News analysis: No lease of life for affordable housing schemes

23 Oct 08
The government's proposal to build 180,000 affordable homes by 2011 is the latest victim of the credit crunch as housing associations are unable to raise the funding they pledged last year

24 October 2008

The government's proposal to build 180,000 affordable homes by 2011 is the latest victim of the credit crunch as housing associations are unable to raise the funding they pledged last year

By Neil Merrick

When the government boasts about the record sums it is spending on affordable housing, it is telling scarcely half the story.

Last year, at the same time as ministers agreed to build 180,000 homes for social renting and low-cost ownership by 2011, housing associations volunteered to dip further into their pockets and find about 60% of the money themselves.

Most of this was due to come from private borrowing, with the remainder raised from selling homes on the open market and through shared ownership schemes. But that was before the credit crunch had been heard of.

A year on and it is hard to imagine the picture looking more gloomy. The cost of borrowing has risen – where a lender can still be found – and, while many loans were agreed by registered social landlords before money markets went into meltdown, it is far from certain that all RSLs will raise as much as they wish over the next three years.

Meanwhile, profits, or surpluses, are falling dramatically as RSLs struggle to sell homes on a shared or any other basis. While one assumes that the government will still put £8.4bn into the 2008/11 National Affordable Housing Programme as promised, the cross-subsidy model on which it depends has run into serious trouble and might be out of action for some time.

'The model is broken at the moment,' says Neil Hadden, chief executive of Aldwyck Housing Group and a former deputy chief executive at the Housing Corporation. 'Whether it's capable of being mended is another thing.' In line with other RSLs, Aldwyck is revising projections for 2008/09. Sales receipts are likely to be £1.2m less than expected, meaning that its total surplus will be closer to £4m than £5m. Boards such as Aldwyck's are wary of increasing subsidy to fund development schemes. 'We put in extra support to make our bids attractive to the corporation, but now the board is being more cautious and is looking for a higher return,' says Hadden.

Mixed funding, under which RSLs rely on money from public and private sources, has worked well for 20 years. By March 2007, the sector had arranged private borrowing worth £43.5bn. But the number of lenders, which once stood in double figures, has decreased and only two or three are now offering new deals to RSLs.

Gavin Smart, an assistant director at the National Housing Federation, says it is still possible for RSLs to arrange loans but adds: 'Credit is less widely available and proportionately more expensive than 18 months ago.'

Prior to this year, grants covered about 50% of new social or affordable housing. While some RSLs agreed loans covering the first two years of the 2008/11 NAHP, these are not enough to support the whole programme. 'Associations need to continue borrowing through the course of the Spending Review period,' adds Smart.

In September, the government announced that it was bringing forward £400m that was due to be allocated in 2010/11 so that RSLs and other developers can bid for it immediately.

The Department for Communities and Local Government says this is a sign that grant rates are rising again and it no longer necessarily expects RSLs to cover 60% of the cost of homes. But it remains unclear exactly what proportion of each home the government will fund.

Sir Bob Kerslake, chief executive of the Homes and Communities Agency, admitted recently that the new agency could not 'reset' grant rates because it had 'no idea what the numbers should be'.

The HCA, which will distribute grants from December once the Housing Corporation is wound up, is promising to be flexible and recognises the cost to the Treasury will rise. 'If we want to keep activities going, then we have to accept that it will lead to more money being spent and fewer outputs,' Kerslake told a conference on rural housing earlier this month.

The decline in property sales by associations is partly due to the dramatic slowing down of Section 106 'planning gain' schemes, where RSLs build homes for rent and low-cost ownership alongside private housing. Many mixed tenure schemes have been 'mothballed' by private companies – leaving RSLs to decide whether to proceed alone and risk leaving prospective tenants to live next to a building site, or put things on hold as well.

Raj Upadhyaya, director of development at the Guinness Trust housing association, says grants alone cannot prop up the construction industry. 'We are in the same boat as [private] developers,' he explains. 'We can't find development partners willing to take any risks. We need private sector partners, particularly for larger schemes.'

Places for People is selling about 30 to 40 homes per month – roughly half the number it sold a few years ago. Its pre-tax profits for 2007/08 were down by two thirds to £6.5m, compared with £19.7m in 2006/07, while income from property sales fell by three-quarters to £32.5m.

Along with other large RSLs, PfP is urging the government to make more grant available now, rather than leaving half of it lying unused. Steve Binks, group finance director at PfP, says: 'If the government could look at front-loading some of the money it allocated for housing, it would help us to maintain starts [on new homes].'

Within the sector, rumours persist that one or two RSLs face serious problems due to falling property sales. While there is no indication yet of any association being taken over, it would be ironic if, after years of RSLs being accused of taking too few risks, any have seriously over-stretched themselves.

Abigail Davies, head of policy at the Chartered Institute of Housing, says it is too early to pronounce the cross-subsidy model dead. Instead the emphasis is likely to be on flexibility, with the government asked to stump up more money – at least in the short term.

'We can't rely on the model when the money isn't there,' says Davies. 'We can go to the market when it is possible and ask the state to pick up the bill when it's not.'


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