Councils explore collective model for new homes

The Local Government Association is consulting with councils about a new collective investment model which could unleash a large scale affordable housebuilding programme free from public subsidy.
The association has written to local government chief executives to gauge appetite for a plan which would see councils band together to gain institutional investment for thousands of new homes.

The proposals are aimed at reducing the costs of entry to gain such finance – often prohibitive for a council acting alone – by spreading them across a consortium of participating councils.
The letter, seen by Room151, says: “The model of support we would like to test with interested authorities involves the LGA assisting a group of councils, collectively, access institutional or other corporate finance, to build new homes.
“Given that accessing this funding opportunity usually relies on a certain scale of housing delivery, (possibly a minimum of 500 units), the aim is to achieve scale through parcelling together schemes from several councils”

The plan would see the LGA funding legal, property and financial consultancy costs upfront and sourcing and structuring finance from investors to meet council needs.
It would then recover its cash, plus an “industry standard percentage”, from the finance raised, a cost which would be spread across all participating councils.
One senior council official who did not want to be named told Room151: “The potential financial gains from institutional investment are significant, but the entry costs are high – comparable to a PFI deal – and for a single district without sufficient land supply such a scheme is not viable.
“However a collective scheme could work.”

The LGA believes that favourable rates could be achieved from institutional or corporate funders due to the scale that could be achieved by collaboration. The lending would be made outside of councils’ housing revenue accounts, and would be available to councils who have reached their HRA borrowing cap, as well as those who are just looking for an alternative way of funding new homes.

The LGA says it would offer support to the participating councils through the process. “Getting the process right can provide much needed homes as well as play a significant part in a councils income generation and growth strategies,” it said. Initial work has been carried out by the LGA with not-for-profit organisation Social Finance to study 16 example development sites in different council areas across the country.
The project tested the sites’ viability under different scenarios – providing housing at Local Housing Allowance rent levels, market rent levels and a mix of sale and rental.

This report demonstrated that 14 out of the developments could be self-funded with mixed tenure and 12 would be attractive to investors based on a total return on investment above 7%. The LGA is seeking information from interested councils on potential new sites before discussing whether there is a willingness to take part in a collective arrangement. The letter said: “We appreciate there is not a one size fits all approach to council-led housing development and there are various options and choices available to local authorities which will be guided by local priorities and issues such as appetite for risk, and desire for influence or control.
“We would therefore like to explore with interested councils their individual ambitions for development and to understand whether a group of like-minded interests could be established.”

In 2012, London Borough of Barking and Dagenham completed a deal with an institutional investor to fund two affordable housing developments totalling 477 homes, but there has been little progress elsewhere.
Separately this week, the government announced that housing associations will be able to bid for cash from a new round of £800m funding through the Affordable Homes Programme.

Photo (cropped): “Scaffolding and brickwork at Epic Fireworks HQ” by Epic Fireworks is licensed under CC BY 2.0