Local authorities want to develop new homes but, says Jonathan Bunt, they need more clarity that councils have the powers to develop affordable homes through alternative structures.
There is an ongoing debate about whether local authorities should be prioritising the development of new social housing or focusing their attention on the delivery of more affordable homes.
What is most telling is the difference in the debate between London and outside of the capital, and how that is serving to drive innovation. The factor potentially suppressing that innovation is the nervousness—perpetuated by risk averse legal colleagues— around the powers local authorities have to deliver new homes.
It is fair to say that everywhere I have been recently, elected members of all parties, have been unequivocal in their desire to see more council housing built. Many have the right to buy receipts to fund new build housing, but those funds can only contribute up to 30% with the balance having to come from council resources.
The challenge is that, to do that, the balance of funding has to come from the Housing Revenue Account and, put simply, many authorities— and certainly most in London—do not have the headroom to use it as an option.
The HRA subsidy buy out in 2012 generally moved councils in to a space where they had a reasonable opportunity to address the backlog in decent homes, with scope to add some new properties along the way.
But those intentions have been damaged by a succession of government policies on rent setting, right to buy discounts and welfare reform leading to lower income, fewer assets and higher demand.
In particular, aspirations for new build were blown out of the water by the cutting of social rents by 1% for four years causing millions in future re-investable income to be wiped out of business plans overnight.
The inevitable response has been to revert to the core capital investment for the benefit of existing tenants, addressing major maintenance backlogs and renewing kitchens and bathrooms, whilst still servicing the £13bn of debt taken on by the majority of councils.
In parts of the country, some councils have been very successful in adding HRA stock. Birmingham, via Birmingham Municipal Housing Trust, and others have managed it as part of broader mixed development or regeneration, such as in Ipswich.
These have, however, generally been achieved in areas where land values and construction prices make social rent models viable. That does not work even in the most relatively affordable parts of London and the government shows no indication of easing the 30% cap (to support new affordable housing).
It is against that background that local authorities, to deliver viable schemes, have explored alternative models and what is within the boundaries of their powers. In his recent contribution for Room 151, Stephen Sheen challenged how local authorities are looking at their freedoms and, whilst, I agreed with the vast majority of the article, I found the perspective on powers frustratingly narrow. In Stephen’s defence that article was set in the context of investment in commercial property but I have encountered many lawyers using the same language on housing ventures.
The central legal argument often focuses on the view that local authorities are acting in a commercial manner leading to unequivocal advice that housing has to be delivered through a trading company.
The reality is that local authorities are not acting in a commercial manner for profit because, if they were, they would not be letting properties at sub-market rent levels prioritising those in relative housing need rather than seeking to maximise return on its investment. Additionally, many local authorities are actively pursuing the physical development of areas to stimulate local economic growth as part of their broader regeneration plans.
When viewed through that prism, a much broader range of structures become available to councils to pursue the delivery of local affordable homes including creating limited liability partnerships, charities and wholly owned registered providers. The specific option pursued depends on the particular objective that each local authority is targeting. Those could be rent levels, specific sources of funding, capital growth and the transfer of risk.
These structures mean that genuinely affordable homes, meeting a wider range of housing needs as affordability problems move up income levels, can be developed, or purchased, using receipts that would otherwise have to be repaid to government.
That it not only has to be repaid but that a steep rate of interest is also levied, adds to the pressure on councils HRAs: cue fewer kitchens and bathrooms being renewed. Additionally, although not at the social rent levels members would prefer, rents are typically well under the government prescribed definition of affordable at 80% of market rent.
Through the right structure, as well as making the use of right to buy receipts an option, a number of different funding sources come in to play including section 106 affordable housing contributions and grant.
It also opens up different options to present to the market for the balance of funding rather than relying solely on the Public Works Loan Board. Funders will be attracted to a degree of “equity” in the structure and that will impact on the arrangement they can offer.
Such offers are not as easy and can carry a different degree of risk compared to going to the PWLB but, often, they are cheaper over the life of the investment and are much more flexible to enable schemes to be initiated. By bringing in that type of finance, councils can also demonstrate that the new homes will have sufficient monies for proper management and maintenance and a fully funded, ring fenced life-cycle fund. These are not things local authorities have universally strong track records on and give enormous assurance to lenders on the long-term viability of the vehicle.
Given prevalent legal views, however, the greatest risk is that too many authorities are dissuaded from pursuing such solutions even though they deliver great outcomes locally (plus typically a small surplus for reinvestment).
In addition to more freedom within the HRA, the call, therefore, should be for the government to give clarity that local authorities have the powers to develop affordable homes through alternative structures and to ease the worries of our lawyer friends.
Jonathan Bunt advises local authorities on investment, development and funding opportunities, particularly in relation to housing and regeneration. He is a former strategic director at London Borough of Barking and Dagenham.