Helping councils build the homes we need

Our communities need more homes, of different types and they need to be affordable, including a mixture of private and social homes.

The LGA's 'Investing in our nation's future' calls on an incoming government to make changes that would free councils to play their role in ensuring everyone finds an affordable home. New housing facilitates economic growth, and helps increase council tax, business rates, and New Homes Bonus receipts locally. New homes for rent can also offer on-going income generation for councils.

Councils have already proven they are well placed to increase housing supply and many more are setting up their own housing companies or exploring the potential to do so, offering flexibility on tenure and rent. Properties that are not subject to financial losses through 'Right to Buy' and schemes that can be financed free from the borrowing cap are all being looked at. Some councils are embarking on new approaches to apply private investment to meet local housing need with schemes that are self-financing, using the rent generated over the term to repay institutional investors.

Alongside pressing for the financial freedoms and a reintroduction of the conditions that allow councils to build, the LGA is exploring potential programmes of support that could help councils increase housing supply without public subsidy.

The support would aim to:

  • pursue and secure new kinds of additional funding, outside the HRA
  • build homes to meet housing need, generate income and stimulate growth
  • potentially access favourable rates from institutional or other corporate funders, which may only be achieved 'at scale'.

The LGA is working with local authorities to explore a number of potential models of support.

For example, financial institutions are demonstrating continued interest in housing investment although accessing this type of funding opportunity can rely on a certain scale of housing delivery or can be perceived as costly and complex to set up. A model of support may be therefore to assist groups of councils to collectively access institutional finance with the aim of achieving the required scale through parcelling together schemes from several councils and deriving economies of scale in the set up costs. Arranging access to combined or individual specialist advice and expertise for councils looking at more innovative approaches to new housing development is another potential approach.

A key element of any programme would be to provide support to the participating councils through what can be a complex and unfamiliar process; applying more widely the learning that is being generated in pockets of financial innovation; as well as capitalising on development opportunities that could come from like-minded and peer authorities working together.

As part of our research into this area the LGA has worked with Social Finance to analyse the financial viability of 16 example development sites across the country for new housing without public subsidy, with mixed tenure schemes. Viability was assessed at Local Housing Allowance rent levels, at market rent levels, and with a mix of rental and for sale.

The report illustrates.

  • whether and with what tenure mix, it would be possible to develop housing that is self-financing in the sample areas (where the rental income covers the cost of the loan and the management and maintenance costs)
  • the impact of flexing tenure mix across a portfolio, the maximum LHA mix each development could sustain in order to be self-financing, and levels of cross subsidy required from market rent or sale.
  • whether the developments would be potentially attractive to investors (based on the total return on investment, IRR)
  • the benefits, costs and risks and the payment profile associated with different types of financing instrument.

Overall the desktop study demonstrates that viability across this example portfolio was strong; 14 out of 16 of developments analysed could be self-financed with mixed tenure schemes.

There is not a one-size-fits-all approach to council-led housing development and there are various options and choices available to local authorities which will be guided by local priorities and issues such as appetite for risk, and desire for influence or control. The LGA is currently consulting with councils to gauge appetite for the potential models of support and is exploring with interested councils their individual ambitions for development to understand whether a group of like-minded interests could be established.

For more information contact productivity@local.gov.uk

8 April 2016