Universal Credit side we are very carefully setting up
trials. I think you have met with Lord Freud on this
subject. Have you spoken to him? Have you had
some evidence?
Heather Wheeler: Yes, some time ago we did.
Grant Shapps: Some time ago, okay. I am treating
that very carefully indeed and making sure the whole
thing fits together in the end.
Q330 David Heyes: A number of the witnesses to
this inquiry have raised with us the issue of the
potential benefits of a write-off of the historic housing
association grant debt; it is a huge amount. There has
been a lot of speculation about your intentions in this
respect. It is maybe a chance today for you to clear it
up for us.
Grant Shapps: Sure. There is nothing immediate that
I am about to spring on you, for the first thing, not
today or over the next few days. There is a lot of talk
about whether the historic debt could be written off to
registered landlords, but we work here in the context
of national budgets that are all about reducing debts
or deficits. If you just say, “We’ll write this off and
not worry about it,” then that money will not come
into the coffers one day when it is due back, and we
use that money all the time. Within the Department,
we fund more house building because that money
comes back in. The argument that is made is: if you
left it with the bodies that are there and they could
take it off their balance sheets, they could then
leverage their balance sheets and build more.
I have to say, we have tested this several times over
in different ways and put those arguments through the
balance sheets, and I have had my officials work on
it. I am not entirely satisfied that would be the upshot.
There is a definite issue to negotiate with the wider
deficit in the Treasury. To put you out of your misery,
there is nothing immediate you are about to hear from
me on this front.
Q331 David Heyes: So that is not a yes, but it is not
a no.
Grant Shapps: Who can rule things out forever? I am
a great fan of innovation in housing finance. You are
about to see a historic settlement on the housing
revenue account for example, so I do not want to rule
things out forever but I am not yet there.
Q332 David Heyes: We have been looking at the
situation in the Netherlands, and quite a few years
ago, they faced this same issue. The result was that
their accumulated debt was written off and housing
associations are now completely financially
independent of Government. Could you envisage that
ever happening?
Grant Shapps: Everything is possible, but right
now—and the Committee might welcome this—we
have had the Localism Act 2011, with all of those
housing measures; the Housing Strategy, outlining my
100-plus ideas; and I am very shortly going to make
some further announcements on progress. You won’t
have to wait very long for that—in fact a matter of
hours, just to tantalise you.
David Heyes: You big tease.
Grant Shapps: I do try. I do not want to then get on
to things that we have not even worked through yet. I
am being upfront in saying we have not.
Q333 David Heyes: What about the possibility of a
housing investment fund run by housing associations?
Grant Shapps: I am all in favour. I know you have
had evidence about people saying there should be a
national housing bank, and people suggest that
sometimes. I am not convinced by that argument at
all. I think the banking system in this country needs
to work for all industries and sectors. Then there is
separately the idea of a national housing investment
group, which I am very attracted to, and my officials
have and will work with organisations who want to
bring those types of things about. I have no objection
to people pooling their resources.
Q334 David Heyes: The Government is pretty fond
of pilot projects. Do you think this is a potential
candidate for a pilot?
Grant Shapps: I do not have a pilot that I am about
to announce. I think that all of these ideas are good
and we will look at them closely. My typical meeting
with a third party on this will go something along the
lines of, “We’ve got this great new idea; we’d like to
come and talk to you about it.” They will come and
talk to me about it, and I will say, “What is it that we
can do as a Government? What do you need to make
this work?” and they will say, “Nothing. That’s the
brilliant thing about the plan,” and I will say, “Great.
Why are you here? Go and do it.” Actually, most of
the time there is not really a blockage. If there is and
there is something Government could do, are not
doing, and it does not cost us a fortune, then come
and talk to me, but most of the time my message out
there to housing associations and to councils is, “We
are giving you all these flexibilities. Go and use
them.”
Q335 Chair: Coming back to the Netherlands, which
David referred to, it is interesting there that they have
had the historic write-off of the grant to housing
associations. When we asked the HCA about the
affordable rent model running out of steam after 2015,
Ev 66 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP
the synopsis of what they said was that they did not
see it completely running out of steam, but they saw
some housing associations begin to run out of the
ability to leverage in more finance. Those associations
would now start to raise the issue of grant write-off
as a possible way forward to give them that capacity.
Isn’t that going to increasingly become the case over
the years, and isn’t this going to become a more and
more real challenge that Government is going to have
to address at some point?
Grant Shapps: You are absolutely right to say that,
after 2015 and probably before that, we need to give
them an indication of where they will be headed, but
you are tempting me into trying to write policy that is
not written, budgets that are not written and spending
reviews that just have not been created yet. If the
lesson of the last couple of years or more shows us
anything, it is to expect the completely unexpected.
The truth is that we have budgets and plans in place
up until 2015, and even those are quite difficult to
predict, so I am rather hesitant at trying to give you a
housing budget for 2015 to 2020 today.
Q336 Chair: Of course. Nevertheless, Governments
have limited lives; they do have to look ahead. Just
coming back to the Netherlands, what was interesting
in the point that David made was that you have a
situation there that they do not think is perfect, but
where you have no subsidy at all going into the
provision of social, affordable rented accommodation,
but ultimately the Government stand behind all the
borrowing associations do. It does not count as
Government borrowing—they stand behind it—and it
reduces the cost of the borrowing so that they are able
to make an affordable housing programme work. I just
wondered if there is any look across to our other
neighbours to see whether there are lessons that can
be learnt from them.
Grant Shapps: I am sure there are. I have been to
places where they have no concept of a social house
at all; it just does not exist. Hammarby, I think, was
one of the examples of where I asked, “Which of these
homes are being built as social?” and they just do not
know what you are talking about. What they do is just
pay people’s rent or assist people in paying the rent—
effectively housing benefit—and build homes
normally. I really admire this Committee’s enthusiasm
for the next tranche of housing reform. There was I
thinking we had delivered quite a lot of it in the last
couple of years and were indicating quite a lot ahead
through the Housing Strategy and that side of things.
I am afraid I cannot provide any more light on the
next round; it is something that I will now start to turn
my attention to. I will always be happy to come back
to the Committee in the next year or two to talk to
you about our plans going forward. I hope I will have
an opportunity to do that.
Q337 Chair: Just back to the here and now and some
of the issues that are around, there is the very
welcome reform of the HRA, which I think has
widespread cross-party support and major support in
local government. It is going to be a big step forward
to reforming housing finance in this country. The only
slight downside was drawn to our attention by the
chair of housing in Birmingham, a Conservative
authority that actually is building council houses at
present. What they were saying to us when we paid a
visit there was, “Well, if we had the prudential rules
in for housing as we do for other aspects of borrowing
in local government, we could carry on building
council housing, but the extra cap the Government
have brought in at a lower level means that we only
just have enough ability to carry on with the future
maintenance programmes we need and, effectively,
our new house building is going to have to come to
an end.” Is that not rather disappointing and should
we be having another look at that situation?
Grant Shapps: First of all, on the Housing Revenue
Account, it is a £19 billion settlement of debt, and I
want to pay tribute to the many former Housing
Ministers whom I shadowed, who got this process
under way, in particular the last one, John Healey, who
did a lot to push this along. I am very pleased that we
are nearly at the point of settlement on that, and I
think it will be an enormous benefit to councils and
particularly to their tenants, who have suffered from
this tenant tax for far too long. The predictability with
which their authorities will be able to manage their
affairs over the next 30 years will be hugely welcome.
Part of that is that every authority will have on
average 15% more to do as they like. Authorities are
in different positions, and this will of course be
reflected by the amount of debt that they will take on.
Some may just say, “Well, we are just going to
improve the homes. Where they are already of a
decent standard, we are going to go even further.”
Others will say, “Actually, we can use some of this to
build,” and I can foresee a significant amount of either
council house building or council house building in
partnership, where they put their land in, which
happens in some places, and work with a registered
provider.
To cut to your question in detail, again it is a bit like
the writing off of historic debt. In essence, this is a
plea for more borrowing, and more borrowing means
more debt. As we know from our neighbours to the
west and the east—in Ireland, France and many other
countries besides—if you get your debt to an
unsustainable level, the markets spot it and you get
hammered for it. We are very hesitant lest we lose
sight of the big national goal of getting the deficit
under control and having a convincing plan in place
to do that.
The answer is no, for the time being, but I will keep
this under review. It is not that I am unsympathetic
to the concept. Fortunately, at the moment there is
something else that a local authority can do, and a
large authority like Birmingham, of course, has a large
amount of land that for various reasons it sits on. I
have mentioned public sector land before—the
100,000 that we are releasing from the various
different Government departments. That does not
include the huge amount of land that local authorities
will have from various different previous enterprises
that they can bring into use. They can involve the
housing associations and/or the private sector to do
that.
Communities and Local Government Committee: Evidence Ev 67
30 January 2012 Rt Hon Grant Shapps MP
Q338 Bob Blackman: I apologise if you answered
this before I came in, but there are large numbers of
local authorities, particularly in London—the
authority, not the housing association—that have
historic housing debt dating back from the 1960s or
1970s. They are paying off not only interest and
capital on those, but often the properties have either
transferred to alternative providers or they have been
demolished and replaced but the debt still remains
with the local authority. I have heard the suggestion
that large elements of this debt will be written off for
those local authorities.
Grant Shapps: On the HRA?
Bob Blackman: On the HRA debt and, indeed,
possibly on their general fund as well, if the general
fund was bearing this debt. Can you just clarify what
is the exact position?
Grant Shapps: The HRA settlement, as most people
know, is a horrendously complex piece of work,
which was why I have put on record my gratefulness
to my predecessors who started to tackle this issue.
The simple answer is I will need to write back to you
with detail in terms of how much historic debt has
been written off in different places, and what the deal
was in each individual location. I just do not have that
off the top of my head.
Q339 Bob Blackman: I understand if you do not
have that, but it would also be very helpful for this
Committee to know what constraints there will be on
what those authorities can then do. Do they have to
use that money for development of housing? I think
that will be very welcome because it will mean that
there will be house building where there probably has
not been. Alternatively, of course, if they have
complete freedom to do with that money what they
wish, some unexpected things could happen.
Grant Shapps: I can confirm it is not part of the
general fund, so the housing account stays separate,
unlike in almost all other areas of local government.
We have previously discussed the un-ringfencing; this
is not the case in the housing accounts. They need to
carry on spending that on their stock.
Q340 Chair: Two other possible ways forward have
been put to us. One is that local authorities will have
different positions in terms of their headroom; some
may have more headroom than they need or want to
use, and others may not have enough. Is it possible
that there could be pooling arrangements or swap
arrangements between local authorities to use each
other’s borrowing capacity? Would that be the sort of
thing the Government would be minded to support?
Grant Shapps: No, not in that sense. I do not rule out
more innovation and creative ways of their working
together. I think that would be welcome, particularly
where there is a geographic alliance. This is a
settlement that has taken many years and a piece of
primary legislation to work out. I have looked through
all the figures and the percentages available to each
authority, and although there is movement it is not
that some authorities only have 2% more and some
have 25% or something. There is not that much of a
range in there. I think the average is 15%. I am
satisfied that authorities can work within those means
to make sure that they provide the best possible
service to their tenants.
Of course there are further possibilities, and I should
say, in answer to the kind of flexibility questions I was
getting earlier, I have not ruled out the possibility of
future stock transfers. The HRA does not bring to an
end future transfers taking place. We have seen many
in years gone past, but they have to be demonstrated
to be good value for money for the taxpayer and,
obviously, they have to be voted on by the tenants, so
most importantly, they have to be satisfied that that
would make sense for them.
The last thing I should say on this subject is that the
individual authorities are able to borrow from the
Public Works Loan Board at an unbelievably brilliant
interest rate—Government lending, basically; it is a
fantastic interest rate. Some of them, when they
thought that was not going to be the case, were going
out to the private sector, and I know when my local
authority discovered they did not need to do that and
could borrow from the PWLB, the saving was
probably £2 million-plus a year in interest.
Q341 Chair: Finally, to see if we can find one way
forward that might allow a bit of flexibility, the
National Federation of ALMOs has produced some
models for how ALMOs might be turned into either
ownership co-operatives, with no more than one-third
local authority stakeholding, involving workers and
tenants, importantly, in their ownership, or a
management cooperative, where there would be a
long-term management agreement for that ALMO to
manage the properties and its finances. I know
discussions have been taking place with your officials
and others about this model working and perhaps not
being constrained by the cap, because it will be
outside a wholly local authority ownership. Is that
something you would be interested in exploring?
Grant Shapps: This could be the so-called CoCo
model in particular. Again, actually, I like all this
innovation. Colleagues in the House sometimes come
to me with a chief executive or housing boards and
put these ideas to me. I am always keen to explore
them. Some of them stack up and some of them do
not. They all have the same test, which is: number
one, is it good value for the public purse; and number
two, are the tenants going to be better off? Are they
going to get better quality housing and more say over
their housing? I am very keen to promote the interests,
or allow tenants to, on all of these things. They are
always subject to tenants being happy and voting on
it, and I think it is absolutely right it should be that
way.
Q342 Simon Danczuk: Another policy resurrected
from the 1980s is the right to buy. I just wanted to
explore the difference between one-for-one
replacement against like-for-like. The Government is
talking about one-for-one replacement. There is a
difference between that and like-for-like, isn’t there?
Grant Shapps: Yes. Let’s be completely up front: one
is an affordable rent home and one is a social rent
home.
Ev 68 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP
Q343 Simon Danczuk: So we will be creating more
affordable rent homes, and the stock of social rented
properties will be going down. Is that right?
Grant Shapps: Yes. Let’s get these figures in
proportion. There are 2.5 million homes to which this
policy will apply. 1.9 million of them are council; 0.6
million of them are those with reserved right to buy
but are now held through large-scale voluntary
transfers by RSLs. Of those 2.5 million homes, this
policy looks to take 100,000 of them over a period of
time and undertake the right to buy. This is unlikely
to decimate the stock of social housing. By the way,
as I mentioned earlier, we are building quite a lot of
social houses, landlord houses for rent, in the old
traditional way, right now. The stock right now is
actually increasing not decreasing.
Q344 Simon Danczuk: In terms of the right to buy,
has any modelling been done around the impact it will
have on the availability of mortgage finance?
Grant Shapps: I have been talking to the mortgage
lenders on this, as obviously a key part of right to buy
is making sure that there is a market there for the
mortgagers. Because we are looking to increase
discounts and caps fairly dramatically, value for
money is there for the tenant and it also makes it a
good prospect, by and large, for the lender, because
immediately they have equity in the home of the likes
that they could probably only dream of with a very
large deposit from a buyer in other cases. I think this
has been broadly welcomed and, of course, until we
issue the details, they will not confirm that, and that
is to be expected.
Q345 Simon Danczuk: Do they think it will affect
the availability of mortgages to other people?
Grant Shapps: I hope that is not the case. Again,
predicting the future is really tough, but I noticed,
looking at some figures last week, that a year ago,
there were only 2,500 mortgage products out there, in
rough numbers; this time this year there are 3,160, I
think. It says to me that the market has loosened a
little bit. With what is going on in Europe and the
instability in the global economy, who knows? In a
year’s time, I could be sitting here saying it is the
opposite, but right now I think there is a realistic
projection that says 100,000 extra mortgages under
right to buy should not knock out a market that, after
all, is several hundreds of thousands of mortgages
overall.
Q346 Simon Danczuk: Would you further the
extension of right to buy to housing associations?
Grant Shapps: I would love to do it, if I am blunt.
The trouble is, again back to Government debt, if we
were to do that, these are housing associations who
have gone out, borrowed the money or taken some
subsidy from us and built the things, have a 30-year
income projection, and would quite rightly turn
around to the Minister and say, “We are happy to sell
this house. Now you need to pay us per home that is
sold for the privilege.” Guess what? We do not have
the money.
Q347 James Morris: One of the challenges, which
you will no doubt grant, is that we need to stimulate
more supply in the private rented sector. As
affordability for homes becomes more stretched, it
looks like more people are considering private rented
accommodation as an option. To what extent do you
see institutional investors playing more of a role? I
think we have a very low amount of our private rented
stock held by institutional investors compared with
other European countries. What kind of role do you
see for institutional investors in trying to stimulate
supply in this important sector?
Grant Shapps: I think it is an important role and you
are absolutely right about the numbers. Something
like 71% of the private rented sector are, essentially,
private individuals who have from a bedroom up to a
few properties but often not more. These are not,
generally speaking, institutional investors. The
numbers vary, but I have seen estimates as low as
1% institutional investment. There is a whole range of
problems. A surprising amount of it just seems to be
what happens in this country and nothing more. There
is almost an institutional non-investment policy; it is
just not the way the housing market works here. We
are trying to break down those barriers, so in last
year’s Budget the Chancellor made changes to the
way that stamp duty is handled to mean that you are
not at a disadvantage as an institutional investor when
you make purchases. At the same time, we have also
signalled technical changes to Real Estate Investment
Trusts—REITs—and the way they are handled. I think
the deadline to deliver on those technical changes is
this year’s Budget.
I have appointed Sir Adrian Montague, who is there
to work out what else needs to be done to move the
institutions into this field. I think there have been
some early signs of progress, actually, with some of
the potential private institutions, such as the likes of
Aviva, starting to register their interest in a way that
we have never seen before. There has been a real rush
to do that. I am hopeful, but I do not want to over-egg
the chances of half of the supply coming from
institutional investors in five years’ time. I think it is
going to be a more gradual process than that.
Q348 James Morris: What do you think are some of
the key barriers, though, to achieving this?
Grant Shapps: Honestly, there is a belief among
institutions when you talk to them that property is
difficult and complex: “Management is traditionally
10% of the rent, so we are not sure about this as well.
It is just not an area we are in.” Conversely, they are
completely into the commercial property side, which
is odd. I just hope they are starting to realise—and, as
I say, there are some early signs in the registrations
that have been going on to take part in this—that
actually there is a great, very stable market here that
the registered providers have understood, because they
know they get a brilliant, potential, steady income
over a period of time. I think we need to convince
them of all those things, but I stand by what I said
before: I think there is an institutional belief against
institutional investment in this country, and that is
what I am trying to break.
Communities and Local Government Committee: Evidence Ev 69
30 January 2012 Rt Hon Grant Shapps MP
Q349 James Morris: When do you expect Adrian to
come back with his report?
Grant Shapps: He is going to call for evidence in
the next month or so. He will report back to me by
the summer.
Q350 Mark Pawsey: Minster, I had a question about
REITs, which you have just referred to, so I wonder
if I might ask you a broader question about the
structure of our housing market more generally. We
currently have 66% owner occupation, 16% private
rented sector and 18% in the affordable residential
sector. Is that desirable? Is it the right mix? Does that
meet people’s aspiration? Does it give sufficient
mobility on a market? That is the first question.
Secondly, what do you think is the effect of the
Government’s current policies and changing that mix
over time? You have said it is difficult to predict the
future, but there must be an impact on the measures
that are being brought forward.
Grant Shapps: I would go further. It is almost
impossible to predict the future. I do not think, as a
Government and as a Housing Minister, it is my job
to have a model in mind of precisely how many homes
should fall into these different categories. I do not
think there is any need for us to do that, and I do
not have a percentage for the private rented sector, or
affordable rent or whatever. What I do think is it is
very important to support people’s aspirations. Even
after a deep recession, which we now know is deeper
than we had thought it was—and the economy is
struggling in common with all of those across Europe
and many around the world—the amazing thing is that
we still see a huge appetite to own your own home.
The surveys still indicate that is where people want
to be.
The responsibility of the Housing Minister is to try to
meet the aspirations of the population. I want to put
people in a position where they can afford their
housing, and I would turn to what I mentioned right at
the beginning in response to the Chairman’s opening
question, which is if you live in a world where house
prices continuously go up faster than people’s
earnings, it stands to reason that eventually you make
it impossible for people to reach those aspirations. It
is dangerously close to making it impossible for
people to be able to rent their homes either, let alone
purchase them. This is a dangerous situation that I
have constantly warned against—not without some
risk, because every time you say it someone says,
“This is outrageous; you are trying to suppress the
nation’s assets, its housing.” My answer is we have to
be able to house the next generation and this
generation.
I have been happy to see not too much happening
by way of house price movements since I have been
Housing Minister, and for a little while before that as
well, because it means that affordability starts to come
back into line. Without any fuss or bother, Halifax
have been publishing their monthly surveys. I caught
the last one, which said that mortgage affordability is
at its best level for 14 years. That has come about
because house prices have not moved too much. It
means that more people can afford a mortgage,
because the percentage that you pay on your mortgage
is now lower than it was at the height of the house
price boom in 2007. That is a good thing.
To answer your question, I believe in supporting
mobility at every different level, from things like
HomeSwap Direct—which I am immensely proud of,
as for the very first time in this country social tenants
can swap their homes across the entire sector and see
every single available swap, which is fantastic for
mobility—through to, for example, foot-on-ladder
schemes, right-to-buy schemes, bridging the gap with
the affordable rent model, up to 80% of the market.
People are able to save to buy through things like
Firstbuy market housing. I just want the whole thing
to be as flexible as possible.
Q351 Mark Pawsey: And owner occupiers? Do
accept that the stalling in the market means that many
people may wish to move but currently cannot?
Grant Shapps: That is true too, although stability in
the marketplace is quite helpful to people. What
would cause real problems in today’s market is a
massive drop in house prices. Some people say,
“House prices doubled in 10 years; just let them drop
in a year. That would sort it out.” It would not. A lot
of people would be in negative equity; people would
be unable to move. People who have borrowed on
their house to start businesses would potentially be in
trouble. I do not think that is the answer. On the other
hand, I do not want to see rampant house price
inflation putting homes out of reach of people in their
twenties and thirties, which caused this problem in the
first place. Stability is the absolute key. The mortgage
indemnity scheme will enable 100,000 people to get
mortgages with only a 5% deposit. That means that
rather than saving, say, on average, a £40,000 deposit,
you will have to save £10,000. That is going to help
a lot of people get that foot on the ladder as well. It
is a question of working at all these different levels.
Q352 Chair: One very specific point on REITs: it is
certainly clearly an idea that everyone enthusiastically
says is a good thing in principle but has never really
worked. The draft proposals for the 2012 Finance Bill
are being considered, which generally have received
a welcome from the industry, but the British Property
Federation has drawn two specific problems to our
attention: first, the investment trading issue, which
constrains what a REIT can do; and secondly, the fact
that it has to be listed, which might stop the creation
of some smaller RIETs. I wondered whether the
Government were listening to those concerns and
might want to give some consideration to them with
a view to getting this thing up and running.
Grant Shapps: First of all, I read the transcript from
the BPF, so I was aware of their concerns and their
evidence to the Committee. Secondly, because this is
a subject of the 2012 Budget, I fear that it is probably
more in the Chancellor’s domain than mine, and he
will not thank me for speculating about it.
Q353 Chair: Right, but no doubt you will have a
word with him to draw his attention to the concerns
raised?
Grant Shapps: I am sure his officials are already all
over it.
Ev 70 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP
Q354 Stephen Gilbert: Minister, I think you tried to
talk about the public land disposal a couple of times
already. I just wondered if you could give us an
overview of where we are at the moment.
Grant Shapps: The Prime Minster announced his
ambition to see 100,000 properties built on public
sector land. The Government owns huge amounts of
land that it does not use. That was back in the spring;
I worked on it over the summer. I held a Star Chamber
with Francis Maude when we came back in
September, and made very good progress there and
widened it to more departments. The upshot is we are
getting quite close: we are perhaps at 80,000 or so at
the moment, and there is still much more work to do.
I suppose I would describe it as being ahead of where
we thought it might be by this stage.
Q355 Stephen Gilbert: Ahead of the curve—with
announcements imminently on sites?
Grant Shapps: I shall endeavour to keep you posted
on all of this. Yes, part of the transparency agenda is
to let people know what the Government are doing
and the HCA and four major landholding departments
have already published their land release strategies
detailing sites they will be releasing. I will also want
to issue some sort of list to show people some of the
key sites we will be looking to unlock and where we
have got to as soon as we are there.
Q356 Stephen Gilbert: Can you talk us through the
Build Now, Pay Later model of how it is going to be
financed? Obviously, some of the land that the
Ministry of Defence might have will have been in the
CSR for disposal by the Department at best value.
Quite clearly, if it is going to now be used for housing
instead, is there a loss to revenue over the CSR
period?
Grant Shapps: The point about Build Now, Pay Later
is if you have still sites that are going nowhere, and a
developer—several developers—saying, “We can
build this site out, and we can give you the receipt
when the houses are sold,” it seems to me to be an
obvious one. The Prime Minister and I are very
enthusiastic about Build Now, Pay Later. It has the
common-sense element to it: the department is not
going to be able to get a receipt at all because nothing
is going to happen on that land in any case up till
2015. If it is a question of reprofiling, of course we
should be alert to that. It will not always be possible,
but it is certainly something we should look at. I am
very keen on it. There is a first example of Build Now,
Pay Later happening right now in Hemel Hempstead.
I am pleased to say it is not just a policy
announcement, but one happening as well.
Q357 Stephen Gilbert: That is the market value for
the land that the developer would pay after the
completion of the building project?
Grant Shapps: Yes, and you can sometimes get good
value through things like Build Now, Pay Later,
because, as you can imagine, this is popular with
developers strapped for cash or cash flow. You can
potentially build up quite a degree of interest from
developers who may not have otherwise put their
name into the hat for that piece of land, because of
the ability to do Build Now, Pay Later; in doing so,
you can enhance the value of the land for the public
purse. It is just one of these win-win-wins.
Q358 Stephen Gilbert: Local authorities have a
huge amount of land of their own. Is the Department
of Housing cajoling them to release it?
Grant Shapps: Yes, and thank you for giving me the
opportunity to say to local authorities that there is not
that much benefit in hanging on to the land. I have
been very, very clear with, for example, the Homes
and Communities Agency since I have been Housing
Minister that Her Majesty holds no stock in how much
HM land we have in this country. We would rather
have the nation housed than stockpiles of land that are
not required for any immediate purpose and will not
be for 20 years, but we just keep it there. There has
been a horrible hoarding of this land. I have been very
clear with the HCA: “Get the land disposed.”
Oftentimes that means disposing it to the local
authority, sometimes with an endowment, sometimes
with a promise that they will sell it. I pass the message
on to the local authorities: “Use the land productively;
let’s get people housed on it.”
Q359 Mark Pawsey: Minister, you referred earlier
to the New Build Indemnity Scheme as meeting the
aspirations of those who want to get on to the housing
ladder. This is a scheme where the builder puts in
3.5%. Valuation is not an exact science: you can look
at two or three properties and get different valuations.
What is to prevent the builder just bunging 3.5% on
to the sale price of the property and using that as his
guarantee?
Grant Shapps: Very clever people in my Department
and the Treasury try to model these things all the time.
There is always an argument about whether you have
somehow diverted the market from what it was going
to do in the first place and so on and so forth. We are
satisfied because it is still a competitive market out
there, number one. There is a report out today, by the
way, that says in most of the country—although this
excludes London—it is actually a buyers’ market right
now: seven out of 10 people said it was a buyers’
market. With those points in mind, we do not think
that the market will be particularly distorted by this.
Let us not forget you still require a deposit: these are
not 100% or 120% mortgages or some craziness. The
house builder has to put in the 3.5%; the Government
then backs this with a 5.5% guarantee. The
Government’s guarantee is only activated when the
builders’ contribution has been used. Everyone is kind
of in this together and we will have to make it work
together. I do not see a big bubble in homes that are
offered under this particular mortgage product.
A final comment on this: traditionally, there was a
premium on new-build houses and flats. That
premium disappeared in the recession and has not
come back. I am not sure there should be a
premium—I do not know; it is up to the market—but
I would have thought that a new build is not
necessarily worth less than a previously enjoyed
property, which it is at the moment. If there were a
distortion, it might just be to correct a market
Communities and Local Government Committee: Evidence Ev 71
30 January 2012 Rt Hon Grant Shapps MP
perception about new builds, which is that they are
somehow worse than second-hand homes.
Q360 Mark Pawsey: This is a Government
guarantee backing the scheme. That then takes away
some risk from the lender. We received some evidence
from one of our witnesses that, where such a scheme
had applied elsewhere, it encouraged lenders to be
rather more risky than they might otherwise have
been. How do you counter that?
Grant Shapps: Since the housing crash, we have not
seen an appetite for risky lending at all in this market.
Quite the opposite: the problem is the pendulum has
swung too far. It was mad that we ever had 100% and
120% mortgages; it is also crazy that we had 75%
lending for a long time and it was very hard to get
past that. It has ebbed higher now, but the pendulum
swung too far. There is a very lending-averse
atmosphere out there at the moment.
Secondly, the Financial Services Authority published
their Mortgage Market Review proposals for
consultation in December. The final proposals are
expected later this year. While that review will not
come in immediately, the upshot is it makes very clear
the direction of restriction. At the earlier stages of this,
before they amended some of the things, I spoke out
quite strongly to say I was concerned about some of
their proposed measures, because it would have
restricted further lending in an already incredibly
restricted marketplace. They moderated their
proposals and came up with a set that look reasonable.
The truth is, it is very restricted out there. On top of
the Mortgage Market Review, there is also draft EU
direction on credit agreements. The chances of this
becoming a risky, uncontrolled marketplace again are
negligible, but can I repeat my own advice never to
predict too much into the future?
Q361 Mark Pawsey: We can agree that there is not
enough lending taking place, and presumably your
Department measures the amount of lending that is
taking place. Do you think there is any value in having
a target for that?
Grant Shapps: No; especially in a market like
mortgage lending, you need to let the market get on
with it. We are obviously keen with regard to people
who want to borrow, and who have perfectly good
incomes. Some people have wrongly suggested that
the mortgage indemnity scheme will somehow
encourage people who cannot afford mortgages to get
on the housing ladder. That will not happen, in my
view, simply for the reason that the criteria for lending
are the same strict criteria that are here now, plus
possibly in the future with the MMR on top of it, and
it is a very risk-averse market. All we are saying is
people who have perfectly good incomes that can
service the level of monthly repayment still are not
necessarily people who can save up an entire year’s
after-tax salary in order to get on the housing ladder.
We are trying to bridge that gap rather than stoke the
market or create some false target for mortgage
lending.
Q362 Heather Wheeler: That brings me very neatly
on to what I want to ask you about, low-cost home
ownership. We have heard and received information
about very novel ways of private equity coming into
shared ownership, and there have been Government
schemes, but it has never taken up more than about
100,000 properties in the country, rolling, because
people then go on to sell them or what have you. In
Scotland they have a very keen model on it. I was
wondering whether you thought that there was a
marketplace for the Government to up the ante about
how much it might put into low-cost home
ownership—sharing ownership—or whether this is
the time for private equity to come along?
Grant Shapps: I really like shared equity and shared
ownership products. I am forever going to building
sites where I am proudly shown the shared ownership
models in operation. They certainly do exist and can
be quite popular. The downside is they can be quite
complicated for the consumer, in as much as you still
end up paying a rent for the bit that you do not own,
but then that rent can often be equivalent to paying the
whole mortgage, especially when we have particularly
historically low mortgage rates. These products suffer
a little bit through complexity, but as a generic
approach I like the idea of people being able to
staircase up and down out of the level of ownership
that they have, et cetera.
We have to face the fact that in this country we have
a particular desire to own the home we live in. Even
if the mortgage company really owns them, we are
still quite happy with that situation as a national
mentality towards it. However, I welcome all the
schemes; there is a lot of innovation and I am sure
there is more space. Again, I read some of the
evidence you have had, and there are some very
interesting ideas coming down the track that I will
back to the hilt, assuming they do not require
taxpayer subsidy.
Q363 Heather Wheeler: On the basis of taxpayer
subsidy, though, do you think you can up grant levels?
Grant Shapps: I do not have anything up my sleeve
right now in terms of investment. We have put £4.5
billion into affordable housing: all different types of
schemes, which included social house building, some
of which will have included shared equity schemes as
well. It is not that we are not backing it; I just do not
have any more money to back it any further right now.
Q364 Chair: Just to come full circle, we talked at
the beginning about how we increase substantially the
number of homes we build in this country. We are
trying to look at ways that probably are not traditional
ways of doing that, as a Committee. There are ideas
around, like the community land trust, co-operatives,
that might add something. Last week, we went to the
Netherlands and we went to what was called a selfbuild scheme. I have to say, before I went I expected
to see people get out of their office suits, put their
wellies on and start laying bricks. But it was not: it
was a scheme where local authorities laid out quite a
large area of public land and put it into plots. It was
then put in at a price, and individuals came along and
said, “We will buy that plot at that price.” They then
actually contracted to build their own home: it could
have been a flat pack off a transporter from Germany,
Ev 72 Communities and Local Government Committee: Evidence
30 January 2012 Rt Hon Grant Shapps MP
which we saw, or it could be a local architect who
designed one, or a local builder who came and built a
standard property. We were told that was how they
built several hundred houses on the site in Almere, at
prices around €50,000 less than the same property in
the commercial sector. I just wonder whether this is a
big new idea, potentially, you might have a look at,
and the Government might have a look at, and maybe
you do not have to do a lot about it except indicate
some level of interest and support.
Grant Shapps: Absolutely. I immediately knew you
were talking about Almere, and I absolutely love this
model. The Government has committed to this model
in the housing strategy. The draft National Planning
Policy Framework talks about this model. We either
call it self-build or custom build. The reason I was
keen to have two names is that self-build does exactly
what you were pointing at: you imagine people
coming along with their dungarees on and a toolkit. It
is often that people just want to drive the project and
have an architect, and what have you, which is why
we added custom build to it as well—hopefully it will
become memorable in time, once it gets going. Not
only that, I have also found a fund of £30 million to
put to custom build, self-build, in a circulating fund
to help people get underway with this project as well.
With the Government land work that we have been
talking about, and the councils as well, and through
things like the National Policy Planning Framework,
we are very keen and are driving this forward. We
want to see that Dutch example all across the country.
I will be saying more about this in the coming weeks
and months.
I should also mention that at the beginning—January
or February last year—I asked the National Self Build
Association to do work on exactly this front and tell
me where the blockages were. They set up four
different work streams, which were things like
housing, finance, planning and availability of land and
so on. They reported back to me in spring/summer last
year, and I have been undertaking fixing the problems
that were preventing it from going ahead.
Finally, our self- or custom-build market is at a
fraction of what it is in comparable countries, from
Holland to France to Germany to America to Australia
and many others—an absolute fraction—yet it
accounted for 13,000 houses built last year, and it
makes self-build, or custom build, the nation’s biggest
builder. We want to double that marketplace in the
next 10 years: that is the aspiration we have put in
place. As you heard from that stream of consciousness
and policy, we have been doing quite a lot, including
putting some money behind it. Did I come across as
enthusiastic about it, by the way? I just want to make
sure you understand this is absolutely Government
policy.
Q365 Bob Blackman: I was one of those also
enthused by the idea; I think everyone on the
Committee is probably enthused by it. However,
immediately there are two barriers that struck me,
because the whole basis works on the principle that
you buy the land, put planning permission in, and get
planning permission if you need it. You then engage
an architect or builder. There are very few people who
will be in a position to fund all of that out of savings.
What they are likely to have to do is apply for a loan
or a series of loans, because if you buy the land, it
may take you two years to build your house. In the
meantime, you have to live somewhere else. There are
a lot of potential constraints here. The other
consideration, when you look at what they are doing
in Almere—which is an excellent initiative—is that
this is a relatively large area of land where you can
put up almost what you want, within certain small
constraints. I can imagine local authority planners in
this country tearing out what hair they have left on
the basis of this.
Heather Wheeler: They would have a hissy fit.
Bob Blackman: I wonder if you have dealt with the
two constraints of how such things could be financed
and what could be done to ensure people are not
artificially constrained through the planning system?
Grant Shapps: First of all, you are absolutely right on
both these points. On the first point about that
difficulty of the bridging loan or the finance, what is
really interesting is, if you look at the percentage of
default amongst self-builders, it is a fraction of the
ordinary market. This is a good marketplace. You are
right that there are complications in terms of
landownership and the rest of it, which is precisely
why I have set up this £30 million fund; that is exactly
the point of it. You have just outlined it far better than
I explained it earlier. I am on the case with that. It is
a circulating fund: we will get the money back, but it
means that we can help people realise these
aspirations and overcome those problems where the
market is not quite working right at the moment, and
we want to see it pick up the gap in the longer term.
You are absolutely right on the planning front as well.
It will not have gone unnoticed that this Government
has been desperately trying to shift the approach of
the planning system, sometimes even planning
officers,
through
the
NPPF
document—
uncontroversial it has not been—which is absolutely
guided on the principle of just letting go a little bit,
and allowing communities to develop as they want to.
By the way, if you wanted a UK example of this—I
know you probably prefer the overseas trip—in
Bristol a piece of land has been taken and what I
would describe as a community right to build has got
under way. It is a community land trust. They have
done a very similar thing there. I just want to release
the innovation and desire we have in people to go out
and do this. We have the community right to build;
we will be setting up a hub to help promote it and
help people do this. Oftentimes this can be anywhere:
it can be rural or urban. If it is in a rural area, for
example, the community might come together and
decide to have a community right to build: that is the
whole community coming together and saying, “We
have this spot of land; we are going to buy it and set
some development criteria”. Those criteria might be,
“You cannot build more than two or three storeys” or
“It must be this”—but not too in-depth—as at Almere,
so they will create the real innovation we are looking
for through these partially serviced plots, because they
will get together and do it. The beauty of the
community right to build is that the area can go ahead
and vote the planning permission themselves to build
Communities and Local Government Committee: Evidence Ev 73
30 January 2012 Rt Hon Grant Shapps MP
this new neighbourhood, essentially. It is a really
exciting plan.
Of course, it is dangerous, as I have discovered in this
job, to generalise about what everywhere is like. I can
take you to all sorts of parts of the country—you have
probably seen many of them yourself—where there
are vast sections of land, sometimes, that people are
desperate for you to come and develop. This is a very
good model in those cases as well, and some of them
are in urban areas. I have seen potential for some of
these things in the middle of London.
Q366 Chair: Finally, Minister—we do not want to
detain you any longer—this is an idea that I think
everyone was surprised by initially, and then could see
great benefit in. Clearly, it has not necessarily got into
the consciousness of local authorities and other areas
around the country where this potential exists. I just
wondered what the Government could do to promote
it and give people an indication of what might be
achieved and what has been achieved in the name of
it already.
Grant Shapps: We now have this huge opportunity,
because we have passed the Localism Act, we have
the National Planning Policy Framework, which will
shortly become official, rather than draft, and we are
going to make sure we are making a very big play of
these aspects. I hope the message goes out through
Committees like yours. I am sure planning officers
around the country will be avidly reading the
transcript from your Committees, and they will be
instructed by that. As I mentioned, with things like
community right to build—which could be custom
build in some cases—there will be things like a hub
that will come from the Localism Act legislation;
there is the £30 million that, as you say, is out there
but people do not know about yet, but that is because
we have not launched the fund. There is a lot more
that we are going to be doing. We will absolutely
make sure we have people who are recognisable and
known championing this whole concept of self-build
or custom build as well. There is enormous potential.
I am excited that you got to see it for yourself as well.
Chair: On that point of considerable agreement,
perhaps we will end the session. Thank you very
much indeed for coming, Minister.
Ev 74 Communities and Local Government Committee: Evidence
Written evidence
Written submission from the Institute for Public Policy Research
I am writing to formally submit IPPR’s recent report “Build Now or Pay Later?” for consideration as part
of the Communities and Local Government Committee’s inquiry into housing supply.
The starting point for our research was the challenge of meeting the demand for new homes in the context
of severe constraints on the public finances. Unless we find a way to finance new supply the gulf between the
homes we need and the homes we’ve got will grow dangerously wide. Against this backdrop, the report briefly
outlines the powerful economic case for increasing housing supply—and considers whether current government
policy is up to the challenge.
The main focus of the report is an exploration of three new ideas for financing additional housing, in light
of the current economic context:
First, we consider the prospects for institutional investment in residential property in the UK. Our
analysis emphasises the prospective investor’s perspective. We hone in on the heart of the problem:
housing looks low-yield and high-hassle to potential investors. But we then we ask if these obstacles
are surmountable, concluding that, with careful product design, they may well be for domestic
insurance and pension funds. We then argue that it is local authority pension funds that offer the
best prospect.
