Councils negotiate new model to finance housing

A number of councils are in discussions over a new model aimed at making it easier for them to gain income from private rented sector housing.

This week, a partnership between Legal & General Investment Managers (LGIM), construction firm Laing O’Rourke and property management firm Touchstone announced the new venture.

The project comes in the same week that a think-tank, the Local Government Information Unit, released research suggesting councils need to be braver when seeking news ways to provide housing.

The Legal & General venture will see the investment managers LGIM providing capital – estimated at around £22m – that would enable the building of up to 2,000 new homes on council land.

Pete Gladwell, head of public sector partnerships at Legal & General Property, told Room151: “We found that a lot of local authorities know they want to do this but resources in-house to drive through a whole development are limited.

“When they look at a patch of land and think about getting 100 homes on it, the vision is there, but resources to achieve it can be lacking – particularly after the cuts to departmental budgets.”

The model would see councils lease their land to LGIM, which would then fund Laing O’Rourke to build homes which would be leased to the local authority, with management provided by Touchstone.

All rental income above lease and management payments would be retained by the local authority, allowing them to create an additional revenue stream, Gladwell said.

The model also includes an option for the homes to be returned to council ownership at the end of the lease for £1, enabling the public sector to benefit from capital growth.

Gladwell said “The length of the lease would determine the yield – the longer the lease the lower the annual yield. But even when the properties are on L&G’s balance sheet, we can insert pre-emptions to effectively ensure the LA retains the necessary controls.”
And he emphasised that the model allowed councils a large degree in flexibility to meet their accounting needs.

“There is no one single take-it-or-leave it investment package,” he said. “At the moment, councils have two options – borrow the whole amount from the PWLB on their balance sheet, and take all of the development risk, or sell the site to a developer and get a capital receipt. We are offering a full spectrum of options between those two book ends.

“It really comes down to the section 151 officer and how they want to treat it on their balance sheet. We can look at setting up special purpose vehicles or putting in contingent guarantees.”

He said that the partnership would also provide flexibility for authorities to decide the mix of tenures in individual schemes.

“Outside of London, several authorities have said they are looking to create aspirational build to rent that sets a new tone in their town,” he said.

“Other authorities might want more social rent. Obviously, if they want to do that, the revenue flow to them from the properties would be lower, but they might be meeting a different local social need.

Councils would also be able to choose whether to get an under-written income from Touchstone or just agree to take what was left after operating fees were paid each year, he added.

Gladwell did not put a figure on how much LGIM would invest in the venture, but said that construction costs were being roughly calculated at £110,000 per home.

He said that partnering with a local authority provided advantages for LGIM.

“For us, it is about making the most of our internal sources of long term investment that seek long term, low risk income streams.

“The benefit in partnering with a local authority is that they will know their local housing need better than anyone.

“I need to invest to meet long term social need, and the council knows, and represents, that long term social need.”

Research from the Local Government Information Unit concluded that councils will need a “shift in mindset” before they are ready to become “housing delivery enablers”. The paper also expressed concern that there are few good examples of innovation in housing provision.

“This role is not without risks for local authorities,” says the LGIU, “To ensure that any delivery models are financially robust will take time and resources.

“There will also need to be adequate oversight to monitor the type and quality of housing that is delivered by partnerships, something that requires long-term and coherent governance.”

Photo (cropped): Council flats in Warwick by Lydia, Flickr