build Sustained investment in housing of all types 24 th October - PowerPoint PPT Presentation

Planning, development and financing new build Sustained investment in housing of all types 24 th October 2013 Simon Smith Learn with us. Improve with us. Influence with us | www.cih.org

Introduction • Overview of the ‘traditional’ New Build • Local Authorities Landscape • Housing Association Opportunities • Institutional Investment • Business Plan Factors and Risks Learn with us. Improve with us. Influence with us | www.cih.org

New build: overview PUBLIC PRIVATE COUNCIL EQUITY/JOINT TRAD. HA HRA COMPANY VENTURE MODEL • 4 potential routes for delivery (and multiple variants of) • SPV/ALMO/Council company – vehicles to use for development? • JVC/Private Equity deals – tend to be more scheme-based • LAs need to be clear on ‘powers’ 3 Learn with us. Improve with us. Influence with us | www.cih.org

The traditional and basic model • A ‘traditional’ scheme EXTRA SUBSIDY • Land low value or zero GRANT BUILD • Little or no additional subsidy COSTS • 50% grant BORROWIN G • 50% borrowing financed from rents LAND • The underlying fundamental fact... Social/affordable rents are not high enough to be able to finance a mortgage on the whole cost • Subsidy (in the form of grant) is needed to make it stack Learn with us. Improve with us. Influence with us | www.cih.org

External factors – or grant substitute? • Assuming that a level of subsidisation for the scheme is required to enable borrowing to be funded within 40-50 years... • What other sources (other than government grant) are available to subsidise social rent schemes? 1. Cross-subsidisation from market/shared ownership sales 2. Reserves, capital receipts 3. Explicit cross-subsidisation from other properties – Conversion to ‘higher rents’ a new source in the mix – Market renting provides ‘profits’ to help fund borrowing 4. Equity or other forms of institutional investment – A positive move – but needs to pay a return (like paying interest on the investment made by the institution) Learn with us. Improve with us. Influence with us | www.cih.org

All in the mix… summary of all factors Scheme factors Balance of funding Subsidy Build costs Government grant Management Capital receipts Repairs Borrowing that can be Sales proceeds sustained Shared ownership Major repairs proceeds Inflation Market renting Higher rent Debt costs Requirement for subsidy conversions ( Institutional Rent levels investment ) • Previous: Grant as a ‘requirement’ • Now/future: Grant as a fixed input... Learn with us. Improve with us. Influence with us | www.cih.org

Financing models • All housing needs finance and all affordable housing needs subsidy (from somewhere)... – What are the prospects for funding and subsidy? PWLB Opport- Sources of Sources of Banks unity ‘funding’ ‘subsidy’ cost Inst Inv • • HRA borrowing under the cap HCA grant – how to access? • • Prudential borrowing in a Mixed tenure schemes sales new/different vehicle • RTB (additional) receipts • Joint ventures with HAs/Other • Disposals of some schemes providers to reinvest for others • Bond market • ‘Health/Other Resources’ • Institutional investment • Reserves and revenue Learn with us. Improve with us. Influence with us | www.cih.org

Affordable rent • As PRS ‘overtakes’ social as %age tenure, AR and other products could offer a wider ‘spread’ • HCA programme was over-subscribed • Risk of maxed out finances for HAs – Development consortia including LAs/ALMOs – Risks of existing loan renegotiation for many HAs • Role of local authorities in terms of tenancy strategies • Reliance on conversions not a long term policy • Risk of ‘affordable’ rents becoming unaffordable Learn with us. Improve with us. Influence with us | www.cih.org

From traditional social to affordable rent Trad Social Aff Rent No of units 10 10 Build costs £100,000 £110,000 Grant (or other subsidy) £50,000 £24,000 Net funding requirement £50,000 £86,000 Rents £70.00 £90.00 Voids and bad debts 2.0% 2.0% Management £500 £0 Repairs £500 £500 Future major repairs (from yr 6) £750 £750 Inflation 2.5% 2.5% Interest on debt 5.5% 5.5% Conversions 0 1 @ £20 • Both schemes Social – debt profile AR – debt profile 600,000 similarly 1,000,000 800,000 fundable 400,000 600,000 400,000 200,000 200,000 0 0 1 4 7 1013161922252831343740434649 Learn with us. Improve with us. Influence with us | www.cih.org 1 4 7 1013161922252831343740434649