Second, developing our thinking on the role of local authorities further, we argue that they should
release their public land to developers in return for an equity stake in development; hold auctions to
secure private land for new homes; and adopt a “use it or lose it” approach to privately held land fit
for housing, including through the use of more time-limited planning permissions. We suggest also
that local authorities need to make the most of the house-building opportunities that housing revenue
account (HRA) reform offers.
Thirdly, we make the case for the recapitalisation, over time, of government expenditure on housing.
We describe the dramatic shift that has occurred over the past 40 years away from capital investment
in bricks and mortar towards personal subsidy through housing benefit (HB) and then consider how
it might gradually be reversed. We suggest integrating housing policy across government, enabling
a more deliberate focus on delivering this change. We explore the possibility of introducing a stepped
taper to HB and creating a framework for hybrid social-private landlords in order to get more out of
the private rented sector, where HB has at times looked like a landlord-enrichment scheme. And we
float the idea of localising decision-making responsibility for all housing spend, giving local
authorities more of an incentive to keep rents and HB bills down in their area and invest more in
new-build.
The report also suggests two other possibilities that we think merit further exploration, and on which IPPR
is now undertaking further work:
—
We advocate the expansion of the new Green Investment Bank into a fully-fledged National
Investment Bank and contend that one of the types of infrastructure it should fund should be new
housing. This would mean that the state’s resources could be used to enable the private sector to
borrow cheaply to build new homes, inverting the operating principles of the private finance
initiative.
—
We urge that serious thought be given to reforming the UK’s development industry. Getting land to
market is of little use if developers would rather sit on it than develop. We argue we need to find
ways of introducing competitive pressures into the industry to incentivise actual development, rather
than mere land acquisition.
To conclude, we find that Britain finds itself in a “catch-22” situation, with low growth, low supply, low
finance and low confidence, despite low interest rates. There is clearly no one silver bullet that will break this
deadlock; our aim has been to provide food for thought as the government considers its housing strategy. We
are clear that this strategy must offer more than a recapitulation of what has been done already, while not
resting too heavily on the single proposition of the release of government land.
We would be very happy to provide additional briefing or to discuss these issues further with you or
Committee members.
November 2011
Communities and Local Government Committee: Evidence Ev 75
Written submission from the Cambridge Centre for Housing and Planning Research
Summary
— This supplementary submission sets out a response on a number of issues.
— There needs to be clarity as to the future prioritisation of more limited housing grant and the future
availability of Housing Benefit and its capacity to “take the strain” in housing policy terms.
— The state does have a role in lending and investment not least in terms of helping creating markets
and building market confidence. The state has made significant “investments” in housing as it has in
other industries. Given housing is both a consumption and an investment good there is considerable
locked in value and the potential of this now needs to be properly explored.
— Support in kind is important but currently the mechanisms in place have been put into question. It
is important that we have clarity going forward as to their use and impact.
— Institutional finance is already in place in housing via housing associations. There is clear potential
to go further both with respect to that sector and in relation to private renting though here it is
unlikely to dominate. Investor requirements have to be properly understood and met to secure this
desirable outcome.
— Private finance for housing associations has been one of the most significant success stories in this
area. The market is now under pressure for a number of reasons and government policy changes
have created a degree of uncertainty. It is important to re-stabilise this market.
— The new arrangements for local authorities should create a capacity to fund new development and
this is to be welcomed. It is unlikely to replace existing funding capacity.
The Submission
1. This is a supplementary submission by the Cambridge Centre for Housing and Planning Research
(CCHPR) following our initial submission with LSE and the University of Sheffield. CCHPR is one of the
longer established research centres in the UK specialising in housing and planning issues. The Centre has long
experience in work around housing finance and housing supply (see our website for further details
(http://www.cchpr.landecon.cam.ac.uk/).
2. This is an important Inquiry posing fundamental questions as to the capacity of the government and public
and private sectors to meet the nation’s housing needs. With cutbacks in government expenditure and reductions
in housing supply and mortgage finance alongside the continuing growth in the number of people and
households there are real challenges to the continued health of both the economy and society in the UK.
3. The Committee asks a number of questions and in this supplementary memorandum we seek to provide
responses:
(a) Making best use of limited capital and revenue subsidy in terms of stimulating supply
This raises considerable challenges. In many respects funds should go to the areas where unmet demand and
need is highest—but these tend to be the most expensive so the subsidy applied produces fewer homes. At the
same time the potential to lever in additional resources through borrowing or equity investment is greater in
higher priced areas because the risks are lower and the returns are higher. One option would be to focus funds
on regeneration areas where the market is very weak and on the infrastructure for residential development in
higher demand areas. In this way it would support areas where the market is either very weak or where the
impact of modest subsidy would be greatest in terms of triggering a supply response.
There has been a long standing debate in the UK about what is the most effective sort of subsidy. We can
distinguish capital subsidy, revenue subsidy and personal subsidy. Capital subsidy covers the costs of
development above and beyond what might be met through rents or mortgage payments by means of a capital
grant. An alternative is to pay a revenue grant to cover borrowing that was raised to pay for the development.
Up front capital grants are preferred over revenue grants because they are less vulnerable to political change.
An alternative is to supplement any capital or revenue subsidy with personal subsidy. This is the route the
government has chosen. It is clear that DWP wishes to curb the rising £21 billion housing benefit bill and this
tension now sits at the heart of housing policy. It impacts upon the decisions of providers, funders and investors.
It is important to secure some clarity as to the future course of housing benefit and the willingness of DWP to
“take the strain”.
(b) The role of the state in terms of lending and investment as distinct from grant
It is clear that for the most part the housing market should function as a market and be based on private
sector activity whether as individuals or companies. The state can assist that market to meet the demands of
households—not least by easing tax requirements/providing tax reliefs, eg, capital gains tax, as part of its
policy stance. Setting aside direct state funding via the different types of subsidies, the state also has a role
with respect to lending and investment, first through the rate setting via the BoE and the general management
of the economy. Second, the state can play a significant role in creating market confidence and activity through
lending and investment—ie, advancing funds which are repaid with or without an uplift reflecting the
Ev 76 Communities and Local Government Committee: Evidence
performance of the underlying asset or the organisation to which those funds were advanced. Currently the
government is proposing a “build now, pay later” scheme whereby public land is developed by private builders
and the land cost will be repaid on sale. This has some merit though it should not be without “strings” including
ensuring at least that part of the development is for affordable housing. It also funds equity loans for house
purchasers through housing associations. These funds are repaid to the association with uplift according to the
HPI. Though there is the potential to repay this to government that is only done if the funds raised are not reused for housing development within three years. So uplift is achieved and it feeds back into the housing
programme. This is sensible. Both help the market and providers/supply. The question partly is the opportunity
cost of using that explicit/implicit investment elsewhere and with better returns. There is no evidence to suggest
that this evaluation takes place.
Currently there is a live debate about the £40bn of government grant which has been made to housing
associations over the decades to help fund development. This sits as a repayable charge on housing association
balance sheets. With the reduction in new grant funding some large associations have been exploring whether
this grant could be written off so that it increases the balance sheet capacity of housing associations.
Alternatively some have asked if it could become an equity investment though this raises the question of how
big the premium might be and how this is paid for on top of the current costs/profit structure. It would imply
higher rents. At present the costs of raising equity are probably higher than raising debt. Some associations are
moving towards being fully leveraged within current borrowing terms and thus need to find new ways of
raising funds, eg, the recent Places for People unsecured retail bond issuance. Given that all developing
associations will be increasing their leverage in order to raise finance for development alongside the new
affordable housing regime this exploration is important. It is one possible solution for a group of associations
rather than a solution for the sector as a whole. It also raises a range of governance/constitutional issues
including the public/private status of housing associations, whether and how the equity investor has any say in
the running of the business, how that equity might be traded and whether this could lead to conventional
mergers and takeovers? None of these issues have been resolved to date. Overall, this suggests that although
we are moving towards a greater role for lending and investment, equity might only be a partial solution.
(c) The role of support in kind
This is important and has grown in significance as access to grant funding has declined. The rise in the role
of Section 106 agreements whereby developers agree to provide free or discounted land in exchange for
development rights on the remainder of the site is a case in point and this was discussed in our initial
submission. Support in kind is however vulnerable in that it only works in so far that the mechanism in question
is operating. Section 106 development slowed in the downturn and thus associations reliant upon this found
their development programmes stalled. Moreover because it is in kind it rests on the “random” distribution of
those opportunities rather than providing funding directly where it might be needed most.
Guarantees have been a neglected part of the UK housing system. The current Mortgagee Protection clause
used in shared ownership to protect lenders to the borrower from losses in the event of default has a number
of weaknesses which have not been resolved despite protracted debate between the FSA, CML and the NHF
with the consequence that mortgages for shared owners are less readily available. Similarly mortgage
guarantees provided by local authorities to underpin higher loan-to-value lending by mortgage lenders have
fallen into disuse reflecting lenders’ concerns about the terms under which they were offered. In other countries
state or private mortgage guarantees are used to encourage lenders to offer higher LTV loans to first time
buyers. This is a common solution but it is one that does not currently exist in the UK. There are a number of
technical reasons for this—mainly surrounding the credit standing of the mortgage guarantee insurance
providers. The state could provide this cover as is the case in a number of countries.
The barriers are many and varied—the absence of strongly resourced MIG insurers, misunderstanding about
the cost and use of Local Authority guarantees and the tensions between the EU CRD legislation and the current
SO mortgagee protection clause. All of these could be sorted out if government took a lead in the process.
(d) The availability of long term private finance from institutions
There is a tension in the UK mortgage market between its reliance on short term savings instruments to
bring money in and lending on longer term mortgage products. This mismatch has been managed over the
years but the tensions have increased since the downturn and not least because the FSA is now requiring firms
to give much closer attention to liquidity and basis and interest rate risk. This tension has led some to focus
on the possible role of pension funds which have long term liabilities in the form of pensions and need long
term assets to match them. Given that housing prices and rents move roughly in line with RPI/wages there is
a good fit. However pension funds have shown no real appetite to invest in residential real estate beyond being
active buyers of housing association bond issuance. Recently there appears to be renewed interest in investing
in residential real estate though it has been slow to crystallise into actual new funding.
The barriers appear to be many and varied but include lack of experience and the mixed characteristics of
residential real estate—a mix of gilt (stable) and equities (volatile) characteristics which is hard to position,
the absence of daily pricing measures, periodic limited liquidity and reputational risks. There are a number of
current explorations into the barriers and the committee should consider the progress being made and what
could be done to expedite this.
Communities and Local Government Committee: Evidence Ev 77
If institutional investors wish to invest in residential property, then it makes sense to do so by holding a
diversified range of bonds issued by different landlords—there is no particular virtue in institutional investors
like pension funds actually owning property directly and as noted above institutions do already hold HA paper.
The barriers to entry for new large scale private landlords are high—it is difficult to acquire a portfolio
which is simultaneously sufficiently diversified but also spatially concentrated (for economies of scale in
management), and to do so within the short time frame required by investors.
In this regard it can be argued that the most practicable means of creating large scale, long term, institutional
landlords in the private rented sector may be to encourage housing associations to expand into market renting,
since they already exist, are of a viable scale, and have the necessary expertise. The key issue here would be
to develop regulation to ensure that any cross-subsidisation is from private to public rather than the other
way around.
A further strand in this is the linking of shared equity with institutional finance. There are a number of
public and private shared equity schemes in place which assist first time buyers. Ultimately if the provider of
the shared equity is government or the property provider—builder, local authority or housing association there
will be balance sheet constraints. There is potential for Institutions to buy up performing loans books and thus
allowing the original funder to recycle its funds into more activity. Builders have over £1 billion of shared
equity loans on their books and housing associations will have an even larger sum. There is some evidence
that institutions are wiling to explore this potential and it would be helpful if this was taken further.
(e) Increasing private finance for housing associations and ALMOS
Higher rents will support more borrowing but potentially will change the role of the sector. A number of
changes have been made in terms of borrowing rules which have eased the raising of private finance including
for example the use of security trustees, taking account of first tranche sales for shared ownership, and allowing
sales and disposals to be taken into account—all these have increased the capacity to raise finance but they are
modest. Some large associations have secured credit ratings to widen their appeal in the funding markets and
others have formed borrowing clubs which allow small associations to bundle together their funding
requirements.
At the same time the number of lenders of debt to the sector has been shrinking reflecting changes in
financial markets and mergers. Much of the back book of private finance for housing associations is loss
making for lenders—loan terms granted in the highly competitive market evident up to 2008 were extremely
fine with the upshot that as funding costs have risen the returns on these loans are far lower than the current
cost of funds. This loss making is hardly conducive to expanding loan books and indeed this has meant a
number of lenders have now looked to reasons to re-price loans. This is a new and unfortunate tension between
lenders and HA/ALMO borrowers.
(f) Reform of the Council Housing Revenue Account system and more funding for housing supply
The principle of HRA reform is to redistribute existing debt among local authorities with retained stock so
that each local authority has the maximum amount of debt that its income stream will support. In these
circumstances, local authorities will not have any room for manoeuvre to increase funding until they have
either increased their rental stream (which they cannot increase by more than the government’s annual guideline
without carrying the cost of any additional Housing Benefit), or reduced their debt, either by diverting income
to do so or by selling assets.
The ability to reduce debt, particularly by asset disposals, is not distributed equally across local authorities,
and there is no guarantee that those authorities with the greatest capacity to dispose of assets will either be in
the greatest need of reinvestment in adding to stock, or necessarily be willing to do so. Due to past quirks in
the subsidy system, a number of local authorities have less actual debt than their allocated debt ceilings, and
so could borrow more immediately, if they had the income stream to support additional debt. The number of
such authorities is not known. DCLG collect the necessary data from the subsidy returns, and it would be
helpful in estimating the scale of this capacity if this data were published.
November 2011
Written submission from the Building & Social Housing Foundation
Executive Summary
— BSHF welcomes the opportunity to submit evidence to the Select Committee on this important and
timely issue. The UK’s historic and growing undersupply of housing has a substantial impact on
the country.
— The current government, like the last, is publicly committed to a vision for significantly increased
housing supply, and is implementing a variety of policies, which are designed to deliver new homes.
However, critics suggest that these changes are insufficient to deal with the scale of the problem.
Ev 78 Communities and Local Government Committee: Evidence
—
—
The following strategic objectives would work together to overcome many of the substantial barriers
to delivering sufficient housing:
—
Build new places.
—
Enhance delivery of land.
—
Ensure that an appropriate range of finance is available to support development.
—
Maximise the use of the existing building stock.
There are a number of specific policy changes within each of these four areas, which could support
an increase in housing supply. These include:
—
Local authorities should create revolving funds to support infrastructure development and,
where relevant, land purchases.
—
Local authorities should prioritise having a senior role within the organisation with
responsibility for inward investment and the securing of the common wealth of the area.
—
Government should seek to develop mechanisms that would allow local communities to capture
some of the planning gain.
—
Government should investigate the barriers to adequate finance being available for a diverse
range of housing models.
—
Government should investigate new mechanisms for helping potential first-time buyers in
building up a sufficient deposit.
—
HM Treasury should move to the internationally accepted “general government” system of
classifying public sector debt.
—
Detailed assessment of the different mechanisms used across Europe would provide greater
insight into the options available in the UK.
About BSHF
The Building and Social Housing Foundation (BSHF) is an independent housing research charity committed
to ensuring that everyone has access to decent and affordable housing, and holds Special Consultative Status
with the United Nations Economic and Social Council. Since 1994 BSHF has organised an annual series of
Consultations at St George’s House, Windsor Castle, bringing together diverse groups of experts for in-depth
discussion and consideration of an important housing issue. Earlier in the summer a Consultation was held on
housing supply and the findings have been published as More Homes and Better Places: Solutions to address
the scale of housing need.1 This submission is based on this report and on original research that BSHF has
been involved in.
Introduction
The UK’s historic and growing undersupply of housing has a substantial impact on the country: it affects
individual households, who struggle to find housing that fits their needs at a price they can afford; it affects
the wider economy, creating a drag on growth and hindering labour mobility; and it affects society, worsening
inequality and amplifying the challenges of demographic change.2
This undersupply of housing is a longstanding problem, which has been exacerbated by the financial crisis
of 2007–08. The structural problems—such as those related to land and planning, opposition to development,
and the operation of the construction industry—have been compounded by increased restrictions on finance
and mortgage availability. An inquiry into the delivery of new homes by the Select Committee is, therefore,
very timely.
The current government, like the last, is publicly committed to a vision for significantly increased housing
supply, and is implementing a variety of policies across different aspects of housing supply. However, critics
suggest that these changes are insufficient to deal with the scale of the problem. Significant, but achievable,
change is necessary if the country is to get the housing it needs.
At present, however, there is an absence of clearly articulated strategic objectives, to provide a coherent
framework within which individual policies can be developed, to contribute to the overall vision of greater
supply. The following strategic objectives would work together to overcome many of the substantial barriers
to delivering sufficient housing.
—
1
2
Build new places. Local authorities should take a leading role in assembling land and parcelling it
out to a range of suppliers, to increase competition amongst firms and between different models
of development.
Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing
need,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994–15C5-F4C0–99170AE24B5B0A84
ibid.
Communities and Local Government Committee: Evidence Ev 79
—
—
—
Enhance delivery of land. Those who own or control land that is suitable for housing need to be
encouraged to bring it forward for prompt development, at values that will secure appropriate quality.
Government policies, regulations and taxation structures create certain patterns of incentives, which
may or may not support the prompt development of land. These rules and their consequent incentives
should be aligned to ensure that they provide the maximum possible incentive for development.
Ensure that an appropriate range of finance is available to support development. Following the
global financial crisis, there has been a fundamental change to the financing of housing supply and
purchase, in addition to short-term credit constraints. Government and the housing sector need to
ensure that these changes are adapted to, so that housing supply is not inhibited, and that funding is
available for the infrastructure needed to boost growth, and cope with climate change.
Maximise the use of the existing building stock. The existing stock of buildings, including empty
homes and some commercial properties, represents a potential source of additional housing. Where
possible this should be brought into use to help to meet housing needs.
BSHF considers that the specific policy responses outlined below must form part of a coherent strategy if
they are to deliver the new homes that are required in the UK.
1. 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
1.1 Since the early 1990s successive governments in the UK have relied on revenue subsidies such as
Housing Benefit to “take the strain” of housing policy. Whilst the economy is strong it can appear relatively
easy to rely on revenue subsidies that can be covered by healthy tax receipts. However, such a system inevitably
comes under pressure in times of economic constriction, when upward pressures on claimant numbers are
likely to coincide with downward pressure on government spending.
1.2 Expenditure on Housing Benefit continues to rise and is likely to continue to increase, despite government
measures to control it.3 Evidence suggests that expenditure on Housing Benefit has increased primarily for
two reasons. Since the start of the recent recession, the increase in expenditure is largely due to rising numbers
of working age claimants. Prior to the recession the increase in expenditure on Housing Benefit was due to
rising rents. The longer term trend towards higher rents suggests that the sustainability of the support can be
best ensured by adopting policies that seek to restrain increases in housing costs (including rents). This is
unlikely to be resolved without serious attention to the supply side of the housing system, ensuring more homes
are developed to suppress increases in housing costs.
1.3 Therefore, securing the long term financial sustainability of support with housing is closely linked to the
need to increase housing supply. It may be necessary to rebalance capital and revenue subsidies, to provide
greater investment in the development of a long-term social housing asset. It may now be time for supply side
“bricks and mortar” subsidies to take more of the strain to ensure that housing support is financially sustainable
in the long term. A particular emphasis on increasing the provision of social housing at below market rents in
areas of high demand could have a real impact on the long-term sustainability of support with housing costs.
1.4 Focusing on the supply side and increasing the delivery of new homes includes options beyond a simple
return to substantial levels of grant funding for new build housing. The answer to question two below begins
to highlight the variety of types of support that can be provided to finance new housing supply.
2. What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance
between them
2.1 The state has an important role to play in supporting the delivery of new housing supply, which goes
beyond simple direct capital and revenue subsidies. Lending and investment in different forms provide
alternative options, which could be developed further alongside a range of other state actions.
2.2 Research by Housing Europe has identified eleven different mechanisms being used to finance social
housing in different European countries, including interest rate subsidies, tax-privileged private investment,
and Government secured private investment.4 Detailed assessment of the different mechanisms used across
Europe would provide greater insight into the options available in the UK. For example:5
— In France, tax-free household savings schemes finance non-market loans to social housing providers
alongside state and local subsidies, tax incentives and other loans. Land is often provided by local
authorities.
— In Germany, the federal government has withdrawn from direct supply support and shifted towards
demand side subsidies. Municipalities develop their own programmes and housing companies are
private entities, with a variety of shareholders. Private investment in social housing is promoted via
tax concessions.
3
4
5
Pattison, B and Vine, J (2011) Housing Benefit Claimant Numbers and the Labour Market: Modelling and analysis,
http://www.bshf.org/published-information/publication.cfm?thePubID=4E36E822–15C5-F4C0–9910CF24FAAC301E
CECODHAS Housing Europe (2010) Financing Social Housing after the Economic Crisis, Table 1, page 15,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=7AD1065F-15C5-F4C0–99BAE15289421527
These examples are taken from: Financing Social Housing after the Economic Crisis.
Ev 80 Communities and Local Government Committee: Evidence
—
In Sweden, corporate tax exempt municipal housing companies have always been financed by capital
market loans, which were sometimes backed by municipal guarantees and central government grants.
In the past, interest rate subsidies were provided by the central government, but these have ceased.
2.3 These examples show some other options and highlight the importance of assessing the full range of
interventions available to support housing supply. The key is identifying which options can be combined to
finance additional supply, and more specifically affordable housing, in different locations and contexts within
the UK.
3. 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
3.1 Local authorities should create local ventures for large-scale strategic sites, taking title of land,
promoting, granting planning permission, putting in infrastructure and parcelling out the serviced land.
Such local ventures should be led by local authorities, but would typically require participation from other
stakeholders such as land owners.
3.2 A local venture of this nature would be able to pull together a range of stakeholders with a financial
interest in a development. Within its structure it could integrate planning, investment and development
functions, and would have the ability to draw in the appropriate skills. This technique would generally not suit
smaller sites, but could be appropriate for both substantial extensions to settlements and new settlements.
3.3 By undertaking activities related to planning permission, site assembly and the installation of
infrastructure, the risk to developers would be substantially reduced. Reducing the risks for developers could
allow a wider variety of development models to emerge.
3.4 A group of partners coming together to take a longer-term interest in the site would help to draw benefits
into the community over a longer period. The involvement of local authorities would help to ensure democratic
accountability to local communities, and would also be vital to ensure statutory functions such as planning
could be properly integrated.
3.5 An effective public-private partnership supported the developed of a new settlement near Amersfoort in
The Netherlands. A Joint Development Company was set up, with the Council and five private companies as
shareholders. The companies included both those that had invested in land locally and those that had previously
had positive involvement in Amersfoort. This Joint Development Company then raised €750 million from
BNG (the Dutch municipal bank) repayable over 15 years, which then financed the infrastructure and other
upfront cost.6
3.6 Local authorities should create revolving funds to support infrastructure development and, where
relevant, land purchases. By taking a leading role in creating such funds, local authorities could draw in other
sources of finance, such as from private companies. Local authorities’ aims would be well-aligned to use these
funds in a counter-cyclical fashion, supporting local economies and building infrastructure at times when other
construction work is slower, acting to support growth where there is market failure and to pump prime markets
until confidence, and private sector growth and investment returns. Local authorities could also create loan
guarantee schemes to support community-based housing solutions who may struggle to gain access to finance.
3.7 A key barrier to local authorities undertaking these kinds of role is the skills and capacity at a strategic
level. Local authorities should prioritise having a senior role within the organisation with responsibility
for inward investment and the securing of the common wealth of the area. In some authorities this role
will already exist, in others it will need to be created or developed. In the past, this role would often have been
handled by the Borough Valuer or economic development departments, working with the chief planning officer
and engineer. Much of the country’s post-war reconstruction and early town centre redevelopments were
managed by these three key people within local authorities. The chief planning officer role in local authorities
is not, at present, a statutory post. It has been argued that remedying this situation would help to raise its status
within authorities. Specifically, it would help to ensure that planning is more effectively integrated in corporate,
operational and policy decisions of the local authority.
3.8 All chief officers should be required to take a broad view of common value, and be able to look beyond
the narrow outcome of maximising cash returns from individual actions such a land sales, to ones that create
long-term capital and social value in communities.
3.9 Placing this role within local authorities is vital, as authorities are uniquely well positioned to look at
common assets and the physical realm. This should look to incorporate physical assets (such as land and
property) and social capital. Chief officers should also have responsibility for communicating with other
executive officers and councillors: it should be a corporate priority for the council itself to understand what
the community’s assets are and to develop their community leadership role around this understanding.
3.10 In the longer term, stronger local authorities that are better able to draw investment into their areas will
benefit central government, as they will make fewer calls on the central purse. Efficient local authorities should
6
Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing
need,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994–15C5-F4C0–99170AE24B5B0A84
Communities and Local Government Committee: Evidence Ev 81
be able to develop local investment plans that maximise the use of public, community and private finance and
assets, and thus ensure that calls on central government funds are calls of last resort.
3.11 Central government can make other changes that support local communities in delivering new supply.
A different type of support can be provided through mechanisms to capture planning gain. Government should
seek to develop mechanisms that would allow local communities to capture some of the planning gain,
the increase in the value of land that occurs when planning permission is granted. Capturing some of the gain
for the benefit of the community has the potential to contribute to supply, in part because it may lower
opposition to planning permission, if the existing community can see that the local area will gain some of
the benefit.
3.12 The government has announced that a land auction mechanism will be piloted, which is one possible
mechanism for capturing planning gain. Details of this pilot have not been announced, but there are a number
of different methods for capturing more of the planning gain.
3.13 Some planning gain captured in this way may be useful in establishing revolving funds for the creation
of infrastructure, etc. More generally, if a local authority has acquired land through a land auction process, it
may seek to establish models like the local ventures described above, to undertake infrastructure works and
parcelling out of the land.
3.14 Some models used in mainland Europe could be considered in the UK. These typically rely less on
taxation or levies and instead on a mix of equity investment in infrastructure by municipal banks and
constraining the value of land received by landowners and developers, either to an agreed multiple of existing
use value, or a fixed percentage of outturn sales value. These have advantages of certainty for landowners,
represent a fair but not exploitative uplift in value, and might be preferable, as being less complex, with lower
transaction costs and less vulnerable to avoidance strategies, than taxation.
4. 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
4.1 Accessing long-term private finance is an important part of supporting the delivery of more new homes
in both the private and social rented sectors. However, the availability of multiple sources of smaller amounts
of finance is also important, as is the need to ensure that first-time buyers have access to suitable finance.
4.2 Government should investigate the barriers to adequate finance being available for a diverse range
of housing models. A number of alternative housing models already exist in the UK or play a significant role
in the housing systems of other countries. These may be able to play a more substantial role if they are given
the right type of support or have barriers to their development removed. These models include:
— Sweat equity, where people contribute their time and effort towards providing their own housing
instead of financial equity.
— Community land trusts, which seek to provide long term affordable housing for a particular
community.
— Self build, where individuals take a leading role in the design and/or building of their housing.
— Housing co-operatives, which jointly own and democratically manage housing stock.
4.3 These housing models, and others like them, account for only a fraction of the housing stock in the UK,
unlike some other countries in Europe or North America where they are much larger, both in terms of total
numbers and as proportions of the stock. There is the potential in the UK for many more residents to be
attracted by the opportunity to develop long-term affordable housing in sustainable local communities. Building
up the necessary social and financial capital to develop these models takes significant amounts of time and
effort, and they are unlikely therefore to contribute large amounts of new stock in the near future. However, in
the longer term, they have the potential to play a far more significant role. In the past this has often led to
these models being marginalised and institutional barriers have made it difficult for them to increase.
4.4 It is important to ensure that those developing housing using innovative models can access finance. It
may be appropriate for special lines of credit to be made available for co-operative and self-help housing,
which occurs in other countries, for example through the German Federal Bank.
4.5 Some of these models can have wider social and economic benefits. Self-help housing schemes that train
NEETs (young people not in employment education or training) to bring empty properties back into use can
develop their skills, improving their employment prospects, at the same time as delivering much-needed
housing.7
4.6 There is evidence that housing supply is linked to the number of transactions in the housing market.8
Government should investigate new mechanisms for helping potential first-time buyers in building up a
sufficient deposit. The tightening of mortgage market restrictions means that obtaining a deposit is now
7
8
Pattison, B, Strutt, J and Vine, J (2011) Self-Help Housing: Supporting locally driven housing solutions,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=2F9EC046–15C5-F4C0–991896202739F469
Meen, G (2003) Regional Housing Supply Elasticities in England,
http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/media/8/E/Geoff%20Meen.pdf
Ev 82 Communities and Local Government Committee: Evidence
perceived by consumers to be the major barrier to property purchase.9 This perception is supported by the
fact that between the first quarter of 2007 and the same period in 2011 the median first-time buyer deposit as
a proportion of income rose from 41% to 87%.10 Whilst approaches that increase households’ access to debt
by loosening lending conditions are not desirable, ones that achieve it whilst making the borrowing safer are
potentially sound.
4.7 For example, the government could ensure that any home meeting A, B or C on its energy performance
certificate would be eligible for an additional loan from the Green Investment Bank; this might be able to act
effectively as a deposit, with the repayments being affordable due to the savings on energy bills. (This might
be structured over an extended period, and could range from, say, £5,000 for a C-rated home to £10,000 and
£20,000 for B- and A-rated properties respectively.) By providing additional finance, a loan from the Green
Investment Bank would assist with the deposit requirement, whilst also incentivising green homes.
4.8 Local authorities could create loan guarantee funds that support first-time buyers. Some local authorities
are already developing this type of approach. In Germany, self-builders can access low interest loans of up to
€50,000 from the government to help them build eco homes.11 Government should also be considering
measures such as Local Asset Backed Investment Vehicles and the issue of infrastructure bonds that are
repayable after around 20 years from the uplift in land values as a result of new infrastructure and related
development.
5. How housing associations and, potentially, ALMOs might be enabled to increase the amount of private
finance going into housing supply
5.1 Whilst we do not have detailed information in response to this question, we note that some housing
associations (typically smaller ones) have relatively unencumbered assets. Further research is required to assess
whether it is the case that some of these housing associations have the desire but not the skills and expertise
to sweat those assets.
6. How the reform of the council Housing Revenue Account (HRA) system might enable more funding to be
made available for housing supply
6.1 The reform of the HRA is a welcome step but more can be done to release funding for local authorities
to increase housing supply. HM Treasury should move to the internationally accepted “general
government” system of classifying public sector finance. The current public sector net cash requirement
(PSNCR) system of classifying debt (previously known as the public sector borrowing requirement, or PSBR)
is an implicit form of regulation, as it brings local authority borrowing for council housing within the public
sector debt calculation and therefore requires tighter control by the centre.
6.2 Moving to the internationally accepted General Government Financial Deficit (GGFD) standard would
remove local authorities’ trading activities, such as housing, from the national debt, significantly increasing
their freedom to borrow against their housing assets to increase supply.
6.3 Although local authorities’ housing departments in England are to gain some freedom in their accounting
in April 2012, this will be accompanied by the introduction of a cap on housing borrowing. The proposed
change in the accounting standard would permit this cap to be relaxed, with prudent borrowing and asset
management becoming the governing control focus for local authorities.
6.4 This move would also have the advantage of removing the risk that the debt of Registered Providers
(such as housing associations) may become part of the national debt. At present housing associations are
regarded for accounting purposes to be private bodies. However, because the state has a relatively high degree
of control over housing associations it is possible that at some point the Office for National Statistics will
revisit that classification and insist that they be considered as public sector for accounting purposes.
7. 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
7.1 The introduction of Affordable Rent has split opinion within the housing sector. Until the programme
has been running for several years it will be difficult to make an objective assessment of its impact. It is vital
that the programme is carefully monitored from its outset. This monitoring will need to consider the impact of
the programme on a number of different levels, including the numbers of new homes being built, the quality,
size and location of these homes, the longer term impact of the programme on housing supply and the impact
on the revenue subsidy bill.
October 2011
9
10
11
Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing
need,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994–15C5-F4C0–99170AE24B5B0A84
ibid.
ibid.
Communities and Local Government Committee: Evidence Ev 83
Written submission from Shelter
I. Summary
1. Shelter welcomes the committee’s decision to hold an inquiry into the financing of new housing supply,
particularly the sections of the review that address the urgent need to secure funding for the delivery of truly
affordable new homes.
2. As the leading housing charity, campaigning across all tenures to bring an end to homelessness and bad
housing, we draw on the experience of our front-line advice and support services in the development of our
policy and research expertise. Our clients face a large number of problems, including shortages of social
rented housing; spiralling costs and poor conditions in the private rented sector; unattainable or unsustainable
homeownership; and difficulties maintaining mortgage repayments. Ultimately these are all a symptoms of a
critical lack of homes. A key factor behind this shortage is the lack of sufficient finance to support development,
particularly in relation to truly affordable and stable housing.
3. Shelter is very pleased to see the Communities and Local Government Select Committee tackle the issue
of housing finance, which is fundamental to the long term health of our housing market. It requires long term
solutions and greater cross party consensus on the best ways forward. As a result, Shelter believes the
Committee is uniquely placed to provide innovation, guidance and, most importantly, leadership to government,
parliamentarians, civil servants and the wider housing sector on this issue of critical importance. We hope we
can contribute to a set of recommendations that will help to shape a cross party debate and foster agreement
about the way to achieve the increase in housing numbers, particularly affordable housing, that all of the major
parties have called for.
4. This submission outlines some ideas, financial and otherwise, that may help to boost the delivery of
affordable housing, including effective use of public land, the role of the planning system, incentives to promote
institutional investment in the housing market, and non-grant financial tools such as investment guarantees.
5. However, it is unlikely that any one measure on its own can unlock the stalled housing delivery system
and boost supply to the levels that are needed. Some of the ideas outlined below will work best, or indeed may
only work, in combination. Shelter believes that new approaches to both land and finance will be required.
Increasing the supply of either land or finance in isolation will not work: additional land supplied without
finance will not be developed, and additional finance without land will simply inflate prices.
6. Shelter warmly welcomes the recent commitments made by the Prime Minister and Chancellor to increase
levels of housing supply, and their recognition of the stimulus effect housing development can have on the
economy. And Shelter similarly welcomes the Government’s commitment to making the planning system
“increase significantly the delivery of new homes”.12
7. However, we have also made it clear that sufficient government investment is essential to delivering
enough affordable homes. We were very disappointed to see that funding for new affordable housing was cut
by over 60% in the last Comprehensive Spending Review, which made housing the biggest loser in a
particularly tough spending round.
8. Reforms to the national Housing Revenue Account (HRA) subsidy system do offer potential for some
councils to utilise revenues from their housing stock for new investment, provided they are allowed to do so.
Shelter believes that all surpluses raised from housing stock, whether in rent or sales, should be ring-fenced
for housing delivery and upkeep. We await with interest further details on how the HRA reforms will work in
light of recent announcements on reviving the Right to Buy, but are pleased that the government has pledged
that Right to Buy receipts will go to finance new supply.
II. 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
9. Supply across all tenures has not kept pace with growing demand for many years and has fallen to a
historic low following the recent credit crunch. It shows little sign of increasing to the levels we require as we
move out of recession.
10. With economic projections looking increasingly uncertain and growth falling behind the government’s
own projections, investment in house building provides an opportunity for the government to stimulate
economic growth. Each additional new home built creates 1.5 jobs in the construction sector as well as
additional employment through supply chains linkages and the economic multiplier of construction compares
favourably to other high value sectors.13 Given the significant capacity available within the sector it is
extremely unlikely that additional public investment would displace private sector investment.14
12
13
14
DCLG, Draft National Planning Policy Framework, page 30.
The Construction sector has an economic output multiplier of £2.09 for every £1 of additional construction demand. This
compared to £1.70 for both the manufacturing of medical and precision and banking and finance (ONS Input-Output Analysis
2002 Edition).
Investment in housing and its contribution to economic growth, FTI Consulting, October 2011.
Ev 84 Communities and Local Government Committee: Evidence
11. House building also has beneficial effects on the supply side of the economy that could help raise the
long term growth rate of the national economy including: (i) avoiding long term unemployment among
construction workers (and particularly youth unemployment) which would result in people becoming
increasingly isolated from the labour market,15 and (ii) improving labour mobility, with 5.6 million people
reporting that housing costs prior to the recession had affected their ability to move for work. Of these, 2.4
million were aged 18 to 34.16
12. In order to realise these supply side benefits it is essential that any proposals for housing supply are
firmly rooted in a proper assessment of the need for new homes. Local authorities and local communities must
understand and respond to the need for new homes ensure that a shortage of affordable housing does not
constrain the economic recovery in those parts of the country where need is most acute.
13. Shelter welcomes the government’s commitment to delivering new homes and the important cross party
recognition of the stimulus effect this can have on the economy. During his Conservative party conference
speech the Chancellor, pointed out that the delivery of 100,000 new homes could provide up to 200,000 jobs,17
whilst the Shadow Chancellor, spoke about the role the delivery of 25,000 new homes could play in stimulating
the economy.18
14. It should be recognised that previous approaches to house building have focused on the quantity of units
delivered, sometimes to the detriment of quality. New homes in the UK are now among the smallest in Europe
and frequently fail to meet even basic assessments of design quality.19 All new homes should be built to last
as long as the successful typologies of previous centuries, with excellent standards for internal and external
space, environmental efficiency and design.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance
between them
15. Overall public spending on housing has tended to remain at much the same proportion of total
government expenditure over recent decades. But the balance within that expenditure has shifted over time
from capital (or affordable housing supply subsidies) to revenue expenditure (in the form of housing benefit).
Steadily rising rents compared to wages have driven the housing benefit bill upwards, while the chronic
shortage of affordable homes is a testament to the under funding of supply by successive governments.
16. The last Comprehensive Spending Review cut capital grants dramatically. While Shelter believes this
situation must be reversed, we also recognise that there could be a useful role for state lending in addition to
grant funding.
17. Borrowing has always been key to residential development. The future rental payments and capital
growth associated with new housing provide an income stream and asset base against which the cost of housing
developments can be secured, making house building a good bet for lenders. Yet financial markets are currently
failing to provide enough capital to supply the homes we need: in this context there is a strong case for state
lending to replace private investors. And even in more normal market conditions, the public lending is a
cheaper source of finance than private banks or markets.
18. A “National Housing Investment Bank” could attract investment funds and provide loans for the
construction of low-cost housing.20 In European countries such banks have proved effective at leveraging
public funds to channel private finance into both house building and improvements to the existing stock, a
model that RICS have called on to be replicated in the UK.21 The government has partially adopted this
approach through its Green Investment Bank: we would urge the committee to consider whether this model
could usefully be expanded to include financing house building as well as green infrastructure.
19. Affordable housing is self-financing over the longer term, which is why much of the existing council
stock is now debt-free. As original construction debts are paid down, it is right to ring-fence the proceeds for
further housing investment. This maximises the long term efficiency of public investment, by providing new
genuinely affordable homes that can enable more households to cover their own housing cost independently,
reducing the need for employers (via wages) or the taxpayer (via Housing Benefit) to fund increasing rents.
20. Nonetheless, while the wider housing market remains unaffordable for so many households, there will
always be a need for capital grant to support affordable supply. The appropriate balance between grant and
borrowing will vary according to market conditions over time and across different schemes. For housing to be
truly affordable for the long term it will need sufficient grant to keep the debt burden at a level that can
maintain rents at or below what is affordable to people on low incomes.
15
16
17
18
19
20
21
In July 2011 there were 63,000 unemployed construction workers, over double the pre-recessionary level (DWP Claimant Count,
ONS).
The Human Cost, Shelter (2010).
Rt Hon George Osbourne MP, Chancellor of the Exchequer, 3 October 2011, Conservative Party Conference.
