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Ideas invited to kick start social housing
Contract Journal; April 2008

With little private development underway to subsidise social housing starts, the Homes and Communities Agency is inviting contractors to come up with alternative ideas to kick-start the sector. Mark Smulian looks at the funding options available

The door is open to builders and the rulebook - if not torn up - has lost it rigidity.

Social housing has been hit by the downturn, and the Homes and Communities Agency (HCA) is determined to get it going again. It has declared itself open to any suggestions from builders about deals that could get sites working. Combinations of public and private investment, land and profit are all on the table, and it actively wants builders' ideas.

Having assumed that a large chunk of the social housing would be delivered from section 106 planning gain deals, and cross-subsidy from homes built for sale, the HCA now finds there is precious little development to subsidise anything else. Deputy chief executive Eamonn Boylan says the quango stands ready to help.

"We are very open to any ideas from builders about how we deploy resources to get work started in a market that has stalled," he says.

"The HCA cannot simply supply development finance, but we are interested in talking about whether we could de-risk any project."

Boylan says the agency wants to engage with public bodies - mainly councils - that own usable land. These sites could be put into social housing projects financed by HCA grants and councils' borrowings, with builders "working perhaps in a purely contactor role, but also possibly in models in which they share risk and rewards," he says, adding, "we do not want to be prescriptive".

One stumbling block is getting any additional borrowing off the public sector's balance sheet, something the HCA is exploring with the government.

John Slaughter, director of external affairs at the Home Builders Federation, says there are many ideas around but as yet "no silver bullet".

Maintaining workflow

He expects that support from councils through land or money will be important in maintaining a flow of work. "It seems to us that traditional section 106 and cross-subsidy are not going to work, and in their absence the only other obvious source is local government finance," he says.

"Councils can put in land and acquire assets in models where builders can do the work and take profits later, or share risk and rewards. "Nothing is ruled out as everyone is looking for new models, so it's a good time for builders to be talking to local government and trying to think creatively about new structures."

Chris Durkin, chief executive of Inspace and on the developers group that advises the Mayor of London, says schemes that were planned as mixed tenure are now not viable. "The vast majority of the RSLs have been looking to redesign their projects with private becoming intermediate rent or affordable rent," he adds. "But for this, further grants are required from the HCA."

"It has brought forward significant amount of funding to help support schemes otherwise unviable. Obviously there is the argument that this strips out funding from the future, but we need today's solutions for today's problems."

Stalled projects

Many projects are stalled in the pipeline and the housing associations have the problem that they were encouraged to build for sale by the Housing Corporation and now cannot sell those homes. Peter Taylor, chief executive of John Laing Partnership Housing, says this means that the associations do not have the expected sales income available to reinvest, and while most remain financially sound, the banks' position is so poor that they are wary of lending even to associations.

He says: "Banks do not want to lend for private housing and we are looking with housing associations to see what we can do to share risk. "There could be joint ventures where they put in land and we have a build licence and pay for the land at the end of the process, or a model where they put in land and get homes for affordable and intermediate rent at the start, and we defer the private sale homes for a couple of years."

Stephen Teagle, managing director, affordable housing and regeneration, at Galliford Try, has been impressed with the HCA's response to the crisis.

"It has acted in a very applaudable way to keep housing associations developing, and been very good at acting to clear blockages," he says.

"There are its grants from the National Affordable Housing Programme, its infrastructure funds, equity stakes in projects and gap funding, the HCA has used all of these and been very flexible and a very positive regime to work in." Until recently most social housing developments would have been mixed ones of homes for rent and sale. Lack of mortgage finance has hit the latter and something has to take its place.

This could be private renting, but Teagle says developers will increasingly offer homes for shared ownership; something he thinks will outlast the downturn.

Shared ownership allows buyers to raise a mortgage on part of their property's value and rent the remainder, progressively increasing the proportion they own as they can afford to. It is common in social housing, but has rarely been offered by private firms.

"I think the idea of developers offering shared ownership is here to stay because it works when mortgage finance is scarce," he says.

Innovations such as joint ventures and rapid investment of public money might blunt the worst of the recession's effects on social housing, but what happens after that?

It's a point that worries Slaughter. He says: "One practical step the HCA has taken has been to pull money forward to be spent now that would have been spent in later years.

"Everyone is concerned to get through the worst of the downturn but the issue is what happens after 2010/11, when there will be presumably a large number of other calls on central government money."

Boylan say the HCA programme in 2009/10 will exceed 3bn, up from the 2.75bn originally planned.

"That is being done by bringing money forward from year three of this spending round and we are talking to the government about the medium term," he says. "There are tough choices. Do we use this money now to keep projects going and people working? We have felt we have little option, but we recognise there could be a medium-term problem."

The HCA's stance may mean that some builders at least have the luxury of surviving long enough to worry about the post-2011 world.

Is private rental the answer?

Private rent is the sector no-one has made work, despite regular initiatives. It has been saddled with a poor public image and, until very recently, anyone who could afford a mortgage had little financial incentive to rent. Falling incomes and tight mortgage finance make things look different, some builders think.

John Laing Partnership Housing has set up a private rental arm named Intro Homes Lettings, backed property industry investors.

"We probably would not have looked at private rent sector, but there is now a lot of interest," says chief executive Peter Taylor.

The company has avoided the cost of setting up a property management arm by using the lettings divisions of estate agents with which it already deals.

Chris Durkin says that the existing model needs to change. "The time has never been better to stimulate the private rental sector," he adds. "If this is not a short term slip then private investors may not be attracted back to the market. RSL's are the best equipped to move their business to rental streams."

Stephen Teagle believes the industry can get financial institutions interested now as the yields are now good enough at 5%-6%. "It's working because of rents being lower and people not being able to access mortgage finance.

"The involvement of reputable builders and financial institutions would help the sector to overcome its image problems," he adds.

John Slaughter says the HBF will press the government to encourage private rent "which has been the Holy Grail of the property industry, and conditions for it are unlikely to be as attractive again".

Building slow-down

According to the National House-Building Council, there were a mere 80,000 homes started in 2008/09, less than half the 184,819 of the previous year. In the November 2008 to January 2009 period there were 7,768 starts by private builders, only just ahead of the 6,970 recorded by housing associations, a level itself 11% down on the position a year earlier. January and February saw 5,670 private starts and 4,608 by housing associations.