Innovation in council housebuilding: chapter seven
The ‘how’ of council housebuilding has three dimensions – resources, policy making and the development process.
‘Resources’ involves bringing together powers, leadership, land and property, funding and skills. ‘Policy making’ centres on HRA business planning and financial modelling. The ‘development process’ focuses on the delivery pipeline, from site identification through to the planning system and construction. Understanding the complexity of each of these elements and sub-elements is vital.
The findings for this chapter draw principally on the case studies. There are few, if any, previous detailed studies on this aspect of council housebuilding. There are a limited number of reports that provide basic information, for example from the Association of Retained Council Housing (2013), but these are not up-to-date. The funding aspect of resources (especially HRA finances) has, however, been covered in previous work and this is referred to below.
Resources
As has already been pointed out, there are five resource issues. It is the bringing together of each of these that is critical in taking forward council housebuilding.
There are a complex range of powers that affect the council housebuilding process and also provide the context in terms of the self-financing regime. They include:
• Localism Act 2011 (Part 7) which abolished the previous HRA subsidy system and replaced it with the self-funding scheme
• Housing Act 1985 (Section 9) which sets the basis for local authorities to provide housing
• Local Government and Housing Act 1989 (as amended), together with the regulatory framework for social housing on the use of the HRA
• Housing and Regeneration Act 2008 (for instance, sections 68-71) provides clarity by setting out statutory definitions of social/affordable housing, together with the updated National Planning Policy Framework (NPPF) in 2018 that includes social rented housing within the definition of affordable housing
• Town and Country Planning Act 1992, especially the associated regulations, which cover local authorities granting themselves planning permission for their own developments (for example the use of unilateral undertakings rather than planning agreements)
• planning agreements/Section 106 agreements of the Town and Country Planning Act 1990 (as amended), which can be used to acquire stock or receive payments known as ‘commuted sums’ that can help fund council housebuilding (the Government issued a consultation paper in March 2018 that will have implications for future agreements)
• European Union Directive 2014/24/EU, 2014, on public procurement, which is important if the commissioning and procurement stage in the development pipeline focuses on training, local jobs and the local supply chain.
It is, therefore, essential that councils seek legal advice to fully understand the complex requirements.
A frequently repeated message from the case studies is the significance of local leadership. It links with the enabling role of councils that has been covered in chapter two. It involves councillors and senior officers confirming the importance of council housebuilding, both internally and to external stakeholders. In the case of Stroud, the local MP played a prominent role by raising the issue of the lack of HRA headroom borrowing to ministers and successfully holding an adjournment debate in the House of Commons in December 2017.
There are six interlinked leadership elements to achieve successful council housebuilding outcomes. They include:
ensuring that the provision of affordable rented housing through, for instance, council housebuilding is at the top of or high up the local agenda (for example Nuneaton) making the case for and promoting the added value of council housebuilding:
local jobs and training, for example the ‘Building Birmingham’ Scholarship’ programme
positive impact on the local economy in terms of, firstly, the multiplier effect of investment and secondly, supporting SMEs (Stoke-on-Trent)
council housebuilding as part of infrastructure provision to boost the economy (Oxford)
contributing to better health and wellbeing outcomes, especially if new homes meet the needs of, for instance, older people wishing to downsize (Birmingham)
The external face is particularly important. Firstly, it helps to show that councils are committed to taking direct action on the crisis of affordable rented housing. Secondly, it highlights to the local community that councils are investing resources in neighbourhoods that may not have seen any new housebuilding for a number of decades. Thirdly, by promoting council housebuilding as one element of affordable rented housing provision, it can overcome possible concerns of other providers, such as housing associations, which may initially see it as a threat to their programmes.
supporting high design and quality standards that could act as an exemplar for other providers (Stroud)
guaranteeing that there is a strong corporate approach on council housebuilding by, for example, bringing together housing, planning and regeneration activities (for example Camden’s community investment programme (CIP))
highlighting to external stakeholders the role of council housebuilding
developing joint working and partnerships with organisations such as housing associations (which may be able to provide skills and expertise).