Rt Hon Ed Balls MP, Shadow Chancellor of the Exchequer, 26 September 2011, Labour Party Conference.
CABE Housing Audits 200507.
BSHF, The Future of Housing: Rethinking the UK housing system for the twenty-first century , 2009.
Balchin, P. and Rhoden, M. Housing Policy: An Introduction, fourth edition, page 40, Oxford, Routledge, 2002.
Communities and Local Government Committee: Evidence Ev 85
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
21. In addition to direct public investment, there is a range of tools that governments can use to channel
investment into housing supply. Some of these, such as planning gain, are well established, others could be put
to greater use. Outlined below are a number of key areas where public sector action could help to stimulate
housing delivery, which we would suggest the committee considers.
Local Plans
22. Planning has long been the most significant indirect form of public support for affordable housing. At
its best, the planning system successfully channels investment into affordable housing by setting out clear,
strong policies that affordable housing is a fundamental requirement, without which planning permission will
not be granted. This mechanism works by sending a clear message to the market, which translates the
requirement for affordable homes into lower land prices. But this only works if the market believes the policy
will be enforced. If such policies are weakened, or perceived to be weakening, the market will quickly adjust
land prices upward to absorb the extra profit that might be made from more private and less affordable
development. Higher land prices make development more expensive and homes less affordable, and mean more
subsidy is needed to deliver affordable housing.
23. Therefore reform of the planning system needs to ensure strong policies on affordable housing provision
are in enshrined in Local Plans. This is especially true since, following the abolition of Regional Spatial
Strategies, Local Plans and their associated policies will be the sole mechanism through which affordable
housing is planned for.
24. Affordable housing should not be treated as a residual requirement but as a fundamental aspect of
sustainable development. We are therefore concerned by the references to development viability in the draft
National Planning Policy Framework22. These imply that land owners and developers could argue for
affordable housing to be excluded from a site in order to achieve profit margins of a level that is “acceptable”
to them. Allowing landowners to present requirements for affordable housing as threatening viability risks
pushing land prices up further.
Planning gain
25. Over half of all affordable homes are currently delivered on planning gain sites, even since the economic
downturn (the figure was 56% in 2009/10, down from 62%23). The value of the planning system’s support for
new affordable homes is in excess of £2bn per annum. It is therefore essential that the reformed planning
system continues to provide effective support for the delivery of affordable homes—and we are concerned that
the draft NPPF may undermine this support.
26. To help local planning authorities secure the required level of affordable homes through S106 agreements,
the NPPF should include a policy presumption that Local Plans contain both a numerical requirement for
affordable housing and a percentage of units that should be provided in any market led housing scheme. This
would not impose specific targets, but would require a simple public statement of local authorities’ policies.
27. To preserve the real value of the planning system’s investment, the NPPF must emphasise more strongly
that affordable housing should be provided on-site and only exceptionally be provided off site or commuted.
The provision of affordable housing on-site as part of market-led developments remains a critically important
supply of land for affordable housing, and an important factor in creating inclusive and mixed neighbourhoods.
28. Where off-site provision is justified, the total amount of off-site provision required should be much
clearer than “a financial contribution of broadly equivalent value”24 as the draft states. For example, if the
affordable housing requirement in a Local Plan was 40% then, on a site of 60 homes, the on-site provision
requirement would be 24 affordable homes. However, if the affordable homes were to be provided off-site,
40 affordable homes would be required, as this equates to 40% of the combined total of 100 homes on both
the sites, when the original 60 are all market housing.
29. It is also essential that local planning authorities ensure that their Community Infrastructure Levy (CIL)
charging schedules support the levels of affordable housing required in their development plans. As indicated
by the Minister in the committee stage of the Localism Bill, there should be a very clear statement in the
Framework that the CIL should not prejudice affordable housing.
Public land
30. It is often asserted that surplus public land is a vast potential source of new housing. Different parts of
the public sector do hold considerable land assets, and in general it must be sensible to bring them into use
wherever possible, and Shelter welcomes attempts to speed up their release. But surplus public land has a long
22
23
24
DCLG, Draft National Planning Policy Framework, paragraphs 39 to 43.
DCLG HSSA data.
DCLG, Draft National Planning Policy Framework, page 31.
Ev 86 Communities and Local Government Committee: Evidence
history of failing to deliver on the promises made for it. Much of it is not in the right places, has contamination
costs associated with it, or is otherwise under utilised for a good reason.
31. More importantly, public authorities are under legal obligations and financial pressure to secure best
consideration for any assets disposed of in order to maximise investment in the services they provide—not to
finance housing delivery. Health authorities, for example, need new and different incentives if they are to
release land for development cheaply rather than maximise returns to fund health budgets. It also remains the
case that there almost no holding cost of land—whether for public or private owners. There is therefore little
that can be done to tip the balance of incentives in favour of rapid development when the option of later release
at greater value exists.
32. These divergent incentives and financial pressures often preclude using public land to improve the
fundamentals of development economics, leaving schemes on public land in the same position as commercial
developments.
33. Releasing public land on a delayed payment basis, as under the “Build now, pay later” scheme announced
in the 2011 Budget, may help to speed delivery of development schemes by reducing the upfront costs to
developers and sharing some of the risk between public and private sectors. Just as with conventional land
sales, there is an urgent need to ensure that such sites deliver sufficient quantities and proportions of truly
affordable housing, and that the need to secure capital receipts for public land does not undermine this goal.
Where appropriate, public authorities should also retain equity stakes in developments, to preserve a degree of
control over future use and give the public a share in future value gains.
34. More effectively, local authorities regularly release land to housing associations at below market rates,
in order to subsidise affordable housing delivery. However, it remains to be seen whether this straightforward
means of supporting housing finance will survive the current squeeze on council finances and the cuts in
affordable housing grants. Where local authorities provide subsidised land for development by housing
associations or other providers, this should be predicated on securing positive housing outcomes—particularly
provision of affordable homes.
35. An alternative approach is for public authorities to retain ownership of land and develop it in directly or
in partnership. This may not constitute the “release of public land”, but it can provide genuine additionality.
Direct development on public land ensures that the assets themselves, and the uplift in value that quality
development brings, are retained for public benefit. Publicly developed housing can then be used by local
authorities to meet their own, locally determined, housing priorities—whether for social, intermediate or
private homes.
Investment guarantees
36. Government guarantees are an under-utilised tool. Where markets need to achieve scale before they can
operate effectively, guarantees could help to give early investors the confidence to invest.25 The major barrier
to the use of guarantees is often held to be Treasury accounting rules requiring 100% cover for any government
guaranteed investment. Maintaining sufficient cover to adequately cover reasonable assessment of risk, rather
than full theoretical exposure, could enable more use of public guarantees, and provide a powerful new tool
for supporting development finance.
37. The promise of large scale institutional investment in private rented housing is one area that guarantees
could be used for. Despite the strong capital growth residential property has delivered over the long term, this
market has simply not materialised. One argument is that intervention is needed to help the market reach
the scale it needs to be self sustaining. Investment guarantees would be the obvious policy instrument to
achieve this.
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
38. Pension funds and other institutional investors have long been cited as a potential source of investment
in rented housing, and the government has recognised the need for greater institutional investment into the
private rental market.26 These measures would be welcome, but deeper market reforms will be needed to tip
the balance of returns in favour of investment in long term income rather than speculative investment in
capital growth.
39. 71% of private rented stock is owned by individuals, and over three quarters of landlords only have one
property.27 Their income from rent is taxed as investment rather than trading income, restricting growth.28
Landlords operating to professional standards should be treated as professionals by the tax system and offered
the same level of encouragement to grow as other small businesses, while being equally subject to effective
regulation.
25
26
27
28
JRF, 2011: http://www.jrf.org.uk/sites/files/jrf/families-aspirations-good-housing.pdf
Budget 2011; British Property Federation.
Julie Rugg and David Rhodes, The Private Rented Sector: its contribution and potential, University of York, 2008.
JRF and Shelter Private Renting: A New Settlement—A Commission on Standards and Supply, 2002.
Communities and Local Government Committee: Evidence Ev 87
40. Large scale institutional investment in housing supply would clearly be welcome, if it can provide
additional sources of financing for high quality homes, but we should not expect a revolution in housing finance
to come from this source. Even in countries with much larger private rented sectors and significant institutional
investment in housing, it remains the case that the bulk of landlords are small scale investors, and particularly
individuals, much as in the UK. The exception is Switzerland, where institutions are required by law to invest
in property—and even there institutions only hold 23% of the privately rented stock.29 Finally, there is no
guarantee that large scale landlords will provide better services to tenants than smaller ones. As with any
source of housing finance it is also critical that additional funds are channelled to new supply, and do not
simply go towards inflating asset prices.
How the reform of the council Housing Revenue Account system might enable more funding to be made
available for housing supply
41. To date the revenue and capital receipts from council housing have not been sufficiently ring-fenced and
this is part of the reason why local affordable housing has been significantly underfunded, both in terms of
supply and upkeep. The national council housing finance system has prevented all the rents collected by local
authorities being reinvested in the maintenance and management of housing stock, undermining the viability
of the local affordable housing.30
42. Reform of the Housing Revenue Account (HRA) offers the opportunity to address this longstanding
problem. According to PricewaterhouseCoopers the reforms: “will put councils in control of their housing
assets—which are forecast to generate more than £300 billion of rental income over the next 30 years”. They
add that: “Efficient operation of the HRA could lead to the build up of some £50 billion of new investment
resources across the country, over 30 years (£25 billion in today’s money). Councils can now look at their
housing as a real asset capable of generating additional investment resources”.31
43. In 2009 the Local Government Association estimated that if the system is reformed, up to 80,000 to
90,000 additional affordable homes could be built by councils over five years, which would also deliver
approximately £35 billion additional investment to the English economy. Over a 10 year period, it estimated
that 139,000 new homes could be built.32
44. Shelter therefore welcomes the government’s intention to dismantle the current Housing Revenue
Account Subsidy System. We also believe strongly that the local ring-fence on councils’ Housing Revenue
Accounts should be maintained and strengthened, to allow all revenue and capital receipts to be reinvested in
maintaining existing council stock and building significant numbers of affordable homes in the areas where
these are most needed. We have argued previously for the removal of “notional debt” from the national housing
subsidy system altogether. Failing this, it is essential that councils be enabled to use what surplus they can
generate within their HRAs to support new affordable housing provision.
45. Government rules have also prevented 75% of the receipts from the Right to Buy from being reinvested
in building replacement stock or maintaining the housing that remains. Between 2004 and October 2009,
revenue from Right to Buy receipts in England has totalled £6.2 billion, with £4.7 billion going to the Treasury
for general spending.33 This has deprived local authorities of vital funds that could have been used help fund
the supply of new affordable housing.
46. Shelter cautiously welcomes the recent suggestions from the Prime Minister that any new funds derived
from the Right to Buy sales will be reinvested in properties available for “low rents for families that are
currently stuck on the waiting lists”.34 However, we do have concerns regarding the definition of affordable
housing that the government is using, as discussed below, as well as the more detailed financial arrangements
underpinning the revived Right to Buy. We await further details from DCLG on the exact details of the new
arrangements and the impact this will have on local authority and housing association financial models.
Local authority borrowing
47. An obvious barrier to direct public housing development is that it requires short term capital investment,
which is currently in short supply. Borrowing to invest in housing supply is a way of meeting people’s housing
needs, but it is also a prudent use of money. Affordable homes, unlike practically all other public assets, carry
both an asset value and a predictable, long term income stream in the form of rents. Historically rental income
on public housing has more than covered the cost of debt service, management and maintenance, which is why
the national Housing Revenue Account Subsidy System now returns a surplus to the Treasury of around
£2 billion per year.35
29
30
31
32
33
34
35
Kath Scanlon and Ben Kochan (eds), LSE (2011): Towards a sustainable private rented sector: the lessons from other countries.
Shelter (October 2009) Shelter’s response to the CLG’s consultation—Reform of council housing finance.
PwC and Smith Institute (2011): Making the most of HRA reform.
Local Government Association (June 2009) Local housing—local solutions: the case for self-determination.
Local Government Association (June 2009) Local housing—local solutions: the case for self-determination, p 15.
Rt Hon Dvid Cameron MP, Prime Minister, 5 October 2011, Conservative Party Conference.
PwC and Smith Institute (2011): Making the most of HRA reform.
Ev 88 Communities and Local Government Committee: Evidence
48. Local authority housing represents a large (and largely unencumbered) asset, giving local authorities the
ability to raise finance at very low margins.36 Yet currently, public sector housing debt is included in the
definition of public debt,37 and therefore subject to deficit reduction targets. The ability of councils and other
public bodies to finance new house building could be improved by adopting the General Government Financial
Deficit (GGFD) accounting rules followed by other European Union countries, which would give such
borrowing the same accounting treatment as borrowing by housing associations.38
49. We understand that the Chartered Institute of Public Finance and Accounting is confident that, were
councils freed to borrow on their housing assets, the provisions for prudential borrowing would continue to
ensure that borrowing levels would remain sustainable.
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
50. The move to allow landlords to charge up to 80% of market rates as part of the “Affordable Rent” model
is a concern for Shelter. In areas with high market rents, particularly London, 80% market rent would represent
a significant increase on existing rents in the social sector. Such a significant rise could result in a system
where “Affordable Rented” properties are out of the reach of many local residents.
51. Such significant increases in rents will almost certainly push up the housing benefit bill, as more tenants
will need more state support in paying their rent. This could result in more and more tenants being caught in
a benefit trap, and potentially jeopardise the use of any expected savings on the housing benefit bill to support
capital investment in new homes.
52. If the new system is to deliver effective financing for new homes, it will need a suitable working
definition of affordable housing to be in place. The existing definition, contained in Planning Policy Statement
3 (PPS3),39 defines affordability as “a cost low enough for [households] to afford, determined with regard to
local incomes and local house prices”. The draft NPPF defines affordable housing40 as housing where
“eligibility is determined with regard to local incomes and local house prices”. This is a nuanced but very
important change. It could result in a bizarre scenario in which new homes are considered affordable if
eligibility for them is determined by household’s income, even if the rents they are offered at remain
unaffordable to the very same households.
53. In this scenario, the “Affordable Rent” regime may not be capable of funding homes that people can
actually access or keep. The fact that the new “Affordable Rent” model will also be applied to existing units
which come up for re-let is likely to result in a significant decrease in the availability of social housing at truly
affordable rent levels in areas with acute levels of need.
54. Even if these problems can be overcome, there are very real dangers that the new model will not prove
sustainable over the medium to long term. Housing associations have stretched their balance sheets significantly
to deliver under the model, and are unlikely to be able to stretch them further in future. By taking on more
debt some associations are coming close to the limit of their banking covenants, and doubt whether they would
be able to participate in any second round of Affordable Rent after 2015, particularly if housing continues to
receive low levels of grant funding.41
55. Some associations have put forward alternative models for financing development in a low grant
environment. Ultimately, like the Affordable Rent model, these rely on increasing association borrowing on
the back of higher rental incomes. With incomes falling, unemployment remaining high, and a growing crisis
of affordability across all tenures it is difficult to see any approach based on ever increasing rent levels as
anything other than an unsustainable rise in the housing benefit bill.
56. In conclusion, the need for new approaches to increase the supply of affordable housing finance is more
urgent than ever. Despite challenging fiscal and market conditions there are alternative approaches to housing
finance that merit investigation. Shelter warmly welcomes the committee’s inquiry into this crucial matter, and
we would be glad to assist in any way that we can.
October 2011
36
37
38
39
40
41
APSE (2009) A new generation of council housing: an analysis of need, opportunity, vision and skills.
The Public Sector Net Cash Requirement.
Shelter (October 2009) Shelter’s response to the CLG’s consultation—Reform of council housing finance.
In Annex B.
In its glossary.
Round Two, Inside Housing 16 August 2011.
Communities and Local Government Committee: Evidence Ev 89
Written submission from the Home Builders Federation
The Home Builders Federation (HBF) is the principal trade association representing the interests of private
home builders in England and Wales. Our membership, which includes companies ranging from major national
firms, through regional companies to smaller local firms, is responsible for more than 80% of the new homes
built every year.
Summary
— Private home builders account for a large majority of new housing supply. The inadequate supply of
mortgage finance, especially high LTV loans, is by far the biggest constraint on new home sales and
housing supply. Once effective housing demand begins to recover, development finance could hold
back the industry’s expansion.
— The Affordable Rent model should make every pound of subsidy go further, but cuts in total grant
funding will work in the opposite direction. However significant numbers of Affordable Housing
units are delivered with nil grant from private housing sites through S106 agreements. In these cases,
a sizeable private subsidy is provided out of the development and land value. National and local
authority regulatory demands often squeeze the supply of Affordable Housing.
— The public sector controls between a quarter and a third of potential residential land. The industry
welcomes the coalition government’s programme to dispose of surplus public sector land, and
especially the “build now pay later” scheme given current financing constraints.
— High land values, created by shortages of permissioned residential land, and the cumulative
regulatory cost burden, mean it is very difficult to achieve (a) an adequate development profit margin
and (b) a residual land value to persuade land owners to sell and (c) an acceptable institutional yield.
The answer to the housing supply crisis is to increase permissioned land supply and to reduce the
regulatory burden on all housing, and not to provide favourable treatment—eg subsidised public land
or waivers of Affordable Housing requirements—for one type of provider within one tenure (ie
institutional investors in the PRS).
— We are unable to judge yet whether the Affordable Rent model will be sustainable in the medium to
longer term.
Introductory Comments
Private home builders have for many years accounted for the vast majority of new home building, whether
sales to private owner-occupiers or investors, or Affordable Housing delivery on private housing sites through
S106 planning obligations agreements. Since the downturn in 2007, the social housing share of total
completions has increased. HCA funding was increased to maintain Affordable Housing output, whereas
completions for private buyers have fallen sharply. However once more normal market conditions return we
would expect to revert to the pre-recession situation.
Because private home builders normally account for the bulk of new home production, any discussion
about meeting the country’s housing requirements must focus primarily on removing constraints to private
home building.
At present, by far the most serious constraint on private housing completions is the shortage of mortgage
finance, especially the absence of higher loan-to-value mortgages for buyers with very limited equity (whether
first-time buyers or existing home owners whose equity has been eroded by the fall in house prices).
Most of the Committee’s questions are about public funding, and are therefore relevant to Affordable
Housing delivery, whether by private home builders or directly by registered providers (RPs).
An important issue, not covered in the questions, is development finance for the private sector. There are no
statistics available, so we can only make general comments. Most of the major home builders have refinanced
and are now on a sound financial footing. However, funding is very restricted for many SMEs in the sector
who often rely on project-based bank funding. Some SMEs have decided to eliminate debt altogether. The key
question for the future is whether development finance availability will expand, and whether homes builders
will be prepared to increase gearing, once housing demand begins to pick up. If funding remains restricted,
this could restrict the industry’s ability to meet expanding demand.
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
The Affordable Rent model should make every pound of public funding go further in terms of numbers of
homes provided, but cuts in funding will act in the opposite direction. However a large number of Affordable
Housing units are delivered annually with nil grant through S106 agreements on private housing sites.
Public subsidy is not the only relevant consideration. Because most S106 Affordable Housing delivery is nil
grant, there is a considerable private subsidy provided out of the development value or land value. For example,
on a site of 100 units, at an average market sale price of £150,000, with the local authority requiring 30% to
Ev 90 Communities and Local Government Committee: Evidence
be Affordable Housing, then if the RP pays the developer £80,000 per Affordable unit, there is a £2.1 million
private subsidy. (Note these numbers are for illustration only.)
This raises a further important issue. The viability of many housing sites is seriously challenged outside the
highest priced markets. The cumulative regulatory demands made on development value by central government,
local authorities and various public agencies and private utilities, have become a major cost burden. The higher
these demands other than Affordable Housing, the less land value subsidy there will be left over for Affordable
Housing, and so the more Affordable Housing delivery will be squeezed. In effect, demands such as zero
carbon, or onerous education demands in local tariffs or S106 agreements or CILs, or high levels of public
open space, will be at the expense of Affordable Housing provision. There is only so much private land value
subsidy available to cover regulatory demands.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance
between them
No comment.
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
The 2008 OFT report on homebuilding concluded that the public sector controls between a quarter and a
third of potential residential land. Therefore the public sector has a potentially very significant role to play in
promoting home building.
The industry welcomes the coalition government’s programme to dispose of surplus public sector land. The
“build now pay later” scheme will be especially beneficial because the private sector is capital constrained.
However the industry’s ability to expand production on public sector sites will be held back by the shortage
of mortgage finance—if companies do not have customers able to buy, they cannot build. Also public land,
like any land, requires planning permission before home builders can build. Therefore the NPPF will be critical
to whether increased disposal of public sector land leads to a significant increase in new home production.
As the mortgage market begins to improve, public land should be able to provide an increasingly important
contribution to total housing production, whether through outright sale or schemes such as “build now pay
later”.
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
A great deal of work has gone into trying to get long-term institutional finance into the private rented sector
with very little success so far. The HCA did a lot of work and most of the larger home builders have had
discussions with institutions, advisors, the HCA, etc.
New homes are clearly likely to be the primary source of housing for institutional investment. From the
private home builders’ perspective, the reason for this failure is quite clear: on most sites it is not possible to
(a) generate an acceptable development margin, and (b) generate a residual land value sufficient to persuade a
land owner to sell, and (c) produce an institutional yield. If a. or b. is not met, no production can take place.
If c. is not met, the institution will not invest.
There are two fundamental problems. First there is the high price of land, caused primarily because the
planning system controls supply so tightly. The price of residential land is largely set by home prices in the
owner-occupier market. Second, the regulatory burden on new homes (Affordable Housing, other S106
demands, CIL, zero carbon, Flood and Water Management Act provisions, public open space demands, etc.)
increases the cost of development very significantly. High land prices and high regulatory costs mean
institutional yields cannot be achieved from most new housing.
However we should note that we do not believe these two fundamental barriers should be removed solely
for institutional investors in the private rented sector, for example by waiving Affordable Housing requirements
or by offering discounted public sector land. High land prices due to permissioned land shortages and high
regulatory costs are barriers to all home building. It would very undesirable—and indeed quite wrong—to
remove them for one type of provider in one tenure. The solutions are (a) to allow a significant and sustained
increase in the supply of permissioned land for housing, and (b) reduce the cumulative regulatory burden on
home building, as promised in last year’s Spending Review.
How housing associations and, potentially, ALMOs might be enabled to increase the amount of private
finance going into housing supply
No comment.
Communities and Local Government Committee: Evidence Ev 91
How the reform of the council Housing Revenue Account system might enable more funding to be made
available for housing supply
No comment.
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
This question is probably best answered by RPs. A number of larger private home builders bid successfully
for grant funding under the most recent Affordable Housing programme, so clearly they believed the Affordable
Rent model could be made to work and deliver housing supply. An important test will be the nil grant offers
RPs make to private developers for S106 Affordable Housing units compared with the size of offers under the
old programme. HBF is not yet able to answer this question.
October 2011
Written submission from the Local Government Association
The Local Government Association
1. The Local Government Association (LGA) is here to support, promote and improve local government.
We will fight local government’s corner and support councils through challenging times by making the case
for greater devolution, helping councils tackle their challenges and assisting them to deliver better value for
money services. www.local.gov.uk.
2. This response has been agreed by the LGA’s Environment and Housing Programme Board. The
Environment and Housing Programme Board has responsibility for LGA activity in the area of the sustainability
of the environment, including issues of planning, waste and housing.
Summary
3. Housing circumstances are very different in different areas of the country and, consequently, the solutions
have to be finely tuned at the local level. It is clear that no one-size fits all national policy is going to solve
the issue of housing supply. To be effective, the solutions to the crisis in housing supply need to be based on
local understanding of housing markets, local economic drivers and pressures, access to and need for jobs,
infrastructure and services to support new housing development.
4. Councils are keen to contribute to meeting housing supply both through council building schemes and via
their leading role in leading and facilitating partnerships, de-risking sites and providing land or support in
kind—so often crucial in making development viable. Councils are also working, with the LGA, investors and
financial institutions to investigate innovative models and new sources of long term finance.
5. Councils could however do more if they were provided with:
— Genuine self financing. We welcome recent moves by the government towards a devolved finance
system for council housing. However, the system will not be genuinely self financing unless councils
can keep proceeds from the sale of council housing and centrally imposed caps on housing finance
borrowing are removed.
— We need a reversal on the Treasury’s position on creaming off of forecast growth of Business Rate
yield for 2013–14 and 2014–15.
— Support to meet infrastructure needs which often act as a block on new housing developments.
— A level playing field with Housing Associations. Currently local government borrowing is counted
against the national debt; this is disadvantageous to councils when applying for funding to increase
housing locally.
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
6. In the context of reduced resources how available capital and revenue public subsidy is deployed and
accessed is critical in meeting housing needs at a local level. Councils have demonstrated through that they
are keen and capable of contributing directly to increasing supply, through the huge take up from the local
authority new build programme, and can often do so more efficiently than Housing Associations.
7. Councils are constrained however by the current financial rules which mean that local authority borrowing
is considered as government debt and therefore often scores lower on value for money grounds. This is despite
that fact that the level of central government grant received by local authorities for each home built is at a
lower level in general than that received by housing associations when compared on a like for like grant unit
cost basis. For example:
— Across England this difference is around £10,000 per home between the National Affordable Housing
Programme and that of the Local Authority New Build.
Ev 92 Communities and Local Government Committee: Evidence
—
—
Put another way £1m of HCA grant would buy an extra two, typically larger homes from a council
than if the funding was directed at housing associations.
In some regions the difference is stark; for example in London councils’ unit cost is as much as
£35,000 less than that of housing associations.
8. Establishing a level playing field between local authorities and housing associations, allowing them to
access mainstream funding for house building on the same basis as housing associations and private developers,
rather than making them bid for separate pots of funding is key to ensuring limited funding achieves maximum
results for local areas.
Portsmouth City Council is positive about the potential to develop affordable housing. Portsmouth
applied under the Local Authority New Build Programme to build new social housing using HCA
funding combined with other streams such as prudential borrowing, partnership funding and land
sold through a newly created special purpose company, Portsmouth Social Housing (PSH). Apart
from this development the council has bid to the HCA with a private finance initiative (PFI) for the
development of an additional 700 homes—200 of which would be for sale on a commercial basis.
The council recognises the need for private homes for sale alongside social and affordable housing
to meet demand and ensure balanced communities.
9. We should also not forget the subsidy that is already locked in the system. It is crucial that councils and
other providers are supported to make best use of existing assets which in the absence of other streams of
public funding will become ever more important.
10. Councils have been funding capital projects by capital receipts from the sale of spare land and assets for
many years. The amount of receipts generated by public sector bodies has fallen significantly in recent years
due to a reduction in values caused by the recession and reluctance to part with assets at historically low prices
during an economic downturn (down from £4 billion in 2007–08 to £1.46 billion in 2010–11). However,
collaboration between public sector partners is likely to increase the supply of excess assets in future which
could release land and investment for housing projects (£1.7 billion receipts are forecast for 2011–12).
LOCAL AUTHORITY CAPITAL RECEIPTS
Year
Receipts
(£m)
2006–07
2007–08
2008–09
2009–10
2010–11
(provisional)
2011–12
(forecast)
3,671
3,992
1,353
1,427
1,463
1,734
http://www.communities.gov.uk/documents/statistics/xls/2013297.xls
11. The public estate is currently fragmented in terms of ownership and location. Capital investment is
similarly fragmented across different public sector agencies. This needs to change so that we can join up assets
and investment around places to save money and deliver better value to the taxpayer. Councils are best placed
to lead this process, which could also release additional land for housing and investment in infrastructure.
12. Central government needs to take every opportunity to devolve funding and control to local level and
remove constraints on councils engaging in financial and commercial activity to allow them to maximise the
effective use of assets and attract investment.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance
between them
13. State lending and investment needs to be targeted to address the infrastructure needs of the nation.
Councils already approve over 80% of the planning applications for new housing that come their way. However,
there are hundreds of thousands of planning permissions that have yet to be developed across the country
(85,000 in the East Midlands alone). It is therefore crucial that the government focuses on lending and
investment measures to help turn existing permissions into new homes with supporting infrastructure as well
as changes to the planning system that may allow more permissions to be granted in the future.
Together with Cambridgeshire County Council, the district councils of Cambridgeshire have set up
a joint development control committee for the Cambridge fringes to make decisions on planning
applications for major developments which straddle their boundaries. This committee has already
given approval for over 5,500 new homes.
Cambridge City Council and South Cambridgeshire District Council have plans for thousands of
new homes on the fringes of Cambridge and have set clear policies to make this happen.
The Council’s strong commitment to affordable housing has been underpinned by working with the
Homes & Communities Agency and Cambridgeshire Partnerships Ltd on the “Cambridge Challenge”
which has provided access to substantial funding, enabling developers to move forward despite the
recession. Support from Cambridgeshire Horizons, the local delivery vehicle, has also been vital.
14. Investing in our nation’s infrastructure is central to increasing the supply of housing by making
development viable for both developers and communities. Public opposition to development is the top barrier
Communities and Local Government Committee: Evidence Ev 93
identified by councillors; LGA research has demonstrated that the provision of infrastructure and services to
support development has an overwhelming impact on the desirability of development to residents.
15. The challenge quite clearly is large; the scale of investment required to meet the country’s infrastructure
needs has been credibly estimated to be at least £500 billion by 2020. The question is therefore how we
maximise the amount of money available through lending and investment as well as grant funding. The central
issue here is that there is not a single public sector balance sheet, but a collection of balance sheets of varying
strength. Policy should be framed in a way that puts that variety to work in the most effective way. Crucially
this means mobilising investment from across available resources rather than tailoring investment to the
capacity of the most overextended balance sheet.
16. The LGA has put forward proposals to government in our document Funding and Planning for
Infrastructure which would provide support for infrastructure needed to unlock development sites and support
new housing supply. In brief we propose that:
(A) We need to rethink the way investment is funded and planned through bringing together different
funding streams into one place-based pot.
(B) This model needs to be complemented by planning and management of development based on local
economies. This will require:
—
A joined up approach to investment in nationally significant infrastructure networks that
is based on the needs of local economies, understands their impacts at local level, and
provides certainty for decision making at local level.
—
Aligning planning and investment decisions at the right economic level by encouraging
councils to plan and coordinate infrastructure delivery at the level which reflects the
functional local economy.
—
Removing unnecessary bureaucracy and prescription in the planning system will allow
local people and their directly elected representatives to plan effectively for the
development of their area. The National Planning Policy Framework (NPPF) moves away
from complex and sometimes contradictory national policy and swathes of guidance to
focus on key principles. This approach will support councils to develop strong local plans
which reflect local needs and priorities.
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
17. Councils understand the importance of increasing housing delivery to meet the needs of hard pressed
local communities and of working across boundaries to plan for housing. Councillors overwhelmingly take a
proactive and positive attitude towards development locally; a LGA survey shows that 80% of the councillors
surveyed agreed that their local authority area needs new housing.
18. The LGA/CLG Housing Commission Housing Shortages: what Councils can do was “impressed by
entrepreneurial skills we have seen displayed by today’s councils”. Councils are increasingly leading the way
to support appropriate housing growth by “de-risking” sites and providing support. In some cases this takes
place in the form of direct subsidy from council sources but often councils provide support “in kind”.
19. For example, the Housing Commission found examples of Councils supporting new supply in the
following ways:
—
Providing Council owned land (which can be developed and/or used as equity). Powers under the
1972 Local Government Act Section 123 provide councils with powers to dispose of land in any
manner they wished were helpfully extended in 2003 which provided a general consent thereby
removing the requirement for Local Authorities to seek specific approval from the Secretary of State
for a wide range of disposals at less than best consideration. We agree with the government that
local authorities are best placed to determine what best consideration means and would like to see
all remaining requirements to seek ministerial consent removed.
—
Local arrangements bring together the different players, often comprising major developers and
house builders, housing associations and a variety of public, private and voluntary and community
sector organisations. Councils often play an important role leading and facilitating these partnerships.
Often this involves dedicated work with local communities to ensure development is viable is both
economic and community terms.
—
Councils can play a central role in site assembly and acquisition, sometimes including use of
Compulsory Purchase Orders and General Vesting Designations. In some cases Councils provide
their own land (which can be developed and/or used as equity).
—
Councils also take a supporting role; deploying expertise to provide legal and technical support along
with local knowledge. This can for example include the production of Master plans for major sites.
—
Increasingly councils are looking to models such as Local Asset Backed Vehicles to use their assets—
most commonly land—to attract private investment.
Ev 94 Communities and Local Government Committee: Evidence
20. However, the absence of a level playing field as referred to in our answer to question 1 can sometimes
discourage collaboration between housing associations and councils.
Basingstoke and Deane Borough Council worked in partnership with Sentinel Housing and the
community to regenerate a housing area at Oakridge. The success of the scheme was down to a
number of key points:
— The council being willing to put in the land for free into the scheme.
— Sentinel Housing and the council responding to the wishes of existing residents by
changing the development proposals.
— Ensuring high quality design was paramount.
— Involving tenants in the design and operation of the community centre and making sure it
was the first thing to be built.
— Keeping residents informed.
The scheme provided a significant increase in the number of homes provided; a mix of sizes and
people queuing up for a chance to be allocated a home there.
Hackney’s flagship scheme—Dalston Square development—is a partnership between the London
Development Agency, Transport for London, Barratt Homes and the Council. The scheme will
deliver 600 new homes, a new train station, bus interchange, a library, retail and commercial units
set within a large landscaped public square. The Council’s role in the partnership was to provide
land at nil value to facilitate the development and to assist with de-risking the financial viability of
the project. The Council also performed the role of ring master co-ordinating the partners and leading
stakeholder engagement to promote the benefits of the scheme and manage residents concerns.
Blaby District Council has joined forces with Lloyds TSB to help first-time buyers onto the housing
ladder. The Local Lend a Hand scheme, will enable first-time buyers to purchase a home with a
deposit of just 5%. As part of the scheme the Council will help people who can afford mortgage
repayments, but not a large deposit, to secure a house by guaranteeing up to 20% of the total value
of the mortgage taken out with Lloyds TSB.
Leicestershire County Council has committed all of its New Homes Bonus received in 2011–12 to
support the building of rural affordable homes.
In 2011–12 the Council is using its funding to boost the number of affordable homes available to
rent or for shared ownership schemes in villages, so families and young people are not forced to
move out by high prices. Local housing associations have put together schemes but have been unable
to proceed as there are “funding gaps” in their proposals. The Council’s New Homes Bonus funds
are being used to fill these gaps.
Working in partnership with the Housing Associations developing the schemes the county council is
proposing, in 2011–12, to support:
12 affordable homes in Sapcote, with £332,000 earmarked from the county council and
£100,000 from Blaby District Council, affordable homes in Somerby, with £188,000 from the
county council and £87,000 from Melton Borough Council.
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
21. Several banks and other financial institutions have begun to explore alternate and innovative forms of
long term finance with individual councils, groups of councils and the LGA.
22. The LGA is undertaking detailed work with councils, financial institutions and others to explore the
viability of a number of innovative models to bring new long term finance into the sector. This includes:
— Development of a financing institution owned and run by the local government sector which would
issue bonds on behalf of all participating councils. We think this has the potential to deploy the
sector’s considerable financial strength to good effect and will manage risk in a collective manner.
— The option for councils to come together to cooperate over bond issues.
23. The LGA is commissioning specialist advice to refine all potential options. We think there is potential
for the development of a new model that would bring long term private finance from large financial institutions
forward and would be pleased to provide the Committee with a progress report in due course.
24. It is also crucial that councils are able to capture the economic benefits of development locally; this is
central in supporting long-term investment in local areas and meeting housing needs. The Local Government
Resource Review’s proposals for re-localisation of business rates could be an important step in this direction,
provided that councils are able to retain all of the proceeds of growth.
25. When the Local Government Resource Review was launched, it was intended to offer better incentives
for local authorities to promote economic growth in their areas by enabling them to benefit financially from
Communities and Local Government Committee: Evidence Ev 95
that growth. However, what has since emerged in the detailed technical consultation on the proposals is a
presumption that, in 2013–14 and 2014–15, the Treasury will cream off a predetermined level of forecast
growth. Local authorities could only benefit financially from growth over and beyond the government’s
forecast.
26. The government’s proposals to take away the first slice of growth are therefore doubly disadvantageous
to local government. Firstly, they allow the Treasury, rather than councils, the benefit of a major slice of
business rate revenue. Secondly, they give the government the benefit of extra yield attributable to higher than
forecast inflation, without any recompense for local authorities which now face funding cuts that are, in
consequence, larger in real terms that the 28% figure set out in the Spending Review.
How the reform of the council Housing Revenue Account (HRA) system might enable more funding to be
made available for housing supply
27. Government’s aim for the new local system of housing finance is to give councils freedom to be
innovative and ambitious in how they manage, maintain and improve the existing stock and to invest in new
homes. Self financing should mean that councils can keep all of the rents from social housing to invest directly
back into local housing stock.
28. However, powers in the localism bill to allow the Secretary of State to impose limits on councils’
housing finance borrowing threaten investment in social housing and prevent true self financing. The sector
already has a well-established and effective approach to managing borrowing—the Prudential Code. Local
Government has a strong track record of prudent financial management, a strongly positive net worth, and a
manageable, low level of debt. As such, this provision is unnecessary, and fundamentally in opposition to the
principles of self-financing. Councils with less than 10% of their housing stock below the decent homes
standard will be unable to finance necessary improvements themselves, as the Government expects, if they can
only borrow enough to finance the HRA buyout.
29. If Councils were to have the cap removed and follow the principles of the Prudential Code, this would
enable many councils to borrow to build additional housing, which in turn would help to kick start the economy.
30. Councils should be given financial freedoms that allow them to operate and plan their operations on an
equal basis to Housing Associations. Again, this would help kick start the economy.
31. The government has recently announced proposals to increase discount for tenants to buy their homes
under the Right to Buy (RTB) scheme. Unless councils are able to retain the receipts from RTB, the new system
of self financing will be undermined as councils will not have sufficient resources to invest in replacement or
new housing homes.
32. The most cost effective way of ensuring that funding raised from RTB sales supports replacement homes
where they are needed is by allowing councils to keep the full receipt of the sale to reinvest in housing locally.
This will allow councils to pay off the debt associated with the property and provide additional funding for
housing investment plans. This will:
— Allow councils to plan long term for improvements to stock and increases in housing supply.
— Provide the flexibility for councils to respond to the short term needs of their communities; for
example through new build schemes making use of pockets of public land and redevelopment sites
that would not be unlocked through any other means.
33. The alternative; national pooling and redistribution of receipts will involve wasteful collection and
bidding rounds—delaying the use of the funding and reducing the amount available for investment. It runs
counter to the principles of localism and decentralisation which underpin the government’s reform of the
Housing Revenue Account (HRA) and threatens to de-rail the strides taken towards self financing by the
government.
34. In addition, allowing councils to determine the level of the discount in their areas will maximise the
amount of money raised by the scheme by ensuring that discounts are based on an understanding of local
housing markets and what is affordable for tenants wishing to buy their homes. Determining discounts at
national level will not enable to scheme to be tailored to local conditions.
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
35. We are pleased that the government has included the possibility for local authorities to introduce
affordable rents should they wish to. Council landlords have able to bid for the affordable homes programme,
something the LGA has been campaigning for. As detailed in our previous comments the public borrowing
rules currently place councils at a disadvantage compared with a housing association as a private sector entity
whose borrowing doesn’t count to the public sector.
36. It is too early in the life of the scheme to draw fixed conclusions; however we are keen to investigate
further with Councils and Housing Associations the investment and sustainability of the scheme and the
Ev 96 Communities and Local Government Committee: Evidence
variable impact across localities. For example; in some areas the margin between 80% rent and social housing
rent is slim which may mean the potential for additional income is limited.
October 2011
Supplementary written submission from the Local Government Association
This paper has been prepared at the request of the CLG Select Committee, following the LGA’s oral evidence
session delivered by Cllr Clyde Loakes (21 November 2011) in his capacity as Vice-Chair of the LGA’s
Environment and Housing Board.
