Local Authority Housing Treasury Advisory Perspective

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Local Authority Housing Treasury Advisory Perspective

Maidstone – 14th June 2013Mark Swallow – Client Director

Confidential - not for disclosure to third parties

Local Authority Housing - Background— LA's have been providing social housing since the 1920's

— Requirement to keep HRA dates back to Housing Act 1935

— Part II Housing Act 1985 – Powers to provide Housing and Other Accommodation

— General Needs Housing

— Other buildings associated with housing, shops and recreation grounds, land, offices and hostels

— Local Government and Housing Act 1989 – requires local authorities to keep a ring– fenced land lord account – HRA

— Since the 1980’s LA’s have been looking at alternative ways to deliver/provide housing, legislative constraints have prevented innovation

— Impact of Localism Act – Some known's but more unknowns!

2Local Authority Housing Seminar


Local Authority Housing – Supply

– Local authorities in England owned 1.69 million dwellings on 1 April 2012, a decline from 2.81 million on 1 April 2001

Local Authority Housing Seminar

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and Demand!–There were 1.85 million households on local authority waiting lists on 1 April 2012


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Not Just LA Housing

– The government estimates that 232,000 additional households could require homes each year to 2033.

–In 2012, only 115,600 new homes were built in England.


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Self Financing – Something New?

– Self-financing based on authorities ‘buying’ themselves out of a negative housing subsidy position or receiving a lump sum in lieu of future positive subsidy receipts

– It was a ‘once and for all settlement between central and local government… a one off allocation of debt’ after which all responsibility for maintaining social housing stock rests with local authorities

– Authorities are now able to plan long term for the investment needs of their

assets and service levels in consultation with tenants

BUT – constraints still exist


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Borrowing Cap – Powers to put a limit on an authority’s indebtedness (the cap) are included in

the Localism Act 2011

– Government considers that it is necessary, due to the current fiscal position, to maintain control on local authorities’ debt

– Set to continue, at least until the next spending review – 26th June - Change to policy?

– The cap restricts the ability of authorities to take on additional borrowing under the Prudential Code, even if the borrowing is affordable by the HRA

– Investment is therefore curtailed although the cap

– The determination states that the cap will only be seen to be breached at the end of the financial year, allowing authorities some short term flexibility

– The future proposed accounting changes to the treatment of leases will affect the calculation of the debt cap.

– LGA have recently calculated that 60,000 homes could be built if cap did not exist



The Only Option?– No change to the legal position regarding housing provision

– Ring-fence remains around HRA housing

– Subsidy system no longer exists providing “freedoms” to provide more housing

– But debt cap exists which puts a constraint on new housing provision

–National borrowing limits are close to the limit so even non HRA housing provision may be under pressure

So what is the alternative?

- Find alternative solutions!


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Alternative Solutions – Use Your Balance Sheet– Local Authorities hold substantial assets on their balance sheets, both in terms of physical assets and cash resources

– Depending on your Corporate Objectives/Priorities you can use this balance sheet strength to provide solutions;

– Solutions to housing delivery – new homes on existing land holdings, financial support to housing schemes – reserves or borrowing capacity

– Solutions to current low investment returns – replace interest receipts with rental income and provide capital appreciation

– Alternatively someone else can use your balance sheet strength to generate improved investment returns and provide a housing delivery solution


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Special Purpose Vehicles (SPV) – A number of successful Special Purpose Vehicles have been used around the

Country to deliver property/asset projects

– In many of these partnerships the local authority commits land to the SPV and establishes a contract with it to protect the Council from potential losses or delivery failure

– The SPV oversees development through contracts with developers and Registered Providers (RPs

– In this way it is not a delivery agent, and does not take development risk, this is taken by the developer/RP

– Usually there is no upfront land payment or equity contribution from the developer or RP but they guarantee future payments to the SPV



SPV - Structure

Sale proceeds

Land £

Possible Prudential Borrowing

Potential land value / reinvestment towards

s.106 / wider regeneration benefits

Return on investment and share of sales proceeds

Plot 1 Plot 4Plot 3Plot 2

Council

Co-investmentPartner

Procure Works / Services -Upfront Infrastructure and Planning

JV Co



Local Housing Companies Joint venture between the public and private sectors, with local authorities 'investing’ land in the development process and private developers and other investors providing funding to an equivalent level

The suggested benefits are that Local Housing Companies will:—Increase the supply of a range of homes, including affordable homes—Allow local authorities to invest land in housing development to capture a

share of increasing land values—Position local authorities at a stronger point in the centre of the

development process—Provide opportunities for a range of investment and development players

to become partners of local authorities —Create quality schemes with wider consumer choice and tenure options



LHC - Structure

Assets

Equity committed (working capital and development equity)?

