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Cross purposes
Housebuilder – July 2007

Cross subsidy deals done to fund on-site affordable housing and estate regeneration are eroding traditional boundaries between housebuilders, housing associations and ALMOs, reports Mark Smulian

Buy one, get one free" is not a sales promotion concept normally applied to housing, but it comes into play when builders are working on cross subsidy deals with housing associations. The concept is simple, but its practice is bringing radical changes in the relationships between builders, land, money and customers.

Under these deals, a housing association or local authority will have land - usually an estate that needs total or partial demolition - that can accommodate both homes for sale and affordable housing. The land values are such that income from selling the private homes is sufficient to pay for the social housing and still give the builder a decent profit.

Social landlords like this approach because they often own large brownfield estate sites, but lack sufficient Housing Corporation grant to develop them.

Thus, instead of simply using the builder as a contractor, a joint operation is mounted with one set of housing paying for the other. Builders benefit from the chance to build in an area where it might be otherwise problematic to find sites, and may not have to put money in upfront to buy the land.

Housing associations are often willing to come to arrangements where the builder buys the land from them plot-by-plot as private homes are built, removing the need finance land purchase at the outset.

Cross subsidy has so far largely been the domain of builders who specialise in social housing, but it could grow if the government tries to increase affordable housing construction while sticking to its policy of restricting the use of greenfield sites.

Affordable housing has been one of the few subjects on which new prime minister Gordon Brown made his view explicit before taking office, when he told an interviewer: "I recognise you have got to combine the building of housing for ownership with the building of houses for rent in a far more mobile and fluid society... the aim is affordable housing."

United House has long built for housing associations and saw cross subsidy as an opportunity, says md Colin Dixon. Far from being in an industry niche, he expects some volume housebuilders to want to join him.

He explains: "The big developers have been reluctant to get involved but they will have to, because these large estate regenerations are the sites that are available and new greenfield sites for them are going to be few and far between."

Large builders may want to do deals with cross subsidy specialists to tap into their expertise, Dixon predicts.

"We can become a conduit for them. We have the experience of working with housing associations long term and of talking to local authorities about regeneration. "The big developers do not have staff experienced in negotiations with associations and lack the patience to stick with it, but large estate regeneration is here to stay as a business."

Patience is indeed a virtue with the projects, which can take up to five years to complete as existing residents must be accommodated while their homes are demolished and rebuilt.

"That is a long time for a developer waiting for a profit, but they have to face it that these are the large opportunities for the future," Dixon says. "If the big developers will not take the risk of working with associations on regeneration sites, then I will and I'm sure the other companies that work in cross subsidy will too."

Deals can be done under which, for example, a social housing specialist builds for the housing association but also builds the homes for sale acting as contractor to a volume housebuilder.

"We can give them a fixed price for building homes, but there are very different models and possibilities," adds Dixon.

Stuart Miller, deputy md of John Laing Partnership - a social housing specialist bought out from Laing - says cross subsidy can be an advantage when dealing with council planners because these projects come with social housing as part of the deal and there is no need for lengthy planning gain negotiations.

"Cross subsidy can be an advantage because it changes the relationship with the local authority, especially if that is where the land is coming from," he says.

Miller also sees an advantage in financing. "Housing associations may pay for the land upfront and sell it to you house-by-house so you do not have to buy the land and then wait to sell homes on it to get your money, which frees up your finances," he says.

Cross subsidy can create new opportunities for builders, but they can sometimes be too successful for their own good.

Social landlord Notting Hill Housing Group ventured into cross subsidy and was so pleased with the results that it decided to become its own developer.

Chief executive Kate Davies explains: "If you profitshare with a builder you only get half as much yourself. We did cross subsidy once and it was very lucrative because the prices shot up, and that made us think 'hey, we could do this for ourselves'."

The result is that the group now develops its own land, employs builders as contractors and markets the homes for private sale through its Notting Hill London brand. "We make a 15-20% profit which subsidies the social housing," says Davies. "Our pipeline has about 300 homes for sale on that internal cross subsidy basis."

It is not just housing associations that are using cross subsidy. Before long, arm's-lengths management organisations (ALMOs) will do so too. These are the council-owned bodies that have long term contracts to manage council housing. They were originally set up to deliver refurbishment for the decent homes standard, but the earlier ALMOs have completed that work and are looking for a permanent role in managing neighbourhoods.

An obvious route is to demolish substandard and obsolete homes and build new ones for rent or sale.

Steve Partridge of the Housing Quality Network consultancy says: "Cross subsidy works very well because you can build as many private homes as the site will allow to get the amount of social housing that you need. There is no legal impediment, and I'd say at least 75% of ALMOs are looking at this as a way to get their foot in the door of building."

One advantage ALMOs have is that their estates very often have large amounts of wasted land - typically derelict garage blocks or neglected open space - so they can demolish homes, replace the same number as affordable properties and still find space for private homes to provide the subsidy.

Matt Cooney, chief executive of Solihull Community Homes, the Solihull Council ALMO, eagerly anticipates entering this market. "We are absolutely looking at cross subsidy," he says. "We have estates with areas of surplus garages where we could build, and other land. It is difficult otherwise to build as we want to, because we could not get Housing Corporation grant to cover it all."

Cooney wants to marshal all the available finance for building, which could include Corporation grant, cross subsidy and money that Solihull council can raise through its borrowing powers.

The rigid barriers that once separated builders, councils and associations are dissolving as councils begin to build again and developers have gained the right to bid for Corporation funding. Cross subsidy is another step towards all concerned doing deals across traditional boundaries.

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