19 December 2008
Every cloud has a silver lining, and the credit crunch could give social housing its moment in the sun. Richard Parker says RSLs could become major home providers, with a little help from the new Housing and Communities agency
Recent statistics on the UK economy suggest we might be facing the worst housing downturn since the 1920s. Mortgage approvals have fallen by almost 60% since last year; house prices have decreased by 16% on last year's peak and are still falling; the rate of repossessions is rising daily; waiting lists for social housing are getting longer; and new supply is forecast to plummet to under 80,000 from over 200,000 last year, with thousands of construction jobs lost in the process.
The ratio of new social and affordable housing to private building was 1:4. By this time next year it could be 1:1. Indeed, for the first time in a generation, both the government and private house builders are looking to use public finance not just to complement housing developments, but to lead the market. It is hoped that government intervention will help restore mortgage lending and boost confidence, but in the short term housing associations are expected to fill in the gaps where the market has imploded.
The severe downturn in private new builds has put the spotlight firmly on housing associations. It has been suggested that public investment in both social rented and intermediate housing is brought forward and that housing associations should be encouraged to buy up more sites. There have been concerns that increasing social housing in place of private residential development might hold back the government's aspirations for more mixed income/mixed tenure communities. But there seems to be broad political support for more publicly funded affordable housing – including a welcome increase in shared ownership homes.
Ministers are hoping that the housing association sector can withstand falling land values, which undermine the cross-subsidies that provide for mixed housing development. More than a third of all social housing comes through Section 106 'planning gain' agreements predicated on rising land values. While the balance sheets of most social landlords are relatively more robust than those of private builders, public housing still represents a major challenge for most associations. However, the sector has a history of partnership building and innovation, and many of the large associations have expressed a willingness to take up the challenge.
The focus is on the country's 60 or so large housing associations, which account for most of the new build investment and joint ventures with local authorities and private developers. For decades the sector was in the backwoods of the house building industry, providing mostly homes for rent in deprived areas. There has been unprecedented expansion in the past five years, with output doubling to around 45,000 units and more homes offered for full and part sale – often with limited government grant.
The feasibility and suitability of housing associations' performance mechanisms have evolved considerably since the large-scale housing transfers of the 1990s, which bolstered the sector and paved the way for billions of pounds of private investment into repairs and refurbishment. However, the public-private funding regime is under intense pressure. Increasing the flow of grants will help, but new and expanded funding options are needed if the sector is to maintain activity, let alone fill in some of the gaps.
The government remains committed to a significant increase in affordable housing, although its target of 3 million new homes by 2020 now looks extremely ambitious. Funding to housing associations has been increased by 36% to £8.4bn for the period from 2008 to 2011. But this investment is expected to provide at least 45,000 new social homes for rent and over 25,000 shared ownership homes a year. For an extra 36% of funding, the government is expecting the sector to deliver 52% more affordable housing. With less planning gain and limited scope for savings – the Housing Corporation suggested efficiency savings of around 10% – bridging the funding gap will be far from easy.
The new Housing and Communities Agency, which replaced the Housing Corporation and English Partnerships on December 1, could make the difference. With an investment budget of £5bn a year, it could support innovative funding approaches that unify the corporation's grant-backed programme model with English Partnerships' investment model. The latter funded pre-development works on large and complex sites through investments that earned a return. This could be used to create the platform for new development.
The HCA's funding contribution, which is now a grant, would have the attributes of an investment or equity stake in properties. This would form part of the overall capital contribution to new affordable development – whether affordable housing or a mixed housing development. The new agency would benefit from the value gain as low-cost home owners move up or the properties are sold outright by housing associations. In a more limited form, these principles could also apply to housing for rent. The public sector becomes an investor, rather than grant giver, and seeks to share in the future gain.
The conventional grant funding regime is static and offers no capital appreciation or return as the value of the properties it co-funds increase over time. Research by PwC shows that, over the long term, this equity- based approach is more cost effective for low-cost home ownership housing, and could cut the grant subsidy on some homes by half.
The HCA could be a passive investor, and housing associations might simply be required to recycle a larger portion of the receipts generated from asset sales. If a more active investor model were followed, housing associations would return grant – with the appropriate return – to the HCA when assets were sold on, allowing the agency to redistribute these receipts across the sector in accordance with its priorities.
However, funding development on these terms exposes a housing association to real commercial risk. Liabilities may accrue quickly if there are delays to planning approvals, cost rises or lower than expected value on private house sales.
The HCA should support established funding options that can offset the risk, and in the process lever in more private finance. Under a limited-recourse funding model, for example, a housing association would set up a project company or special purpose vehicle – in its own right or jointly owned. The SPV would be responsible for the development and construction of affordable housing and the refurbishment of the existing housing. It would raise the financing and engage subcontractors to provide the new housing and other capital investment. The revenues secured from housing sales – both affordable and private – are used to part repay the sums borrowed from lenders.
Financing housing projects on limited-recourse basis is a cost-effective way of increasing investment in an uncertain market. The approach is also attractive to housing associations not just because of the contractual and financial rigour that accompanies it, but because it is well suited for large and complex projects.
Market instability makes innovation difficult, and there is an argument that the social housing sector is better served by keeping its head down and sticking to its basic remit of providing rented homes for the most vulnerable in society. But these are testing times and the housing market is in serious trouble. A further collapse in all forms of new housing at a time of rising unemployment will put huge pressure on local communities. Furthermore, a lot of good things have been achieved in housing in the past ten years, such as quality standards, eco-homes, public-private partnerships, and urban regeneration, and these might be put at risk.
Pushing ahead with new funding models is not a panacea, but it could make a significant and lasting difference and help put housing associations more firmly on the map as major providers of a mix of housing types.
Richard Parker is a partner at PricewaterhouseCoopers. This article is based on the author's PwC Talking points booklet, Funding for affordable housing — New options for housing associations