International Models for Affordable Housing: Lessons from the United Kingdom

The Euromoney Egypt Housing Finance Conference - 25 May 2009

Trowers & Hamlins LLP Sceptre Court 40 Tower Hill London EC3N 4DXt +44 (0)20 7423 8000 f +44 (0)20 7423 8001 www.trowers.com

contact Tonia Secker (London) Sara Hinton (Cairo)e tsecker@trowers.com e shinton@trowers.com

Introduction■ What is affordable housing – the UK view?

■ Who delivers it?

■ What are we trying to achieve with new affordable housing?

■ Delivery models for new build affordable housing

What is Affordable Housing?

■Low cost rental accommodation■ available for rent

■ sub market levels

■ made available to people whose needs are not adequately served by the commercial housing market

■ Low cost home ownership accommodation■ occupied on shared ownership/shared equity basis

■ made available to people whose needs are not adequately served by the commercial housing market

Key requirements for delivery in the UK■ Long terms affordable housing use

■ Sustainability of design and construction

■ Regional fit

■ Sub-market rents and controls

■ Security of tenure

■ Move towards investment return on public sector subsidy

Newbuild Affordable Housing delivery models

■ Recognition that State subsidy is necessary – unless rent levels are high

■ Gap between the costs of construction and ongoing maintenance and the level of associated debt which can be serviced by the rental income

■ Models which balance subsidy and private finance

Delivery Models

■ Capital subsidy – short term payment

■ Private Public Partnerships – revenue payment over long term

Capital Subsidy

■ National competition – operated by Government agency

■ Pot of available subsidy

■ Bid for grant – contribution towards acquisition and construction costs

■ Assessment against criteria

■ £2.7 billion allocated 2008/2009

Basic Structure

Local Authority

Bank

Manager

HCA

Government

Tenants

DeveloperTenancy

Agreement

Loan

Direct Agreement

Grant Agreement

Management Agreement

RentchargeNominatio

ns

Key Contract Characteristics – Construction Phase (1)

■ Base design and quality standards

■ Payment in 2 tranches – security required for 1st tranche

■ Payments linked to satisfaction of conditions and milestones

Key Contract Characteristics – Construction Phase (2)■ Restrictions on disposals

■ Recovery grounds for default

■ Independent certification of works

■ Certification of final costs

■ Reporting obligations

■ Certainty for developer and State

Key Contract Characteristics – Operational Phase (1)

■ Affordable housing use

■ Approved form of tenancy

■ Services Specification

■ Restrictions on rent levels – limited to an index

■ Restrictions on power to dispose of land

Key Contract Characteristics – Operational Phase (2)

■ Rights against the land on default

■ Clawback of grant on disposals

■ Right to acquire

Housing - PPP

■ State specifies in outline terms what it requires

■ Private sector consortia will then bid to deliver it

■ State gains use of an asset before it has fully paid for it

■ Private sector borrowing funds development; payment runs from practical completion

Loan Agreement

Municipality

BankShareholders

Landlord

Residents

Direct Agreement

Project Agreement

SubcontractorsTenancies

and Leases

Cou

ncil

Dire

ct A

gree

men

ts

Equity SPV

SubcontractsRents

Housing PPP - Development Phase

■ Clear specification

■ Defined delivery dates

■ Independent certification of practical completion

■ Consequences of late delivery

■ Monitoring

■ Funder step in

Housing PPP

Payment flows when housing is operational:Government

Occupants

Funder

Project Company Shareholders

Subcontractor providing maintenance

and management

Payments for operation of housing subject to performance criteria

Repayment of finance

Equity Return

Contract paymentsLandlord

Project Company

Housing PPP – Operational Phase (1)

■ Clear specification

■ Monthly payments to SPV – subject to performance

■ Availability deductions – only paid for “available” housing

Housing PPP – Operational Phase (2)

■ Performance deductions

■ Catastrophic events – insurance

■ Who covers the risk of empty houses?

■ Termination for material failure – compensation

■ Funder step in to avoid termination

Housing PPP – Longterm Ownership of Asset■ Who gets the housing at the end of the project?

■ State option

■ Landlord obligation

■ Key is total debt repayment

■ If no outstanding debt?