1. Best Practice in Development—Local Authority Case Studies
Councils understand the importance of increasing housing delivery to meet the needs of hard pressed local
communities and of working across boundaries to plan for housing. Councillors overwhelmingly take a
proactive and positive attitude towards development locally—an LGA survey showed that 80% of the
councillors surveyed agreed that their local authority area needs new housing.
Councils have to balance the economic, social, and environmental priorities of their area, ensuring that all
opportunities for sustainable development which fulfil such criteria can be taken forward. A number of
prominent case studies were included within the LGA’s written evidence to the Select Committee. In addition,
further examples of innovative and sustainable development can be found below:
Wiltshire
The Council is developing the concept of “total community place”, with strong local leadership through an
inclusive Cabinet and inclusive Area Boards. The aim is to have a single community plan for Wiltshire built
on the bottom-up picture—including data on levels of housing demand and Parish Plans—for each community
area. The main challenge is to remove the barriers to local-scale rural housing developments. Local budgets
will allow Area Boards to spend on infrastructure and environmental improvements and to meet local priorities.
Local trusts already exist and there may be scope for them to take on affordable housing as well as providing
other services to the local community. Local communities will be given more influence over the location,
management and allocations of housing schemes. However, it will be necessary to consider whether
sustainability also needs to be redefined: it is not simply about moving people into urban areas; it is about
protecting the viability and sustainability of rural communities and developing them as living, vibrant places.
Leeds
The Council in Leeds is promoting an urban eco settlement in Aire Valley to deliver some 12,000 new
homes, provide low carbon retrofit measures to 8,000 existing homes and deliver 40,000 new jobs. Leading
this programme, senior councillors and directors have already established strong governance arrangements with
the key stakeholders in the area through a joint public/private sector board. By promoting strong and open
partnerships the council retains the strategic lead on developing this sustainable new district for the city. It also
ensures that through these partnerships, projects will be deliverable and commercially attractive. The local
democratic leadership—through local councillors and MPs—is also important in engaging local communities
to shape the changes. Each area has a masterplan agreed by the public sector, the private sector and the
local community.
Greenwich
Greenwich Council has used strong political leadership and corporate commitment to deliver new affordable
housing, as part of its wider regeneration and anti-poverty strategy, as well as pursuing the Council’s own new
build schemes. It has established close relationships with a number of preferred development partners, with
one of the largest housing investment programmes in the UK including over £250 million grant allocated to
housing associations for 2008–11. The Council uses planning powers and public sector investment in
infrastructure to secure high design quality, well integrated, tenure-blind and mixed income communities. Its
Unitary Development Plan has included intermediate affordable housing (secured through Section 106
agreements) and lettings plans are ensuring a healthy mix of household types and child ages to build balanced
and cohesive communities. At Greenwich Millennium Village, for example, the primary school and health
centre were opened at an early stage in the development, providing social infrastructure from the start and
supporting links between new residents and the existing wider neighbourhood.
Sheffield
Sheffield has in place close partnership working on area regeneration between Housing and Planning teams.
As part of the Housing Market Renewal programme, a Planning team has worked hand in hand with locally
based regeneration teams to ensure a co-ordinated council approach to designing and delivery of physical
change in neighbourhoods. By working together through all stages of policy making, planning and delivering
housing and place projects, time and money has been saved on agreeing design and specifications and securing
Communities and Local Government Committee: Evidence Ev 97
scheme approvals. Most importantly the council has had a single voice in its work with new housing developers,
local businesses, service providers and other social landlords, helping to set out the city’s requirements clearly
and therefore making it an easier place for them to invest. The “Developer Manual” which brings together
housing and planning guidance for new homes has been shortlisted for an RTPI award and recognized by the
Planning Advisory Service as best practice. And the council’s Designer Panel has provided focused expertise
on property and place design.
South Holland
South Holland District Council formed a housing company—wholly owned without development partners—
to build new homes (to supplement the 22 homes it had built in recent years). The Leader of the Council, Cllr
Gary Porter, chairs the Board, which consists of Councillors, Officers and a nominee from the South Holland
Tenants’ Group. The Council had acquired the necessary permission to manage the Company’s houses, with
the latter retaining ownership. By October 2008, the company had become the South Holland Local Housing
Community Interest Company, which includes an asset lock and trades as South Holland Homes. In March
2009, the Homes and Communities Agency awarded the company Social Housing Grant. The Council worked
with the LGA and other councils to ensure that the HCA had a practical funding agreement which allowed
rapid construction and the first social rented homes were completed by September 2010.
Croydon
Croydon Urban Regeneration Vehicle (CCURV) is an innovative partnership between Croydon Council and
John Laing Plc established in November 2008 to deliver regeneration within the Borough. CCURV brings
together core skills from each partner—Croydon supplies the land (initially four town centre sites) and local
knowledge, while John Laing commits to matching Council investment with equity; it brings its development,
management skills and expertise, both in-house and externally sourced. The result is a partnership which should
ensure that over the next 25 years major developments meet Council requirements to maximise asset value,
and are consistent with its vision for the regeneration of the Borough. Projects include a hub which brings
together many of Croydon’s public sector services and provides mixed housing/commercial schemes. CCURV’s
innovative structure as the first Local Asset Backed Vehicle of its kind provides shared control between the
public and private sectors; the nature of this long term partnership means that barriers created by the recession
can be more easily overcome. Without CCURV, planning consents for key regenerative schemes—including
the new public services hub and new community facilities in Waddon as well as the masterplan for College
Green—could not have progressed.
Birmingham
The Birmingham Municipal Housing Trust (BMHT) model for the delivery of mixed tenure homes aims to
make the provision of market homes attractive to the contractor and to achieve an appropriate balance of risk
and reward between the council and the contractor. The key elements of the model are:
— no land purchase up front;
— planning already secured by BMHT;
— design risk and costs already met by BMHT; and
— use of BMHT house types by developer.
The model was market tested with developers, whose response was extremely positive, and is now being
delivered successfully on the ground. Under the model a Design and Build contract for constructing the
affordable housing is linked to an associated Development Agreement for the market homes. The Council’s
land is licensed to the developer who constructs and markets the remaining market homes within three years.
There is only one land transaction at the end of the process, thus avoiding double Stamp Duty/Land Tax
liability. The Council defers its land receipt until the point of sale with an agreed minimum plot value and
overage conditions. Any unsold plot or house returns to the ownership of the Council. Developers are able to
customise the inside of their market homes as they choose. This typically includes furnishings, appliances and
en-suites. In this model it is the space standards that represent the main difference, with up to 30% larger
homes than some standard market house types.
Manchester
Manchester City Council is making the best use of its assets by building homes for older people within
existing local communities on spare land to free up under-occupied high demand family accommodation.
Working closely with tenants who have two or more spare bedrooms in their current home, the Council is
building 32 council bungalows in the north of the city. A design competition was held to identify a suitable
architect and developer partnership. Manchester is proud to be building Code Level 4 for Sustainable Homes
while incorporating innovation in design for older people, including assistive technology and the City’s
stringent Design for Access 2 and Lifetime Homes standards, supporting continued independent living for an
ageing population. The use of marginal infill sites that are not currently attractive to the private sector will see
redundant parcels of land, often the subject of anti-social behaviour, brought into use. Use of the City’s
streamlined Contractor Frameworks in the procurement process will deliver not only efficient build costs but
Ev 98 Communities and Local Government Committee: Evidence
employment and training initiatives for the local community, connecting people to work opportunities—a key
aim of the Community Strategy.
Liverpool
Liverpool city council is using the LIFE model which identifies four roles for Housing Associations:
—
Lead in an area.
—
Influence what happens in the area or part of it.
—
Follow—collaborate in delivering the direction set by others.
—
Exit an area.
LIFE’s purpose is to facilitate the delivery of Neighbourhood Renewal by generating bespoke solutions to
meet the different challenges posed by individual neighbourhoods, particularly in restructuring Liverpool’s
failing Inner Core housing markets. It is a collaborative, rather than a competitive approach. Working closely
with the council, housing associations contribute to the overall regeneration and management strategies and
agree targets. They partner with Lead Developers set up in each Housing Renewal Area. The model has
achieved rationalisation of housing association stock within the inner core housing markets that has allowed
the council and lead developer partners to work more effectively to bring forward new mixed tenure housing/
neighbourhoods.
Redditch
Redditch Co-operative Homes is a partnership between Redditch Borough Council, five neighbourhood Cooperatives and Accord Housing Association. Through Redditch Co-operative Homes, five neighbourhood
housing cooperatives have been developed in the borough with a total of 285 properties in five Co-Ops, who
buy services from Redditch Cooperative Homes. The neighbourhood co-operatives have been pioneering Green
solutions to housing by working with other co-operatives to find innovative housing solutions. Cllr Bill Hartnett
from Redditch Borough Council said: “It’s been a story of great success. Initially councillors were sceptical
about cooperative housing, myself included, and we had to be convinced that it was going to work. But now
all the political parties in Redditch support it, and I am one of its greatest advocates. We are proud that it has
delivered so many of the things that people in Redditch wanted.”
2. Reform of the Council Housing Finance System
The Committee also asked how councils would deal with mounting debt.
The LGA strongly supports the government’s moves towards a devolved finance system for council housing.
The opportunity that self-financing brings for councils to run their own housing stock independently is good
news for tenants and local taxpayers.
Under the new system however, housing authorities will be required to manage a total of £29.5 billion debt
within long term business plans spanning 30 years. To manage these businesses effectively, councils will need
the freedom and flexibility over investment decisions and control over their housing assets.
However, there are three key areas which will restrict councils’ ability to improve their housing stock and
invest in new supply and which run contrary to the principles of self-financing.
The first of these issues is the cap imposed on the amount each council can borrow for their housing business.
There is no clear rationale for capping councils’ borrowing for housing purposes when no such restriction
applies to borrowing for other purposes. Unlike central government in the past, Councils have a strong record
of sound financial management. They adhere to CIPFA’s prudential code which has proved to be an effective
approach to managing borrowing. The cap will effectively switch off a significant stream of funding that could
be available to build the homes that the government has agreed we need.
Secondly, the principles of self-financing would logically mean that when a council house is sold, the money
from that sale should be reinvested locally to meet local housing needs. However, currently councils must hand
over 75% of the income from Right to Buy to the Treasury. Government’s proposals to reinvigorate the Right
to Buy scheme make it more important than ever for the money to be retained locally. If they are not, councils
will be presiding over a fast dwindling level of council housing and will not have sufficient resources to invest
in replacement homes. The forthcoming consultation provides an opportunity for government to ensure that
proceeds from the sale of council homes are used most effectively to support new housing. Allowing councils
to retain the full receipts from sales would mean that the money could go directly into development projects
and new home construction.
In addition, the Localism Act gives the Secretary of State the power to reopen the settlement and buyout figure at a later date. This causes uncertainty about levels of debt and seriously constrains long term
business planning.
Communities and Local Government Committee: Evidence Ev 99
3. Evidence Substantiating the Fact that it is Cheaper for Local Authorities to Build New
Build Properties, when Compared to Housing Associations
Evidence collected by the LGA’s Housing Commission,42 chaired by Lord Best, demonstrates that it is £10k
cheaper for local authorities to build new build properties, compared to the costs for Housing Associations.
The average cost per property (in England) if built by a Housing Association is £73,000, while for a local
authority it is £63,887.
4. Innovative Best Practice
See case studies listed under item one.
As well as promoting councils at a national level, the LGA is also offering a comprehensive package of
support for councils and councillors across the country to improve their performance in housing. This includes:
LGA Support
Briefings: We are producing a series of briefings on the questions that councils need to be asking to
respond to the major changes that are taking place in the housing sector. The briefings will explore
the practical implications of the reforms, and provide advice as to how to capitalise on the
opportunities and mitigate the risks. They are available on the LGA’s website www.local.gov.uk
Master Classes: Throughout March 2012, we will be hosting a series of interactive housing and
planning development classes to equip councils with the knowledge and skills needed to respond to
the changes, and provide them with practical tools and techniques to support them in their
engagement with local people and external partners. For more information on these events, please
visit www.local.gov.uk/events
Sector Led Support
Peer Challenge: Peer Challenge is a flexible support service, co-ordinated by the LGA, whereby an
external team of officers and members act as “critical friends”, bringing valuable expertise and
learning from elsewhere to review and challenge a particular aspect of the local authority and enable
them to continue to improve their performance, without adding to your budget pressures. Since 2007,
almost 70% of councils have benefited from Peer Challenge. We offer a free corporate Peer
Challenge for every local authority, a free child safeguarding peer review and a fully subsidised
planning Peer Challenge. We also offer a housing Peer Challenges (including strategic housing).
Peer Support: Peer Support is a free, five-day member led support programme to assist any council
undergoing a change of control. The LGA is also expanding its network of peers from across the
country to include business, the voluntary sector and other parts of the public sector.
Online Tools
Knowledge Hub: Knowledge Hub is a new online platform that helps councils to build professional
networks and connections with peers and experts in their fields, thus helping you to drive selfregulation and improvement. It creates a single place to share ideas, knowledge and information
across the sector. Knowledge Hub is also linked to other media platforms, and allows councils to
manage their flow of information, meaning that they don’t miss out on valuable learning and
experience. For more information on Knowledge Hub, please visit www.local.gov.uk/knowledgehub
LG Inform: LG Inform prototype enables councils to look for and understand their own local
authority performance, and compare it to other similar or contrasting local authorities. It helps
councils to understand service productivity, identify potential good practice and access data on key
areas of interest. They will also be able to create and print individually tailored reports based on
data that is of interest to them. For more information on LG Inform, please visit www.local.gov.uk/
about-lginform
5. The LGA’s Proposal for a Single Capital Pot to Help Provide Support for Infrastructure
and New Housing
The LGA’s single pot proposal is detailed within the report Funding and Planning for Infrastructure.43
The coalition Government committed itself soon after its election to a significant devolution of powers and
funding to local authorities. It has already acted to remove some of the barriers to genuinely local decisionmaking, including the derisking of some grants and the abolition of Comprehensive Area Assessments. The
LGA’s work on place based budgets has set out the case for decentralising funding in a dramatic way, using
locally determined governance arrangements to make public services more local both in the way funding is
allocated, and decisions about services are made and accounted for.
For infrastructure investment, this points to a place based approach giving councils flexibility about how and
when they use the capital funding allocated to them through the creation of a real single capital pot with the
42
43
Available at http://www.lga.gov.uk/lga/core/page.do?pageId=15281845, see page 46
Available at http://www.lga.gov.uk/lga/aio/13757366
Ev 100 Communities and Local Government Committee: Evidence
ability to conduct investment appraisal, re-profile, and account for spending all fully localised. Bringing
together different funding streams into one pot, under the control of local councils would result in:
— more efficient targeting of capital funding where it is most needed;
— efficiency savings in administering investment, streamlining or removing resource intensive bidding
and reporting processes;
— a common appraisal methodology to assist in prioritisation of funding to address local priorities and
that adequately reflects wider social and environmental benefits; and
— more confidence and certainty over long term funding essential to attracting private sector
investment.
The Regional Growth Fund represents a step in this direction. The “single pot” nature of the fund is a
welcome development, as is the government’s aim of placing the funding in the hands of the new Local
Enterprise partnerships to manage. The fund is, of course, small—the original £1.4 billion was supplemented
by a further £1 billion in the Autumn Statement, but it is expected to remain significantly over subscribed. It
also will be important to ensure that the fund’s reliance on bidding does not become a new mechanism for
control and produce new barriers to combining money from different sources.
The LGA would encourage the Committee to indicate support for a single capital pot in its final report on
financing the new housing supply, to in turn encourage DCLG to engage with the local government sector
further on the subject.
December 2011
Further supplementary written evidence from the Local Government Association
Summary
1. On 12 March 2012, the Government announced the details of its policy to reinvigorate the Right to Buy
scheme and provide one for one replacement homes. This note sets out the initial LGA response and suggestions
for reviewing the policy in future.
LGA Position
2. The LGA had argued for councils to have discretion over the discount rate to ensure it could take account
of local housing market conditions and ensure the scheme could deliver sufficient funding for replacement
homes. At the heart of our thinking is a strong message that local is best; that councils are best placed to make
decisions about how they spend money they raise locally. Self-financing will, for the first time, give councils
the freedom they need to be innovative and ambitious in how they manage, maintain and improve the existing
stock, and to invest in new homes.
3. These principles should apply to the selling of council housing under Right to Buy. Local authorities, as
bodies accountable to tenants and local people are much better placed than central government to understand
the needs of their tenants, those waiting for a council home and their local housing market. As such the Right
to Buy policy should:
(a) ensure councils are able to set the discount at an appropriate level dependant on local market
conditions, build costs and demand for Right to Buy properties; and
(b) keep 100% of receipts from Right to Buy sales locally to be retained and reinvested in housing
locally. By doing this, councils would also be able to develop local partnership arrangements
with Housing Associations to make the most of local assets, expertise and resources.
4. However, the LGA is concerned that the way in which the policy is to be will have a serious impact on
council housing businesses and the reduction in council housing stock which could result in some areas.
5. The single centralised right-to-buy cap of £75,000 fails to take into account local housing demand and
the cost of building new homes. This means that in some areas receipts will be insufficient to build replacement
homes and consequently some areas in need of more affordable homes may actually be left with fewer. It is
clear that this will not result in one for one replacement in all areas. Through consultation with councils it is
clear to the LGA that different models would produce optimal levels of demand for right to buy and receipts for
re-supply in different areas. This reinforces the argument that councils are best placed to set the discount locally.
6. In addition, the flat national discount rate delivers poor value for public money at a time when we should
be squeezing maximum value from every pound because in some places discounts will be higher than needed
to generate additional sales.
7. The LGA had also argued that councils should be allowed to retain the full receipt of Right to Buy sales
for reinvestment in housing locally. The Government has confirmed that councils will be able to retain receipts
from sales, but only on the condition that receipts will be used to fund no more than 30% of the costs of
building a new home. In practice that will make it difficult for many councils to retain receipts to reinvest
locally because of constraints on alternative sources of funding, like land or borrowing.
Communities and Local Government Committee: Evidence Ev 101
8. Even under the local retention model a certain proportion of the receipts will go to government. The selffinancing settlement contains an assumption about how much the government expected to receive from sales
in the current spending review period under the old system (under which it received 75% of receipts). This
assumed income will be maintained under the new system which means councils will only be able to keep
receipts over and above this commitment. The increased discounts means a higher number of discounts are
required before this threshold is reached, so it will be some time before councils have access to receipts with
which to fund replacement homes.
9. The Government was being urged to allow local places to decide Right to Buy discounts themselves,
which hasn’t transpired. This approach would have tackled the concerns that some areas now may end up with
fewer affordable homes than before.
Proposed Actions
10. In light of the Government’s announcement on Right to Buy, the LGA proposes that government commit
to reviewing the discount in April 2013. Due to the varying impact this policy will have in councils across the
country, this would provide an opportunity to review how the Right to Buy policy is meeting the Government’s
objectives and if a more cost effective and locally relevant discount may be more appropriate.
11. The LGA would also like to see that the criteria “agreement” required for councils to retain receipts is
light-touch, does not require burdensome monitoring or reporting and allows councils reasonable timescales to
reinvest receipts. This will help to ensure that local retention of receipts is a localist policy and not an additional
burden on councils in disguise.
12. Finally, the LGA will argue that newly built properties should be automatically exempt from pooling
arrangements rather than requiring councils to apply for exemption.
March 2012
Written submission from the British Property Federation
Summary
(i) There are essentially two ways in which private sector investment is made in housing; people either
investing individually, or via institutional investors, such as pension funds.
(ii) The ambition of the BPF’s members and successive governments has been to encourage some of the
£2.4 trillion that institutions such as pension and life funds invest in shares and bonds and property into
residential property for rent. Specifically a lot of effort has focused on the 5% of that market (£120 billion)
that is currently invested in commercial property, and diverting some of it into purpose-built “build-to-let”
residential accommodation.
(iii) What has stopped build-to-let investment is predominantly the size and nature of returns that are
generated from private rented sector property, and how this is perceived by institutional investors to compare
with commercial property.
(iv) Yields on private rented sector property, however, have been improving as rents rise whilst house
purchase prices remain stable or fall. To further make the returns on private renting compare favourably with
commercial property Government has also introduced policy reforms to the stamp duty land tax (SDLT) bulk
purchase regime, and consulted on changes to the rules on Real Estate Investment Trusts (REITs). Public land
is also starting to be made available to support build-to-let schemes. A recent £150 million fund launched by
Grainger Plc and the French conglomerate, Bouygues, will use land from the Public Land Initiative and is
currently testing the market for institutions willing to invest.
(v) The main policy barrier that remains is how build-to-let developments are treated by the planning system,
with a lack of clarity about what is defined as subsidy under PPS3 and therefore a lack of flexibility on
planning obligations.
(vi) As well as private sector pension funds, public sector pension funds are starting to contemplate investing
in local housing. Local council pension schemes in Manchester and Ealing are reportedly considering this.
Trustees in the past have raised concerns about it conflicting with their duty to maximise returns for scheme
pensioners.
(vii) Private sector investment is also trickling into the social rented sector with institutions such as Aviva
providing funds to buy social rented stock, and similarly Asset Trust buying shared ownership stock from
housing associations. Whilst such investment does not add to stock per se it frees up capital in housing
associations, allowing them to invest in more housing. Such deals are likely to become more commonplace
and we have urged HM Treasury to extend the new bulk purchase rules on SDLT to portfolio sales of sharedownership stock.
Ev 102 Communities and Local Government Committee: Evidence
(viii) There are other innovative investors who are seeking to channel institutional investment into supporting
people with aspirations of home ownership who are unable to meet lenders’ demands for a deposit.
(ix) Over the past decade, significant amounts of individual investment has been made in housing via the
buy-to-let market. This has helped the private rented sector to grow to meet demand and has had a positive
impact on the quality of stock in the sector, but has not added as much new housing supply.
(x) A threat to the future growth of buy-to-let lending looms in the shape of the EU Mortgage Credit
Directive, but otherwise lending to buy-to-let is slowly recovering.
(xi) We believe more buy-to-let investment should be channeled into building new homes using tax
incentives in “housing zones”, designated by local authorities, and approved by HM Treasury.
(xii) Smaller sums of “retail money” (individuals’ investment) has also been invested in the housing
association sector. During the summer of 2011 Places for People raised £140 million via a retail bond issued
on the London Stock Exchange.
The British Property Federation (BPF)
1. The BPF is the trade association for the property investment sector. In the context of residential our
members include most of the larger companies and institutions investing in the private rented sector, long
leasehold investors, sector specialists such as student accommodation investors, some of the larger developer
housing associations, and smaller private landlords, plus the industries that support them.
Introduction
2. In this submission we have focused on our areas of specialism and interest, specifically the raising of
private sector investment for housing. This inevitably means discussing some of the barriers and support
Government can provide to overcome these, but we have not looked at the grant regime or changes to it and
have therefore not answered all the questions posed by the Committee.
3. The mismatch between supply and demand for housing is well-rehearsed and therefore not repeated here,
save to stress that with the increasing difficulty faced by first-time buyers to purchase their own home, coupled
with rationing of social rented homes, means private renting is in more demand.
Private Sector Investment in Rented Housing
4. The private sector is a significant source of funding for the housing sector. Traditionally, the vast majority
of this has been in the form of loans, either for home purchase, or to assist with development of new housing
association stock, the latter sometimes direct loans, or raised via the bond market. Institutional equity
investment in housing, on the other hand, has not been a significant contributor of funding for many years.
There are admittedly a handful of companies that invest in mainly market rented sector housing, and a small
number of fund managers, but the predominant way that equity has found its way into housing investment has
been via the buy-to-let market, which itself has been supported by significant lending over the past decade.
5. With lending severely restricted during the credit crunch and likely to remain constrained for some years
to come, and public funds for housing also reduced, more attention has been focused on alternative sources of
funding for housing. Much of the rest of this paper highlights some of the schemes and models we are aware
of. These can be complex in their design, but it is worth stressing that ultimately their focus is simple, to
encourage the general public to invest some of their savings in housing, either them making that decision
themselves as investors, or via the managers of their pension and life assurance funds.
Institutional Investment
6. A significant source of potential and relatively untapped investment in housing is the funds that our large
pension and life funds in UK allocate to finance future pensions and life assurance payouts. Most of such
money currently ends up being invested in shares and bonds and about 5% (of the £2.4 trillion) in property
(£120 billion), but nearly of all of that is invested in commercial property.
7. There are private organisations that invest in housing, but they are not pension or life funds. Two of the
biggest are Grainger Plc and Wellcome Trust. The former is an FT250 company that invests in the private
rented sector. The latter is also investing in the PRS as part of its wider investment strategy to generate funding
for its charitable health and science research activities.
8. Much of the stock that existing investors hold was acquired, rather than built specifically for renting out.
For example, Terrace Hill, a property plc acquired a large portfolio of stock from the Nationwide Building
Society some years ago. Some of the Wellcome Trust’s stock was acquired from British Land. More recently,
the private sector housing in the Olympic Village was acquired by Delancey and the Qatari Diar to be held as
a portfolio of private rented stock.
Communities and Local Government Committee: Evidence Ev 103
9. The desire of the sector and ambition of successive Governments has been to unlock some of the
£120 billion that is currently invested in commercial property and divert it to residential, but with the specific
aim of most of that investment going into new housing stock, this has coined the phrase “build-to-let”.
Build-to-let
10. Build-to-let is about using pension fund investment to deliver purpose build rental accommodation.
Predominantly this has focused on private rented sector flats.
11. Scale is important for the large private sector pension fund managers, who tend to allocate investment
in tranches of hundred millions or even billions and one significant issue in achieving a successful build-to-let
model has been where such stock would come from?
12. The most significant issue stopping build-to-let, however, has been the nature of residential returns.
Although investment in residential property tends to generate very good returns, most of such returns in the
modern PRS have come from house price inflation, rather than rental income. Even although residential rents
have grown, expressed as a yield of the purchase price, they tend to generate low income returns. Pension
funds tend to want to invest in property for its different qualities vis-à-vis shares or bonds, providing a good
mix of income and capital return, which commercial property tends to provide. The low yield from residential
property therefore tends to be a strong factor in dissuading pension funds aimed at commercial property
investment from contemplating investment in residential property.
13. To overcome this, the HCA pursued its Private Rented Sector Initiative under the last Government. It
offered encouragement to the sector to come forward with build-to-let schemes, but as the credit crunch bore
down on Government finances it could not offer direct financial support, with just one scheme getting off the
ground, which was to support stalled building projects by the Berkeley Group and was supported with Kickstart
funding—see below.
Taken from HCA website
Since launching PRSI, we have encouraged organisations to work together in developing propositions
of scale; and have used our links with private developers to identify a potential pipeline of housing
schemes ripe for investment. The first deal—to deliver 555 new rental homes—was signed with the
Berkeley Group in August 2010 and a number of other developers and investors are currently
working together to establish funds.
PRSI has ceased as an HCA initiative but we are now supporting local authorities to bring forward
private rental funds within their areas and are helping broker relations between public land owners
and private rental investors. Our brokerage role has helped the ODA with its marketing of the
Olympic Village to investors.
14. Most of the ingredients are now in place if build-to-let is to be success:
15. The private rented market is continuing to face strong demand, rents are rising when house prices are
static and thus yields are better.
16. The Government has offered its support, amending the stamp duty land tax (SDLT) rules on the bulk
purchase of residential property so that an investor buying stock would now face a rate of SDLT calculated on
the mean value of property in a portfolio, rather than its aggregate value. Amendments consulted on over the
summer on the REIT rules would also be broadly helpful to the residential sector.
17. There also seems an increasing keenness on the part of organisations such as the HCA, GLA and local
authorities to make public sector land available to support such schemes, although there is variance amongst
the latter.
18. The only main policy barrier that remains is how build-to-let developments are treated by the planning
system. At present build-to-let is treated very much like any other private sector housing for planning obligation
purposes, even although a house builder will disinvest as soon as the homes are built, whereas an investor may
be sinking capital into such homes for five, 10 or even 20 years. To try and support our sector’s need to make
the yield attractive to institutional investors, some local authorities have seemed willing to be more flexible on
planning obligations, but the lack of clarity in PPS3 over the recycling of subsidy is unhelpful in making that
happen. Local authorities have also been willing to contemplate putting land into such ventures on a profit
sharing basis.
19. In the past few weeks there has been an exciting development in progress towards build-to-let with
Grainger plc and Bouygues Development announcing a fund, which will be supported by the Public Land
Initiative and invest about £150 million, see below. The organisations involved seem confident this will deliver
the returns institutions are seeking.
Grainger plc press release—Bouygues Development and Grainger partner up to seed new build to
let residential investment fund
Bouygues Development Ltd. (“Bouygues”), part of Bouygues Group, one of the world’s leading
construction and services group, and Grainger plc (“Grainger”), the UK’s largest listed residential
landlord, today announce the creation of and their co-investment in a new Build-To-Let Fund (“the
Ev 104 Communities and Local Government Committee: Evidence
Bouygues & Grainger Fund” or “the Fund”). The Fund will provide institutional investors with
the opportunity to invest in scale into the Private Rented Sector (“PRS”) which to date has been
relatively inaccessible.
The Fund is unique in that it has a dedicated portfolio of purpose built PRS development sites in
London and South East of England.
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 circa three and a half years, with
construction expected to begin in Q1 2012 and the first units expected to complete in Q4 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.
The Fund benefits from an exclusive pipeline of projects developed by Bouygues Development, and
offers investors the opportunity to acquire the sites at cost, which will enable the Fund to deliver
superior returns. The Fund aims to provide an attractive coupon based return over the development
and investment stages, and a return based on capital appreciation.
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 seek additional equity investment
from institutional investors, totalling up to £150 million.
The Bouygues & Grainger Fund is primarily designed to capitalise on the appetite of UK and
overseas investors to put long term money directly into residential property in London and the South
East. The Fund is also strongly aligned with the UK Government’s plans to increase the number of
new homes being built, and the Housing Minister’s public land initiative.
20. Besides institutional investment coming from big private sector pension/life fund managers, such as
Aviva, Legal & General, Prudential, etc. the other source of institutional investment that could provide funds
would be public sector pension funds.
21. The idea that local authority pension funds for example, could be investing in local housing, has been
mooted. From our engagement with such funds in the past the response has been that the first duty of pension
fund trustees is to gain the best investment returns for their pensioners and thus whilst supporting local housing
might be desirable from a social standpoint, it could conflict with the duty of trustees, unless of course local
housing was generating an appropriate return.
22. It is therefore interesting that a couple of local authority pension funds are reported as being advanced
in plans to invest in local housing, in Manchester (below) and Ealing.
Reported in Inside Housing, 17 June 2011
Manchester Council is considering using institutional investment to fund new private rented housing.
The authority is in talks with a pension fund which serves local councils, believed to be the Greater
Manchester Pension Fund, to invest in the scheme.
The deal would be a first for the sector in that the pension fund would provide start-up capital and
take on development risk, rather than buying a stake in existing properties.
The council would contribute land, while the pension fund would meet development costs. Both the
council and the fund will take an equity stake in the developments. The council is also talking to the
Homes and Communities Agency about contributing sites and with housing associations, particularly
Manchester-based Great Places, about managing the homes.
The property manager has to put up a rental guarantee or take a lease on the development for a
period. The homes would be built by a contractor on a design and build contract.
Paul Beardmore, Manchester Council’s director of housing, said: “We want to get housing
development going again and provide homes for lower income working people across the city and
give them a choice of living in different neighbourhoods.” Mr Bearmore said the model would allow
the council to avoid borrowing constraints.
The first scheme is likely to be let at market rents but others could be mixed tenure. Mr Beardmore
said he did not yet know how many homes could be built and would not be drawn on the expected
returns or level of investment. Discussions are still ongoing but he hoped to have governance and
commercial arrangements finalised within six months and start on site in around 12 months.
Private Sector Investment in Social Housing
23. Whilst the significant focus of our sector has been on attracting the institutional investment that is
normally allocated to other property investment, particularly commercial property investment, one or two
organisations have been trying to look at attracting the broad sweep of pension fund money that is invested in
“alternative assets”. With shares and bonds both performing poorly there is increasing appetite amongst pension
Communities and Local Government Committee: Evidence Ev 105
funds to find other assets that deliver much the same returns and risk as bonds. It is early days, but at least
one private sector pension fund manager has started to invest in social housing, because it delivers a steady
index-linked income return—see below.
Derwent Living press release—Derwent Living partners with Aviva Investors in £45 million stock
transfer
In a landmark move, and a first ever for the UK housing sector, Aviva Investors has agreed a
£45 million deal to fund the transfer of 839 properties from Home Group to East Midlands housing
provider Derwent Living.
An additional 296 Home Group properties are also being transferred to Derwent Living with the
funding being provided by Clydesdale Bank and The Royal Bank of Scotland.
The total funding for both of the deals amounts to £55 million for the transfer of 1,135 social
properties to the Derby-based provider from housing association Home Group which is rationalising
stock outside its key area in the north east. The transfer will bring Derwent Living’s stock total to
around 15,000 properties—making it one of the largest housing associations in the Midlands.
The funding was provided by the Aviva Investors REaLM Social Housing Fund which is part of the
asset manager’s Return Enhancing and Liability Matching (REaLM®) strategy which aims to address
the current underfunding issue being experienced by UK pension schemes by hedging against
inflation risks and generating returns in excess of liabilities.
24. Asset Trust is another private investor who has for some time now been investing in affordable housing,
predominantly buying the shared ownership stock off housing associations. The similarity is that whilst both
the Aviva and Asset Trust investment does not add to new stock per se, by freeing up housing association
capital it allows those organisations to invest in new build elsewhere. We have therefore been making the case
to HM Treasury to extend the SDLT bulk purchase regime to shared ownership housing, which it does not
at present.
Other Models
25. Thus far our evidence has predominantly focused on rented accommodation, which is built for that
purpose, but there are investors who are seeking to attract private institutional investment into supporting home
ownership. Mill Group, for example, have a co-investment model, which seeks to support homeowners who
cannot afford a deposit on a home. Their model is summarised below.
Mill Group’s Co-investment Rationale
Co-investment will be initially offered to first time buyers of good credit standing, who may not
have the substantial deposit savings which are now required to obtain a mortgage.
The co-investment product brings passive investors together with co-owners who occupy the property
as their own home. The co-owner agrees to pay an occupation charge on the part they do not own,
as well as assume responsibility for repairs, maintenance and insurance. Capital appreciation is
shared between the investor and the co-owner who occupies the property, essentially in proportion
to their cash investment. After some years the co-owner may wish to buy out the investor’s share or
move on, to buy another property, but otherwise provides a long term income flow to investors, who
may sell this income flow at any time. Homes are bought by co-owners in the open marketplace.
Buy-to-let
26. Probably the most significant source of private sector investment in housing over the past decade has
come from small investors buying standalone property, either with their own funds or often supported by a
buy-to-let mortgage.
27. This investment has substantially increased the size of the private rented sector, at a time when demand
has also increased significantly, but has not made such a powerful contribution to new build stock.
28. Indicators suggest there has been a sustained recovery in buy-to-let lending during 2011—see below—
although activity remains well below peak and a significant amount of new lending is remortgaging, rather
than new loans.
State of the Buy-to-Let Market
—
The number and value of outstanding buy-to-let mortgages continued to grow. At the
end of the second quarter, 1.34 million buy-to-let mortgages, worth £154.5 billion, were
outstanding, up from 1.26 million, worth £148.8 billion at the end of the same period
in 2010.
—
Although the latest quarter’s increase is significant, the market is currently running at
around one third of the levels seen at the peak of lending in 2007.
Ev 106 Communities and Local Government Committee: Evidence
—
—
—
For the first time since 2008, arrears rates for buy-to-let mortgages are lower than in the
owner-occupied sector. In the second quarter, all buy-to-let cases where loans were over
three months in arrears (including those under control of a receiver of rent) were, at 28,100
or 2.09% of the total, 0.05 percentage points lower than in the owner-occupied sector.
Repossessions in the buy-to-let sector increased by 9%, from 1,700 in the first quarter, to
1,900 in the second.
Moneyfacts states that a year ago there were 295 buy-to-let mortgages available. In
September 2011 the figure was 481.
There were £10.4 billion of buy-to-let loans in 2010, up 22% on 2009.
29. There are three further observations we would make about the buy-to-let sector:
30. The EU Mortgage Credit Directive currently passing through its legislative stages in Europe could cause
significant damage to the UK buy-to-let sector. As drafted, UK borrowers using buy-to-let loans would have
to show as part of the lending approval process that they can meet their loan commitments from their income
that excludes rent derived from their property investments. This would have significant consequences for the
amount of new buy-to-let lending.
31. No Government has really sought to channel what is significant investment in housing coming from buyto-let. For example, we have suggested creating “Housing Zones”, offering tax incentives to investors in new
build. These would have to be designated by local authorities to stop building in the wrong place, and be
approved by HM Treasury to keep costs under control, but could help force more buy-to-let funds into new
build. A capital gain tax relief for example might be the best incentive as many investors are disappointed
the current capital gains tax regime, with a flat 28%, makes no distinction between long-term investors and
property speculators.
32. Little of individuals’ money (so-called retail funds) currently goes into collective investment schemes
that are investing in property. Part of the problem is that small investors like to be able to buy and sell when
they wish. That is difficult in a collective scheme, where most cash will be tied up in buildings that cannot be
instantly bought and sold. The way around that is to invest in companies or Real Estate Investment Trusts
(REIT) that invest in housing. The original design of the REIT regime in the UK was not particularly conducive
to residential investment and better for commercial property investment, but there are proposals which HM
Treasury are pursuing which will make the REIT regime better for the residential sector. The other challenge
in convincing the public to invest in housing via a property company or REIT is a cultural one—that they get
a “share” rather than a “property” they can feel and touch. If the European Mortgage Credit Directive passes
unamended, however, that might create demand for more collective investment schemes in housing as buy-tolet lending becomes constrained.
33. An amount of individual investment has also found its way into the housing association sector via a
London Stock Exchange retail bond as below illustrates.
London Stock Exchange announcement—27/6/11
Places for People, one of the UK’s largest housing associations, is the first non financial borrower
launching a retail bond on the Order book for Retail Bonds from 27/06/11. With the benefit of a
senior unsecured guarantee from the main asset owning business in the group, the issuer, Places for
People Capital Markets plc, is offering a bond with a fixed rate of 5% and a maturity of five years
and six months. This issue is designed to be eligible for ISAs and SIPPs.
The bonds are tradable in denominations of £100, after an initial minimum investment of £2,000.
Evolution Securities Limited has been appointed as Lead Manager and Authorised Distributor.
October 2011
Supplementary written submission from the British Property Federation
INQUIRY INTO FINANCING OF NEW HOUSING SUPPLY—ADDITIONAL WRITTEN EVIDENCE ON
REITS AND PROJECTION OF THE NUMBER OF HOMES THAT BUILD-TO-LET COULD DELIVER
I am grateful for this opportunity to explore further a couple of points that arose in my recent oral evidence
to the Committee.
As you know at that time an announcement on reform of the Real Estate Investment Trust regime was
pending the Autumn Statement and I can now comment more fully on the measures that were contained in the
HM Treasury Statement of 6 December.
REIT Reform
Generally as I explained to the Committee, the further reform of the REIT regime is to be welcomed and
takes us further towards a regime that supports residential investment, but there are a few issues that remain
outstanding and will continue to create uncertainty for investors, who otherwise would use a REIT structure.
Communities and Local Government Committee: Evidence Ev 107
Summarising first the reforms planned for the next Finance Bill, I will focus only on those that are what
HM Treasury terms “barriers to entry”—an appropriate description in relation to residential investment.
The entry charge paid by a company joining the regime is to be abolished
Having an entry charge made some sense in the context of the first wave of commercial property companies
that converted to REIT status, as part of that conversion process allowed some companies to escape embedded
capital gains tax liabilities on their balance sheets. A conversion charge was therefore a sensible quid-pro-quo.
