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The return of the council house
Housebuilder – April 2014

Changes in council borrowing rules and the cutting of grant to housing associations have prompted local authorities to consider building homes themselves again. Will this be an opportunity for housebuilders? Mark Smulian reports

There are potentially around 400 new clients emerging for housebuilders as local authorities take their first steps back into building new homes after a gap of 25 years. Some big money could be involved, in particular if two initiatives come off.

The first is for the Local Government Association (LGA) to set up a Municipal Bonds Agency, which would raise funds from the money markets and lend these on cheaply to councils.

The second is a campaign by councils for the government to lift the caps imposed on how much they can borrow against their housing rental income to build new homes.

It is early days yet but housebuilders with long memories will recall that councils once were important clients, building some 150,000 homes a year in the late 1960s. But then they vanished in the 1980s. A combination of spending cuts and the Thatcher government's 1988 decision to switch funds for new homes to housing associations reduced council building to almost nothing.

The revival is being driven by the imperative to meet housing need and by the wider financial freedoms councils now enjoy.

At present housing associations mostly build homes at the government's "affordable rent" level - pitched at 80% of local market levels. Some councils, particularly Labour ones, consider this excessive and want to build homes they can rent out more cheaply.

Mixed developments

Money flows from a variety of sources into these programmes: receipts from mixed developments of homes for sale and for council rent; sums paid by developers in lieu of building affordable homes on their own sites; borrowing against rental income; planning gain and use of council-owned land to cut the cost of projects.

While the idea of councils cross-subsiding rented homes from adjacent homes for sale is nothing new, a few are looking at becoming market landlords themselves or even building homes for sale where the council, rather than a private partner, would take the development risk. Such moves could see councils building homes to let at commercial market rents to subsidise those they rent out at "social" levels.

The heyday of local authority building saw many large councils create direct labour organisations (DLOs) to build their homes, a source of acrimony with the building industry. Builders' grievances about council giving work to their in-house teams led to the imposition of compulsory competitive tendering for building projects in 1980. This has since been much watered down but means that few councils now have any internal capacity to build houses, so they will need industry partners.

One of the most ambitious council housebuilding programmes has been launched by Southwark, which plans for 11,000 new homes over 30 years.

Southwark has been lucky as a number of luxury residential developments have been built along its River Thames frontage where developers did not want social housing and nor did the council, as the sums paid in lieu enable Southwark to build far more social rent homes on cheaper land elsewhere.

Fiona Colley, cabinet member for regeneration and corporate strategy, explains: "Housing associations used to be able to build more than we could for the same money because they could access government grant, so it was logical to let them do that, but those grants have largely gone now.

"They are building for 80% of market rent, which we as a council don't support and we now have the opportunity to borrow against our rental income, so things have changed.

"Other boroughs are looking at council-owned companies, which could do that borrowing, and we may do that or by setting up a special purpose vehicle, and we're still considering whether we take all the development risk ourselves or work with a partner."

Southwark's once-mighty DLO now does only housing repairs. "We're looking at what skills we might need in-house, but I think that is more likely to be development management than actual building," Colley says.

The council is using consultant Mott Macdonald as project manager, including for the appointment of contractors.

Nearby Croydon has taken a different approach with a four year framework contract comprising builders Durkan, Higgins, Lakehouse, Mullaley, Quinn, Mansell, United House and Westridge.

It has a 6 million programme financed through borrowing and funds from the Greater London Authority and aims to build 50 -100 homes a year.

Each project sees a mini-tender exercise among the framework contractors, all of whom have committed to using local labour and offering apprenticeships.

Beverly Nomafo, head of housing development and regeneration, says: "We're building on land the council owns but which it would be hard for anyone else to develop because they are small sites, or old garages.

"It is worth us putting in the time and effort to build there but it would not be for a developer.

"There is a mixture of large family houses where we move in people living in overcrowded conditions and bungalows for people who are under occupying."

Homes are built to Code for Sustainable Homes level four or five to help tackle fuel poverty and meet the council's environmental objectives.

Scotland's different rules and the positive encouragement from the Scottish government have resulted in councils there building homes for a while.

Aberdeenshire, for example, has invested 45 million in building in the past five years, providing 335 homes.

In January it awarded a four year framework contract to Bancon Construction, Keir, McTaggart Construction, Muirfield (Contracts) and Robertson Construction to build 50 homes over the next four years.

Other councils in England with small new build programmes include Bournemouth and Harlow.

One council that has tried its hand at building homes is Luton, though so far only bungalows.

Luton used its Building and Technical Services to build the homes, providing new skills to workers who normally do only repairs and maintenance.

Employment opportunities

A council spokesman says: "We are looking to deliver similar in-house developments in the future which not only save on costs and increase the skills and knowledge within the organisation, but also lead to further local employment opportunities."

John Perry, policy adviser to the Chartered Institute of Housing, says he doubts there will be a resurgence of council DLOs to compete with housebuilders, though admits: "this is more a gut feeling than real insider knowledge". Perry thinks there is a lot of potential in council housing. He says: "If councils were able to use their full borrowing potential - still under prudential rules - they would have capacity to borrow up to 20 billion over five years."

That could support up to 230,000 homes, though Perry thinks they would be more cautious and opt for fewer. "It is important to recognise that much of this potential output is only achievable by councils themselves," he says.

Key constraint

"The key constraint is land, and much of the land for new building by councils will be associated with existing estates, including replacement of unpopular or obsolete stock, using garage and commercial sites or unlocking 'backland' or garden land that is little used. "Councils are best-placed to assemble such sites and work in liaison with existing residents of estates affected by new development."

Some councils are already well ahead. Brentwood is working on a proposed "entrepreneurial programme" in several fields including housing.

A council report approved in November explains that if Brentwood entered business as a landlord letting at market rents (in addition to its social housing) it could see 500,000 a year of income, a tidy sum for a small district. The report also proposed that long term Brentwood should "consider options of development of housing for sale alongside housing for rent, or occasional sales within the rented portfolio to benefit from capital gains".

South Cambridgeshire, one of the country's fastest growing areas, has already invested 7 million in a council-owned company to build homes for rent.

It expects to build 40 homes over the next two years and will buy, build and sell properties.

A council spokesman said: "In a small way we will be competing with the private sector but this is one of the fastest growing parts of the country and there is a lot of potential."

This could all be good news for housebuilders as a substantial flow of money comes into development, but the idea of councils competing to sell private homes or recreating building DLOs may give them pause for thought.

How a Municipal Bonds Agency would work

A Municipal Bonds Agency would be set up by the LGA and borrow money from the capital markets and councils would then borrow it cheaply and flexibly from the agency.

LGA chair Sir Merrick Cockell told its executive in November he hoped some of the money raised, if the project goes ahead as expected, would be used for housebuilding.

Its head of programmes Paul Raynes explains: "We found a lot of interest from our sector and players in the financial markets.

"The Treasury is not keen to be directly involved but recognises local government has the powers to do this itself."

He says some 21 councils have publicly declared their interest and a similar number are working with the LGA less formally.

"They could use the money for anything they'd normally borrow for, but a growing number of councils are finding the idea of building homes attractive," Raynes says.

"Politicians from both sides of the spectrum are arguing we need over 200,000 new homes a year. Private sector housebuilders have almost never managed that. To achieve it, council housebuilding will have a role."