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The great housing experiment

Big changes are afoot in the way affordable housing is funded. The Treasury wants to kick-start a housebuilding boom, but at value-for-money prices. To save the day, the ODPM is turning to the private sector. The Housing Corporation 鈥� the quango that distributes development grant to registered social landlords 鈥� is allowing private sector developers to compete for funds alongside a much-reduced list of eligible RSLs. The money up for grabs is substantial, totalling 拢3.5bn up to 2008.

Housebuilders appear to be jumping at the chance. In January, a pilot scheme to open up a 拢200m slice of the 拢1.67bn programme for 2005/06 received 171 expressions of interest from housebuilders, property developers and RSLs. In total, they were seeking 拢5bn worth of funding, 25 times the pot available.

But despite this bidding frenzy, housebuilders have mixed feelings about the new regime. Some evangelists foresee a brave new world of housing management where the line between private and public sector will become increasingly blurred. On the other hand, out-and-out cynics believe that opening the sector up to more competition won鈥檛 change a thing.

Housebuilders for 鈥�

Terry Fuller, director of partnering at Taylor Woodrow, is among the most enthusiastic advocates of the new system. Fuller is credited with persuading the Housing Corporation to take the plunge in the first place, and has submitted an 鈥渁mbitious鈥� bid covering 鈥渄ozens鈥� of sites.

鈥淭aylor Woodrow has got a number of sites coming through the planning system with affordable housing, and we want control over our own destiny. For most housebuilders, it鈥檚 about certainty and controlling our resources a bit better,鈥� he says. 鈥淲e build most affordable housing anyway, through section 106 鈥� this is just cutting out the RSL middlemen.鈥�

As Fuller indicated, developers鈥� relationship with the Housing Corporation to date has been at one remove, acting as contractors to RSLs that have successfully bid for funding. Under the new system, they can bid alone or as part of a consortium that might include RSLs or private housing management firms. Fuller believes that bidding direct to the Housing Corporation should give the builder more control over the process, less bureaucracy, a choice of which RSLs they work with, and a chance to improve efficiency by standardising designs and specifications.

鈥� and against

But other housebuilders don鈥檛 see the new system making that much difference.

鈥淚 need to be convinced that we need to change our relationship with housing associations,鈥� says Colin Smith, managing director of Crest Partnership Homes, the affordable housing division of Crest Nicholson. 鈥淚鈥檝e been working on affordable housing at Crest for 10 years and I don鈥檛 have any issues with working with a lot of associations. We鈥檝e got a tried-and-tested process and we鈥檙e not looking to change that.鈥�

But despite his scepticism, Smith has submitted a bid to the pilot programme. 鈥淚t鈥檚 an additional source of funding that can鈥檛 be ignored. We have schemes that need grant, and if it鈥檚 going to go to developers it鈥檚 important to test the water. We will try to maintain relationships with our existing social housing partners. The fact that the grant is given to Crest Nicholson direct won鈥檛 change that we want to get them on board from day one.鈥�

Even less enthusiastic is Michael Hill, business development director of Countryside Properties鈥� affordable homes division, In Partnership. 鈥淲e wouldn鈥檛 want to develop the homes. The profit margin we鈥檇 require will be greater than that of a housing association. We can produce a more cost-effective bid if we do it in partnership and carry it out as a contractor, not a developer.

The only circumstance in which we would bid is if a housing association partner or partners wanted us to lead a bid because they felt we were more likely to secure grant.鈥�

Smith and Hill鈥檚 argument, essentially, is 鈥渋f it ain鈥檛 broke, don鈥檛 fix it鈥�. But what if a surge of very competitive bids from developers pushes housing associations out of the running, and leads to a drop in contracting work? Direct bidding could break the system, and re-fix it to look entirely different.

Writing the rules

Housing associations need to clear a series of regulatory hurdles to get their hands on development grant, but the details of how the Housing Corporation will manage and regulate private sector bidders are still out for consultation. However, housebuilders agree that the rules in the pilot scheme will have dramatic implications for their cash flow and project costs.

Under the current system, RSLs receive 50% of their grant allocation when the development starts on site, and 50% on completion. But to avoid accusations that public money is lining the pockets of private bidders鈥� shareholders, the corporation has decided that developers won鈥檛 receive a penny until all the homes they have built are occupied. One housebuilder estimates that the cash flow hold-up could add between 5% and 7% in financing costs to the total cost of development.

Mary Lynch, strategy director at Lovell, points out that debt finance from banks is one of the few areas where private sector housebuilders have room to manoeuvre on development costs.