However, there are hardly any residential property companies of significant size and virtually none with
significant capital gains tax liabilities. Most residential REITs would be formed, rather than conversions from
existing companies. The entry charge has therefore been a significant barrier to entry—a payment in effect for
no benefit.
The requirement for a REIT to be listed on a recognised stock exchange is to be relaxed
Again this was no barrier to most of those REITs that exist, because they were already property companies
listed on the Official List of the London Stock Exchange. For a residential fund being formed, however, a full
listing involves costs which are very difficult to justify. Relaxing the rules to allow AIM or equivalent listing
is a significant step forward.
At a relatively detailed level, the way in which the draft legislation proposes to implement the relaxation
has the unexpected effect of imposing a new requirement that there be regular active trading in the shares of a
REIT. We hope this is unintended and consider that it could present real problems for new REITs, so we have
indicated to officials how it can be avoided.
The diverse ownership requirement a REIT has to meet is being reduced
Current REIT rules require what is called a diverse ownership test to be met, by reference to an adaptation
of the complex tax law “non-close company” rules (which effectively test whether a company is controlled by
five or fewer persons). The test must be met immediately on entry into the REIT regime and on an ongoing
basis. It also treats a pension fund or financial institution as a single person, ignoring the diverse ownership of
that fund or institution, limiting the ability of such organisations to launch new REITs.
Two changes are proposed to these rules. First, new REITs will have a grace period of three years before
having to satisfy it. This change is very welcome, but could be made significantly more helpful if the grace
period also applied to the reformed listing requirement mentioned above: there is little sense in requiring a
new REIT which is allowed to be closely owned initially to be listed during that initial period.
Secondly, a modification of the rules will treat the test as satisfied if the reason it would not otherwise be
satisfied is the presence of “institutional investors” among the REIT’s shareholders. This change, too, is very
welcome, but its effectiveness will depend on what qualifies as an “institutional investor”. The definition
currently proposed includes a range of entities including pension funds, life companies and sovereign wealth
funds. Unfortunately, it does not include housing associations, charities, financial institutions or UK and
overseas listed property companies. Excluding some of the most obvious organisations likely to be able to
contribute substantial residential stock and residential management expertise will inevitably reduce the
effectiveness of this measure in terms of encouraging the emergence of residential REITs. We hope the
government will think again.
What Remains to be Done?
Although the current proposed reforms mark significant progress in reforming the REIT regime to support
residential investment, there are other reforms that we believe are essential if we are ever to see a significant
number of residential REITS. The two most important issues relate to the way the traditional tax distinction
between “trading” and “investment” activities applies in the REIT context, and the scope for using the REIT
structure without the compliance burden of a listing.
A property portfolio can only fall within the tax-exempt ring-fence of the REIT rules if it is amounts to an
“investment” business in tax terms. Very broadly, that means that the REIT acquires property with a primary
interest in the rental income it generates, rather than with a view to making a quick profit on sale. It is often a
source of difficulty for businesses that the tax rules operate by reference to a clear differentiation between
activities that fall on one side of a line or on the other, whereas commercial reality often involves operating in
a big grey area that spans that line.
All property investment businesses—whether commercial or residential—are ultimately about giving
investors a total return that comprises income and capital growth. Every property investment business will buy
and sell assets from time to time, and will hope to make a profit when it does so. However, there is a structural
tendency in the UK residential context to rely to a greater extent on regular asset sales than is generally the
case in commercial property investment businesses. The reason for that tendency is that the net income return
delivered by UK residential property represents a smaller proportion of the total return than is the case in the
commercial property context. Specific technical “trading” concerns can also arise in the context of residential
shared ownership leases and right to buy properties.
Ev 108 Communities and Local Government Committee: Evidence
Residential property investment businesses are therefore generally quite sensitive to the operation of the
investment/trading test. The industry has consistently asked government to consider providing a greater degree
of clarity and certainty around the operation of that test specifically in the context of and for the purposes of
the UK REIT rules. This should not be objectionable in principle: the REIT rules already deem certain
transactions (disposals within three years of substantial capital expenditure) to be “trading” transactions for the
purposes of the REIT rules; and a “white list” or “safe harbour” approach is already adopted in the authorised
funds context for example, to provide business with certainty that particular types of activity will be treated as
investment rather than trading. However, the response has so far been unsympathetic, for reasons that have not
really been explained.
If residential REITs are to become a reality, it is very important that government engage more constructively
with industry to explore how greater clarity and certainty can be given, in appropriate cases, as to when the
trading/investment test can be regarded as satisfied. We are confident that a way forward can be found which
would help deliver residential REITs without creating material revenue risk to the Exchequer.
In other countries with REITs a further evolution of their regimes has been the creation of private REITs
that are unlisted. The rationale for only allowing listed REITs in the UK is understandable, which is that listing
provides a degree of protection for investors, which unlisted REITs would not. However, because most
residential REITs would be started from scratch and therefore be smaller than existing commercial property
REITs there is an argument that allowing unlisted REITs would particularly be beneficial to the residential
sector.
A Projection of the Number of Homes that Build-to-let could Deliver
Current institutional investment in the residential sector is estimated at £4.33 billion by IPD, which excludes
the student accommodation sector. As set out in our original evidence about £2.4 trillion is invested by the
UK’s pension and life funds in all investment assets (shares, bonds, property, etc), and as a comparator the
commercial property sector has about £120 billion of institutional funds invested in it.
Even if just 5% of that figure (£6 billion) were invested in residential property it would make a significant
contribution to housing delivery. It is, however, very difficult to project with any accuracy the question the
Committee poses.
For example, as Government policy acknowledges, an important factor will be access to land. At present
there appears good impetus behind getting the Homes and Communities Agency to support build-to-let on an
equity share basis, by contributing central Government land, but until March of next year (2012) we will not
know the extent of that commitment, and even then probably not for the period stretching to 2015, and the
HCA has no control over local authority land, which is far more abundant.
As explained in oral evidence how build-to-let is treated for planning obligation purposes will also have a
bearing on delivery. At present, it is treated by most local authorities as the same as units for sale, and there
is nothing in national planning guidance which differentiates between the two. I hope I explained why that
may be construed as unequal, given the sums and period that investors would be sinking capital into build-tolet vis-a-vis traditional house building for sale. One or two local authorities are starting to recognise the value
of long term private investment, but more should be encouraged to think about how to treat build-to-let as part
of the planning obligation process.
I hope this further note is helpful, and we remain very willing to provide further information to the
Committee if required.
December 2011
Written submission from the Chartered Institute of Housing
Introduction
1. CIH welcomes the opportunity to respond to the Department for Communities and Local Government
Select Committee Inquiry on the financing of new housing supply given the Government’s recognition of the
chronic under supply of housing and the commitment for housing development to kick start the economy.
2. CIH is the professional body for people involved in housing and communities, with over 22,000 members
across the UK and Asian Pacific. We are a registered charity and not-for-profit organisation. Our vision is to
be the first point of contact for—and the credible voice of—anyone involved or interested in housing. We exist
to maximise the contribution that housing professionals make to the wellbeing of communities.
3. We have a wealth of information and expertise at our disposal and access to members working to deliver
housing opportunities across the UK. We regularly contribute to a wide range of debates on housing supply
and demand, including those on the new homes bonus, housing revenue account, affordable rent models,
national planning policy framework, welfare reform, and mortgage reviews amongst others.
4. We welcome the government’s recognition of the chronic lack of supply of housing and this is noted. The
country faces a growing housing crisis. New households are continuing to form, despite a housing shortage
Communities and Local Government Committee: Evidence Ev 109
and as a nation, we are building fewer homes than in 1923. Yet, developers have land banks and planning
permissions average an 80% success rate.
5. Increasing the levels of house building to meet current and future need nationally and locally as
emphasised in the National Planning Policy Framework, through the encouragement of mixed and balanced
communities is supported. The planning system has a vital role in ensuring that homes are built, that a
proportion of housing is affordable and that supported and specialist housing is available.
6. Yet extraneous pressures compound planning, housing and investment issues. The recession, lack of access
to finance for developers and lack of access to credit for house buyers has created both an affordability issue
and hampered the supply of new homes, resulting in a reduction in the number of conversions of planning
permissions to full development, and subsequently, new housing developments being built.
7. We have actively supported and called for the need for more adequate investment in the housing market
across the continuum of social/affordable and market housing, however, the range of options need to be suitable
to market conditions in local areas and a one size all approach is therefore unlikely to suit. Tweaking around
the edges of investment in new housing supply will not work.
8. Reforms to welfare, housing benefit, planning, social housing regulation and investment; coupled with the
general economic climate, rising inflation and debt re-pricing cost uncertainty; will all mean a pressure on
landlords to develop their own approaches to the way they manage their businesses, services and assets
9. These changes to the operating environment for housing associations (HA) and local authorities (LA) in
the provision of new housing are widespread and enormous in scale forcing an emphasis on competition and
innovation in both maintaining existing provision and in the understanding of what future investment in housing
may need to look like.
General Summary
10. The submission argues that:
—
Current supply is less than half the house building needed to meet new demand, quite apart from
dealing with the current backlog of almost 8% of households in various forms of housing need. We
need a house-building programme sufficient to the size and scale of the current problem just to keep
up, let alone clear a backlog of need or prepare for future generational need.
—
Capacity within the sector is very stretched; it would be wrong to assume that current capacity, with
limited direct subsidy, can be stretched significantly to further increase output.
—
Current policies will result in both new build and parts of the existing stock being used in a new
role of providing housing at “Affordable rents”; this inevitably means fewer houses being available
to meet the greatest needs at “social” rents, unless ways are found to encourage new provision
here too.
—
Current policies carry considerable risks, of various kinds, both for individual providers and for the
sector as a whole. A one size all approach to accessing investment is not suitable due to the different
size, type and portfolio of properties in existence.
—
Adequate, innovative and flexible investment in the housing sector is needed. This may be coupled
with a increasing emphasis on the provision of government security in the investment market for to
enable the provision of further social housing through alternative investment models.
—
Put somewhat simply, a catch 22 situation exists in market housing provision; maintaining investor
confidence in delivery is vital to increase the supply of new market housing; providing properties
are built in locations and of the right size, scale and type to suit local market conditions. However,
difficulties remain in accessing mortgage finance especially for first time buyers where average
deposit levels are beyond the reach of many and high house prices relative to earnings affect other
potential movers. Innovation in the mortgage market is needed and the range of products on offer
need to be sustainable for investors as well as suitable for households. The lack of building, lack of
moving and lack of confidence in the sector needs to be rectified in order to increase the supply of
the right homes in the right places. .
—
As an additional point, it is important for the Committee to bear in mind the “housing market”
should be seen as a continuum encompassing both affordable and social housing as well as market
housing. Affordable and social housing should not be seen as properties outside of the housing
market. By simply looking at price or market signals can leave large parts of the market
un-catered for.
11. Given limitations of space, the remainder of the CIH submission concentrates on issues of new supply
in the social sector.
12. As background to the questions it has posed, it is important that the Committee bears in mind the current
and expected future demand for housing, and hence the volume of new supply (both market and social) that
is required.
Ev 110 Communities and Local Government Committee: Evidence
Current backlog of housing need
13. The scale of need for new housing is demonstrated by the government’s own assessments. First, there is
a backlog of outstanding need which has grown to about 1.9 million (or over 8% of) households. This
assessment, published in November 2010, is based on the position in 2009. It projected that increasing supply
and other factors would gradually reduce the backlog by 2020, but that it would still remain at historically
high levels (see Figure 1).
Figure 1
Projected changes in levels and types of housing need in England to 2021
Type of Need Profile over Projection Period
10.00%
9.00%
% of households
8.00%
Unsuitable
Overcrowded
Concealed
Sharing
Rental Affordy
Mortgage Diff
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
19
9
20 9
0
20 0
01
20
0
20 2
0
20 3
04
20
0
20 5
0
20 6
07
20
0
20 8
0
20 9
1
20 0
11
20
1
20 2
1
20 3
1
20 4
15
20
1
20 6
1
20 7
1
20 8
1
20 9
2
20 0
21
0.00%
Year
Source: Bramley et al (2010) Estimating Housing Need, figure 7.8. London: DCLG.
14. Reconsideration of the assumptions in this 2010 report and how these relate to current conditions would
suggest that the forecast of an easing backlog is now much less likely to apply, because of the likelihood that
the market will not recover rapidly and that the rented sector will grow little in gross terms (ie most growth
will be from changes in tenure in the existing housing stock, not from new provision).
Projected future demand
15. To the assessed backlog at any one time has to be added the expected levels of new demand arising
from population growth and other factors. The number of households in England is currently projected to grow
to 27.5 million in 2033, an increase of 5.8 million (27%) over 2008.44 This means that, if the projections
prove correct, 232,000 new houses will be required per year. Of this, just over three-fifths is driven by natural
population growth (ie fertility and life-expectancy levels), with net migration accounting for just under twofifths.
Overall housing need
16. Analysts caution against the simplistic calculation of removing the backlog within a given period (say
10 years), nevertheless it can be seen that the housing minister’s recently expressed aim of building around
200,000 units per year will fall short of meeting new needs and do nothing to clear the backlog. Yet even this
may be an optimistic assessment of what can be achieved, given current starts in all sectors of only 98,000 per
year.45 These figures illustrate the scale of the problem and the reasons for so much stress within the housing
market. Understanding supply and demand at the local level is vital; having robust Strategic Housing Market
Assessments locally will be critical to this. Local authorities will need to take local decisions using local
resources where they arise. Yet without sufficient regional collaboration, understanding and making provision
for overall housing need which may operate larger than simply the local area, will be vital.
The Role of Public Subsidy and Other Funding Sources in New Housing Supply
17. The Committee’s questions revolve around the fundamental issues about how new housing is paid for.
In the social sector, the basic options are:
— rents from both new and existing tenants;
— other income, eg from sales, or from surpluses/reserves, or by savings in operating costs;
44
45
DCLG (2010) Household Projections, 2008 to 2033, England.
DCLG live table 213.
Communities and Local Government Committee: Evidence Ev 111
—
part sales, ie making greater use of shared ownership, where costs are shared with the buyer;
—
raising outside capital, eg by borrowing;
—
direct subsidy—either capital, eg social housing grant to housing associations, or revenue, eg until
April 2012 the housing revenue account (HRA) subsidy paid to local authorities;
—
use of free or reduced-cost land from public authorities, or securing free land or other amenities
through section 106 agreements; and
—
indirect subsidy through housing benefit (HB), allowing rents to be higher but (with various important
provisos) still affordable.
18. Clearly, all forms of public subsidy are under pressure, with grants to housing associations (HAs) only
likely to average 15% of costs under the “Affordable rent” programme, and HRA subsidy disappearing
completely next year. Government policy is therefore to shift the balance of funding for new housing away
from direct subsidy towards all the other sources by:
—
encouraging HAs and local authorities to raise rents and to provide more shared ownership units
where capital requirements are lower;
—
putting pressure on HAs and LAs to raise funds through sales, put surpluses/reserves into new build
and free new resources through greater operating efficiency;
—
obliging HAs to raise as much as they can through borrowing and other forms of external finance;
—
asking public agencies to free-up land; and
—
allowing housing benefit to “take the strain” of increased rents.
Issues About Current Policy
19. These policy shifts all have consequences; some are listed briefly below.
20. Raising rents makes housing less affordable to those in need and they are more likely to need to HB.
This affects especially those in work and on incomes too low to be able to buy, a group whose numbers have
grown considerably because of the difficulties of accessing owner-occupation.
21. Part sales through shared ownership clearly have a role but suffer from a number of handicaps such as
the often narrow gap between the costs of shared and full ownership, unfamiliarity by buyers, etc. Past
governments have not succeeded in raising levels of shared ownership much above 100,000 nationally at any
one time (given that units eventually move out of shared and into full ownership).
22. Property sales must be to bodies outside the sector if they are to produce new resources, as the market
value of a property is greater than the tenanted value of social housing. But this reduces the supply of housing
at social rents, even if it increases the supply of low-cost private homes. There are also issues around the skills
needed for managing disposals in this way and around the restrictions of the TSA on disposals. In the case of
the new right to buy (RTB) initiative, the major doubt is the ability of the market to take up the target level of
sales (100,000 over three years) given that currently less than 3,000 are sold under RTB annually and pushing
up discounts to attract sales reduces the available receipt. There are also concerns about how the funding will
be redistributed to areas with greatest needs and whether like for like sales and replacement will occur. These
issues are further compounded by a genuine risk that RTB sales will be hampered by the lack of mortgage
access across the board and the need for a high rate of discount in order for households to gain access to
mortgages due to the rate of deposits needed. So the key issues with this scheme are around expectations and
demand—there is a lack of demand for ex-social stock, a lack of potential owner occupiers and a likelihood
that homes could end up as buy to let with all the local issues/problems that brings. RTB also causes multiple
management and market issues in the longer term
23. Surpluses and reserves are not idle funds or “unused capacity” but are used to fund investment in the
stock and in communities, if they are not used to fund new homes. However, there will be issues about housing
association’s gearing, and whether they are as astute with borrowing as they could be. There is an expectation
on housing associations and providers to make surpluses and have financial capacity, but there are limits to
that capacity. These other priorities are likely to suffer—a key issue given that, for example, the social housing
sector has to retrofit nearly 4 million homes to meet government targets to reduce carbon emissions.
24. Operating costs have been reduced by many organisations and more savings could undoubtedly be
achieved. However, landlords need to be very careful about the impact on services to current tenants. Also, as
CIH has shown in its work—including the report “Is Big Really Best”?46—mergers and other ways to drive
down costs do not always work. Our forthcoming report “Is Big Best2”47 (CIH) illustrates the range of
pressures driving associations to be more efficient.
25. Borrowing is constrained by lending covenants attached to existing loans. Lenders are looking to raise
rates on existing loans, and have already made clear they will look for opportunities to do so.
46
47
CIH, 2005, Is Big Really Best? http://www.cih.org/policy/IsBigBest.pdf
CIH, forthcoming, “Is Big Best 2”.
Ev 112 Communities and Local Government Committee: Evidence
26. Using public land is a good option but LAs (for example) may want to ensure it is used for social rented
units to meet the greatest need—this clashes with government policy.
27. Dependency on housing benefit carries the obvious risks of pushing up the HB budget and takes place
at a time when eligibility for HB is being reduced; also, many people want to avoid being on HB as it
complicates their earnings if they are in low-paid jobs.
28. The major concern about the combination of current policies is that they are very likely to reduce the
supply of housing at social rents and/or make it less accessible because of the changes in HB. This obviously
means that the position for those in greatest need gets worse not better, even if other slightly less needy groups
get some benefit.
29. CIL and S106 arrangements48—one thing that the construction industry has made very clear is that
there will be no revival in house building unless there is potential for a profit.49 In times of economic volatility
the viability of any substantial development is very hard to establish but it is clear that direct public benefits—
such as contributions to social housing, new or improved infrastructure, design quality—do come under great
pressure as the perceived “balancing factors” in many viability calculations. And yet successive Governments
have made it clear that such factors are essential to the achievement of sustainable development through the
introduction of Section 106 arrangements and the Community Infrastructure Levy (CIL).
30. Attracting and encouraging essential capital to fund infrastructure projects will require a step change in
the way risk is managed both for investors, the housing sector and Government. The substantiation and
negotiation of public benefits is a significant cost to the public purse at a time when skills and resources are
being lost in the public sector. So there is a mutual benefit in simplicity and transparency which can help to
build joint working more readily. With CIL there-is an up-front and public calculation of costs and because of
that there is a fair chance that such costs can be off-set against the purchase cost of the land ie helping to keep
schemes viable. As CIL is an optional arrangement for local authorities, although it seems to have widespread
support, house builders cannot rely on the benefits from its certainty in all locations.
31. Government is currently consulting on CIL revisions50 just 18 months after the first charging procedures
were introduced. The value of CIL’s certainty can however easily be undermined if the arrangements are subject
to review too frequently. Stability is needed to encourage adoption. In a similar vein, the British Property
Federation (BPF) called for some stability in the tax regime applying to the re-use of brownfield land, a
sustainability practice that the Government has indicated that it wishes to support.
32. It may transpire that a consequence of CIL changes might be, for instance, an alteration to the present
balance between the on-site and off-site provision of affordable housing. Safeguards will be needed to protect
affordable housing delivery. In turn such a change could have funding consequences that the Committee ought
to be aware of but cannot anticipate.
33. Efficiency—Registered providers need to focus on effective use of stock and capital investment portfolios,
which will require the improvement of management information tools in order to understand assets and the
importance and effectiveness of capital. When building new properties, the risks include voids and a trade-off
between new build and community investment in other activities. These must be managed and the efficiencies
between products and outputs carefully negotiated.
34. Direct investment in the housing sector in affordable housing could serve as a measure to boost the
economy overall; a multiplier effect would be attained that every pound spent would create additional economic
output. This measure would have the effect of increasing employment in the building construction industry and
related supply chains, enable the use of land which has planning permission but remains undeveloped and
increase confidence in further investment in both the sector and economy overall. This would lead to an
increase in the supply of new properties in order for supply and affordability issues to be addressed.
The Role of Grant Funding and Possible State Lending or Investment
35. These issues raise the overall question of the role of state assistance for capital finance for new build,
whether as grant or in some other potential form. As can be seen from the above, the role of state capital
funding is essentially to get the right balance between the different funding sources to achieve the objective of
making new housing affordable to those on low incomes or on benefits: insufficient support for capital
investment creates the problems just described.
36. That said, many in the sector assume that capital grants will never return to previous levels and indeed
may disappear completely. However, this implies a future in which rents in the social sector inexorably increase
in real terms, and/or in which there are regular sales outside the sector. Either of these threatens the future of
the sector in terms of its ability to meet the greatest needs. There are two levels of risk to be balanced here.
One is for the individual organisation which faces a new range of risks—greater capital exposure, more
uncertainty about income (because of the likely effects of the HB changes), less cushion in the form of state
support. The other is for the sector as a whole, since what “works” for individual organisations in the short
48
49
50
We acknowledge the input from our partner in the “Planning for Housing Network” the Royal Town Planning Institute in
consideration of our response on CIL and S106.
DCLG, 2010 “The house building industry: Promoting recovery in housing supply”, DCLG London.
DCLG, 2011, http://www.communities.gov.uk/publications/planningandbuilding/cilreformconsultation.
Communities and Local Government Committee: Evidence Ev 113
term carries risks for the role of the sector in meeting housing need, its future reputation, the recruitment and
motivation of staff, and a range of other longer-term factors.51 CIH is keen to stress the importance of the
provision of a wide range of options rather than expecting a “one size fits all approach” to housing investment
and supply to work.
37. The funding outlook requires the housing sector to review long term investment strategies; reductions in
grant funding mean the sector will have to be more aware of and responsive to value for money especially as
the new regulatory environment will place an increasing emphasis on efficiency through economic regulation.
The shift away from direct payments to landlords may result in funders re-rating the sector, restricting supply
and leading to pressure on balance sheets. Potentially this could also lead to rent increases payable by existing
tenants as lenders and the sector cope with a different financial operating environment and pressure on the
terms by which equity could be provided to the landlord.
38. The Committee asks about state lending or investment but the difficult about this is that it will still count
as public borrowing. If, for example, social housing grant were a repayable subsidy, then the repayments would
have to be factored into the cost of the project, even though the grant itself would eventually be recyclable.
39. There is considerable discussion within the sector of making use of the potential borrowing capacity not
currently available because of the historic grant which “sits on” housing associations’ books as a liability in
the event of disposal, but one which is most unlikely to be called on (except in predictable circumstances such
as sales of individual units, when it can in any case be “recycled” within the housing association). The difficulty
about this is that existing lenders will have already factored in the existence of this “comfort factor” in
making their original loans: they are likely to want to re-price the loans in the event of it being used to raise
other finance.
40. We are aware of a number of other options touted as a possible way of increasing the supply of housing;
including the provision of market rental housing by registered providers to meet demand for those priced out
of the market. This may see private developers and investors seeking registered provider status to deliver
affordable rent, which offers a higher rate of return than socially rented homes. We may also see a new deal
therefore on the legal status of registered providers notwithstanding the maintenance of charitable status and
the subsidy model. Others would prefer to review the tax breaks on offer to incentivise or promote new
build developments.
The Role of Public Sector Support in Kind
41. The provision of free (or cheap) land can reduce costs, but various factors have to be considered:
— Land currently in public ownership and potentially surplus to requirements is obviously in limited
supply, and is not necessarily in suitable places to develop housing. Attractive surplus land may
already have been used, leaving only less attractive or difficult to develop sites.
— Local authorities mainly now have land associated with existing estates. Most will want to (and
should) consult with tenants before releasing it. Tenants may have strong views on who the developer
should be (or not be) and the type of development and rent levels. Often, and understandably, they
will want some benefit for existing residents in terms of opportunities to move to bigger/smaller
properties, etc. The prospect of “Affordable Rent” developments may therefore be an obstacle.
— Under the Government’s “Build now, Pay later”52 scheme house builders pay for land only once
they have started work on the new homes, which reduces a significant obstacle in the construction
process early on. In October 2011, the Government reiterated the commitment to use public land
for housing supply under this scheme, announcing the release of available government land across
the country.
42. The current efforts to release land are certainly worthwhile, but the limitations need to be borne in mind.
43. The provision of security in order for longer term investment models to be made available might be one
option worth pursuing. Guarantees by a public authority may reduce the cost of borrowing or help to facilitate
it in cases where it might not otherwise take place, but of course have a time-cost in terms of negotiations and
agreements with public agencies. In themselves they should not count as notional “expenditure” by the
authority, but accountants will want to make assessments as to the extent of the risk of the guarantees being
called in; clearly the risk would be greater if several were held by one authority, and would need to be
accounted for as a liability.
The Role of Long-Term Private Finance, Especially From Institutions
44. There is an expectation that local authorities will need to invest in new forms of finance as a result of
housing revenue account changes. New mortgage products may be made available which offer longer-term
51
52
See the report Tough Choices: Different perspectives on the long-term risks facing the social housing sector by Ipsos MORI
(2011). It highlights government policy change and budget uncertainty as the greatest of the risks over which organisations have
little control.
Grant Shapps offers “Build Now, Pay Later” deal to developers, DCLG press release, 30 March 2011:
www.communities.gov.uk/news/corporate/1876832
Ev 114 Communities and Local Government Committee: Evidence
stability to potential movers within the housing market and to the housing sector in terms of the bonds or other
finance products that are accessible to them.
45. There appears an appetite towards getting pension funds to invest in rented housing, whether private or
social as long term investment vehicles. This has been on the agenda for a number of years but has as yet, not
borne fruit. What is clear, is this could help provide stable and long term funding at an affordable cost. We are
also aware of numerous local authorities thinking more strategically about how they use their own pension
funds to invest in their own housing in order to generate a return. Again the risk appetite for this would be
known and quantifiable to those investing pension funds.
46. There is a risk for social landlords that in becoming too dependent on private finance to bridge the gap
on reduced public capital funding, their finances become stretched and ability to provide new affordable homes
beyond 2015 will be compromised.
47. It will be important for the debate to shift away from debt finance to something else—many developing
housing associations will get close to their lending covenants rather sooner than planned because of affordable
rent, so a desire to use bonds or other investment vehicles is growing. Longer-term loans funding property
throughout its life should be available. We are aware that unsecured lending is an option being considered by
some, however, unsecured lending is difficult to administer and by the very nature of it, more expensive to
service than other sources. Consequently, we would urge caution here and are clear that it may not be the
answer to the sector’s long term financial stability and indeed may jeopardise the viability of both individual
organisations and those in group structures.
48. The drive for increased efficiencies in everyday spending is also having an impact on the overall response
and approach to prudent investment. It is not clear whether the housing sector could increase reserves simply
by being more efficient. Delivering huge efficiencies is operationally difficult to achieve in any sector, including
the private sector.
Can housing associations and ALMOs access more private finance?
Housing associations
49. There is a strong sense in the sector that housing providers will move from government finance to more
private finance on the capital markets through bonds, rather than through traditional lenders. However, the
conversation on funding is somewhat dominated by the larger housing associations. This view presents risks
for smaller housing associations for whom lending portfolios and risk appetite will be considerably different.
The Committee should note that different housing associations have different financial models so a one size
fits all approach will not work for everyone; size matters in terms of funding options especially to access bonds.
50. Potential changes53 to the use of Real Estate Investment Trusts (REITs) could see housing associations
becoming interested in exploring the potential of the model to increase the supply of affordable homes, as it
creates easier access to equity capital markets and an opportunity for balance sheets to work harder
ALMOs
51. The potential for ALMOs to raise private finance was recently considered in a report by the National
Federation of ALMOs to which ConsultCIH contributed. Essentially, the approaches explored would all require
ALMOs to be reconstituted so that their majority ownership passes from the LA to tenants. While this would
of course depend on the willingness of tenants to take on a bigger role, the report (Building on the potential
of ALMOs to invest in local communities) pointed out that most ALMOs now have extensive tenant
involvement, and at this stage many might contemplate taking on the extra responsibilities of being the majority
shareholders. If such a reconfiguration of the ALMO were accepted by the LA and by tenants, it could pave
the way for one of three new models:
—
Model 1—A long-term management contract—based on the ALMO model having a 35-year contract
and on the local authority having one-third rather than sole ownership of council properties.
—
Model 2—A long-term management contract including transfer of some vacant properties or land—
similar to Model 1 but with some limited transfer.
—
Model 3—Transfer to a Community and Council owned organisation (CoCo)—a fundamental change
to the ALMO’s constitution which transfers ownership to the community, but on a different basis to
a current stock transfer. Unlike conventional stock transfer, the CoCo would retain a financial
relationship with the council through a covenant to meet the council’s interest and repayment
obligations on its HRA loans.
52. These models, particular the “CoCo”, have potential to give access to private finance and the NFA held
discussions with lenders in developing them. They all take account and build upon the potential represented
by council housing finance reform.
53
Knocking down barriers, 21 October 2010, www.insidehousing.co.uk/ihistory.aspx?storycode=6518537
Communities and Local Government Committee: Evidence Ev 115
The Potential Arising From Reform of Council Housing Finance
53. Council housing finance reform makes the fundamental change of giving LAs full control of their revenue
finance and ending the “pooling” of revenue at national level through the HRA subsidy system. It has been
made possible, in part, because this system has recently moved into surplus. Were this surplus to be “left” in
the system when the transition takes place in April 2012, it would of course create considerable potential for
new investment by local authorities, both in new build and in their existing stock/estates. However, neither this
government nor the previous one was willing to allow this, and the debt burden on LAs has been increased to
reflect the “loss” of future surpluses to the Exchequer.
54. A further constraint is that the level of debt in each LA will be “capped” at a certain amount when the
new system comes into operation. Therefore, unlike HAs, LAs will be unable to borrow to the full “prudential”
extent justified by their rental incomes.
55. Nevertheless, LAs will have some extra borrowing/investment potential for new build, although the
extent of it will depend on various factors including:
— the limit set by government in each case;
— the capacity to raise rents (broadly, the extent to which the LA has unused potential to raise rents
within current rents policy; some authorities are already at or near to this limit); and
— the demands from the existing stock and tenants, eg to complete decent homes funding, start to make
the stock more energy-efficient, and deal with tenants’ priorities such as environmental and security
improvements, etc.
56. The outcome is likely to be some limited capacity to build, which will probably be higher than recent
historic rates (which were only 2–300 per year) but not exceed the levels achieved in the last two years with
HCA grant funding (of 1–2,000 per year).
57. There are suggestions that some local authorities may look to revive options appraisals as they try to off
load stock once the HRA settlements have been determined. This would lead to new stock transfer organisations
and the receipts reused for regeneration and new build programmes.
58. CIH has long made the case that council housing borrowing should not count against the main measure
of central government debt, thus freeing councils to borrow prudentially in the same way as housing
associations. This case was recently made again, with CIH input, by four councils but earlier this year was
rejected by HM Treasury.54
How effective will the “Affordable Rent” scheme be in increasing supply?
59. To provide the homes people need, an increase in supply is vital. The HCA is expecting to deliver around
80,000 out of 170,000 new properties via affordable rent by 2015. Landlords will have to consider that rents
set higher than social rents give an opportunity for reinvestment and may more closely match demand with
supply in different areas. However, conversions to the affordable rent scheme will not help much with covering
the cost of developments unless and only to a degree, it they are operating in high value areas. A recent L&Q
report on Affordable Rent suggests that it “will absorb large amounts of the housing association sector’s
financial capacity”,55 affecting the sector’s ability to participate in future policy initiatives and make their
stock work efficiently and effectively for them. This is of considerable concern given the current emphasis on
promoting this product.
60. Affordable rent has changed the housing association sector’s financial forecast; the sector is now more
dependent on sales and disposals to the open market than previously. Debt will go up considerably, so gearing
ratios will rise which affects investor confidence. Local authorities will play a key part in getting the right
homes in the right places, taking opportunities of capacity and maximising outputs. However, providers will
need to be aware of and plan for, benefit reform and LHA changes as this will impact on supply; in areas with
high rental values, the affordable rent model may still not be an option for many households. Should interest
rates rise, this could challenge assumptions about the overall cost of development, which again, would impact
supply and the viability of schemes.
Conclusions
61. It is without doubt, that new homes are badly needed in the right places at the right prices to suit local
circumstances. However, the planning, investment and regulation responses have until now not been as robust
and substantial as to meet the current backlog of housing need or future demand. Managing investment risks
and developing commercially viable solutions across the whole of the housing market will be vital if the
country is to build enough housing to support current and projected future demand.
October 2011
54
55
Westminster Council (2011) The Case for Borrowing for Investment in Housing.
L&Q/PWC (2011) Where next? Housing after 2015.
Ev 116 Communities and Local Government Committee: Evidence
Written submission from Grainger plc
Grainger PLC
Established in Newcastle upon Tyne in 1912, Grainger is the UK’s largest listed residential property owner,
manager and developer, and has a substantial business operation in Germany. Grainger directly owns £2.4
billion of residential property assets and has over £3 billion of residential property assets under management.
Grainger owns or manages over 40,000 properties in the UK and Germany.
Grainger’s business, focused solely in the residential property sector, ranges from ownership, property
management, fund and asset management, development to refurbishment. Grainger is also a leading provider
of equity release products through its subsidiary brand, Bridgewater Equity Release.
Grainger is a co-investor in and the fund and asset manager of the UK’s largest private rented sector
residential investment fund, G:res, which has approximately £400 million of residential assets in UK.
Grainger is a constituent of the FTSE 250 index on the London Stock Exchange. Grainger is also a
constituent of the FTSE4Good index.
Introductory Remarks
There is an undeniable growing demand for private renting and a shortage of housing stock. The key issue
is supply which is clearly recognised by many including the Government and this Select Committee.
In order to match the demand for more rental stock by tenants, the Government’s desire for more houses
and an investable asset class that is attractive to institutional investors, more land must be made available in
suitable locations (close to transport hubs and in areas of greatest demand) for more homes to be built.
The UK has a comparable proportion of home ownership compared to the US, but much higher than our
Northern European neighbours. Grainger does not believe it is necessary to ask whether ownership is preferable
over renting or vice versa. Instead, we believe that the important question facing UK policy makers is “When
is owning appropriate and when is renting appropriate?”
The Government must not treat or consider renters as second class citizens, the message that “it is always
alright to rent” and the preferred choice at certain times of one’s life (young or old) should be adopted. Renting
should be viewed as one of the stepping stones of housing tenure in most people’s lives.
It is essential that the Government embraces this view and facilitates a functioning and effective private
rented sector that is not overly burdened by regulation.
In order to make the private rented sector (PRS) more attractive to financial institutions it has to offer similar
scale and yields to commercial property (which is largely funded and owned by financial institutions). Initial
upfront costs are often so high compared to rental income that yields are unattractive to institutions. If upfront
initial costs could be reduced it could improve the yields. As there are a very limited number of existing
opportunities to invest in residential stock at scale, solutions must therefore include a development and
construction (ie new build) element.
High land acquisition and development costs often reduce yields to an unattractive level for a rental income
based residential investment model. Solutions which reduce these upfront costs and allow the investors to
acquire the assets (or stock) “at cost” (eg wholesale) rather than at retail premiums, dramatically improve the
financial viability of Build-To-Rent schemes.
This is the approach that Grainger and Bouygues, one of Europe’s largest construction companies, have
followed in our partnership to build and manage institutional grade private rented stock available to institutional
investors. (See case study below.)
By using public land on a deferred equity basis the Government can facilitate the delivery of more homes.
Land can be provided on a condition that it is exclusively available for rent for a period of 7/10/12 years,
aligning residential to commercial property in terms of the length of the standard commercial lease.
It is vital that the private rented sector remains free from too much regulation and the market sets the rent
levels. It is important that any form of rent capping is resisted as this will deter the financial institutions (and
private investors) from investing in the private rented sector and detrimentally affecting supply. The
introduction of regulation and rent capping in the 1980s led to the retreat of institutional investment in the PRS
and has left us with the buy-to-let dominated sector we have today. Rent levels should be controlled by supply
issues not regulation. (See Joseph Rowntree Foundation, Housing Market Taskforce, “The UK private rented
sector as a source of affordable accommodation”, Professor Michael Ball, University of Reading, November
2010.)
The Government has made a number of moves to facilitate the entry of institutions to this market, through
changes in SDLT, the review of REITs and the Public Land Initiative. We strongly welcome these changes.
By using its land assets selectively and prudently the public sector could further facilitate entry by
institutional investors into the private rented sector at scale.
Communities and Local Government Committee: Evidence Ev 117
Case Studies
At the bottom of this response, we include several case studies to demonstrate how housing supply may
be financed.
The first case study demonstrates how the public sector can use its land to increase housing supply. The
Defence Infrastructure Organisation appointed Grainger as a development partner to develop up to 4,250 houses
on under-used military land at the Aldershot Urban Extension. The MoD retains ownership, while the
agreement structure aligns the interests of Grainger with the MoD to deliver best value.
The second case study is of a Build-To-Rent fund which will build new private rented sector accommodation
and provide an entry route for institutional investors. This fund is being led by Grainger and Bouygues, one
of Europe’s largest construction groups.
The third case study is of the G:res Fund, which Grainger fund and asset manages and co-invests in alongside
other domestic and international investors. It is a specific example of current institutional investment in
residential, the ability to exploit economies of scale and provide attractive returns to investors.
Summary of Responses
— Public land as an equity stake—This solution fits in with the Government’s drive to make better
use of public land. With a similar principle to the “build now, pay later” scheme, we believe public
sector bodies should be encouraged and, indeed, given advice and guidance in contributing their land
into a partnership with a developer for an equity stake in the partnership to develop a Build-To-Rent
scheme. This would increase viability for the scheme and the public sector body would benefit
from a long term income stream which they could, if they wanted, sell to an institutional fund at
some point.
— Local authorities should be encouraged to be flexible in their approach to their land assets and should
consider injecting their land into a partnership agreement with private sector delivery bodies for an
equity stake in a long term residential fund. (See Resolution Foundation, “Making a Rented House
a Home: Housing solutions for ‘generation rent’”, Vidhya Alakeson, August 2011.)
— Reduce or remove affordable housing requirements on Build-To-Rent schemes—Local
authorities should be encouraged to be flexible in their approach to Section 106 and affordable
housing requirements when considering the merits of a new private rented sector development (ie
Build-To-Rent). By reducing or removing the affordable housing requirements on developments
built purely for the PRS, the ability for developers to deliver new rented accommodation will be
increased dramatically.
— To attract large financial institutional investment into the private rented sector, the Government must
explore further policy levers that would facilitate the ability for such institutions to access assets
and portfolios at scale (preferably new build stock) and at attractive yields by suppressing upfront
entry costs.
Specific Responses to Questions
1. 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?
Grainger recommends that the Government reintroduce tax relief for remediating brownfield sites.
Brownfield sites requiring remediation are often marginal and have very sensitive viabilities. We believe that
the benefits to the UK economy of increasing the ability of the private sector to develop will outweigh any
savings made by the Exchequer through the abolition of tax relief for remediating brownfield sites.
Reintroducing relief would also bring the added benefit of giving greater support to the brownfield-first
principle by supporting development on brownfield sites over greenfield.
2. What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance
between them?
No response provided.
3. 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?
