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

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Planning, development and financing new build

Sustained investment in housing of all types 24th October 2013 Simon Smith

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Introduction

• Overview of the ‘traditional’ New Build
• Local Authorities Landscape
• Housing Association Opportunities
• Institutional Investment
• Business Plan Factors and Risks

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New build: overview

• 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’

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PUBLIC PRIVATE

HRA COUNCIL COMPANY

• TRAD. HA

MODEL EQUITY/JOINT VENTURE

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The traditional and basic model

• 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

BUILD COSTS

LAND

GRANT BORROWIN G

EXTRA SUBSIDY

• A ‘traditional’ scheme
• Land low value or zero
• Little or no additional subsidy
• 50% grant
• 50% borrowing financed from

rents

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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)

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All in the mix… summary of all factors

• Previous: Grant as a ‘requirement’
• Now/future: Grant as a fixed input...

Build costs Borrowing that can be sustained Government grant Management Capital receipts Repairs Sales proceeds Major repairs Shared ownership proceeds Inflation Requirement for subsidy Market renting Debt costs Higher rent conversions Rent levels ( Institutional investment ) Scheme factors Balance of funding Subsidy

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Financing models

• All housing needs finance and all affordable housing

needs subsidy (from somewhere)...

– What are the prospects for funding and subsidy?

Sources of ‘funding’ Sources of ‘subsidy’

• HRA borrowing under the cap
• Prudential borrowing in a

new/different vehicle

• Joint ventures with HAs/Other

providers

• Bond market
• Institutional investment
• HCA grant – how to access?
• Mixed tenure schemes sales
• RTB (additional) receipts
• Disposals of some schemes

to reinvest for others

• ‘Health/Other Resources’
• Reserves and revenue

PWLB Banks Inst Inv Opport- unity cost

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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

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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 1 @ £20

200,000 400,000 600,000 800,000 1,000,000 1 4 7 1013161922252831343740434649

AR – debt profile

200,000 400,000 600,000 1 4 7 1013161922252831343740434649

Social – debt profile

• Both schemes

similarly fundable

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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

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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...

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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

• r 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)

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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

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LA Opportunities – national and local

• New build from the resource base?

– Borrowing headroom – 2/3rds -> 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

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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

10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 With investment Existing system

• “Let’s get building”

– New build in plans – our estimate 20-25,000 in first 5-10 years – Financial capacity overall up to 200,000-250,000 homes: need land(!) – £7billion capacity and appetite - 60,000+

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Financing replacement

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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

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LA build via ALMO/Subsidiary

• A number in place as direct owners and managers or ALMO

(charitable) subsidiary set up

• Typical approach

– HRA land moved over to ALMO – SDLT issues may/not arise – LA borrows and on lends to ALMO/Subsidiary to part finance development –prudential borrowing to the General Fund, often with a premium and linked to a firm repayment schedule – ALMO joins development framework (with developers/HA partners) – Non-borrowing finance mostly HCA grant - can also allocate LA/RTB receipts directly as effective grant-funding for the scheme – Rents at social to ‘affordable’ (members and HCA an issue here)

• Theoretically, there are options to alter the ownership of the

subsidiary

– Off balance sheet and able to borrow directly

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LA/ALMO build: positives and challenges

• Positives

– Economies of scale – all in the LA/ALMO family – Cost of funds via General Fund (or HRA direct) likely to be cheaper than can be found in private finance, even with premiums from the LA – Revenue reserves in the HRA could be diverted to the company as additional resources – still gets the reserves spent ‘in house’ – As for direct ALMO option, may be opportunity to diversify offer in ALMO and additionally really brand separately – Removes leakage of taxation – As a separate (subsidiary) vehicle, options to take it in potentially more directions

• Issues and challenges

– CLG may still regard this approach as ‘circumventing’ the debt cap – HCA grant via LA or partnership, not direct – Company does not have borrowing capacity in its own right (initially) – Increases the layers of complexity and costs of/time to set up – Many feel it might only be worth doing if scale could increase – Irrecoverable VAT (ALMO)remains an issue

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LA subsidiary – outside of HRA/ALMO

• Under consideration – at a small number of non-ALMO authorities
• Aim to enter the market for diversified housing offer

– Where tenure and rent flexibility might better sit outside the HRA – Market renting (almost certainly outside the HRA) – Properties for sale cross-subsidising other council investment in regeneration – Opportunity to put non-HRA land into a company

• No ‘typical’ features but would cover

– GF prudential borrowing by the council, lent to the company – Allocation of receipts and other sources of finance – Management by third party (RP) or own HM services – Returns accrue to the council – care on trading and profit making

• Options around ownership

– 100% owned – on balance sheet, returns to the council – Joint venture – on or off balance sheet

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Private finance: traditional HA model

• For overall investment: stock transfer
• For scheme by scheme development: land transfer/S106
• Stock transfer

– Affected by the implementation of self financing – Valuation likely to be much higher than in the past – What is on offer to tenants? – Cost and nature of funds may be more expensive than CoCo – All other features apply – waiting for guidance but will be a stretch