Payment of purchase price reflecting value of asset on satisfaction of

conditional contract

Equity committed (working capital and development equity)

Site 1 Site 2 Site 3

Council Partner

JV Co

Framework agreement with call-off contracts: exclusivity



Prudential Borrowing

– A local authority is able to raise finance under its prudential borrowing powers, in order to develop affordable housing

– This funding could be provided as a loan to an alternative housing provider e.g. a Registered Provider

– Could be used towards direct development or setting up an alternative delivery vehicle such as a local housing company/SPV

– Borrowing cap issues avoided (HRA not national)

– Recently arranged a £20m 5 year deal at 3% return for local authority (cost of funding to RP)

– Potential future market for local authority to Registered Provider lending?

– Capital/Revenue distinction required



Institutional Investors–Almost unlimited cash chasing high quality investment opportunities

– Pension Fund Investors – seeking quasi government risk with inflation linked returns

– Leasing type arrangements – balance sheet treatment could cause problems

– Various types of guarantees – default risk, capital value risk underwritten by LA

– Co – Investment models – non bank mortgage schemes

Providing attractive investment opportunities to investors – providing the right housing mix for local authorities?


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Current Central Government Initiatives – A 2010 report by property group, Savills, estimated that "help Britain

building" could add 1% to the output of the economy

– £570 million Get Britain Building investment fund for developers. This will help to build new homes on development sites that have stalled, haven’t started or are classified as being on hold

– Identification of enough formerly used, surplus public sector land to support up to 100,000 new homes and are looking to sell this quickly to

– New Homes Bonus. This is a grant to local councils for increasing the number of homes and their use

– Loan guarantees for housing developers that are backed by government to encourage the building of more social and privately rented housing

– Encouraging a wider range of investors to build houses for private rent with our Build to Rent Fund



Current Central Government Initiatives

– Reduction in regulations on house builders to make the planning system more efficient and effective, and are offering finance options to self-builders from a specially created fund of £30 million

– Helping community groups to build new homes through the Community Right to Build which became law on 6 April 2012. It is now easier to bring vacant and underused public land back into use through the Community Right to Reclaim Land

– Helping buyers with the NewBuy Guarantee scheme, which started in March 2012 and allows buyers to get a mortgage on a new-build homes with only a fraction of the deposit they would normally require. More than 70 housing developers and 6 major lenders now offer the scheme

– Councils can also use Private Finance Initiatives for housing refurbishment and regeneration, where other grants or funding wouldn’t have been enough to make the changes needed

Use H M Government PLC’s Balance Sheet?



What Can You Do?– Contribute land and other assets – existing holdings, purchase of new sites.

– Use planning levers and tools - Local Plans should set out very clearly what is expected in terms of quality, design, typology, scale, infrastructure and affordable housing

– Implement infrastructure tariffs – CIL

– Fund infrastructure - facilitate the physical and social infrastructure that will attract developers

– Use funding models and incentives – New Homes Bonus, CIL, TF.

–Consider ALL alternative approaches – BUT consider their impact on your current and future financial position!


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The Role of Arlingclose

– Working with partners to explore AND DELIVER housing options

–Independent – one size does not fit all

– Developing a toolkit of options to present to clients

– Will soon have a track record of delivery

– Best placed in terms of TREASURY ADVISORY, CAPITAL FINANCING and ACCOUNTING expertise – can assess the impact on the balance sheet

Arlingclose – Well Placed and Resourced to Help You


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Summary– Local authorities have a central role in the provision of housing

– Central Government have given local authorities the freedom and opportunity to think innovatively, although constraints still exist

– Opportunity to provide investment in existing stock as well as meeting the needs of the local community through new homes provision

– Housing delivery drives economic growth and delivers other tangible benefits (Social, Health Etc)

– Local authorities can show the leadership and innovation that is needed, and can build on this by aligning resources and funding, providing infrastructure and services, engaging with developers and businesses


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Questions?

Mark Swallow CPFA - Technical Client Director

Arlingclose Ltd 60 Moorgate

London EC2R 6EL

Mobile: 07875 330826

E-Mail: [email protected]

Web: www.arlingclose.com


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Documents

Local Authority Housing Treasury Advisory Perspective