Red Housing

"Fixing our broken housing market” with Infrastructure Finance and Market Diversification Tools?

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Summary: The Housing White Paper “Fixing Our Broken Housing Market” identifies three broad themes which the Government suggests should underpin a transformation of housing delivery. This note highlights two of the important messages; the importance of aligning infrastructure provision with housing development including the role of Government financial support for such infrastructure and measures intended to diversify the housebuilding market.

The Housing White Paper “Fixing Our Broken Housing Market”  identifies three broad themes which the Government suggests should underpin a transformation of housing delivery. These are (1) improved (local authority) planning for the right number of homes in the right places (2) speeding up housebuilding and (3) a reduction in reliance on a relatively small number of large housebuilders. This note highlights two of the important messages for delivery, first the importance of aligning infrastructure provision with housing development including the important role of Government financial support (on commercial terms) for such infrastructure  and secondly, measures intended to diversify the housebuilding market.

Financial support for housing on commercial terms has been with us for some time, ever since being needed as a stimulus measure following the arrival of the financial crisis. Early housing stimulus support could be found in the guise of the Get Britain Building Fund  followed by an early appreciation of the need for a substitute programme of public finance for funding infrastructure to open up large sites, the Large Sites Infrastructure Fund managed by the Homes and Communities Agency (HCA). Whilst the White Paper does not introduce any new sources of finance it; highlights the important and ongoing role of the £3bn Home Building Fund in infrastructure investment, throws a little more light on the £2.3bn Housing Infrastructure Fund announced as part of the National Productivity Investment Fund during the Autumn Statement 2016 and emphasises the need for local authorities to identify development opportunities arising from Government infrastructure investment.

£2bn of the Home Building Fund fills a gap in traditional private sector lending by providing long term loans through the HCA to enable private sector developers and investors to forward fund infrastructure for large sites. The Housing Infrastructure Fund, when open for business for bids later this year, will also fill a gap but this time in the public sector provision of funding for infrastructure for large sites. It will be a capital grant programme for local authorities intended to fund infrastructure projects which unlock housing development in areas of the greatest housing need (the Government are also encouraging joint authority bids for cross boundary funding needed to open up strategic sites). Whether authorities use this programme for grant or investment funding remains to be seen. The White Paper also emphasises the opposite concept of using  planned Government infrastructure development as a catalyst for housing development, using as an example the National Infrastructure Commission’s recommendations for infrastructure to maximise the Cambridge to Oxford knowledge cluster corridor.

There are three other tools which the White Paper might have considered (1) measures to enable the holistic funding of major settlements (2) potential for extensions to the housing guarantees scheme and (3) measures to enable the large scale funding of estate regeneration.

Government proposals for garden villages of between 1500-10000 homes (in addition to existing proposals for garden towns and cities of 10000 homes plus) highlight the potential for holistic solutions for infrastructure. Diminishing public expenditure means increasing focus on private finance alongside more limited public funding. An investment framework pilot could be considered to road test an holistic approach to funding instead of the current funding by phases. The ideal would be to attract institutional finance for those elements of the new development with secure long term cash flows eg market rent housing and leasing of infrastructure.

A settlement delivery entity would attract equity finance (perhaps in a public/private joint venture). A revolving infrastructure fund could be established comprising ring fenced equity and debt funding repaid from completed developments and reinvested further in infrastructure. Private finance could be supported by HM Treasury recoverable financial transaction capital (which does not count toward public sector debt) in a similar fashion to that managed by the HCA within the Home Building Fund. A local authority could also consider supporting investment by using its prudential borrowing powers, for example, working alongside the settlement delivery entity by funding infrastructure or a market rent vehicle.

The initial equity would establish the “investment snowball” which, once rolling, will accumulate  additional investment as it “rolls” across the proposed settlement. The financial structure should allow for more expensive short term funding to be replaced with cheaper long term debt funding. Institutional funders will be the primary source of long term funding, refinancing equity and bank finance. The aim would be to establish long term cash flows to be used to fund long debt repayments. Treasury or housing guarantees could also be considered.