Grainger recommends that Local Authorities should be flexible in their approach to land assets that they
hold. Local Authorities should take account of, consider and incorporate plans for un-used or under-used land
for development, particularly housing, in their local plans.
One approach that Local Authorities and all public sector bodies should consider in the context of the
Government’s ambitions to release public sector land for housebuilding is to swap public sector land assets for
a long term equity stake in a partnership with a housing delivery body, such as a Build-To-Rent development.
This would improve the ability of housing delivery bodies to increase housing supply.
Ev 118 Communities and Local Government Committee: Evidence
Grainger recommends that a new approach to Section 106 and affordable housing requirements is taken
when considering new developments for the private rented sector. The precedent already set within the student
housing sector should also be applied to the private rented sector. Reducing or altogether removing affordable
housing requirements on PRS developments would greatly increase the viability of the scheme and improve
yields, making it a more attractive proposition for institutional investors.
Grainger believes that it would be helpful to provide guarantees for first time buyers in the form of Mortgage
Indemnity Guarantee schemes. This would help to de-risk housing development, thereby supporting the supply
side of the housing sector.
4. 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?
The Joseph Rowntree Foundation identified the major barriers to institutional investment in the private rented
sector in a paper by Professor Michael Ball of Reading University in November 2010. Each of those barriers
are outlined below, with Grainger’s response highlighted in italics.
— high investment transaction costs linked to the “too-small for them” scale of residential investments:
— scale can be addressed by providing access to investment grade stock that is newly built, ie
Build-To-Rent;
— a lack of matching investment income with investor liabilities, because returns contain a significant
capital element that cannot be realised without selling the properties:
— by reducing upfront initial entry costs (such as land values), the reliance on capital returns can
be offset with a more attractive investment proposition based on rental income;
— intensive management and maintenance:
— while it is true that residential management and maintenance is more intense and costly relative
to commercial property management and maintenance, it is possible to reduce these costs to a
reasonable level through economies of scale and efficient procedures (see “Economies of scale
in residential property management” below.);
— high tenant turnover and vacancy rates:
— due to high demand in the private rented sector, this issue is no longer a significant barrier in
many areas, however, good property management and efficient and effective procedures can
reduce turnover, void and vacancy rates even during times of lesser demand;
— potential reputational issues:
— while reputational issues will always exist in residential more so than commercial, good
professional property management can reduce this so that it is no longer a major barrier, and
indirect investment vehicles can offer investors the opportunity to invest “at a distance” so to
reduce their reputational risk even further (see “Professionalising residential property
management” below);
— illiquid, thin markets that make it difficult to sell blocks of flat on a timely basis or to work out what
is their fair market value at some points of the property cycle:
— there is already an active residential investment market for large scale portfolios. This financial
year Grainger acquired, in two separate transactions, approximately 2,000 houses worth over
£300 millon in total. And if Build-To-Rent developments get off the ground, opportunities to
expand that market will grow even further (see section directly below, “Economies of scale in
asset/portfolio acquisition”).
Economies of Scale in Asset/Portfolio Acquisition
Scale in investment is important. Institutional investors will not find the private rented sector attractive until
they are able to invest at levels of investment that are large enough. It is not in their interest to slowly assemble
a residential portfolio over decades. Instead they would prefer to put their money to active use over the short
to medium term.
Despite Grainger’s two major transactions mentioned above, opportunities to invest at scale in existing
residential stock, particularly the private rented sector, are limited in the UK. Instead, opportunities should be
given to investors to invest in newly-built residential stock, ie Built-To-Rent. This would also support the UK
economy and ease the housing shortage.
Economies of Scale in Residential Property Management
Economies of scale in management are key to improving viability and returns. The main challenge for
residential investment in seeking to compete in the capital markets is the constrained rental income/yield, which
is primarily due to increased costs in both management and transactions compared to commercial property.
We strongly believe the “service offering” that good property management represents is essential for
profitable residential investment and in turn a strong PRS. If service/management is poor, tenants become
Communities and Local Government Committee: Evidence Ev 119
unhappy (and therefore rental income is not steady or guaranteed) and the asset value deteriorates (as the
property itself is in need of refurbishment). To ensure continuity of income (both through rents and sales), the
property must be maintained and possibly improved. Rental income and capital values will only improve if the
asset is managed well.
Professionalising Residential Property Management
The Government should give greater support to the professionally managed private rented sector.
Organisations, such as the Institute of Residential Property Management (IRPM), are working hard to provide
a career path and recognised qualifications for those in residential property management, and the Government
could support such private sector led initiatives.
Having an established workforce of residential property managers would also address many of the
reputational concerns that institutional investors may have in investing in the residential sector.
5. How housing associations and, potentially, ALMOs might be enable to increase the amount of private
finance going into housing supply?
Grainger recommends that the Government reviews the period of perpetuity. Affordable housing is usually
restricted to the sector for a period of 125 years. If this was lowered so that there was a reversion after a
shorter period then this might encourage institutions in to the sector, but still with a long term investment view.
6. How the reform of the council Housing Revenue Account system might enable more funding to be made
available for housing supply?
No response provided.
7. 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?
No response provided.
Case Study—Build to Rent Institutional Investment Fund
Bouygues & Grainger Fund
Bouygues Development Ltd. (“Bouygues”), part of Bouygues Group, one of the world’s leading construction
and services group, and Grainger plc (“Grainger”), the UK’s largest listed residential landlord, have partnered
up with the aim of creating and co-investing in a new Build-To-Let Fund (“the Bouygues & Grainger Fund”
or “the Fund”). The Fund will provide institutional investors with the opportunity to invest in scale into the
Private Rented Sector (“PRS”) which to date has been relatively inaccessible.
The Fund is unique in that it has a dedicated portfolio of purpose built PRS development sites in London
and South East of England.
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 circa three and a half years, with construction expected
to begin in Q1 2012 and the first units expected to complete in Q4 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.
The Fund benefits from an exclusive pipeline of projects developed by Bouygues Development, and offers
investors the opportunity to acquire the sites at cost, which will enable the Fund to deliver superior returns.
The Fund aims to provide an attractive coupon based return over the development and investment stages, and
a return based on capital appreciation.
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 seek additional equity investment from institutional
investors, totalling up to £150 million.
The Bouygues & Grainger Fund is primarily designed to capitalise on the appetite of UK and overseas
investors to put long term money directly into residential property in London and the South East. The Fund is
also strongly aligned with the UK Government’s plans to increase the number of new homes being built, and
the Housing Minister’s public land initiative.
Case Study—Public Sector Land to Support Housing Supply
Aldershot Urban Extension, Ministry of Defence
Defence Infrastructure Organisation (DIO) appointed Grainger as the developer to create a major new
development of approximately 4,500 homes and community facilities on surplus military land in Aldershot,
Hampshire.
Ev 120 Communities and Local Government Committee: Evidence
DIO and the Homes and Communities Agency (HCA) have worked together to appoint Grainger to redevelop
the 148ha Aldershot Urban Extension (AUE) site in Hampshire.
Grainger will regenerate the land at Aldershot Garrison to create a mixed-use residential scheme of around
4,500 homes together with community facilities, schools, local centres and leisure facilities. Work will include
the restoration and conversion of the historic Cambridge Military Hospital building and will now work towards
achieving planning.
DIO manages all of the Ministry of Defence’s land and is selling part of the estate after a planned restructure
and consolidation to meet military operating needs.
The AUE is one of the largest brownfield sites in the South East of England. As Aldershot is the home of
the British Army, much of the operational military estate will be retained.
The new development will take into account the heritage features and listed buildings, such as the Cambridge
Military Hospital, and ensure that the development is delivered to meet the expectations set out in the
Supplementary Planning Document (SPD).
Rushmoor Borough Council adopted the AUE SPD in March 2009 which sets out the guidelines for the
development to ensure quality homes in a sustainable and energy efficient environment, where people want to
live and work. The principles of the SPD built on the finding of the Enquiry by Design which took place
in 2005.
The AUE represents the major housing allocation for the Rushmoor Core Strategy.
The appointment of Grainger follows a competitive tendering process.
Case Study—Example of Current Institutional Investment in PRS
G:res
G:res is UK’s largest private rented sector residential investment fund, which has approximately £400 million
of residential assets in UK.
Launched in November 2006, Grainger both advises and is the largest investor in the Fund, holding a 22%
stake. G:res is a close-ended fund. It was established for a period of five years (to 2011), with 2x1 year
extension options (2013), and a liquidation period which now brings the Fund’s life out to 2015. The Fund
currently has 12 investors. As at the end of March 2011 it owned 2,056 units with a Gross Asset Value of £375
million excluding cash, Vacant Possession Value of £415 million and a Net Asset Value of £151 million.
Around 93% of the assets in value terms are located in London and the South East. The extension will allow
the fund manager to extract maximum value from the assets and crystallise as much vacant possession value
from the portfolio as possible.
Specific objectives of G:res are to manage the portfolio to achieve:
(1) Growth in rents whilst maintaining stable occupancy;
(2) Attractive acquisitions;
(3) Medium to long-term capital appreciation; and
(4) Property disposal at the appropriate point to maximise investor returns.
An integral part of G:res’ strategy is to continue improving the quality and performance of the portfolio
through effective asset and property management in order to enhance the value and saleability of each
individual block and unit.
October 2011
Supplementary written submission from Grainger plc
INQUIRY INTO FINANCING OF NEW HOUSING SUPPLY—SUPPLEMENTARY EVIDENCE
REGARDING THE PROJECTION OF THE NUMBER OF HOMES THAT BUILD-TO-LET COULD
DELIVER AND CHANGES TO THE REIT REGIME
We are grateful for having been invited to give oral evidence to the Committee for this particular inquiry.
We strongly believe in the need for government and industry working together to find ways to unlock new
sources of financing for housing supply.
Please find below our answers the supplementary questions we have been asked subsequent to the oral
evidence session.
Communities and Local Government Committee: Evidence Ev 121
Projection of the Number of Houses that could be Delivered Through Build-To-Rent
Institutional Investment Models between now and March 2015
Unfortunately, predicting the number of houses that could be delivered over the next three years through an
institutionally invested Build-To-Rent sector is impossible. It may be useful, however, to put into context where
the residential investment sector is today and the potential the institutional investment market holds for the
residential sector.
Currently the Private Rented Sector in the UK is worth around £500 billion. Of that amount, institutional
investment is approximately 1% or £5 billion. In comparison, the commercial property sector has over £120
billion of institutional investment.
While institutional investment in residential will unlikely reach the same levels as the commercial property
sector, it demonstrates the enormous potential for institutional investment in the residential sector.
Reaction to the Changes to the REIT Regime
We believe that the measures on the REITs regime in the draft Finance Bill are all positive. They bring the
sector one step closer to the possibility of residential REITs. The changes will encourage residential property
companies to explore the opportunities arising from the changes for the possibility of setting up a new
residential REIT.
The barriers to entry for residential REITs have been reduced through the changes in the draft Finance Bill
including the abolishment of the conversion charge, the opening of the regime to diverse ownership, close
company tests being given longer to comply with the rules, cash being a good asset affording the REIT more
time to acquire the right assets, and financing costs being redefined so that the tax charge on excessive interest
doesn’t apply to non-interest finance costs.
The one aspect of the REIT regime which was not taken up in the draft Finance Bill is the distinction
between trading and investment for residential REITs.
As the regime stands, residential companies are likely to be ineligible to convert to a REIT because they fail
the trading/investment test. This remains a significant barrier for residential REITs.
We have previously asked the government to consider the trading versus investment distinction specifically
in the context of and for the purposes of residential REITs. We believe that this fits well with the existing
REIT regime, but government has not yet addressed this barrier for reasons that have not been fully explained.
Again, we’d like to thank the Committee for inviting us to give evidence to the Committee and look forward
to seeing the outcome of the inquiry.
December 2011
Written submission from the Council of Mortgage Lenders
Introduction
1. The Council of Mortgage Lenders (CML) welcomes the opportunity to submit written evidence to the
Communities & Local Government (CLG) select committee. The CML is the representative trade body for the
whole of the residential mortgage lending industry. Our 109 members currently hold around 94% of the assets
of the UK mortgage market, and include commercial banks, mortgage banks, building societies and non bank
specialist lenders.
2. In addition to lending for owner occupation and private renting, CML members have lent over £60 billion
to housing associations across the UK for new build, repair and improvement to social housing.
Housing Supply
3. There is overwhelming evidence that we are failing to keep pace with the housing supply needed. In
2004, the Barker review recommended a step-change in supply to 240,000 new homes per annum and in 2008
an assessment by the National Housing and Planning Advice Unit showed that a minimum of 240,000 homes
would be needed annually to keep pace with demand. Similar projections have recently been made by Shelter
and The Institute for Public Policy Research (IPPR).
4. With just 102,730 new homes built in 2010 neither of these projections show any sign of being met in
practice. This figure is more than 15,000 less than the previous year and fewer than were built in the last year
of the former administration.
5. Although house-building is at a record low, housing need continues to rise. It is predicted there will be 4
million additional households in England by 2025 as a result of population growth, demographic change and
social change. In its recently published report “Build now or pay later? Funding new housing supply” the IPPR
predict that the worst mismatches between supply and demand will be in the greater south east, with particular
pressure on social housing.
Ev 122 Communities and Local Government Committee: Evidence
6. Overall, IPPR has estimated that, building on government projections for household growth, provided the
economy recovers at a reasonable rate, and assuming we build as many new homes in the next 20 years as we
have in the past 20 (that is, on average, 160,000 per year), we will have in England 750,000 fewer homes than
we need by 2025. With growing evidence of affordability pressures in both home ownership and the private
rented sector, the demand for social housing is expected to continue to grow.
Private Sector Funding to the Social Housing Sector
7. The challenging conditions for the mortgage market continue and the supply of funding for mortgage and
commercial lending is still markedly constrained. The housing association sector is increasingly turning to the
capital markets as a source of funding. From 2005 to 2008 this made up less than 5% of all private finance,
however the latest data from the Tenant Services Authority shows that this is now 37%. Institutional investors
place great importance on cash flow underpinned by direct payments and the view of rating agencies is key to
the continued success of this type of investment. This means that decisions on welfare reform and universal
credit, in addition to the affordable rent programme discussed below, need to be taken with this backdrop in
mind to ensure that the private sector can continue to fulfil its important role in funding social housing in
the future.
Grant Funding and the Affordable Rent Programme
8. The government’s affordable rent proposals have made a significant impact on the supply of social
housing. In July the HCA announced the results of the latest bidding round and forecast that the £1.8 billion
allocated would produce some 80,000 affordable homes. This results in average grant rates of less than £23,000
which is a very significant reduction on the previous three years average of £65,000 for rented homes and
£35,000 for low cost home ownership schemes.
9. This drastic reduction in grant rate has been achieved due to a number of factors, not least the expectation
that rents for new homes, and a good proportion of relets, will increase to near market levels ie up to 80% of
market rents. For housing providers this results in higher levels of borrowing and hence higher loan gearing,
and more risk.
10. There are other factors that have contributed to the reduced grant rate of the Affordable Homes
Programme (AHP). It is evident that housing providers made every possible contribution they could to the
programme in order to ensure that they continued to maintain their development partner status. This includes
maximising the cross subsidy they expect from other property sales, market renting or other business activities,
and putting in free or heavily discounted land.
11. We believe that the levels of cross subsidy achieved in this programme are not likely to be sustainable
for future years. Market conditions mean that contributions arising from Section 106 planning agreements are
likely to reduce and some of the land contributed by housing providers came from previous years when
economic conditions were considerably better. As such we believe it would be unwise to predict that grant
levels could stay at the current AHP level in the long term.
12. With, or without the other cross subsidy contributions, the financial gearing of housing associations is
bound to increase. Their ability to deliver further rounds of AHP homes is questionable and could result in
“survival of the fittest”. The communities minister, Andrew Stunell MP, has acknowledged that there are
difficult questions about the scheme’s viability beyond 2015, recognising that housing associations’ assets “are
not inexhaustible”
13. A recent report from PricewaterhouseCoopers and housing association L&Q adds weight to our concerns.
The report, Where next? Housing after 2015, suggests that even with substantial business efficiencies allowed
for, housing associations will need to borrow around £15 billion by 2015 to build 150,000 homes and meet
stock reinvestment and refinancing commitments. It says the sector’s capacity to continue developing will
diminish swiftly and it would be very difficult for housing associations to manage a further large affordable
housing programme under the same rules.
14. Other forms of subsidy or financial contribution are being considered. Ministers are encouraging
developers to build on government land under a “Build Now, Pay Later” deal. Under the scheme, house
builders pay for the land on which they develop only after they have started work on the new homes. This
may produce some stimulus for the normal house-building market but without specific valuation discounts it
will have limited impact on the provision of affordable homes.
15. A few weeks ago the Prime Minister reiterated the commitment to use public land for housing supply
under “Build Now, Pay Later”, and announced plans to increase the discounts available to council tenants
under the Right to Buy, and some housing association tenants under the Preserved Right to Buy. While we
welcome the commitment to use surplus receipts to fund replacement homes we believe that “one for one”
replacement may prove ambitious and for the reasons set out above government should not rely on AHP grant
rates being replicated.
16. For housing associations the new funding arrangements will not only increase their loan commitments
and financial gearing but it will bring greater risk to their business activities. Over time they will see more of
Communities and Local Government Committee: Evidence Ev 123
their tenancies at “affordable rent” levels and this will be coupled with more variations in tenure. As noted
above, other pressures will arise as a result of housing benefit changes and particularly the reduction in direct
payment of rent to landlords which could arise from the changes currently under consideration in the House
of Lords in the Welfare Reform Bill. The latter poses a considerable threat to the funding of the sector where
there are already signs of reduced investor confidence.
October 2011
Supplementary written submission from the Council of Mortgage Lenders
What is your members’ estimate of the likely gross lending market between 2012 and 2015? Of this market
how much do you estimate will be focused on new build?
CML has just published its housing and mortgage market forecasts for 2012. As the supporting commentary
to that makes clear, there is considerable uncertainty about the short-term direction of the wider UK economy.
For this reason, we do not have explicit forecasts stretching beyond 2012. Assuming that Eurozone problems
do not materially disrupt things, our general expectation would be that 2012 marks the low-point for housing
and mortgage market activity.
With UK interest rates expected to slowly revert to more normal levels over the medium-term, the evolution
of UK house prices is likely to lag behind that of household incomes.
We anticipate only a gradual progressive improvement in affordability pressures and credit availability, and
therefore much slower recovery in property transactions than projected by OBR (its November 2001
Economic & Fiscal Outlook report envisaged transactions climbing to 1.3 million annually by 2015–16).
We have no firm view as to what proportion of gross lending will relate to new build, although the new
build indemnity scheme that is now supported by government, may lead to an increase in new build transactions
relative to those of the market as a whole.
Over the next three years do you expect to increase: a) the level of lending to housing associations; and b)
your support for shared ownership and other affordable schemes? If so, could you give us some indication of
the likely scale of the increase?
As the level of government grant for affordable housing has reduced by some 50% we expect to see a
significant increase in the level of lending to housing associations. We cannot calculate specific estimates as
we do not know the level of funds that will be provided from housing associations themselves, for example,
from asset sales.
We do not collect specific data for lending to shared ownership and other affordable schemes.
As a percentage of total mortgage lending, what levels of 95% mortgage lending do you expect to deliver
between 2012 and 2015?
We have no firm view as to the future LTV composition of gross lending.
But whereas 95% plus lending has been virtually absent from the market over the past few years, we would
hope that firms will be able to make such lending available where this is justified by the wider affordability
characteristics of the borrower. We would expect this to be true with the new build indemnity scheme, where
lenders will want to support creditworthy borrowers who can afford their mortgage commitment but do not
have a large deposit saved.
How much Right to Buy lending do you expect to support between 2012 and 2015?
Since 2009, Right to Buy (RTB) lending has run at around 3,000 loans per year. We cannot predict with
certainty the effect that government’s reinvigoration of RTB will have on lending to this sector. Although the
government’s proposed doubling of the average discount rate through increased price caps will potentially
lower the effective loan to value of new RTB loans, lenders will still need to take account of both the borrower’s
circumstances and whether the property represents adequate security, just as they do on all lending.
Aside from demand, what are the key factors limiting your members’ ability to increase lending for new
housing?
Since 2007 access to wholesale funding has been constrained by the global financial crisis and remains a
serious constraint to lending levels overall. Although the position improved from late 2009 through to the first
half of 2011, the Eurozone crisis has led to a deterioration in funding conditions since the summer. UK lenders
are significantly better positioned now than in 2007, given their higher levels of capital and liquidity, and the
gap between customer loans and customer deposits has shrunk considerably. However, difficult conditions in
wholesale funding markets still have the ability to constrain lending volumes generally, not just for new
Ev 124 Communities and Local Government Committee: Evidence
housing, and in 2012 events abroad, particularly in the Eurozone, have the ability to impact UK lenders’ ability
to lend.
December 2011
Further supplementary written submission from the Council of Mortgage Lenders
You wrote to me on 3 February, requesting our views on custom and self-build. I am sorry to have missed
your deadline.
This is not a subject where we have considerable expertise or significant data. Our members are keen to
support access to sustainable home-ownership. But this has to be set against the many constraints which are
present in the current lending environment. Since the financial crisis, continuing funding constraints, increased
capital requirements and more stringent conduct regulation have all contributed to a reduction in lenders’ risk
appetites. We have also seen a degree of contraction and consolidation of active lenders. This has led to an
overall reduction in gross lending to around £140 billion in 2011. This is down from the £345 billion lent as
recently as in 2006.
Against this background, there is limited availability of self-build mortgages among mainstream lenders.
Where finance is available, there are often a number of conditions attached to it—for example, no lending
against the first stage of the build or lending only up to the value of the part-build rather than against a
projected valuation of the completed build. In addition, self-build often requires specialist underwriting. This
is a resource that, at this stage, cannot be justified by many lenders given the relatively low demand for selfbuild finance coupled with its inherent risk.
I am sorry that there is not more which we can say on the subject. Another source of input could be
the Building Societies Association, some of whose members may have a particular interest in this type of
bespoke finance.
February 2012
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% 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
Communities and Local Government Committee: Evidence Ev 125
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 8% 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).
Ev 126 Communities and Local Government Committee: Evidence
HCA Private Rental Sector Initiative
15. 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% interest in the
fund, with the option to withdraw at a later date.
LB Barking and Dagenham
16. 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% of the units will be let at 80% of
market rent, 20% at 50% of market rent, and 30% at 65% of market rent. The 80% 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.
Bouygues Grainger Residential Fund
18. 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 £150 million.
Akelius
21. 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 £2 billion.
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
Communities and Local Government Committee: Evidence Ev 127
Written submission from the Association of Greater Manchester Authorities
Summary
— The nature of the UK housing market has fundamentally changed, and financing new supply on the
traditional build to sell basis will not deliver the numbers of new homes we need.
— Local authorities can act as enablers of new development, using their landholdings in partnership with
institutional investors, and generating value from that investment in the form of deferred returns, and
Greater Manchester is pushing forward work on turning that into a reality.
— Government and other public sector agencies can act in a similar way and, if properly co-ordinated at a
local level, much more can be achieved.
— A new model of private landlord could be key to the achievement of high quality development at scale to
meet the new realities and demands of the restructured housing market.
— Housing associations have many of the skills necessary to deliver that new model, but the risks attached
to the Affordable Rent model may act as a barrier.
— Partnerships between housing associations and private investors may provide the best way forward,
supported by local authority-led enabling work.
— Government should urgently consider whether the short term nature of most private tenancies and the
wider regulatory framework for the private rented sector fits with the changed nature of the UK housing
market.
— The New Homes Bonus should be recalibrated to better support delivery of volume housing.
1. The Changing Nature of the Housing Market
1.1 In very crude terms, there are two main housing career paths emerging as the fundamental building
blocks of the UK housing market, with the key distinction being between households who have (or can afford
to acquire) equity, and those who don’t (or choose not to):
— The first path is to live with family or rent for a while (this now becoming an increasingly long
while), then buy (maybe with help from family), then trade up and for some invest in Buy to Let,
then downsize/release equity later in life.
— The second is to rent for life—traditionally secure social rent, but now the emerging Affordable Rent
option and, more strikingly, a return to private rent56 as a long term option—either through choice
or, as the decline in number and accessibility of social rented property continues, through necessity.
1.2 All information would suggest that the second route is increasingly common, since the first is becoming
more and more difficult for households to achieve and sustain unless they are well dug in with their own or
inherited equity. That suggests possible high level objectives around:
(i) Making the traditional path via owner occupation more financially achievable;
(ii) Building some bridges or breaking down the barriers between the two paths;
(iii) Improving the housing, quality of life, security and economic outcomes that the rental path offers,
to try to reduce the economic polarisation that seems likely to result from continuing divergence; and
(iv) Re-evaluating the economic arguments between home ownership and renting for households—is the
popular perception of renting as “dead money” outmoded?
These should be looked at in a context where the primary requirement is to secure housing growth to meet a
quantum of demand which, while subject to debate at the margins, is clearly in excess of current delivery by
a worryingly substantial margin.
1.3 From a Greater Manchester perspective, we need to close that delivery gap as a foundation for economic
recovery and growth, both to contribute to national recovery and as a basis for achieving our wider social and
environmental objectives. With funding from both public purse and financial institutions increasingly scarce,
and household budgets squeezed, the main traditional drivers of investment have stepped back from the market,
with obvious results in terms of numbers of market transactions and new development. Homes & Communities
Agency colleagues estimate that around 60% of all new housing starts in the North West currently have some
form of public subsidy, illustrating the scale of market failure. As the gap between household income and the
cost of entering owner occupation continues, there will be a growing cohort of people who cannot purchase,
even with the help of shared ownership/shared equity products increasingly available from developers. But
with supply also continuing to be constrained by lack of finance, it seems unlikely that house prices will drop
substantially, as might otherwise be expected when a product (ie owner occupation) becomes unaffordable.
1.4 The role of the housing market in the UK economy means that this knot of related issues poses a
significant economic threat, given both the place housing has as an investment and the direct importance of
the housing industry and related services as a source of employment. But it also points to a growing crisis in
housing if the supply of homes across all tenures remains substantially behind household growth, as it arguably
has since the late 1970s, and certainly since 2006–07.
56
CLG statistics suggest the private rented sector is growing at around 300,000 dwellings per year.
Ev 128 Communities and Local Government Committee: Evidence
2. Opportunities and Risks
2.1 In this scenario, where are the opportunities for change and substantial progress? We can suggest five
areas of opportunity in terms of bringing new investment in housing delivery in the broadest sense (ie in
delivering additional housing supply or maintaining and improving the quality of the stock we already have):
(a) New investment models to match demand for housing with requirement for long term sustainable,
stable investment opportunities in more risk-averse financial climate;
(b) A more active and flexible use of public sector assets to invest in housing delivery, complemented
by levers such as New Homes Bonus and Community Infrastructure Levy (CIL);
(c) New models of support for households unable to access housing they can afford through the market,
such as the Local Authority Mortgage Scheme being promoted by Sector Group;
(d) Carbon reduction and domestic renewable energy generation as an investment opportunity given
expected significant increases in future energy costs; and
(e) The financial implications of an equity rich, ageing owner-occupying population.
We focus in this response on the first three, as perhaps the most relevant to new development. However, it
may be worth noting and exploring the potential for the equity held by older households as a partial substitute
for first time buyers in funding new development, allowing them to downsize later in life while releasing
under-occupied larger homes.
2.2 In addition, we should consider the need to mitigate some key risks, including:
(a) Increasing divergence between households (and in fact entire neighbourhoods) on each of the two
housing career paths described above, and the economic and social impact that may have;
(b) The extent to which a continued stagnant (or declining) housing market coupled with declining
household incomes as the impact of recession and public sector cuts resonate through the economy
will leave more households struggling to meet mortgage and maintenance costs of home ownership
but unable/unwilling to sell their home because of negative equity;
(c) The impact of reforms of Housing Benefit/LHA and the introduction of Affordable Rents on the way
the market operates, the patterns of demand for housing (spatially and in terms of types of property),
the rental income which can be generated by social and private landlords, and the resulting
uncertainty around all of those issues which makes business and investment planning difficult for
those landlords;
(d) The impacts of a combination of increased demand for private rented homes at the lower end of the
market and limited supply of new homes driving the creation of significant additional poor quality
private rented homes as landlords acquire and sub-divide existing property;
(e) The continued lack of available finance for both the funding of development and purchases by
householders for an extended period, including the long term impact that could have on the
development capacity of the commercial sector;
(f) The declining ability of key public sector players to intervene as a result of reducing budgets and
capacity in HCA and local authorities;
(g) The divergence between areas where values are sufficient to maintain some housing delivery through
traditional business models and those—likely to include much of Greater Manchester and other
Northern urban areas—where new approaches will be needed; and
(h) The barrier to development arising from the expectations of landowners of site values based on
previously achievable prices rather than the new reality, added to the locked-in cost of sites already
expensively acquired by developers in earlier times.
3. Elements of a New Approach
3.1 In a complex system such as the housing market, these risks and opportunities are of course inter-related.
We will try to sketch out in broad terms a narrative as to how we see these and other issues fitting together,
but focusing on securing new housing supply.
3.2 Bringing the first two opportunities together, Manchester City Council are leading pilot work on a new
model which is intended to be applicable across Greater Manchester. Briefly, the scheme requires an investor,
the local authority as land owner, a house builder/developer and a housing managing agent. Schemes for new
private rented housing can be developed on the basis of deferred receipts from the land owner and rental
guarantees from the managing agent (possibly a housing association), which together are sufficient to give a
lender/investor confidence that the income from the development is sufficient to service a loan and provide
a return.
3.3 Current work on a detailed proposal revolves around five local authority owned sites which are a mixture
of good quality/high demand sites and more challenging regeneration linked sites. Detailed appraisals of the
sites have been completed including a detailed housing market analysis. Significantly, Manchester City Council
is in close negotiation with an investor which would significantly simplify the model. The simple model is an
investor and a landowner coming together in partnership and procuring a house builder and housing managing
Communities and Local Government Committee: Evidence Ev 129
agent. Whilst the initial sites are likely to be a mix of private rent and outright sale, further work is going on
to determine if the model will accommodate a mixed tenure approach. The intention would be to utilise the
Affordable Homes Programme together with the investment model to help bring forward further sites. Part of
the local authority’s contribution is to help manage risk by using knowledge about existing and future housing
need and demand to ensure schemes are closely aligned to the local market.
3.4 Our intention is to demonstrate through the pilot that this model can satisfy the requirements of the
investment market, while producing a (deferred) return to the local authority and development at scale of new
housing which meets the needs and aspirations of local residents.
3.5 In part, we are using this to help change the perceptions of investment markets of the residential sector
as a source of acceptable returns on the basis of rental income streams. The attitude to this in the UK has been
out of line with other markets internationally, including the United States, where residential holdings are seen
as a natural part of investment portfolios, and where returns are expected to be generated from rental income
rather than, as has often been the case in the UK, capital growth. This is accompanied by longer term tenancies
than provided by Assured Shorthold Tenancies, providing greater stability and security for households (and
communities) and helping to make renting a more attractive prospect as a housing choice. Larger landlords are
also able to offer tenants alternative properties to fit their changing requirements over time—arguably a level
of customer focus not commonly found in the UK.
3.6 In summary, we believe the time is right to pursue an alternative model for private landlords—working
at larger scale, developing homes designed to be rented out to a range of households, and within a community
context. In many ways this replicates the skills and experience of housing associations, albeit aimed at the
mainstream market rather than the social housing sector, and the Committee might usefully explore the potential
of associations—either on their own account or with private partners—to drive that agenda forward. This new
model for private rent could, in our view, be strengthened by regulatory changes to offer landlords the ability
to offer greater security of tenure in the private sector as part of an overall approach to improving the quality
of both the physical product and the management service to ensure that households whose best long term
housing option enjoy high quality homes in stable, successful neighbourhoods.
3.7 Returning to the Manchester pilot, our intention is that, if successful, this could be replicated across
Greater Manchester, using packages of sites in all ten districts to provide a range of opportunities of different
types of development to match the likely demand in different neighbourhoods across the conurbation, allowing
investors to match their requirements in terms of market segments, risk, tenure, etc. The Committee’s questions
about the best use of public subsidy and the balance between grant and lending or investment by the state are
relevant here. In all sectors, the Greater Manchester approach is increasingly to seek to secure investment and
recycling the proceeds of that investment to bring repeated and multiplied benefits, rather than chasing one-off
funding. Over time we will build our ability to invest in the agreed strategic priorities that will underpin
economic growth in Greater Manchester, and in practice it also drives a different, focused attitude to the
development of projects with real and lasting impact.
3.8 Specifically on housing supply, the approach we are piloting is based on securing deferred returns to the
authorities contributing sites to the project, with the potential to reinvest returns in time to repeat the cycle. If
Government was able to add to the investment pot as a partner, the pace and scale of delivery could be
accelerated, and an agreement could be reached as to the sharing of proceeds over time. A further alternative
would be local authority bonds, suggested recently as a means of raising greater levels of finance to build out
rental developments where sufficient returns can be confidently expected.
3.9 But there is a further element to the possible contribution of Government. The Prime Minister has
announced a new push to secure housing development on Government owned land on a “build now pay later”
basis. While we await further details of this, parallels with the model outlined above are obvious. We are
already working with HCA and CLG in Wigan on a Capital & Asset Pathfinder project, seeking to exploit the
public sector estate as an opportunity to drive development forward. Bringing those threads together, if we
could manage local government, central government and other public sector landholdings such as the NHS in
an integrated way, the scale of investment and delivery possible becomes much bigger. This would need to be
done spatially, looking at places in an integrated way to construct a sensible pipeline of development to
maximise both housing supply and financial returns to the various partners. We need to avoid opportunistic
approaches from different parts of the public sector undermining collective returns through a lack of coordination and understanding of the impact on local markets. The Capital & Asset Pathfinder approach would
appear to be a useful mechanism to help achieve that co-ordinated impact. With suitably strong support within
Whitehall to secure a flexible and positive approach from across Departmental silos, more could be achieved.
3.10 The Committee also ask about the Affordable Rent model and its relationship to funding new homes.
We are working closely with HCA and our partner Registered Providers (RPs) to ensure that Affordable Rent
is implemented successfully in Greater Manchester, by which we mean that the funding the model makes
available from HCA and via rental income from new build and conversions to Affordable Rent delivers the
right homes in the right places to help meet local demand. However, there are clearly still questions for RPs
in particular about the assumptions they should make about rental income, given the Government’s stated
intentions around welfare reform. Housing Benefit changes (and uncertainty about their actual impact) can be
Ev 130 Communities and Local Government Committee: Evidence
seen as a risk to landlords’ income streams, and therefore might well result in a more cautious view from RPs
about their ability to commit funds to back new development. Some RPs may see development for market rent
or low cost home ownership as an option they might pursue in order to hedge against the risks in the social
rented/Affordable Rent sector. The balance between those arguments is hard to predict at the moment, and may
be different in different places, depending on development costs and rent levels and their relationship to
Housing Benefit thresholds. Equally, Government will no doubt be reviewing the impact of Affordable Rent
on the Housing Benefit budget, and whether this is an efficient means of subsidising new affordable housing
provision.
3.11 A further concern for the medium term is how the future for affordable housing provision will look
once the current Affordable Homes Programme round is complete in March 2015. It is far from clear that RPs
will be in a financial position to continue to borrow and invest to develop indefinitely via the Affordable Rent
model at current grant levels, and assumptions around numbers and types of property converting to Affordable
Rent remain untested. Clarity is also awaited on the Prime Minister’s recent announcement on revitalising the
Right to Buy and the guarantee to replace each home sold. As many RPs are stretched in securing borrowing
to support Affordable Homes Programme development, and receipts after discounts are unlikely to cover the
cost of replacement homes, even if councils are able to provide suitable land. HRA reform may, in some places,
provide some flexibility for local authorities to make a more direct contribution, as might prudential borrowing,
although many councils are already under unprecedented financial pressure.
3.12 Finally, the New Homes Bonus is one Government contribution to this agenda. In terms of maximising
the return on that investment, Government’s approach does appear to be flawed if housing delivery is the key
intended outcome. Currently, properties built in Band H attract three times as much New Homes Bonus as a
property in Band A. However, our evidence of the limited new development still being funded by the market
suggests that this is concentrated at the top end where buyers are still able to purchase new property, drawing
from equity in their existing properties. This is not to decry the need to build higher value homes—indeed,
their relatively limited supply in Greater Manchester is seen as a barrier we need to overcome in retaining
more of our high net worth individuals and their economic contribution to Greater Manchester. However, this
is an inefficient use of New Homes Bonus, producing only a small number of new homes. A flat rate payment
based on the Band D average would switch the emphasis toward rewarding volume of housing delivery, rather
than providing an incentive to provide more high value homes, regardless of what local needs might be. In
turn, that might allow local authorities greater leeway to use New Homes Bonus imaginatively as a means of
supporting investment to drive housing delivery.
4. The Role of National Government
4.1 We can suggest a number of areas where Government is uniquely placed to act:
(a) Making the case for housing as a high profile national issue. This is beginning to happen, though
arguably much of the debate has focused on the welfare reform agenda and on the planning system,
rather than on the financial issues which have actually caused the collapse in housing delivery
nationally. But fundamentally, we are not building enough homes to meet household growth (and
this was also true under the previous Government). This partly explains why house prices have
remained relatively high. It should be possible to agree on a cross-party basis that having positive
answers to the question “Where will our kids live when they grow up?” is a central political concern
at both national and local level.
(b) Rethinking the emphasis on home ownership as an achievable ambition for all. The evidence from
the market—in the North West and nationally—indicates a structural shift away from owner
occupation has been underway since 2003, and history suggests that “government rarely manages to
buck fundamental trends in housing tenure [without] a very large financial commitment in the form
of direct intervention … or incentives such as Mortgage Interest Tax Relief”57. Renting is the
growing sector, and government needs to re-examine both the legal framework for protecting
landlords’ and tenants’ interests and how investment into the private rented sector can be increased
to meet future demand (both to maintain and improve quality of the existing stock, and developing
new homes for rent).
(c) Using levers available to influence/direct financial institutions, including those in substantial public
ownership, in their attitudes to investment in housing. While many of the financial issues currently
facing the UK and other developed economies can be traced in substantial part back to ill-judged
lending on residential property, paradoxically there are now opportunities in the housing sector to
achieve stable, low risk returns for investors with a long term view. We should look to see what
lessons can be learned from other countries where the private rented sector is seen as a long term
stable option for both tenants and investors, and whether key elements can be replicated in the UK
to support the development of an active market in institutionally-backed investment in the sector.
This should include for example looking at longer term tenancies, and at stamp duty and capital
gains tax rules as they apply to landlords. This should complement measures to unlock the mortgage
market for those households who can afford to buy but are currently unable to secure finance from
lenders.
57
The end of the affair: implications of declining home ownership, Andrew Heywood (2011)—p 117.
Communities and Local Government Committee: Evidence Ev 131
(d) Maximising the flexibility available to local authorities and their partners, including HCA and
Registered Providers, to get things done in ways that work locally, and understand that the ability of
those organisations to achieve more with less direct financial input from Government depends upon
retaining and enhancing the capacity, experience and knowledge of regeneration, legal, housing,
planning and other professionals. Procurement and State Aids issues often complicate the relationship
between the public and private sector in this area, and this can get in the way of developing and
testing innovative proposals, particularly with private sector partners. While the rules in place are
there for good reasons, it may be worth Government exploring the potential for any flexibility that
can be added without risking compromise of the key principles of sound governance in this area.
(e) Ensuring Government Departments and Agencies are active partners mandated, encouraged and
monitored on their commitment of landholdings and other assets into development proposals led by
local authorities and their partners. The use of HCA as an enabler in this work is already a positive
step—Ministerial and Treasury pressure to engage flexibly in this work and to accept deferred rather
than immediate returns would be extremely helpful. The Capital & Asset Pathfinder work recently
reported on by CLG provides some guidance on useful approaches, and we await details of the
announcement by the Prime Minister on the eve of the Conservative Party Conference in regard to
the “build now, pay later” release of Government land for housebuilding.