• Land transfer – the traditional model for development

– Land transfer/cheap in return for nominations ;borrowing entirely private finance – by HA – Usually grant funded or cross-subsidy/mixed tenure scheme – Times changing: cost of borrowing, introduction of AR, mixed tenure schemes not delivering same levels of cross-subsidy – Most LAs not exploring ‘in-house’ or joint venture models for the future

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HA landscape – Affordable Homes Programme Mark 2

• Extension of the Affordable Homes programme - £957million

from 2015.16 to 2017.18

• To provide 165,000 new homes
• No diversion from Affordable Rents
• Pressure on conversions to affordable rents for existing stock
• Allocation July next year
• Drop Dead Date (for completions) expected
• HCA to ensure delivery of surplus public sector land
• Concern over Welfare Reform may put looking after existing

rental streams than development

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HA landscape – Homes Guarantees Programme

• Scheme to reduce borrowing costs for housing providers by

guaranteeing up to £10bn of debt through the infrastructure (financial assistance) bill for both private rented and affordable rented properties

• As part of the announcement and in conjunction with home

guarantee programme £225m to be made available for affordable housing with it allocated in July (for 13,800 new homes) with the budget increasing the allocation to £450million.

• Only for new schemes – project limit of £5m
• Debt to cover 30 years
• Fixed Charge on property plus covenants
• Reviewed every 5 years

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Build to Rent (1)

• Build to Rent Fund launched to stimulate new private rented housing

supply and to provide opportunities for new institutional investment

• Sits alongside the private rented sector part of the Housing Guarantee

Scheme – though independent

• The Build to Rent is primarily to assist with the development phase (the

Guarantee to assist with the long-term holding once built)

• Fund Initially set at £200million but increased to £1billion
• Fully recoverable, commercial investment where the Government will

share the risk (or bridge) finance

• Scheme can cover development costs including land, construction or

management costs.

• Once the scheme is fully let the developer will sell on its interest or re-

finance and repay loan/equity.

• 45 projects from Round 1 to support 8,000 to 10,000 homes
• Round 2 now open

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Institutional Investment

• What are the types:
• Long-term: Sale/Leaseback schemes
• Short-term: Deferred Purchase
• Rent to Buy
• Build to Rent

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Equity Investment - Intro

• Not ‘one size fits all’!
• Is this the ‘Holy Grail’ for a generation?
• Investors are of different types, with varying requirements
• Key Factors include:

– Size, Return, Term, Exit strategy

• Risks:

– Income collection – Management and Maintenance – Construction and Development – Political / ‘Social’ risk – Financial and Inflation (what has the investor built in)

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Equity Investment Overview

• Pension

Funds/Institutions

– Large Size – Low Rental Yield – Long Term 30yrs + – Exit Strategy – Fixed – Low Risk

• Real Estate / Private

Equity

– Small Size – High Yield – Short Term <15 yrs – Exit Strategy – Flexible – High Risk

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Long-Term Investment

• Usually Sale/Leaseback deals
• Low or no debt, focus on yield (not capital)
• Sale of land by LA or HA to investor via SPV
• Delivery of inflation-linked returns on initial investment
• Management and an income guaranteed provided by

the housing provider

• Exit via reversion of properties to the HA at the end of

the term

– On Balance Sheet (Issue with HRA re debt Cap)

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Long Term Investment (2)

• Examples:

– London Borough of Barking and Dagenham: ( Longharbour) – Genesis HG (M&G investments) – Derwent Living (Aviva) – Manchester Pension Fund

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Shorter Term Options

• Deferred Purchase schemes
• Investors looking for a blend of yield and capital growth
• Focus on:

– Initial Yields – Buying Low, selling high – Timing and process for sale of properties

• Flexibility of Exit : off balance sheet (LA/HA)
• LA/HA purchase homes when their business plan has capacity
• LA/HA provides a guarantee level of rent in return for management

and maintenance

• Interest from investors as an area of growth
• Emerging markets and products

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Rent to Buy

• Property acquired/built without subsidy
• Property let to tenant at affordable/market rent
• 50% of rent is put towards purchase (deposit) of

the property – potential re new mortgage guarantee scheme

• Investor puts capital in , receives annual income

and form of exit

• Examples of Rent to Buy/Deferred Purchase:

– Kirklees Council (QSH)

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Build to Rent (2)

• “Building Homes for Generation Rent” by Social Finance and the

Resolution Foundation

• £140million portfolio – 778 rental homes – what would be the

return?

• In conjunction with 6 RPs – building private rented developments

with own borrowing

• Investors buy a portfolio of fully-occupied properties – keeping

rental income streams – which are affordable

• RPs ‘run’ properties on long-term tenancies
• Returns on income between 3.9% to 4.7%
• Could be improved if the Government Guarantee Scheme used

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Business plans and welfare reform

• Business plan issues from HB/welfare reform

– Reduction in benefit entitlement reduces ability to pay and arrears rise – Move to Universal Credit leads to significant increase in arrears – UC exemptions: vulnerable/elderly/those in arrears – evidence being collected in the ‘demonstration’ areas – Understanding the position of tenants and residents: IT and bank account access

• Many only beginning to understand the implications for

specific tenant-groups – low paid working families are a critical group

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