鈥淭he site is fixed by the planners, which means the amount of affordable housing is fixed and the price of land is the same for everybody. Build costs are the same because it鈥檚 always the housebuilder building the homes, so the only place savings can be made is the bit in the middle [procurement and financing savings]. We are a big player and for this grant to work, it鈥檚 got to work for people like us.鈥�

At Crest Nicholson, Smith believes the delay could throw the feasibility of schemes into doubt. 鈥淥n a large development, we could be getting grant three years later. The gap between completion and occupation is in the lap of the gods, and we have to wait until the letting procedure goes through and the last dwelling is sold - that could be a year down the line. It stops us having to go through very complicated hoops up front. But it depends how efficient your managing agent is. It鈥檚 not the private sector market I鈥檓 worried about, it鈥檚 a case of what the social housing market will be like in 2008.鈥�

As a compromise between the strict regulation that applies to housing associations and the Housing Corporation鈥檚 need to avoid accusations of profligacy on public spending, Smith believes that grant to private companies should be paid on completion. At least one other housebuilder believes that its application includes a convincing 鈥� but commercially confidential 鈥� case to the corporation that its investment is safe and that it should give developers their money up front.

At the moment, the only way for housebuilders or developers to get the money up front is to sign the homes over to a housing association immediately. But Lovell鈥檚 Lynch points out that this is simply a return to the situation the corporation has been trying

to avoid: it has reduced the number of small and medium-sized RSLs active in development to a superleague of 50-70 preferred development partners so that expertise and efficiency savings would be concentrated. Lynch was not intending to submit a bid, but changed her mind after being approached by a number of RSLs and arm鈥檚 length management organisations with responsibility for managing council housing stock.

Playing a long game

Developers that choose not to sign the homes over to a housing association from the start have several options once they鈥檙e completed, each with their own certainties and risks.

The safer and more popular option, in the short term at least, is to sell the houses for a fixed price or at auction to an existing social housing landlord. Berkeley Partnership Homes intends to take this route, and affordable housing director James Walker echoes the views of many of his peers: 鈥淲e鈥檝e no interest in keeping the stock 鈥� we鈥檙e a developer, not a housing manager. It鈥檚 a completely different business 鈥� the City would slaughter us if we became a housing manager.鈥�

But housing developers that do choose to make it their business can enjoy a guaranteed rental income from social housing, an attractive long-term investment given the acute shortage of affordable housing in London and the South. Taylor Woodrow, for example, intends to hold on to its Housing Corporation-funded homes and contract out the management to housing association partners, which it has already specified in its bid.

The company鈥檚 Fuller says that one of the main attractions of bidding and building directly is that it gives housebuilders the autonomy to choose exactly which RSLs it works with and how many. 鈥淕iven that we鈥檙e a national housebuilder, we find

ourselves working with scores of housing associations. Our aim would be to have the country drawn up geographically, so we鈥檇 have London & Quadrant managing homes in one area, Airways somewhere else, Moat in another area. I can鈥檛 believe we鈥檇 be dealing with more than a dozen housing associations in the country over the next couple of years. It鈥檚 to do with partnering, working with people you get on with and streamlining the entire process.鈥�

Direct bidding could also give the developer final control over their schemes, especially important as the government favours mixed-use developments and the scattering of affordable housing around developments rather than concentrating it in one corner. And, according to Lynch, one large developer has already taken the opportunity for greater autonomy one step further, and asked the prime minister if it can set up a housing association within its group structure.

She says: 鈥淪ocial housing may be a very small percentage in a large portfolio but you鈥檝e got no control over it. RSLs can be imposed on developers by the Housing Corporation or local authorities. Where a housing association is really neglecting its responsibilities, either socially or on maintenance, that could affect the whole of what you鈥檙e trying to do. The developer feels its investment is too great to allow that.鈥�

In general, Lynch foresees the lines between developers and developing housing associations blurring even more in the future. 鈥淚 can see there may be a time in the future when developing RSLs will look so similar to [private sector] developers that the Housing Corporation will be calling up and saying 鈥榳e鈥檝e got a managing association in difficulties, would you take them into your group structure?鈥� In 10 or 15 years, I don鈥檛 think you鈥檒l be able to tell the difference between some of the group structures. When I鈥檝e voiced that opinion to senior government officials within the Housing Corporation, they have always agreed.鈥�

Taylor Woodrow鈥檚 Fuller adds that the government鈥檚 鈥渟ustainable communities鈥� agenda will also blur the boundaries between the public and private sectors. 鈥淲hen you鈥檙e building highly sustainable communities, you鈥檙e not just talking about housing, you鈥檙e talking about schools, shops, hospitals. The Housing Corporation wants to be associated with these sorts of scheme. As a major builder, we can do it better.鈥