October 2011
Supplementary written evidence from the Association of Greater Manchester Authorities (AGMA)
Purpose of Report
1. At the Oral Evidence session on 19 December, the Committee requested a further note from AGMA on
the barriers facing Manchester City Council in developing the pilot housing investment model with GM Pension
Fund. The Committee also raised a question on the impact of procurement in general as they had heard previous
evidence during a visit to Manchester suggesting that this was a significant barrier to development.
Background
2. The Manchester Independent Economic Review, conducted by leading economists from Harvard, LSE
and Goldman Sachs, concluded that “outside London, the Manchester City Region is the area which, given its
scale and potential for improving productivity, is best placed to take advantage of the benefits of agglomeration
and increase growth.” There are many factors that need to be aligned if the city region’s growth trajectory is
to be optimised. Ensuring that the supply of housing meets the demands of a growing workforce and population
is a fundamental requirement if the supply side of the economy is to function effectively, and AGMA is
therefore committed to restoring housebuilding from the current low levels.
3. The Manchester pilot aims to respond to the current market and assist in delivering increased numbers of
new properties. In parallel, work is being done on the issues that would need to be resolved to expand this
both to a full GM footprint and a wider range of partners, in particular other public sector landowners. This
model is placed in the context of a proposed wider approach to tackling the need to address market failure
while also delivering a wider range of new homes including higher value family homes.
4. The previous housing delivery strategies which involved encouragement of home ownership based on
borrow, build and sell models have not been replaced by any convincing alternative in the current and as
development finance and mortgage finance continue to be squeezed there is little prospect of a quick return to
the old model. Some analysts believe that this situation will be the new norm possibly for the next 10 years.
Our approach therefore aims to make use of other key levers to generate the necessary investment to allow
significant housing development to resume.
5. Unlike in previous recessions, public sector finance is not going to be around to provide a stimulus—
there will be some, but it is likely to be peripheral. Alongside this the withdrawal of mortgage funding is
leading to a restructuring of the housing market, both in the way development is funded but also in the
product—for example we are seeing a steady rise in the demand for private rented sector, at both the top and
bottom of the value scale, which is unlikely to be a short term phenomenon. Supporting this is a significant
culture shift in the way we use our property, particularly in the 18–35 age bracket where job mobility, life style
choices, and debt accumulated through higher education are all having an impact on the type of property
demanded.
6. New delivery models critically need to respond to this new environment and be based on an understanding
that there has been a fundamental move away from grant-led funding, based on need, towards recyclable
investment, based on return.
The Manchester Pilot
7. Discussions with the GM Pension Fund have been taking place to develop a Housing Investment Model
in Manchester that will deliver both low and high rise mixed tenure options, capable of being applied across
GM. The basic premise is very simple; there are two investment partners, the council with land to invest and
Ev 132 Communities and Local Government Committee: Evidence
the pension fund with cash to invest. Together the investors procure a house-builder, sales and marketing
function and a housing managing agent with which it enters into a minimum 10 year lease. Through the lease,
both investors are able to take a guaranteed revenue return on their investment and both share in any capital
return on the sales properties. The new build housing is targeted at economically active households.
8. The model is being tested on the identification of a range of sites with varying values and in different
neighbourhoods. The initial appraisal has clearly demonstrated that some low value sites do not work as a
stand-alone investment, but higher value sites do. However, by packaging sites in a structured way, it is possible
to ensure that the overall rate of return is sufficient to create a viable proposition which meets the requirements
of the Pension Fund while generating a significant scale of new development (250 units).
9. In order to check the assumptions made in the development of the housing delivery model, Manchester
and the pension fund have carried out a soft market testing exercise. There were three main areas of the model
to test with delivery partners—construction, property management and sales. A number of organisations from
the Homes and Communities Agency’s Delivery Partner Panel were invited to participate, including a wide
range of expertise across national house building, contracting and property management. The model was very
well received and some of the organisations were already looking into the build to rent concept. One
organisation in particular was already delivering a mixed tenure development using its own resources to provide
the investment finance. The detailed feedback from the sessions has been gathered, and is now being
incorporated into a detailed brief.
10. Following approval by the City Council’s Executive on 18 January 2012, procurement of a house builder
and sales and marketing advice is being undertaken using the Homes and Communities Agency Delivery
Partner Panel. This will reduce the procurement time considerably as the panel has been through the necessary
OJEU process. Separately a housing management agent will be procured through a straightforward lease
arrangement using a range of Registered Providers selected with a mix of appropriate private sector managing
agents. Procurement and appointment of the delivery partners is projected for Summer 2012, and following the
detailed design work a start on site in Autumn 2012.
Key Barriers Identified by Investment Partners
Theoretical modelling v practical implementation
11. The key barrier is still to demonstrate to all partners that the model works. Modelling work done so far
has taken this as far as possible with theoretical models using real sites, current values, and cost assumptions
which we have tested with a range of potential bidders as a reality check. The final hurdle will be when the
contractor and housing management agent are procured and the real costs can be properly modelled. Because
of the nature of the investment proposals, very specific assumptions need to be made and incorporated into the
model about the likely rental and sales income generated from each development—as with house prices, these
vary significantly not just between different parts of the country, but between different sites within (in this
example) Manchester.
Management lease and rent uplift mechanism
12. The investment partnership needs to minimise its risk on the rental properties through a lease to a
housing manager. Key to the proposal is what cost the housing manager will put on that risk.
13. One of the main risks for the investment partnership is how the managing agent will offer rent uplift
over the period of the lease. A simple RPI mechanism appears straight forward but this has caused managing
agents some serious issues in the past. Market rent levels are by their nature, very market sensitive and specific
to the locality. Linking increases to a national index can create strange distortions at a local level and can
quickly make a development uncompetitive. Part of the bidding criteria will be to evaluate how each managing
agent proposes to set rents and more importantly review them over the life of the lease. This is likely to be
one of the main factors in determining the investors participation in the final scheme and therefore a key barrier.
14. Another key risk will be managing turnover. The management agent’s approach to the question of
tenancy durations will be key, in particular whether the standard private sector Assured Shorthold Tenancy is
felt to help achieve longer-term stability for both manager and tenants. All parties to date agree that keeping
turnover to a minimum will be key and that offering longer term tenancy agreements will be a major incentive
and product differentiation to the investment. However this has to be balanced against the mechanism for
agreeing market rent uplift.
Governance
15. Under normal circumstances, the Council would need to invite a range of potential investors to consider
the offer and to choose those offering the best deal in terms of rate of return required. This is difficult when
developing a new untried concept as it is only by working through the issues with the investor that the scheme
and governance arrangements can be addressed. It is worth noting that the City Council has been inundated
with propositions from developers, consultants and individuals and without a procurement process it would be
challenging to justify any one approach, especially as they all involve a requirement for the City Council to
contribute its land as an investment.
Communities and Local Government Committee: Evidence Ev 133
16. However, MCC is in the fortunate position of being able to work directly with the GM Pension Fund
given that both the Fund and the City Council are public bodies. Each is therefore able to enter into a
Memorandum of Understanding without requiring a time-consuming and expensive formal procurement
process. By working together on the development concept and understanding the partners’ objectives, we have
been able to frame the MoU in terms that support the partners individual needs and aims.
17. Providing the model can now be practically demonstrated, Manchester and the other GM Districts will
be in a much stronger position to offer out future phases to the market as there will be a clear and credible
demonstration of what the model is and how it works on the ground.
Tax transparency
18. Tax issues are still being worked on. However one specific issue has emerged early on in relation to the
type of partnership organisation used. There are two likely organisational structures, a Limited Liability
Partnership (LLP) or a Limited Partnership (LP). Our current view is that an LLP structure would be the most
practical solution, as it offers tax transparency (ie the partners pay tax on the income generated separately,
rather than the partnership itself being tax liable) and greater flexibility in terms of implementation and changes
at a later date. However pension funds are specifically excluded from tax transparency in an LLP making it
impossible for them to opt for this type of partnership arrangement. A simple amendment to the Finance Bill
could enable large scale investment proposals from pension funds to be tax transparent if they invested them
through an LLP structure.
Procurement
19. Specific procurement issues have been mentioned above in relation to the Manchester pilot. However,
there is a more general point that the Committee may wish to consider. The GM authorities have been
approached regularly, particularly since the nature of the housing market has been radically changed over the
last few years, by private sector partners with innovative proposals aimed at generating housing and mixed use
development to test out different models from the traditional borrow, build and sell approach. While some may
have been unconvincing, others have undoubtedly been deserving of further development, and may have
become worthwhile additions to our (and Government’s) efforts to revive housing delivery. Most have involved
local authority investment either through land or funding to acquire land.
20. However, procurement requirements mean that, other than through the partnership with the GM Pension
Fund (because of its public authority status), we would need to openly procure potential partners to take those
ideas through to delivery. Clearly, this requires the exposure of the innovative thinking underpinning the
proposition, which private partners are understandably reluctant to agree. The outcome, though surely
unintended, is that the procurement restrictions and the risk of challenge if not followed, have effectively
undermined public authorities’ ability to partner with the private sector to test new ideas.
January 2012
Written submission from London Councils
Thank you very much for this opportunity to make a submission to the Communities and Local Government
Select Committee enquiry into the financing of new housing supply.
London has had a cross party consensus behind the principle of localising the Housing Revenue Account
(HRA) which has been supportive of both the previous and the current Government’s work in this area.
Devolution of the HRA in April 2012 is, in our view, potentially the biggest change to happen to council
housing since the “Right to Buy” policy of the 1980s.
In exchange for taking on £7.2 billion of national housing debt, 29 stock-owning London boroughs will gain
full control of their housing stock for the first time in a generation. While the final settlement figures are to be
confirmed, early estimates indicate that half of the affected boroughs in London are taking on an average of
£380 million in debt each and the other half are having their debt reduced by £180 million. It is in this context
that we believe there are a range of significant issues for boroughs to address but also potential opportunities
to take forward.
However whilst creating opportunities for boroughs, Government has placed an artificially low cap on the
limit of borrowing that can be undertaken to finance HRA investment. We believe this prudential borrowing
cap should be raised and indexed in order that “the investment value” of a borough’s borrowing capacity
is maintained.
In the light of this fundamental change to housing and also the deepening housing crisis in London, London
Councils was keen to explore ground breaking ways that scope for investment can be maximised in a post
HRA world, and in doing so shape the debate on the prudent maximisation of investment potential in London.
London Councils research found that there were, broadly, three types of borough:
— those with an HRA surplus on day one (either from having borrowing headroom that is not needed
or from having an operating surplus on its HRA);
Ev 134 Communities and Local Government Committee: Evidence
—
—
those who could meet their investment needs in the medium term and then use a resulting HRA
surplus to invest in new stock; and
those who would not be able to meet all their investment needs over a thirty year business-plan
period. Although these might be better seen as different points on a continuum rather than three
distinct types of local authority position.
Our research indicates three broad options that boroughs might pursue collectively in order to increase the
supply of new housing, or to improve existing housing:
— “Trading” borrowing headroom between councils to bring forward investment or development.
— Combining HRA funding and available development land between authorities for new development.
— Exploring arrangements to share services, pool headroom or combine HRAs to optimise performance
and maximise resources.
London Councils HRA Options Research
Boroughs are now business planning to determine how they will manage the debt that they will take on in
March 2012. Following the recent announcement by the Chief Secretary to the Treasury, it is very likely that
boroughs will seek to pay the debt owed to central Government through a loan from the Public Works Loan
Board. In this context, the challenge for boroughs will be to manage this debt whilst at the same time ensuring
that income is optimised, costs are kept to a minimum (seeking to minimise any additional rent collection costs
as a result of the Universal Credit and Rent Direct for example) and priorities—whether they be servicing debt,
investing in existing stock or building new stock—are met.
Once it has ensured that it has an active asset management strategy in place, a borough could consider an
“Investment and Service Partnership” for its stock—essentially a PFI deal without the associated PFI credits—
whereby capital is generated immediately for investment in new or existing stock, with long-term repayment
by the borough to a third party. However, we recognise that, while this is an option that arises from HRA
devolution, given previous experience of PFI deals, boroughs may not be willing to explore this possibility.
Equally, a borough may consider how a stock transfer may enable capital receipts to be added to its HRA,
enabling more housing investment to take place in subsequent years.
While the options above take on a greater significance in a situation of self-financing for housing, the perhaps
more interesting and imaginative opportunities present themselves when considering the options available to
local authorities working together, either with one other partner or in groups. Because of both the number and
variety of boroughs, and the governance arrangements of London, these options have a particular resonance in
the capital. However, they could in principle work anywhere.
Borrowing Capacity and Headroom Sharing
Following devolution in April next year, each borough will have freedom to borrow on the strength of its
assets, both in terms of its housing stock and the rental income that it produces. However, this freedom may
be constrained by two things—the need to invest income in stock and the cap imposed by the Treasury to limit
the amount that it can borrow. While this limit is partly based on central government’s assessment of a local
authority’s borrowing capacity, it is at best an estimate, and is different from, and in many cases lower than,
that borough’s prudential borrowing capacity.
Given this limit in borrowing, it may be the case that some boroughs will have the desire or need to access
capital to invest in their housing stock, but are constrained by their debt cap from doing so. Similarly, some
boroughs will find themselves with some borrowing capacity that they do not need to use, as their investment
priorities can be met without borrowing. In these circumstances, there is the potential for the authority with
higher needs but no borrowing headroom to access the borrowing headroom of the “better off” authority. The
lending authority could charge a fee for providing this capital, and the borrowing authority would benefit from
being able to access resources which it could use to invest in its housing to produce a higher return in future,
from which the cost of the loan could be paid back. This would in effect merely re-distribute existing debt
around local authorities and would not add to the aggregate HRA-related debt. However, at the moment it is
not possible and would need central government’s approval to happen. As such a move would not add to the
aggregate debt, and would allow boroughs to act far more like the housing business managers that HRA
devolution implies, the freedom to swap headroom in this manner is something that we would strongly urge
the Government to actively consider in the coming months.
Boroughs Working Together
It is not merely swapping headroom for capital that becomes a possibility following devolution. There may
be a situation where one borough has borrowing capacity but limited land on which to build new housing. If
it were able to partner with another borough with land but not capital resources, it may be that the two could
negotiate so that the former lends capital to the latter in exchange for a proportion of the nomination rights to
the new social housing that the latter builds on its land. Equally, this sort of cooperation could happen between
more than two boroughs or, in London, even on a sub-regional basis. In this way, imaginative inter-borough
Communities and Local Government Committee: Evidence Ev 135
cooperation could enable delivery of new or improved housing where previously controls over boroughs’ HRA
operations would have prevented such an approach.
The opportunities to bring forward new supply present themselves in other ways, too. Self-financing will
encourage boroughs to consider their housing stock much more as a business than in the past. In this context
they may do more than “sell” their borrowing capacity for a commission or for access to new housing. They
may want to go further with partner boroughs and undertake new development collectively. Such joint
development could take a number of forms: it may be that a number of boroughs enter into a contractual
agreement or form a special purpose vehicle to pool resources such as land, capital, or development expertise,
and use the sum of these parts to build new homes. Those homes would be allocated to the participating
boroughs on a pre-agreed basis according to what each put in. Such a multilateral vehicle could also provide
a body of development expertise and capacity to the participating authorities.
Going further, HRA devolution opens up the medium term possibility of local authorities combining their
HRA operations. In this scenario, it is possible that we might see a situation where a number of authorities,
possibly but not necessarily on a geographic basis, combine their HRA operations. This could in practice mean
anything from sharing back office functions and administration to joint development along the lines mentioned
above to even pooling or aggregating the debt caps of a number of authorities. Access to resources in this case
could be bid-based or relate to agreed priority criteria, with the arrangement operating for a fixed term between
a number of authorities. The business plan positions would need to be complementary for there to be mutual
benefit for the authorities involved.
Going further, full HRA integration could be achieved through a number of neighbouring authorities
combining their HRAs. In practice this would require the transfer of stock to a single authority to create a
single HRA. Governance would be shared between the authorities and a “Group Structure”, akin to a housing
association model could be adopted providing for local delegation. Shared services, including potentially
housing management services could generate efficiencies.
Whilst they may theoretically be possible, we would caution that these options would require consent if not
legislation from Government permitting them, and as such should be seen as a longer term possibility.
There are of course challenges within all the options above. Some authorities with high investment needs
and relatively little access to finance may find even meeting the objectives of an active asset management
strategy has its difficulties. However, London Councils is certain that all authorities will relish the opportunities
and freedoms that the move to self-financing represents, including the possibility to build council housing in
significant numbers for the first time in a generation.
Artificially Low Levels of Borrowing Capacity
There are some issues that threaten this possibility and create uncertainty, however. The imposition of a debt
cap for housing that is unrelated to prudential borrowing rules or limits goes beyond necessary controls on
public expenditure by local government. The prudential borrowing rules should be a sufficient guide to ensure
an appropriate level of borrowing is undertaken by stock-holding councils to invest in housing. We would like
to see the Government commit to reviewing this option as soon as possible following HRA devolution.
A further issue is the fixing of the aggregate debt cap in nominal terms by the Government. This means that,
over time, the value of the debt that boroughs will be able to incur will erode with inflation, undermining their
investment abilities. London Councils recommends that the cap be index-linked, so that it bears a closer
relationship to rental income, which rises according to a formula that includes a measure of inflation.
Finally, the recent announcement by the Prime Minister to encourage a new round of “Right-to-Buy” sales
could potentially undermine boroughs’ business planning abilities. While we support the aims behind the
policy, we remain concerned that the combination of high levels of discount and the use of the receipts to fund
the three-fold objectives of reducing the national deficit, underwriting the construction of a new home and
compensating the relevant HRA for the lost rental income could undermine a local authority’s ability to borrow
on the strength of its housing asset, as its future size and value will be more unpredictable. DCLG will need
to ensure that any new manifestations of the Right to Buy policy do not undermine HRA business plans for
the local authorities concerned.
We hope that the above is helpful to the committee’s enquiry, and we would be very happy to present our
views to the committee in person should you desire.
November 2011
Ev 136 Communities and Local Government Committee: Evidence
Written submission from Oxford City Council
Summary
— The biggest return on investment would be to invest directly in building new Council Housing.
— There is a clear and significant role for the public sector to provide support in kind both on its own
land and through reducing planning uncertainties and thus risk.
— The potential for the HRA reform to be a force for good in reinvigorating new housing supply is
significant providing the Government gives greater local flexibility under its Localism Agenda.
— The Affordable Rent proposals are unlikely to be effective in the medium to long term; in particular
Oxford will see investment in its affordable housing leach away despite the considerable housing
needs in the area.
Introduction
The City Council welcomes the opportunity to respond to the Call for Evidence from the Select Committee.
It has particular concerns about the Government’s Affordable Rent proposals and the reduction in grant funding.
The City has an acute housing shortage, particularly in the social rented sector. The Council remains
committed to maximising housing development as far as it can within the tight administrative boundaries of
the city and the constraints of the Green Belt, attractive landscape setting and flood plain. The adopted Core
Strategy has a policy seeking 50% affordable housing from sites of 10 units or more with 80% of such
affordable housing to be social rented, unless there are demonstrable viability constraints.
The following key points are considered to have particular implications for the future of Oxford and its
economic prosperity.
1. 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
To answer this question in terms of both social and economic policy, it is important to step back and start
by considering whether public funds are better directed to investment in bricks and mortar or to housing
benefits ie subsidies to landlords?
Between the 1940s and 1980s national social policy prioritised the former approach through the purchase of
land by public bodies, the construction of houses on this land and renting these properties directly to tenants,
thereby minimising the housing benefit budget.
In more recent decades, private landowners and developers have been placed under a range of obligations
through the planning system to provide affordable housing, and Registered Providers have been pressed into
becoming the principal providers of social housing. This has had the effect of shifting the balance of public
funding for social and affordable housing towards the benefits system and away from support for land
acquisition and house building costs. The rate of new homes provision has dropped markedly in the past decade
with resulting increases in housing waiting lists.
The present government’s policy of “Affordable Rents” seeks to further reduce the direct public funding for
social housing through the recycling of rental incomes into land acquisition and construction; and
simultaneously, to reduce the support to tenants’ rental costs by restrictions on Housing Benefits and Local
Housing Allowance. The effect of these twin policies will inevitably be to reduce still further the ability of the
public sector to provide affordable homes for those most in need.
Affordable rents at 80% of market rents will not be covered by Local Housing Allowance in Oxford. For
example the LHA rate for the whole of the Oxfordshire Broad Market Area for a three bed house is £213.46
whilst the 80% level of private market rent is £252.00, (June 2011 prices). There remains considerable doubt
too that providers will be willing to charge a rent lower than 80%. In fact private rents in Oxford are
considerably higher than in the rest of the Oxfordshire BMA. A point made by Shelter this week in its Private
Rent Watch Report , which declared that “The least affordable local authority area outside London is Oxford,
where typical rents account for 55% of average earnings” Therefore the Affordable Rent policy will not create
extra funding for housing in Oxford.
It can be predicted that the effect of these policies will be to direct the construction of “affordable housing”
towards locations where private developers can make the most profit and where the Affordable Rent level is
closest to Local Housing Allowance rates. This will mean that the location of new affordable housing will not
be determined by the level of need for such housing and demand will continue to be massively out of balance
with supply—both in volume and spatial distribution. The effect may be such that the Return on Investment
from State funding is positive but at the cost of providing homes in the wrong place for the wrong groups
of people.
The City Council has analysed the potential impact of the affordable rent policy and concluded that it will
make a very limited contribution to meeting the housing needs of the 6,000 plus families who are currently
registered on its housing waiting list. Our firm view is that the biggest return on government investment would
be to work with local authorities and to invest directly again in building new Council Housing.
Communities and Local Government Committee: Evidence Ev 137
2. 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
The public sector has potentially a very key role in tackling the backlog demand for social housing through
the provision of support in kind through the use of sites that it owns and, more indirectly, through reducing
planning uncertainties and risk.
In the current economic climate increased perceived uncertainties and risks are leading private landowners,
developers and their funders to increase profit margins and thus reduce the capital available to provide
affordable housing.
The City Council has embarked on an exemplar project to deliver the greatest number of affordable homes
at social rent as is possible in the current economic circumstances. It has formed a Joint Venture partnership
to develop an urban extension of around 1,000 houses on its own land. Because it is also the planning authority,
it is in position to also provide a clearer planning framework in terms of both timing and S106 costs.
Regrettably, other parts of the public sector are not adopting this approach. For example, the British Rail
Residuary Body is seeking to sell land within Oxford on the open market with significant uncertainties for
developers over the development potential and with significant planning uncertainty. In short, by obliging a
private investor to absorb a very high level of development risk, the government is squandering the potential
to secure the best available affordable housing yield from the site.
Another barrier to a rational approach to land use is the pattern of restrictions on land, which has the
potential to be developed, and the Government’s ambiguous stance towards Localism. While espousing a
rhetoric of localism, it is reinforcing central controls through the draft National Planning Policy Framework,
especially the policy on Green Belts.
There is land adjacent to the urban area of Oxford that is both in public ownership and of low environmental
quality. This land is well located to be developed as a significant and sustainable urban extension to the city
of at least 4,000 homes. It would make a considerable contribution towards meeting both the public and private
housing needs of the city and the sub-region served by the Local Enterprise Partnership. This land was
designated for an urban extension in the adopted South East Plan (regional spatial strategy).
However it lies in the Green Belt and there is very little prospect of it being developed because the NPPF
and other government announcements indicate that Green Belts will be protected without exceptions, and the
RSS housing targets and spatial allocations will be abolished. It remains the case nevertheless that development
of this land would be the most cost effective way of providing affordable housing around Oxford and would
only involve the loss of 1% of the Green Belt around the City. This is not “urban sprawl” but the sensible use
of publicly owned land in a sustainable way.
As has been argued in the past, including in the Barker Review, jumping green belts to provide housing in
dormitory settlements is an unsustainable approach to land use planning. Yet this is has been the policy in
Oxfordshire for almost 20 years. The result is that while some 75% of residents live and work in Oxford, 75%
of residents in the dormitory market towns of Witney and Bicester commute out of these towns, many of them
back across the Green Belt into Oxford.
3. How the reform of the council Housing Revenue Account system might enable more funding to be made
available for housing supply
The extra borrowing headroom proposed in the reform of the council HRA system is welcome although the
removal of the cap limit would be more effective in delivering housing units.
However, the recent announcement by Ministers that Right to Buy discounts will be increased together with
central government retaining a substantial percentage of RTB receipts, will potentially create a situation in
which local authorities will be like a family who take out a mortgage and then have to stand by while the
property on which it is secured is gradually demolished. The ability of Councils to repay the substantial housing
debt that they will take on as part of the HRA reforms would be significantly undermined as the size of their
stock is reduced through RTB purchases. This would in turn limit Councils’ ability to fund new house building
and, in a location such as Oxford where land values are high and developable land in short supply, would
mean that value taken out of the council’s stock would most likely be used to build affordable homes in other
locations where easier and more profitable development conditions obtain.
If the Government genuinely wishes to stimulate the development of affordable housing in locations where
it is most needed, complete local flexibility is needed, including retention of 100% of Right to Buy receipts
coupled with a statutory obligation to use those receipts to improve the quality and/or quantity of affordable
social housing.
Local authorities have the potential to play an important role in providing direct or facilitating new housing
supply. Councils are able to internally borrow capital and also have access to more affordable finance than
Registered Providers or the private sector, thus ensuring bigger returns on investment.
The potential for the HRA reform to be a force for good in reinvigorating new housing supply is significant
providing the Government gives greater local flexibility under its Localism Agenda.
Ev 138 Communities and Local Government Committee: Evidence
4. 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
The Affordable Rent proposals will not be effective in increasing funds available for new housing, not least
because they are accompanied by a 65% cut in the HCA budget. In practice, new housing will be funded in
the near future by Registered Providers (RPs) drawing from their reserves, together with some limited HCA
grant and limited borrowing.
However, the security of the RPs’ rental income is diminished by the proposal to introduce a Universal
Credit, including an element that was previously covered through housing benefit, to be paid to the tenants
directly and no longer to the landlord. This will create an insecure income stream for RPs and Councils,
reducing their ability to raise new finance. This is not sustainable in the long term and the current four year
proposal will lead to reduced funds rather that an increase in funding over the medium to long term.
The other serious implication is that the RPs, through new voids and churn on their stock, will draw value
out of high-price market areas, such as Oxford, and use this to build in less expensive areas with lower
market rents.
Therefore, the Affordable Rent proposals are unlikely to be effective in the medium to long term, in particular
Oxford will see investment in its affordable housing leach away despite the considerable housing needs in
the area.
Taken together, the above considerations highlight the risk of disinvestment and value extraction from social
housing stock in areas of high housing need and high housing cost (where the former is often a symptom of
the latter), leading to inappropriate development of social and other affordable housing in areas with lower
land values (and often, concomitantly, lower housing need).
October 2011
Written submission from the National Federation of ALMOs
Summary
— The NFA believes that ALMOs can play a key role in ensuring that the government make the best use of
any public sector subsidy in delivering new homes.
— ALMOs could help their local authorities fund development programmes through a more positive asset
management programme if certain financial and bureaucratic restrictions were lifted.
— The NFA believes that councils and their ALMOs need more flexible options in the future in order to be
able to continue to meet the needs of their communities. We urge the government to support the
development of the three “CoCo” options outlined in the NFA publication “Building on the potential of
ALMOs to invest in local communities”. The three new types of ALMO could give them the opportunity
they need to borrow private finance whilst keeping their strong links with their local authority. They would
also be able to retain the tenant focus, which has often distinguished them from traditionally managed
council housing.
— The government should also consider changing the classification of borrowing for council housing
investment, recognising that council housing is a trading activity and that, under European accounting
conventions, its borrowing need no longer count towards the main measure of general government debt.
— The recently announced changes to the Right to Buy regime look likely to threaten the viability of selffinanced business plans and council housing as an on-going business and our members are very concerned
about this.
— The NFA is concerned about how the “Affordable Rent” programme can be sustained over the medium
to long term. Many of our members have been keen to explore the “Affordable Rent” product, but would
like to see it as one of the housing options available to the community, alongside social rent within a
coherent and equitable local housing strategy.
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
In the current economic and fiscal environment it is imperative that the limited public subsidy available to
support the development of new affordable homes is put to the best use it can to provide the right kind of new
sustainable homes across the country. The NFA believes that ALMOs can play a key role in ensuring that the
government makes the best use of any public sector subsidy in delivering new homes.
Recent ALMO developments have shown that ALMOs can provide much needed homes for communities
on existing council land. ALMOs in many areas have built on land that no other developer was interested in,
land that was deemed to have little or no value and to be a cost to the local authority in maintaining and
managing it. ALMOs have offered local authorities an option to develop that means the council can retain
control over the land and the asset as well as ensuring that local housing management is not fragmented.
Communities and Local Government Committee: Evidence Ev 139
For example, last year Stockport Homes developed 17 new homes on an existing council estate to meet
housing need in the area. In this instance the development included larger family sized homes as well as
wheelchair accessible homes for families and couples. The development has made fantastic use of an under
used area of the estate, which tended to attract low level anti-social behaviour and has helped to meet clearly
identified housing need in the area.
The NFA believes that it is critical that in the desire to maximise housing supply from a limited amount of
public subsidy the government does not rush to build large numbers of homes in the wrong parts of the country
and focus entirely on numbers, which could encourage the building of smaller homes rather than the family
sized homes that are required in many parts of the country. The NFA believes that ALMOs, working closely
with their parent local authorities can help to ensure that local housing need is met in a sustainable but cost
effective way.
What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance
between them
Many of our members across the country are looking to see what they can deliver without the use of social
housing grant, and a number of ALMOs are engaged in discussions with their local authorities regarding the
possibility of funding development programmes through a more positive asset management programme, selling
some properties under shared ownership, some on the open market and some land to private developers and
using other council-owned sites to develop social housing with the proceeds. This model will allow some local
authorities to make better use of existing council properties and assets and develop new homes to meet the
specific housing needs of their tenants and people on the waiting list.
Some ALMOs and their councils would also like to make more of the rental income that they will be
managing under self-financing from April 2012 to provide more new affordable homes. Even though the NFA
along with other housing stakeholders argued very strongly that the existing safeguards in relation to new
borrowing, such as the Prudential Code, the limits on rent increases and the HRA ring fence were all sufficient
to ensure that local authorities did not increase borrowing at unsustainable levels, the government has felt it
necessary to impose further limits on new borrowing in a self-financing regime.
We understand the commitment that the government has made to reducing the public sector deficit, but feel
that borrowing for investment in new affordable housing should be considered separately to borrowing for
other purposes. Any borrowing for new affordable housing with the self-financed business plan would be
subject to a clear business case based on rental income and costs over a 30 year period. The NFA and others
have already proposed a borrowing ratio of income to debt, which could be agreed with and set by central
government. This would allow some local flexibility around the timing of new borrowing and allow central
government some on-going control, whilst allowing local councils and their ALMOs to make the most of their
assets and deliver some of the new housing that the country so desperately needs.
Some of our members are also interested in the idea of “build now—pay later” and believe it could help
them unlock key development sites with their parent local authorities for a mix of private and social homes or
be used entirely to help kick start private development on some local authority land which, in time, would help
fund new affordable homes in the area.
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
For ALMOs to help their parent local authorities make the best use of public assets, local authorities should
be able to more easily dispose of land or empty properties their ALMOs. This would assist local authorities in
managing their self-financed business plans and encourage them to make the best use of all of their assets. It
is important that there are a number of options for local authorities to make use of in order to encourage them
to be more innovative in their approach to asset management, but at the moment the government is proposing
to exclude disposals to an ALMO from a general loosening of controls on such disposals.
The NFA believes that this is a missed opportunity because whilst there will be occasions when a local
authority could sell land or vacant dwellings on the open market or offer discounted land to housing
associations, there will always be some pieces of land or property that are not suitable for such disposals. A
transfer to an ALMO offers a local authority another option for difficult to dispose of or strategic land and
property, enabling it to make better use of an asset whilst retaining control of it. ALMOs can then use their
expertise and resources to help the local authority provide the right kind of sustainable homes in their 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
From discussions that ALMOs and the NFA have had with the financial sector there does seem to be some
investor interest in both local authority and ALMO housing projects at the moment. Some members have been
talking to both the banking sector and institutional investors such as private pension schemes and there is
potential for them to invest in the ALMO sector, especially whilst the returns from the stock market are so
risky. However, for this to be possible either ALMOs would need to move out of the public sector or
Ev 140 Communities and Local Government Committee: Evidence
government would have to remove the current restrictions and allow ALMOs to attract private sector investment
for new housing supply. It appears to be a catch 22 situation where potential investors are attracted to the low
risk but steady returns of a local authority backed sector, but government does not want local authorities or
their subsidiaries to make use of private sector finance, even for housing projects delivered by well-managed
organisations with solid business plans based on the rental income.
How housing associations and, potentially, ALMOs might be enabled to increase the amount of private
finance going into housing supply
In the current economic climate and the corresponding cuts to public sector spending the ALMO sector is
less able to deliver new affordable homes for their communities under the traditional models. As councilowned bodies any borrowing an ALMO undertakes is counted against the public sector borrowing requirement
set by government. Changes to the way in which the HCA now assess public sector spending in their value
for money assessment mean that ALMOs have been less successful in gaining access to HCA grant than they
had been in the previous allocation rounds. In light of this and the need for further investment in their existing
stock, ALMOs are now looking at different ways to attract funding and a number are looking to diversify and
change their operational model in order to break away from public sector borrowing limitations.
The NFA commissioned a report to consider proposals which would build on the current, successful ALMO
model, creating a new form of organisation with strengthened accountability to tenants and to the community,
and which could raise new resources independently from government finances. The report entitled “Building
on the potential of ALMOs to invest in local communities” has been sent alongside this submission for the
committee’s information.
The work recognises the important priority which the government is giving to reducing the public sector
deficit and the implications for future spending on housing after the Comprehensive Spending Review. The
aim has been to find ways to generate the extra investment needed in council housing, taking account of these
financial constraints, and at the same time address the government’s agenda of decentralising services and
strengthening accountability to customers.
To meet all of these challenges, ALMOs will need more flexibility. If they want to bring in extra funding,
they cannot stay as they are. Three new types of ALMO could give them the opportunity they need to borrow
private finance. But—unlike stock transfer to a housing association—the new options would all allow ALMOs
to keep their strong links with their local authority. They would also be able to retain the tenant focus, which
has often distinguished them from traditionally-managed council housing.
The report gives more detail on the three options, but they range from a long-term management contract of
35 years with the ALMO no longer a local authority controlled organisation, but the housing stock still under
local authority ownership, to a stock transfer, to a new type of organisation that is both Community and Council
owned but not controlled by the council, the “CoCo”.
How the reform of the council Housing Revenue Account system might enable more funding to be made
available for housing supply
Critically, in the first instance, the government should consider changing the classification of borrowing for
council housing investment, recognising that council housing is a trading activity and that, under European
accounting conventions, its borrowing need no longer count towards the main measure of general government
debt. This would offer the government the opportunity to give council tenants, councils and their ALMOs real
freedom to maintain, regenerate and build new homes for their communities, whilst helping to kick start
economic growth in their areas.
In terms of the detail of the current settlement the recently announced changes to the Right to Buy regime
look likely to threaten the viability of self-financing and council housing as an on-going business and our
members are very concerned about the possible implications.
We are aware that government has made assurances that an allowance from the capital receipt will be made
to repay the debt associated with that property, but our members are concerned about other impacts on the
business plan and the likelihood that the remaining receipt will not be retained locally to replace the lost social
home but given to the HCA to redistribute through the Affordable Rent programme nationally.
If the government significantly changes the discounts to encourage another wave of council house sales to
tenants our members are fundamentally worried about the future sustainability of the Housing Revenue Account
in terms of the management of a dwindling and residual stock. Without being able to retain all of the receipts
locally to be able to replace the sold dwelling in the most appropriate way, the whole idea that self-financing
would enable better asset management and a long-term future for council housing is put into question.
Any changes to the Right to Buy regime will also play out very differently in different parts of the country.
In some areas of England there are such low values for some council housing that the current discounted value
would not cover the debt repayment for those homes and the receipt could never help re-provide a new home
Communities and Local Government Committee: Evidence Ev 141
even at affordable rents. At the other extreme, in very high value areas you could easily repay the debt and reprovide a social home on council land, but the high cost of the homes will probably mean that there will be
little take up unless the new discount is extremely large.
It should also be noted that the best properties have already been sold under the Right to Buy policy and
that combined with the residualisation of council housing with the concentration of low income families in the
less attractive (to lenders) dwellings means that even with an enhanced discount a revived Right to Buy policy
is unlikely to deliver the level of receipts that it did in previous years and so the anticipated number of new
units that the receipts could finance are unlikely to be realised.
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
The NFA can understand why the government has chosen to deliver the “Affordable Rent” programme with
its limited funds in order to increase the number of homes it can help build at this difficult financial time.
However, the NFA is concerned about how this can be sustained over the medium to long term. Our members
have been keen to explore the “Affordable Rent” product, but would like to see it as one of the housing options
available to the community within a coherent and equitable local housing strategy. Many of our members are
very clear that in their areas there will continue to be the need for social rented homes as “Affordable Rent”
is just not affordable for many in high value areas or for larger families in some areas. In other areas
“Affordable Rent” levels are roughly at the same level as social rents so will not bring in any additional income
to help fund new building. In high value areas it also looks like it will counteract much of the work being
done by the Department of Work and Pensions to make the transition to work for unemployed households
easier by making the benefit trap steeper for those families already on housing benefit being housed in
“Affordable Rent” properties.
ALMOs are also at a disadvantage under the “Affordable Rent” programme as they have very small numbers
of homes to convert to “Affordable Rent” within their own stock. The NFA would like to see the HCA being
able to agree stock disposals from councils to their ALMOs specifically in order to make use of this programme,
where appropriate and allow ALMOs to deliver new “Affordable Rented” homes for their communities. If
these types of stock disposals were allowed and any borrowing by the ALMO or local authority was not
counted again in the HCA value for money test, it could really help councils and their ALMOs make better
use of their assets and develop more new housing in a much more sustainable way than the current proposals
on the Right to Buy do.
October 2011
Written submission from the Residential Landlords Association
Summary of Evidence
1. We are looking at issues from the perspective of the PRS which is now a major sector in housing provision.
2. Buyers are being shut out of the owner/occupier sector and the social sector is afflicted with ever
lengthening waiting lists.
3. The reality is that there is little likelihood of the social sector being able to provide the requisite number
of new homes.
4. There are major demographic and economic trends relevant to the supply of new housing. We have a
rising population but at the same time the average size of each household is falling, both of which necessitate
extra housing provision. Coupled with this we have a densely populated country which has led to restrictions
on supply.
5. We face a huge contraction in the availability of credit. The wholesale money markets have been closed
and banks are contracting their loan books. Property development is seen as a high risk lending area.
6. Social housing provision has been squeezed out by other demands on the public purse eg welfare benefits.
7. Owner/occupied housing and PRS housing are the same assets class but there is no point in the sectors
squabbling over the same housing stock.
8. The PRS is having to provide accommodation for those who otherwise normally access social housing.
9. On the face of it the PRS is doing well with rising rent levels but this picture is highly misleading.
10. PRS provision has been artificially boosted by involuntary landlords. Some landlords have been kept
afloat by low interest rates. Arrears will increase along with repossessions of rented property once interest
rates raise.
11. Fundamentally the PRS business model is now flawed because capital appreciation is no longer a
realistic possibility.
Ev 142 Communities and Local Government Committee: Evidence
12. There is therefore the spectre of disinvestment. The key to this is return on investment in the PRS.
Hitherto this has depended on capital appreciation because rental yields are too low. Yields need to be
rebalanced.
13. We take it that it is a given that there is a need to improve housing supply.
14. Much PRS stock is older housing. Generally PRS landlords do not purchase new dwellings although
some do. There is a premium price to be paid. PRS provision is more heavily geared towards the younger
element of the population.