A frequently repeated message from the case studies is the significance of local leadership. It links with the enabling role of councils that has been covered in chapter two. It involves councillors and senior officers confirming the importance of council housebuilding, both internally and to external stakeholders. In the case of Stroud, the local MP played a prominent role by raising the issue of the lack of HRA headroom borrowing to ministers and successfully holding an adjournment debate in the House of Commons in December 2017.
There are six interlinked leadership elements to achieve successful council housebuilding outcomes. They include:
• ensuring that the provision of affordable rented housing through, for instance, council housebuilding is at the top of or high up the local agenda (for example Nuneaton)
• making the case for and promoting the added value of council housebuilding:
o local jobs and training, for example the ‘Building Birmingham’ Scholarship’ programme
o positive impact on the local economy in terms of, firstly, the multiplier effect of investment and secondly, supporting SMEs (Stoke-on-Trent)
o council housebuilding as part of infrastructure provision to boost the economy (Oxford)
o contributing to better health and wellbeing outcomes, especially if new homes meet the needs of, for instance, older people wishing to downsize (Birmingham)
• supporting high design and quality standards that could act as an exemplar for other providers (Stroud)
• guaranteeing that there is a strong corporate approach on council housebuilding by, for example, bringing together housing, planning and regeneration activities (for example Camden’s community investment programme (CIP))
• highlighting to external stakeholders the role of council housebuilding
• developing joint working and partnerships with organisations such as housing associations (which may be able to provide skills and expertise).
The external face is particularly important. Firstly, it helps to show that councils are committed to taking direct action on the crisis of affordable rented housing. Secondly, it highlights to the local community that councils are investing resources in neighbourhoods that may not have seen any new housebuilding for a number of decades. Thirdly, by promoting council housebuilding as one element of affordable rented housing provision, it can overcome possible concerns of other providers, such as housing associations, which may initially see it as a threat to their programmes.
The consistent message emerging from a number of studies is that funding is complex and uncertain, with many different sources each having different rules and regulations. Understanding and utilising them is fundamental to developing and implementing a programme of council housebuilding. It is also vital to appreciate that agility and the ability to respond quickly is needed in reacting to initiatives such as the Government’s competitive bidding round for local authorities in 2018 on raising individual headroom borrowing caps.
The four major funding sources underlined in the online survey and which correspond with other studies are:
• borrowing within the headroom debt cap – used by 70 per cent of respondents
• right-to-buy (RTB) receipts – used by well-over four-fifths of respondents
• other capital receipts such as sale of land – used by approximately one third of respondents
• Homes England (formerly the Homes and Communities Agency) grants – used by 60 per cent of respondents.
Each of these has their own ‘rules’. For example, only 30 per cent of RTB receipts can be used and they must be utilised within three years or returned to the Treasury. In the case of Homes England, there are a number of specific and general programmes, such as estate regeneration. There are also regulations affecting joint use. For instance, RTB receipts can’t normally be used in conjunction with Homes England grants.
In addition, there are a number of other funding sources that can be used and/or are emerging, including:
• commuted sums through planning agreements (where the affordable housing contribution is provided as a cash payment that can be used on another site)
• new homes bonus
• lottery funding, which has been used to support ancillary community projects in neighbourhoods with council housebuilding programmes
• government programmes such as local growth funding through local enterprise partnerships (LEPs), which is being used to tackle infrastructure and other development constraints on housing sites (for example Sutton) and the community housing fund (Northumberland)
• growth deals and delivery plans that include grant funding for affordable housing (Oxford).
Again, there are many challenges in utilising these sources that make their use difficult. Firstly, there are often many other calls on these resources. Secondly, they may involve competitive bidding with no guarantee of success. Thirdly, they can form part of much bigger strategic funding programmes which at the outset lack clarity over the scale and nature of funding for council housebuilding, and they may eventually take the form of a specific funding stream managed by Homes England. An emerging example of this is the growth deal for Oxfordshire (see the Oxford case study in the next chapter).