The Housing Guarantees Scheme is a temporary means of utilising the UK’s balance sheet without materially increasing public sector debt. It was initially used to reduce the cost of funds for affordable housing and continues to underpin institutional investment for the private rented sector. Consideration could be given to realigning the Scheme to de-risk elements of the housebuilding industry or support capacity growth eg in reducing risk and cost in build to rent delivery and or supporting medium-sized housebuilders who could benefit from new sources of finance.

The Government recently published its Estate Regeneration Strategy. This contained a section on “Financing and Delivering Estate Regeneration”. Granted there is the Estate Regeneration Fund managed by the HCA for strategic financial interventions, however, this amounts only to £140m and as a consequence it will be crucial to obtain a pipeline of private finance to deliver regeneration across 100 plus estates. Again this may be ripe for some sort of investment framework or platform.

An entire section of the White Paper is dedicated to measures to endeavour to diversify the market. The argument is made on the dependency on a relatively small number of major housebuilders whose business model limits the number of homes constructed.  There is also a lack of innovation in building methods the White Paper argues. Finally, smaller firms have not recovered to pre-recession output levels. Therefore the White Paper contains measures to support small and medium sized housebuilders (and custom home building) and to support other parts of the housing market.

Small and medium sized builders often cite the lack of available finance and land as two of the main barriers to expansion. To address finance, £1bn of short term loan finance in the Home Building Fund has been targeted at small and medium-sized businesses. The provision of this development finance should unlock the development potential of sites for small and medium sized businesses. In addition the Government has developed the accelerated construction programme. However as mentioned previously there is no mention of extending housing guarantees to support small and medium sized businesses.

Accelerated construction is targeted  at small and medium sized firms, contractors and others to build out public sector surplus land. In outline terms accelerated construction involves the Government (a) identifying suitable sites from within the Government’s Public Sector Land programme (b) obtaining outline planning permission and undertaking basic site preparation, where relevant (c) selecting a development partner (such as an SME builder or contractor) through a competitive process. The successful partner will obtain full planning permission, fund remaining site preparation costs and cover the cost of constructing homes. In some cases the Government may offer to reduce the developer partner’s risk with indemnities in the event that homes constructed cannot be sold (d) sharing profits in line with levels agreed through the competitive process upon the sale of homes. The Government is also seeking to extend this programme to local authorities and has sought expression of interest for packages of support to join the programme.

The Government also sets down proposals to support building by housing associations. In addition to making available the Affordable Housing Programme 2016-21 (with greater flexibility as to tenure outputs as stated in the Autumn Statement) the Government has promised to set a new rent policy beyond 2020 (current policy is a 1% reduction per annum until 2010) to assist associations to borrow against future income. In return for this rent certainty associations have been asked to build more and improve efficiency.

The White Paper also supports institutional investment in homes built for private rent, Build to Rent (BTR). The Government is consulting on measures to support BTR including (a) changing the NPPF so that local authorities plan proactively for BTR where there is a need (b)  making it easier for BTR developers to offer affordable private rental homes instead of other affordable housing and (c) ensuring that longer term tenancies (of 3 years or more) are available to tenants.

However, the White Paper does not address the issue of the lack of an exemption from 3% SDLT surcharge and difficulties of addressing irrecoverable VAT. There will also need to be a close look at the impact of affordable private rents on cash flows and valuations in an industry where yields have been historically tight. Although the White Paper calls on investors to up their commitment to housing in return for “a clear and stable long-term framework for investment, including products for rent” there is little or no further detail on what this means. Iinstitutional investors are also being asked to “invest more widely in housing, including shared ownership” although the latter has thus far not been a sector for institutional investors. Finally, elsewhere in the White Paper the Government commits to consult on extending local authority flexibility to dispose of land at less than best consideration and hopefully therefore by doing so clarifying potential best consideration issues around disposal of land for market rent as against market sale.

Whilst local authorities will also have certainty over rent levels, have received tacit support in the White Paper for their wholly owned housing companies as innovation (albeit with the implicit of extending the right to buy to such companies) the issue of lifting the cap on Housing Revenue Account borrowing has not been addressed at all.

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