15. The importance of the PRS is twofold. It buys up existing housing which enables owner/occupiers
to buy new property. Importantly, the PRS contributes through converting older stock to sub divide it into
individual units.
16. Provided certain issues are successfully addressed the PRS can help expand housing provision. However,
structural issues need to be addressed first.
17. PRS tenants indirectly bear a much higher taxation liability than in either of the other two tenures. This
feeds through into increased rents.
18. Residential landlords are also disadvantaged in relation to VAT because of the exempt supply treatment
of residential accommodation. This means also extra costs are passed on to tenants.
19. Owner/occupiers are in particular privileged regarding their tax treatment.
20. PRS gearing is at around 55%, at least for longer term traditional professional landlords; as opposed to
new entrants.
21. The PRS is made up of small and medium sized landlords with little prospect of direct institutional
investment. Institutions are better suited to provide finance for the PRS.
22. The PRS has traditionally been dependent on bank and mortgage lender debt financing.
23. Going forward this traditional type of lending is not going to be available and we need to look at
alternatives to develop new funding arrangements.
24. Essential to this is a structural reform of taxation system for the PRS such as capital gains tax roll over
relief and entrepreneur relief.
25. Alongside this tax incentives are needed to boost the acquisition of new properties at the lower end of
the market.
26. We recommend two incentives a private rented sector expansion scheme and for SIPPS to be able to
invest in residential properties. Both could be geared towards lower valued properties.
27. There is no instant remedy but the PRS has a role to play to help promote sustainable growth in housing
supply. To do this we need to address the structural issues such as taxation reform.
28. We have major concerns about the way the planning system works particularly in relation to the provision
of shared houses which are needed to meet increasing demand.
29. Urgent action is needed to help grow housing supply.
Response
About the Residential Landlords Association (“RLA”)
1. The Residential Landlords Association (RLA) is one of the two direct membership national landlords
associations operating in England and Wales. We have a membership of around 15,000. Our members own or
control over 150000 units of accommodation. Primarily our members are landlords in their own right but a
number are managing and letting agents, some of whom are also landlords. Our members operate in all subsectors of the Private Rented Sector (PRS). Properties are rented out to families, working people, young
professionals, the elderly, students and benefit customers.
Communities and Local Government Committee: Evidence Ev 143
The role of the Private Rented Sector
2. This submission is made from the perspective of the PRS. This Sector has grown significantly and now
represents around 14% of housing provision with about 3.5 million dwellings, approaching parity with the
social sector. Although the PRS provides accommodation across all age groups predominantly the Sector houses
younger people (see Table below):
40
35
30
25
%
20
15
10
5
0
16-24
25-34
35-44
45-54
55-64
65 or over
Note: Household reference person.
Source: EHS
3. The average age of a first time buyer is now approximately 38. Aspiring home owners are being shut out
of the owner/occupier sector. They are unable to afford the higher deposits required and mortgage funding is
being rationed. Others are preferring to rent through choice. The social sector is also severely constrained with
ever lengthening waiting lists. Due to cut backs in public spending there is little likelihood of the social sector
being able to provide the required number of new homes. Relative to other sectors the size of the owner/
occupier sector has contracted.
The underlying trends
4. There are in our view a significant number of underlying trends which the Committee needs to consider
as part of this Inquiry. These are both demographic and economic. So far as the demographics are concerned
in the United Kingdom we have a rising population. There is continuing net inward migration. Unlike
continental Europe the birth rate is not falling. Most importantly, the population are living longer.
5. At the same time average household size is falling. More people are living on their own or in smaller
units. Part of this is aspirational because children want to leave home and set up on their own. Part is due to
social change and most importantly many older people, who are living longer anyway, end up living on their
own. The upshot of all of this demographically is that demand for accommodation across the board is rising.
6. We also have the particular problem in this country that it is one of the most densely populated in the
World even though the built up land mass probably represents no more than 10% of the total land area. This
in itself has led to constraints on supply.
7. Turning now to the economic position, huge forces are at work as a fall out from the excesses of the
credit boom prior to 2008. We face a huge contraction in the availability of credit. New housing provision is,
of course, capital intensive. The increasing regulatory requirements such as Basel III tighter oversight by
regulators and significantly market forces mean that credit is going to be much more limited. It has been
estimated that lending peaked at around 1.2 x deposits but in the USA and Japan the ratio is a much more
prudent 0.7 x deposits.
8. Our lending levels are coming down. Our lenders have had to rely on access to wholesale funding to
bridge the difference and this has been particularly true of mortgage lending. It was the closure of these
wholesale markets that precipitated the credit crunch. Buy to let mortgage provision through specialist lenders
was funded through the wholesale market model. Across Europe banks are deleveraging. They are contracting
their loan books because it is simply not practicable for them to raise additional equity funding. The only way
they can do it therefore to meet market conditions and regulatory requirements is to cut back on the amount
available to lend. Furthermore, property and property development in particular are seen as a high risk lending
Ev 144 Communities and Local Government Committee: Evidence
area. The omens for reversing this trend and expanding the occupier housing provision in the short to medium
term are not good.
9. When it comes to the social sector what we find is that social housing provision has been squeezed out
of national budgetary provision. Previous expansions of social housing were publically funded. However,
because of the shifting of emphasis in Government spending it is no longer realistic to expect that the tax payer
will fund new social housing provision on any kind of scale. Too much money is now spent on welfare benefits,
pensions, personal social care and, of course, education. These big spenders have crowded out social housing
provision coupled with a declining tax base due to the recession and a reluctance on the part of people to pay
higher taxes. It is unrealistic to expect significant public funding of social housing provision in the future. The
current deficit deduction programmes have accentuated this problem. Furthermore, in the social sector to ensure
that they are affordable (so called) rent levels are such that there is no return on investment for the tax payer.
Where outside funders are involved then this can only be achieved by way of public subsidy but tax revenue
are insufficient.
The PRS as a housing provider
10. Housing in the owner/occupier sector and in the PRS is in the same asset class. Houses are bought and
sold and transferred between these two sub-sectors of the private sector. Another way of looking at it is that
because there is a shortage of accommodation the PRS and owner/occupiers squabble over a limited housing
stock. This lead to complaints, often unjustified in our view, that prior to 2008 in the boom landlords were
squeezing out first time buyers and pushing up prices. This was yet a symptom of the overall problem of
insufficient supply. What is not mentioned, however, is how the PRS helped to fund many new developments
at that time often through off plan purchases, particularly of new apartment developments. By putting down
initial deposits and pre-purchasing PRS investors gave developers the necessary funding and confidence to
proceed with these developments. This is, of course, no longer feasible.
11. On the face of it the PRS is doing well. Rent levels are rising, there is increasing demand because of the
lack of supply in both the owner/occupier sector and the social sector. Increasingly the PRS is having to provide
accommodation for those who would otherwise have been housed in the social sector, with the assistance of
housing benefit budget. Rent rises have been particularly marked in London of late. Some would say the PRS
is a bright spot in an otherwise drab picture.
12. The RLA, however, believes that this picture is highly misleading. There are a number of reasons why:
(1) Provision in the PRS has been artificially boosted by a significant number of “involuntary
landlords”—these are individuals who cannot sell at the moment. They may well be in negative
equity. Potentially, over time, as market conditions improve they will sell up.
(2) Many landlords in the PRS, especially late entrants, are being kept afloat by low interest rates.
Property values have fallen generally outside London by 20% in nominal terms (equivalent to
30% in real terms) on average. However, debt levels remain the same. Rental margins are tight
so it is the low interest rates which mean that these landlords still afford to make their
repayments. However, as and when interest rates rise, as they inevitably must because they are
at an artificially low level, these PRS landlords will face real distress and repossession.
(3) Although the arrears rate for buy to let mortgages is low at present, and falling, as outlined in
the previous paragraph as interest rates start to climb again we face a potential wave of
repossessions.
(4) Where repossessions have already taken place lenders are being much more canny than they
were in the last recession at the end of the 1980s/early 1990s. Although there have been some
sales, in many cases lenders are appointing rent receivers and hanging on to properties which
continue to be rented out.
(5) Fundamentally, for the PRS the business model is now flawed. It was originally built on capital
appreciation with the ability to make and take a big capital profit because of apparently booming
house prices.
(6) Those who came into the PRS late on on the back of the boom culminating in 2008 now realise
that capital appreciation was a mirage and likewise so many will want to get out as soon as
market conditions improve so far as selling the property is concerned.
(7) Although the capital appreciation model of investment in the PRS is no longer viable, although
we believe that the long term professional landlords will, by and large, remain.
(8) Now that the capital appreciation is no longer the viable fundamental concern is the return on
investment in the PRS. Historically, the Sector has depended on capital appreciation rather than
rental yields. Rental yields themselves are low. However, in the current climate because of
downward pressure on income many cannot afford higher rents. Nevertheless, because of the
shortage of supply of accommodation and the need to rebalance yields rents are currently on
an upward trajectory in many parts of the country, especially in London. Returns are currently
too low now that capital appreciation is no longer part of the equation. There needs to be a
significant adjustment to produce a worthwhile return on investment in the PRS. Otherwise,
large scale disinvestment will follow.
Communities and Local Government Committee: Evidence Ev 145
The need to increase housing supply
13. For the purposes of this Inquiry it is taken as a given that there is a general acceptance of the necessity
of improving housing supply. We have already referred to CLG estimates of need and given evidence above
as to the underlying demographic changes in this country which are driving the demand and therefore the need
for an increased supply. Importantly, by increasing supply we will prevent further booms in house prices.
The PRS and provision of new housing stock
14. The bulk of the PRS stock is to be found in older housing stock. On the whole the PRS does not purchase
new dwellings although the off plan purchases referred to above were a notable exception to this. Some PRS
investors do specialise in buying new properties. Indeed, quite a number of buy to let investors in the boom
leading up to 2008 bought properties on new developments. Nevertheless, there is a perception that if you buy
a new property then a premium price is being paid. Money is perhaps unnecessarily being spent on shiny
fixtures and fittings which soon depreciate.
15. The importance of the PRS in new housing provision is twofold. Firstly, it recycles existing stock
enabling owner/occupiers to buy new properties. This has been demonstrated by the demographic changes
which have taken place in the past decades. Owner/occupiers have moved out of city areas for example and
purchased new homes on new developments on the fringes of the city. PRS renting has stepped in. The second
way in which the PRS contributes and in this case it does provide new dwellings is by converting older stock.
Often this takes place by way of sub-division particularly with larger older Victorian and Edwardian properties,
for example. Commercial properties may also be recycled and converted. This is a particular skill of the PRS.
16. We need to see if the PRS can expand to try to help restart housing provision but as well as the concerns
outlined in Paragraph 12 above there is a major structural problem which needs to be addressed affecting the
PRS namely its taxation regime.
The PRS and tax
17. Beside the need to reconfigure the return in the PRS, the other message which the Association want to
put over to the Committee in this evidence is that the disadvantageous tax treatment of the tenant in the PRS
as compared with that in the other two tenures. The immediate reaction will be “what are they talking about”?
It is the landlord who is taxed not the tenant. This is not so, it is the tenant who indirectly bears this tax burden
which falls on the PRS to a much greater extent than either the owner/occupier sector or the social sector. The
latter is tax exempt because local authorities do not pay tax and registered social landlords, as charities, are
also exempt.
18. Owner/occupiers also receive huge tax breaks in comparison. As a business person, when you look at
your return on your investment ie your income (whether from rents or capital receipts) you look at your return
after tax. Taxation costs are therefore factored into your calculation and are included in your charges ie the
rents paid by your tenants. Landlords in the PRS, unlike social landlords, are taxed on their receipts both in
terms of rent net of expenses and interest and capital gains if they dispose of a property. The burden of capital
gains tax is particularly iniquitous because it now makes no allowance for increases in value due to inflation.
The a business of residential renting is not regarded as a trade so Entrepreneur Relief is not available. Like the
costs of regulation, all of these costs ultimately bear down upon the tenant through the rents which they pay.
19. When it comes to value added tax (VAT) again the residential landlord is disadvantaged. Residential
renting is an exempt supply but unlike say, the supply of food which is zero rated, this means that the landlord
cannot recover the VAT he pays out, eg on repairs. Instead, again this cost is passed on to the tenant.
20. The consequences for tenants who indirectly bear these taxation costs arising from VAT are as follows:
(1) The landlord has to pass on VAT spent to purchase materials or to carry out works. EU law
allows a reduced 5% rate but the UK Government has not adopted this approach.
(2) When it comes to provision of new housing by conversion the residential investor has to bear
the full cost of VAT and, therefore, again passes this on indirectly through the rent to the
tenants. This contrasts with a purchase of a new home which is zero rated for VAT. Here the
builder can recover VAT and the purchaser does not have to pay VAT on the purchase of the
dwelling. Clearly, this adversely affects a landlord wanting to carry out a conversion and distorts
the provision of converted accommodation, in which the PRS excels.
21. So far as owner/occupiers are concerned they are privileged when compared with PRS tenants as are
social tenants. A landlord’s rental income is taxed so this burden ultimately falls on PRS tenants. There is no
tax however on any imputed rent on owner/occupied properties. When it comes to capital gains tax an owner/
occupiers principal private residence is exempt from capital gains tax; whereas the PRS landlord is fully
exposed to CGT liability. Even worse there is no rollover relief for the PRS landlord who sells a property
although they may want to reinvest in the PRS. This is why the PRS tenant is disadvantaged because these
extra taxation costs are passed on.
Ev 146 Communities and Local Government Committee: Evidence
Gearing in the PRS
22. In conjunction with Prof. Michael Ball of Reading University the RLA has recently carried out the first
ever in depth survey of landlord’s costs. This is not yet a published work. From the initial response 200 of our
members gave detailed costings and this showed that the level of gearing, on average, is at 55% based on
current property values. This is in line with Dr. Julie Rugg’s findings that the PRS is generally low geared.
23. Bearing in mind that as a national Landlords Association we tend to represent professional landlords
(the average portfolio size of our members is 8 as against the national average of 4), we have yet to investigate
how this relates to gearing of a particular group of landlords we have identified, those who were brought into
the sector in the boom leading up to the crash in 2008 using buy to let finance generally. It is clear from other
survey evidence and information held by mortgage lenders that this sector is far more highly geared and in
many cases may well be in negative equity particularly where properties were bought towards the end of the
boom. It is this type of landlord which we have already indentified which is under threat as and when interest
rates rise.
The nature of the PRS
24. Overall, the PRS is made up of small and medium sized landlords. Experience in the UK is in line with
other countries in this regards. Following the passing of the Housing Act 1988 there was a view held that this
would bring in larger corporate investors but this has not materialised outside specialist areas particularly
students, this picture is likely to change. The problem is that rented properties tend to be scattered in many
different locations. In practice, it is hard to put together a portfolio which would achieve economies of scale.
Smaller or medium sized landlords frequently self manage and therefore can achieve economies in this way,
particularly by avoiding having managing agents to manage their properties for them. Although it is the
Government’s hope, we do not feel that there is going to be an influx of corporate investment directly into
PRS renting. On the other hand there is a clear opportunity for indirect investment by providing funding.
Essentially this is what happened with the buy to let boom in that mortgage lenders provided funding for
property purchases and improvements.
Funding for the PRS
25. Traditionally, the PRS, although relatively low geared, has been highly dependant on debt funding from
banks and mortgage lenders. Traditionally, the high street banks have funded property purchase and
improvement for renting out and then the specialist lenders, the buy to let lenders, came into the market,
usually funded through wholesale borrowings as already pointed out. Normally, because of being small and
medium sized operators this has been by way of traditional mortgage funding, taking security on a property
and lending 60% or 70% of its value. Landlords have been able to use their portfolio to leverage in borrowings
eg to fund new property acquisitions or to improve their existing stock. Obviously, with the current loan to
value ratio for many existing landlords there is still considerable equity held by them which could continue to
be utilised in this way, if only funding were available. As always in a recession there are bargains out there to
be had if the money is available.
26. Going forward, however, the problem is whether traditional bank type debt funding is going to be
available. We have already highlighted the contraction in lending overall which is going to occur as banks
readjust their balance sheets following the credit crunch. It is critical to this Inquiry as it directly bears on how
far the PRS can contribute towards the increase of housing supply.
What part can the PRS play in increasing housing supply?
27. Previously, in this submission we have identified three potential ways:
(1) The purchase of new stock direct from builders.
(2) Conversions.
(3) Purchase of existing stock which in turn helps the sales chain that ends in the acquisition of
new properties by owner/occupiers.
28. We believe that the PRS can play a role in all of these but it needs two things. Firstly, the yield issue
needs to be addressed. Secondly, we have to develop a new funding model to supplement traditional debt/
mortgage funding and thirdly, through the tax system tax reform and incentivisation to bring about growth.
New funding arrangements
29. When it comes to new funding models further work is clearly needed to see what appetite there is for
this from funding institutions. We are not arguing for the existing debt model to be superseded, only to
supplement it. However, for any new funding model to be successful the issue regarding return on investment
for PRS landlords themselves, already referred to above, needs to be successfully addressed. Importantly, the
structural tax changes referred to below will also help. On the footing that generally speaking institutions are
not going to want to invest directly but are better providing funding for PRS landlords, we need to develop
ideas such as residential rent bonds to access the bond markets and equity investment.
Communities and Local Government Committee: Evidence Ev 147
30. Similarly, if equity capital could be made available to landlords this would provide another source of
funding. The problem at the moment is that the banks are fighting shy of the traditional lending model because
they have become over exposed to property generally, or so they perceive. The banks themselves who are
struggling to find funding. Clearly these new sources of funding, if they could be developed, could be focused
on providing new housing supply for renting in the PRS. After all, one advantage the PRS does have is a
growing market with strong demand.
Reforming taxation in the PRS
31. Essential to this is a structural reform of taxation in the PRS. For example there is an immediate step to
be taken by giving PRS landlords deemed trader status in the same way as furnished holiday lettings are
treated. Then at least CGT treatment would be brought into line in other businesses. The PRS landlord is even
more harshly treated than other businesses who do obtain various reliefs in respect of CGT eg rollover relief
and entrepreneur relief. It is appreciated that this will not sit easily with the Treasury’s wish to maximise
taxation but by stimulating the market and particularly construction other tax revenues come in eg stamp duty
land tax, income tax from workmen, VAT on the sale of furniture and equipment.
Tax incentives
32. As well as this structural reform the Association strongly believes that tax incentives are needed which
would help boost the supply of new housing via the PRS involvement. These are twofold:
—
Private Rented Sector Expansion Scheme:
(1) The Business Expansion Scheme was originally introduced alongside the introduction of
the current Assured Tenancy Regime but ended a long time ago. It stimulated growth in
the PRS. It led to new build. Our scheme is modelled on the same kind of principles. It
should be aimed at the provision of new accommodation.
(2) By providing tax breaks for new build and the creation of new units by conversion/
extension, not only is this much needed accommodation provided but as already pointed
out the Government can increase tax receipts. Now is a good opportunity for land to be
acquired to provide new housing (for instance what about all the empty pub sites?).
(3) What we call the Private Rented Expansion Scheme, modelled on the old Business
Expansion Scheme, should be reintroduced to stimulate growth in the PRS. As already
stated there is still good demand for rentals and it is likely that this will increase. It is not
therefore going to be a case of new dwellings being provided only to stand idle.
(4) We should also look at using tax breaks to encourage landlords in the PRS to buy up new
build units which are standing vacant (or vacant conversions) which have been carried out
with a view to being sold so far unsuccessfully to the owner/occupier market.
(5) What form should the new Scheme take? Firstly, there should be indefinite capital gains
exemption so long as these properties are kept within the private rented sector for, say,
five years. Realistically it will be some time before there is capital appreciation anyway
so there is no immediate loss of tax revenue.
(6) Secondly, all rental income for these newly created units should be tax free for five years.
Obviously the landlord would not then get the benefit of related expenditure which was
otherwise tax allowable; nor related tax relief on interest. As these are new units of
accommodation by definition there would be no loss of tax revenue because at the moment
tax revenue would be received for these properties anyway as they are not currently in
existence/use.
(7) Just as importantly, we would have a ready source of new homes to rent for those in
need. Pressure would therefore be taken off local authorities, particularly local authority
homelessness sections. There would be a saving on costly provision of bed and breakfast
type accommodation and expensive contracts to provide short term housing for the
homeless.
(8) All round this should be win win not just for tax revenues but for the economy as a whole
particularly as it would stimulate the down and out construction Sector. People would get
back in to jobs with a saving on benefits. It would help regeneration particularly existing
derelict sites.
(9) The Business Expansion Scheme was proven to work so it is a tried and tested means of
promoting economic development.
—
Self Invested Pension Schemes (“SIPPS”):
(1) To promote employment, retention of skills in the construction sector and to take up empty
units the Government should allow self invested pension funds to invest in residential
units, up to a maximum purchase price of £250,000 per unit outside London (with a
suitable adjustment for London prices).
Ev 148 Communities and Local Government Committee: Evidence
(2) The units must then be let out by an ARLA, NALs etc affiliated letting agent. These
measures would prevent any abuse, mop up unsold units, allow part finished developments
to be completed, free up capital for both building companies and banks. The tax take
would also increase as would employment taxes as a gradual improvement in prospects
would follow.
(3) The real cost of this measure is negligible yet it could reap very great benefits very easily.
It is suggested that this be introduced for a limited period of five years in order to stimulate
demand. There is capital in these funds waiting to be invested.
Although we have talked of the tax treatment of new properties there is a strong case that
this should extend to investment in existing properties to also assist in generally
stimulating the market.
The current crisis
33. Confidence has slumped and demand is generally low. Unfortunately, there is no magic bullet; no instant
remedy which will bring about large scale change. If there was somebody would have thought of it by now.
We are going to have to claw our way out of the current mess. The RLA believes that the PRS has a role to
play in helping promote sustainable growth in housing supply especially because of low gearing there is equity
available. Properties acquired at the right price can provide the rental yields required to stimulate investment.
We do need to find new ways of providing the necessary funding but for a lowly geared business model which
can be achieved. However, the taxation regime is punitive and stands in the way of growth for the Sector. It
urgently needs reform. Tax incentives which we believe will be tax neutral (because they will provide other
forms of revenue for the Exchequer) are a way of kick starting investment in this way. By channelling
investment through tax neutral tax incentives to new properties growth can be achieved.
34. What we advocate is both our proposed tax incentive schemes should be focused at the lower end of the
market in value terms and also be concentrated on provision of new units. This does not mean just brand new
properties but also bringing back into use empty units, as well as promoting conversions/extensions. It lends
itself to new units being provided above shops, as another example. We acknowledge that safeguards are
required to prevent abuse but feel that these can be successfully put in place.
The Planning System
35. We consider that the planning system as it presently operates is broken and no longer fit for purpose. It
is standing in the way of improving housing supply. We have made submissions to this effect both to this
Committee and to the Government’s consultation on the proposed National Planning Policy Framework we
support the thrust of the draft Framework. We are extremely concerned at the hysterical opposition which has
been whipped up against these sensible measures. Indeed, we feel that the Framework needs to be clarified and
strengthened to help grow both housing supply and particularly the wider economy.
Houses in multiple occupation (HMOs)
36. One particular area of expertise for the PRS is providing shared housing and bedsits especially for
the young.
37. The Association, along with many other landlord representative organisations consider that it is absolutely
vital that as a matter of urgency the planning regime for these small HMOs needs to be revisited. Unless
radical changes are made and the old planning regime is reinstated this will stand in the way of the urgent
need to provide shared housing and bedsit type accommodation, particularly for young people. This is
particularly important in the light of the change to the shared accommodation rate for local housing allowance
and housing benefit purposes.
38. Some 30 local authorities are imposing Article 4 Directions requiring planning permission for a change
of use from a single dwelling to a small HMO (occupied by up to six unrelated persons). We believe that this
power is being abused and is highly discriminatory against very young people for whom the PRS caters. There
is a pressing need for this kind of shared housing. It is not the function of the planning system to determine
who can live where or to impose quotas on the numbers which is what is happening as a result of the changes
to the planning law originally implemented by the previous Government. We believe that this whole situation
calls for an urgent review. It will clearly inhibit conversion of properties and changes of use to provide the
required accommodation and stand in the way of expanding housing provision.
Conclusion
39. We believe that urgent action is needed to grow housing supply. At the moment we cannot turn the
supply tap on but what we can do is to put in place the ground work along with incentives hopefully to kick
start some growth. The PRS has a significant part to play in this as it is the one sector of housing provision
which is still growing. However, this should not be about squabbling over existing stock; rather the imperative
is for new stock. The planning system needs to be reformed particularly in relation to smaller HMOs. We need
to look at new ways of housing finance. The present tax system for the PRS which discriminates against renters
Communities and Local Government Committee: Evidence Ev 149
in the private sector needs structural reform. Changes need to be made to the VAT regime. To help the supply
we have put forward two suggested proposals for tax incentives. The PRS has a role in helping to promote
growth but only if the reforms we have referred to in this evidence are implemented.
October 2011
Supplementary written submission from the Residential Landlords Association
There is £101.7 billion invested into just over 800,000 Sipps currently. There are different types and
characteristics but of the higher value more flexible type which would have funds and the ability to undertake
the investments required there are 200,000 or 25% of the total number.
My original estimate of 50,000 that would be interested or likely to take up such an offer would appear to
be on the conservative side according to those I have spoken to. There is the potential for a significant
contribution to the economy, that would grow further with stamp duty, furnishing, etc etc.
January 2012
Written submission from Paragon Group
Executive Summary
— Tenant demand is already outweighing existing stock in the private rented sector (PRS).
— Private rental is the only growing tenure type in the UK. The PRS is already the dominant housing
choice with transient sectors of the population including students, economic migrants and those who
relocate for employment purposes. Long-term demand in the PRS is forecast to rise, fuelled by major
socio-economic factors and a contraction in the owner-occupier and social housing tenures.
— Private landlords are the backbone of the PRS, accounting for 89% of landlords and 71% of
properties. Buy-to-let financing has enabled growth in the PRS and incentivised landlords to improve
their properties, driving up standards in the sector.
— Experienced private landlords do not typically purchase new build properties but tend to invest in
existing properties because rental demand is focussed overwhelmingly on established communities
with good local facilities and transport links. Landlords know the market conditions of the area in
which they are investing and choose properties that correspond to local demand.
— Institutional investment has only ever played a limited role in the provision of housing and is, by its
nature, unsuited to the fragmented, dispersed nature of the rental market because it can only deliver
value from economies of scale. There is a distinct lack of tenant demand for the type of properties
in which institutions tend to invest except in very specialist sectors.
— The most effective way to tackle the issue of supply in the PRS is to foster a regulatory and economic
environment that encourages a committed base of landlord investors and lenders.
About the Paragon Group
Paragon is the leading independent provider of mortgages to residential property investors in the private
rented sector through our specialist brands, Paragon Mortgages and Mortgage Trust.
We launched our first buy-to-let mortgages in 1995 and have increasingly focused our business on
professional landlords who have proven experience in purchasing and letting residential rental property. This
focus is reflected in the excellent performance of the Group’s buy-to-let mortgage assets and our reputation as
a leading voice in the sector. We currently have approximately 40,000 landlord customers and manage over
£9.5 billion of loan assets.
In addition, we operate a specialist loan servicing business for third parties through our Moorgate Loan
Servicing brand. The division offers a professional, flexible, efficient and cost effective proposition to lender
clients to help them manage their loan assets effectively. Clients include building societies, investment banks,
specialist lenders, commercial banks and other financial services companies.
The Role of the Private Rented Sector in Meeting Housing Need
3.4 million households in England, nearly one-in-six, now class the private rented sector (PRS) as home, an
increase of 1.4 million since 2001. Private renting is the only growing tenure type although it is still small
compared to other European countries and the historic highs reached in the UK during the 1960s.
The PRS is already a popular choice with transient sectors of the population including students, economic
migrants and those who relocate for employment purposes. Long-term demand in the PRS is forecast to rise,
fuelled by major socio-economic factors such as the growing number of single person households and people
starting families later in life. There is a changing perception of renting, with it increasingly seen as a tenure of
choice rather than the poorer choice of either social housing or ownership.
Ev 150 Communities and Local Government Committee: Evidence
First-time buying is declining but it would be inaccurate to portray this as being caused by buy-to-let
investors. Mortgage finance has become harder to access as lenders have responded to the credit crunch by
requiring larger deposits (the average loan-to-value fell from 95% in 1994 to 77% in 2010) but rising levels
of graduate debt, affordability constraints and lifestyle choices have also contributed to the decline of firsttime buying.
The contraction of the social housing sector has meant a greater role for the PRS in housing people on lower
incomes and the Government’s decision to move social housing rents more in line with market rates in order
to finance new housing supply will make private rental an option for many who would not have previously
considered it. The Localism Bill is also likely to push more tenants who would previously have not considered
renting privately towards the PRS.
Housing supply is failing to meet demand. The UK population is expected to grow to 71.6 million by 2033
with an estimated 290,000 new homes required each year to satisfy that demand. Only 102,500 homes were
built in England last year. In the PRS tenant demand is already outweighing existing stock, with the Association
of Residential Lettings Agents claiming the sector is operating at capacity.
The current economic environment is exacerbating the underlying pressures on housing. The lack of
consumer confidence and the drying up of mortgage finance has resulted in a dysfunctional market that places
severe pressure on the PRS, which in turn filters through to rental inflation.
Housing Supply in the PRS
Private landlords
Private landlords are the backbone of the PRS with 71% of properties in the PRS owned by individual
landlords. While there is no such thing as a typical landlord, the average landlord is just over 50 years old, is
financially astute, has been letting property for 11 years and holds an average of eight properties. The idea that
the PRS is dominated by novice landlords is a myth; most individual landlords consider themselves to be
professional investors and nine out of 10 have more than six years’ experience in renting out property.
Contrary to public perceptions, landlords do not usually buy up new build properties but tend to invest in
existing properties because rental demand is focussed overwhelmingly on established communities with good
local facilities and transport links. The PRS grows through landlords purchasing and improving existing
properties which avoids the new property premium, offers scope for refurbishment (and therefore higher yields)
and is aligned better with tenant demand. DCLG figures show 77% of property owned by private landlords
was constructed pre-1980.
Furthermore, private landlords typically know the market conditions of the area in which they are investing
and so choose properties that correspond to local demand, often holding a mix of different property types to
match the needs of different tenant types.
The flexibility afforded by private landlords’ investment in diverse property portfolios to respond to this
variation in tenant demand is one of the reasons why private landlords are the dominant suppliers to the PRS.
Another important factor is that the private landlord model is much more economically efficient than any other.
Private landlords will often discount their own efforts in managing and improving their properties, lowering
the cost of a portfolio and leaving tenants as beneficiaries of lower rents as a result.
Buy-to-let support of the PRS
Buy-to-let has increased choice for tenants and is an important (but not exclusive) source of finance for the
PRS. The rapid growth in the PRS and the number, and value, of buy-to-let mortgages since the late 1990s
coincided with a period of strong economic growth and an increase in demand for flexible, high quality
rented accommodation amongst several demographic groups. The growth in the market has also prompted an
improvement in housing stock as landlords have been incentivised to improve their properties.
Buy-to-let was significantly affected by the credit crunch with an 81% decrease in the value of new loans,
and the number of buy-to-let products declining by 90% from July 2007. Although buy-to-let lending has
entered a period of recovery, it remains difficult for private landlords to access finance for property purchases,
thus contributing to the current market dysfunction.
Institutional investment
There has been a great deal of comment on the role of institutional investment in the current debate on the
housing supply crisis. For many, it appears to be a panacea to the structural problems affecting the housing
market. However, institutional investment has only ever played a limited role in the provision of housing, even
when it has been encouraged by successive governments. Its current role extends only to students, the elderly
and large housing developments.
Communities and Local Government Committee: Evidence Ev 151
There are several reasons why institutional investment has not had the impact expected by some policymakers. This type of investment is, by its nature, unsuited to the fragmented, dispersed nature of the rental
market because it only delivers value from economies of scale. The kind of properties that institutional investors
are likely to invest in through “build-to-let” schemes, such as two-bedroom flats, in large purpose-built
developments are unattractive to tenants and there is already an over-supply of this type of property caused by
pre-credit crunch property developer and investment club activity.
Institutional investment also works against the development of generally mixed communities because of
the preference for larger developments. The Government’s Rugg Review noted that encouraging institutional
investment via build-to-let might create rental “silos” and make the market more inflexible.
Furthermore, while private landlords do not charge for their time, investing instead their “sweat equity”, the
kind of management companies that the institutional investment model requires can significantly affect the cost
of managing properties, reducing investment returns, creating inflationary pressures on rents and raising
questions about economic viability.
Paragon does not oppose attempts to encourage institutional investment, notwithstanding the above concerns,
but it is important that institutional and individual investment should be seen as complementary and treated
equally in terms of regulation, tax breaks and other fiscal incentives. Any skewing of incentives towards
institutional investors could actually result in a contraction of supply over the medium term if individual
investors feel they are not competing on a level playing field.
Alleviating Pressure in the PRS
Paragon believes that there is stock available within the UK for landlords to invest in, and there is a will
among individual investors to purchase that stock. However, the muted wholesale credit markets and the lack
of consumer confidence in the owner-occupier sector have stalled the usual operation of the housing market.
European Commission proposals that seek to bring buy-to-let into the scope of consumer regulation would
further restrict finance and hamper the delivery of new PRS supply.
As stated above, private landlords—the backbone of the PRS—do not typically invest in new build property,
and will only do so where there are proven and sustainable levels of tenant demand. But government initiatives
on public land and empty homes are welcome for the effect they may have on reducing the pressure on different
tenures. The most effective way to tackle the issue of supply in the PRS is to foster a regulatory and economic
environment that encourages a committed base of landlord investors and lenders. It is also important that
governments work together to achieve solutions to the global economic problems that have constricted the
supply of finance.
The Coalition Government has so far shown a good understanding of the PRS and has stopped further layers
of landlord regulation. It is another myth that the sector is not regulated—there are over 50 Acts of Parliament
and 70 sets of regulations that govern the sector. Increasing this regulatory burden risks causing landlords to
leave the sector and so put further stress on supply.
There are tools that can be used to further encourage landlord investors and create a business environment
more akin to that of countries with comparable private rented sectors where landlords benefit from more
competitive taxation regimes and are able, in some cases, to offset capital losses. Paragon would welcome any
initiatives that are intended to encourage private landlord investment.
October 2011
Written submission from the National Housing Federation
1. Introduction and Summary
1.1 The National Housing Federation represents 1,200 independent, not-for-profit housing associations in
England. Our members provide two and a half million affordable homes for more than five million people.
Our members are the main providers of new affordable homes, they will be building 90% of homes delivered
under the Affordable Homes Programme 2011–15 (AHP) and currently build around half of all new homes.
1.2 We welcome the opportunity to submit evidence to the Communities and Local Government Committee
inquiry into the financing of new housing supply. The focus of the inquiry is on steps Government could take
to ensure that resources are available to support future housing delivery.
1.3 In a difficult economic climate and with political focus on reducing the public deficit it is inevitable that
there will be very tough decisions to be made about where and how best to target scarce public subsidy in
housing in the context of rising housing need. We are supportive of the Government’s ambitions to deliver
170,000 affordable homes over the next four years and other steps it has taken to boost overall housing supply.
However, we are concerned by some of the consequences of these policies on new supply and the erosion of
the sector’s capacity.
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1.4 Due to the considerable overlap in the committee’s questions we have set out the background of the
AHP and the financing of new housing supply below, followed by a response to the questions. The key points
in our response are:
— We have a number of concerns about the implications of the new investment model and believe that
the model is unlikely to be sustainable far beyond 2015 in its current form. Government needs to
reconsider how Affordable Rent can work alongside a different model of investment.
— Government needs to reconsider its approach to assessing value for money of revenue versus capital
subsidy for the provision of affordable homes. We do not believe that a revenue based model offers
best value for money for the taxpayer.
— Government should focus on securing the best delivery environment for housing and helping to
support stable lending. We have made a number of recommendations in this area.
— Government should consider our recommendations to increase the capacity of housing associations
to fund new homes and help attract institutional investment.
2. Public Subsidy For New Affordable Homes
2.1 In the 2010 Comprehensive Spending Review (CSR) the capital budget from Government to build
affordable homes was slashed by 63%. The Government has allocated resources of £4.5 billion for the AHP
over the next four year period to deliver up to 150,000 homes. The gap left by the drastic cut in capital grant
will be filled, in part, through revenue from the introduction of a new affordable rent—up to 80% of the market
rate—to be charged for most newly built homes and a proportion of re-let properties.
2.2 The new investment model leads to a much greater level of development risk being transferred to housing
providers and requires much higher levels of borrowing to deliver new homes.
2.3 Before we turn to focus specifically on the financial implications of the new AHP it is first worth
considering what will be delivered as a result of the proposals. We have a number of concerns about potential
weaknesses of the new approach:
— the model fails to support the delivery of a range of housing tenures to meet a range of local
housing need;
— the model makes delivery difficult in low value areas, in particular in regeneration areas, due to the
limited additional financial capacity that can be secured through higher rents;
— the exclusion of some small and medium sized provider, who unlike national organisations are unable
to reinvest capacity from high value to low value areas;
— the uncertain future for affordable home ownership products that remain in high demand and help
people on moderate incomes to buy a home;
— the impact of a number of fundamental weaknesses and risks inherent in a revenue based model of
development for both government and providers;
— the impact of welfare reform on the viability of the new investment framework and the conflict in
policy especially around larger homes and under occupation;
— affordability and work disincentive implications for tenants paying the new intermediate rent;
— considerable local authority opposition to the new model and the impact that this could have on
delivery; and
— gradual erosion of housing association capacity and longer term sustainability implications.
2.4 We believe that a sustainable investment model should be underpinned by a number of key principles.
For the sector and government it should:
— support the development of affordable homes at scale, with a range of tenure options;
— be viable for housing providers to deliver;
— support flexibility and innovation;
— offer excellent value for money for the taxpayer;
— consider quality, tenure and need—not just number of units and average grant rates;
— have a balanced approach to risk sharing between government and housing associations;
— enable a range of providers to be able to develop, ensuring maximum use of sector capacity; and
— offer genuine freedoms and flexibility to local government and their housing partners to meet local
housing need.
2.5 For people in housing need investment in affordable housing should:
— deliver homes at a scale that meets local need;
— support the delivery of a range of affordable homes at difference price points and tenures;
— deliver sufficient numbers of specialist and supported housing, larger and rural homes;
— offer solutions for areas of the country which have lower land values;
Communities and Local Government Committee: Evidence Ev 153
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enable regeneration activity to be funded;
be able to respond flexibly to local needs; and
support job creation and local economies.
3. Financing the Delivery of New Affordable Homes
3.1 Private finance going into housing supply has historically come from two sources; conventional corporate
debt provided by financial institutions and bond finance either publically listed or privately placed.
3.2 Debt finance has been the major source of private funding for the housing association sector. Banks have
made long-term finance (for periods up to 30 years) available at exceptionally competitive rates. For housing
associations whose balance sheets are modestly geared, this conventional corporate debt was the most cost
effective way of funding the needs of their business in terms of financing growth through development and
acquisition of new homes.
3.3 However, there are questions surrounding the continued availability of long-term debt finance and the
cost of capital. Banks are coming under considerable regulatory pressure and are being encouraged to match
the lifetime of their assets with their liabilities. Many lenders are of the view that that there will be an increasing
move towards shorter or medium term finance of between five to seven years. Where long-term conventional
corporate debt finance remains available, it is likely that lenders may demand an ability to reprice at intervals
of five years. For many housing associations this may well represent a refinancing or repricing risk that they
are unwilling to bear.
3.4 This suggests that the funding of the affordable housing sector may well be moving to a more polarised
position with the banks providing short-term finance which could be on a individual project rather than a
corporate basis, with the capital markets and a wider pool of institutional investors being the main source of
long-dated debt.
3.5 Bond finance is well established as a mainstay of housing association financing, with over £8 billion of
current bonds outstanding. Even in a volatile market. There remains good institutional appetite for bond finance
from the current investor base.
3.6 Raising finance via the capital markets is not solely limited to the larger housing associations issuing in
their own name. Institutions like The Housing Finance Corporation