The uncertainty and complexity of funding is illustrated by the competitive bidding round for individual increased headroom borrowing capacity announced in principle in autumn 2017:
• detailed guidance on the three-year programme beginning in 2019/20 was published by the Ministry of Housing, Communities and Local Government (MHCLG) for councils outside London in June 2018, with a deadline of early September for bids
• only local authorities in high-affordability pressure areas (defined as where the difference between social rents and private rents is more than £50 per week) have been eligible to bid
• additional borrowing capacity can be combined with grant funding from the shared ownership and affordable homes programme 2016-2021 or retained capital receipts from the sale of council homes under RTB.
In London, the situation is different as the elected Mayor issued a funding prospectus in May 2018 for ‘building council homes for Londoners’. This drew on the devolved funding arrangements over the use of the Government’s additional £2 billion for affordable housing in England announced in October 2017. An addendum to the prospectus was subsequently published in July 2018 to include the individual increased headroom borrowing capacity.
The initial reaction of councils outside London (including some of our case studies) was determined by the eligibility to bid criterion. Eligible councils generally welcomed the bidding round but expressed concern over the tight timetable for bidding, as well as noting that the size of the programme was limited. The LGA, in a response to the MHCLG borrowing programme prospectus, summed up the situation as a “positive step in the right direction – but the Government now needs to accept calls to scrap the cap on council borrowing across the country”.
The previous paragraphs have shown that there are a wide range of skills required to deliver a council housebuilding programme. They include leadership, expertise in site identification, an understanding of the complexities of funding streams and an appreciation of the powers and regulations affecting different elements of the programme. In addition, as the next two sub-sections indicate, there are project management skills required as well as the need to access specific expertise in business strategy, town planning and financial modelling.
As a number of interviewees for the case studies pointed out, councils traditionally had these skills when there were large development programmes up to the early 1980s. The issue now is on effective methods for filling these gaps. In part, this can be achieved by ensuring commitment to training programmes (such as the ‘Building Birmingham Scholarships’). It also requires unlocking existing skills within other departments, such as finance and planning.
Other ways of addressing skills shortages include:
• in-housing training and apprenticeship schemes
• use of external consultants
• sharing staff between councils
• working with housing associations, which may be able to provide some of the necessary expertise because of their development programmes.
Policy making
Councils are required to prepare a 30-year business plan for the HRA. This provides the basis for setting priorities on the use of the HRA, for example stock modernisation, council housebuilding, estate regeneration and so on. It also links with council-wide medium-term financial strategies. It is normally supported by more detailed five-year plans for the HRA and corporate annual capital programmes, as well as being co-ordinated with council-wide asset management strategies. The policies and priorities are also usually cross-referenced to local housing strategies and housing policies on affordable housing provision in local plans.
Diagram two: policy making framework
Policy context, for example:
Council housing, for example:
Council resource plans, for example:
• corporate/community plan
• HRA 30-year business plan
• corporate capital programmes
• local housing strategy
• HRA five-year plan
• corporate revenue programmes
• local plan
• HRA annual updates
• asset management strategies
• economic development
The major challenge for local authorities is that the intended stable framework for business planning as part of the self-financing settlement has been thrown off course because of changes in Government policies such as rent setting, promotion of right to buy and welfare changes. This has made business planning more challenging because underpinning assumptions frequently have had to be altered.
The online survey results, therefore, contrast with the findings reported in the study by the Association of Retained Council Housing (2013). The latter noted that councils were in a learning period on business planning but were generally in the position of having a clear framework on integrating HRA strategies with corporate policy making and governance. There was a generally held view that the HRA business plans would only require minor modifications each year because the assumptions on key variables, such as rent levels through to inflation, would not significantly change.
This contrasts with the present position, with over half of respondents pointing out that they will be reviewing and rewriting their HRA business plans in 2018. Of these, over 50 per cent had previously revised their strategies as recently as 2017. A small minority, however, were taking the view that they would postpone a review until, for example, “we have certainties over Government policy on high-value assets and the levy” associated with voluntary right to buy. Since then, Government has confirmed that the forced sale of high-value assets will not be implemented.
An element of HRA policy making is financial modelling. As both the Chartered Institute of Public Finance and Accountancy and Chartered Institute of Housing (2016) and the Association of Retained Council Housing (2013) point out, this is important for deciding on HRA investment priorities. It normally involves, firstly, a basic model using government-based assumptions on inflation, rents and so on. Secondly, a sensitivity analysis is undertaken to identify key variables and assumptions. Thirdly, the model is then reworked on the basis of changing these key assumptions to help explore the financial options and trajectories.