Local Authority Landscape • HRA – New Build • HRA ‘Whole site’ and Joint Ventures • HRA -Institutional Investment • ALMO – build (or) through subsidiary • GF – Local Housing Companies • GF – Institutional Investment Learn with us. Improve with us. Influence with us | www.cih.org

LAs HRA under self-financing • All authorities are better off 1. Increase in assumed major repairs allowance • Rise to £1.726bn = increase of £460m (£48m in the Eastern Region) 2. Retaining rent income as rents increase • £300m+ underneath target rent which will be made up over time 3. Ability for many to borrow up to the borrowing cap but unevenly spread • Headroom total £2.87bn (£233m in the Eastern Region) 4. For debt take- on authorities, a ‘cheap’ debt gain • 85bps on £13.5bn = £100-125m (£27m in the Eastern Region) • A small number struggling in short term – decent homes • A larger minority with medium term pressures • The vast majority with some borrowing and potential revenue to invest – vast majority looking at some form of new build... Learn with us. Improve with us. Influence with us | www.cih.org 11

HRA build: key features and trends • ‘Traditional’ approach to council housing • Generally on land already in the HRA – Infill or other brown- and green-field sites – Regeneration and redevelopment a key feature (to increase density or increase bedrooms) • Mix of finance – Borrowing via PWLB – likely to be in separate HRA pool – using headroom beneath the borrowing cap – can link loans to schemes – Non-borrowing finance from receipts (RTB and other non-pooled receipts), HCA grant funding (22 have contracts in place or pending) and other reserves (revenue reserves may not be inconsiderable for many authorities following the settlement) • Tenancies and rents – Secure tenancies but Localism Act gives flexibility – Choice of rent policy (HCA/RTB funded new build outside of rebate limitation arrangements) Learn with us. Improve with us. Influence with us | www.cih.org

HRA build: positives and challenges • Positives – In house (or ALMO) management and repairs – likely to be minimal marginal additional cost – Cost of funds likely to be the cheapest available via PWLB – No VAT or other taxation leakage – Revenue reserves may be growing quite quickly given headroom within the settlement – subject to maintaining rent increases • Issues and challenges – Headroom beneath the debt cap is limited and, once used, takes time to re-establish – Tenancy constraints may also operate – members view of HRA as ‘safety net @ social rents’ – Need to become HCA partner in own right – bidding process passed – HRA is a creature of legislation – generally less flexibility around future use Learn with us. Improve with us. Influence with us | www.cih.org

LA Opportunities – national and local • New build from the resource base? – Borrowing headroom – 2/3 rds -> 25-30,000 units @ HCA leverage levels – Revenue and reserves could reduce leverage requirement and increase supply – Revenue @ ‘steady state’ -> 4-5,000 pa delivery? • New build from the asset base? – How many additional units from redevelopment of poorly performing assets? – What is the potential for delivery on infill sites? • Debt cap remains critical constraint Learn with us. Improve with us. Influence with us | www.cih.org 14

Raising or abolishing the debt cap…? • Councils will deliver programmes from the headroom that they have (some borrowing but mainly revenue/reserves) • A three- way ‘lobby for growth’: recent progress – Changing borrowing rules – Abolishing the debt cap – Raising the debt cap – on a formula- or bid-basis • “Let’s get building” 70,000,000 – New build in plans – our 60,000,000 estimate 20-25,000 in first 50,000,000 5-10 years 40,000,000 – Financial capacity overall up to 200,000-250,000 homes: 30,000,000 need land(!) 20,000,000 – £7billion capacity and 10,000,000 appetite - 60,000+ 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 With investment Existing system Learn with us. Improve with us. Influence with us | www.cih.org

Financing replacement Learn with us. Improve with us. Influence with us | www.cih.org 16

HRA ‘Whole Large Scale’ Site Development • Some authorities looking to develop ‘whole’ sites with cross subsidy from market sale and shared ownership • Transfer of land between GF and HRA • Joint Ventures as a possibility of sharing risks/profits through build costs and sales Learn with us. Improve with us. Influence with us | www.cih.org 17