Development process
The development process (or development pipeline) is a vital part of council housebuilding. As with the real estate development process as a whole, there are a series of sequential steps and stages. These can be conceptualised as comprising four broad overlapping phases – initiation, feasibility, project management and lettings. The first three of these are especially relevant for this project.
Diagram three: development process
In reality, the development process for a single scheme for council housebuilding is more complex:
financial viability is constantly monitored and amended as information changes and becomes more detailed (such as site conditions)
elements are interrelated – for example, a change in funding affects viability, leading to modifications to design and layout
delays, postponements and even abandonment of a project can happen because of, for instance, changes in national policy or funding.
Five further interrelated points are significant. Firstly, the case studies demonstrate that there may be a number of individual projects in the development pipeline at any one point in time (such as in Birmingham). Each will be at a different stage. This has advantages and disadvantages. The advantages include the ability to switch resources between projects if one scheme becomes stalled. The disadvantages centre on the need to be able to manage a number of projects at the same time.
Secondly, and of increasing significance, there is the complexity of developing larger sites where council housebuilding is, for instance, one element of a bigger regeneration scheme (such as Camden’s CIP). It could involve a multiplicity of providers such as housing associations and private sector housebuilders, and an extensive consultation process. Inevitably, the development process for these strategic sites will be much longer and more complex.
Thirdly, planning is a vital consideration throughout the development process:
at the initiation stage, matching sites with identified housing requirements is a significant part of the planning process
planning requirements on design and layout are important at the feasibility stage
obtaining planning permission (including unilateral undertakings) may not be straightforward, especially if there are objections from adjacent landowners and residents
throughout the development process, community involvement is vital in gaining support for a scheme – including residents’ and tenants’ associations and , in rural areas, parish councils.
Fourthly, the timetable can be lengthy for the development of even a small site. With a favourable planning policy and community support, the three stages prior to letting new homes may still take 12-18 months. Some of the case study authorities highlighted that large mixed tenure brownfield sites with a capacity in excess of 100 units could take over five years from initiation to lettings.
Lastly, viability assessment is an ongoing exercise throughout the development process. Key points include:
moving from broad overall assessments at the initiation stage to highly detailed studies at the feasibility stage
regularly reviewing and updating viability as more information becomes available, such as site conditions and infrastructure requirements
being prepared to respond to changes in the external policy environment on, for example, national planning policies and funding.
In relation to the last point, it is important to appreciate that these changes may be positive as well as negative. A number of our case study councils indicated that the MHCLG prospectus on the additional HRA borrowing programme opened up possibilities of developing sites that had stalled at the start of the feasibility stage.
In broad terms, viability is a relatively straightforward concept. As one of our case study councils pointed out: “A positive or negative viability assessment of a single scheme is determined by the rental income generated over a pay-back period compared with development costs (including offsets such as grants), on-costs, ongoing maintenance and management costs and any loan repayments.” However, each of these elements is complex, as illustrated in the table below.
Table four: viability assessment elements
Element
Commentary
Rental income
The amount of income from rents over the pay-back period (i.e. rental stream). It is an estimated figure based on judgements on likely rent increases/decreases.
Pay-back period
This is the length of time considered reasonable to repay the investment made. It relates to the life of the asset. Some of the case studies use 50 years.
Development costs
These primarily include (i) construction, (ii) acquisition of land and property (if required) and (iii) contingency sum to cover unknown costs. Notional land costs are not normally included where sites are owned by councils. Development costs may be offset by grants and other funding sources such as commuted sums from planning agreements.
On-costs
This covers costs such as design fees and the use of consultants. In some cases this is included within development costs. The Royal Institution of Chartered Surveyors (RICS) has highlighted that there is a lack of clarity and consistency in its use.
Maintenance and management
Estimated day-to-day repairs and maintenance costs together with management costs.
Loans
Loan repayments such as HRA borrowing
It is important to appreciate that viability assessments must be understood in the context of the wider HRA business plan priorities and the HRA borrowing cap.
