Innovation in council housebuilding - Birmingham

Birmingham City Council is the single largest developer of new homes in the city, accounting for nearly a third of all new development.


Birmingham City Council is the single largest developer of new homes in the city, accounting for nearly a third of all new development. Between 2009 and 2017 it built 2,654 homes through the Birmingham Municipal Housing Trust (BMHT) – 1,548 for rent and 1,106 for sale (normally in mixed tenure developments). In July 2018, BMHT built its 3,000th new home, including over 1,700 for rent. It aims to build approximately 1,200 council homes between 2018 and 2021 using nearly £140 million from its HRA. If the borrowing cap was lifted, the council could build a further 18,000 homes by 2031.   

Context
Following a period of economic and social problems as well as population decline between the late 1960s and the 1990s, Birmingham has an increasingly buoyant economy. The population grew by 10 per cent in the first decade of this century and it is estimated that it will grow by 200,000 people (90,000 households) between 2011 and 2031. However, overall new housebuilding fell from 4,000 in 2005/06 to 1,500 in 2011/12. There is, therefore, a shortage of new homes, especially affordable housing, with over 25,000 households on the local housing register. In addition there is a legacy of uncompleted regeneration programmes with undeveloped cleared sites, especially in older inner city neighbourhoods.  

Council housebuilding
Birmingham City Council established the BMHT in 2009. Its purpose is to bring forward and help develop local authority-owned sites for council homes (and market sale – see below). The sites range from being relatively small (such as former garage courts) up to around 300 homes in neighbourhoods that require regeneration. The smaller infill sites are unattractive to larger housebuilders – hence there would be little benefit in the local authority attempting to sell these sites. The initial programme in 2009 was small-scale (129 properties) so as to test the approach and build up the necessary in-house expertise and skills.

In 2016/17, there were 872 council housebuilding starts (and an equal number of market sale starts). The new financial freedoms and flexibilities under self-financing provided a major stimulus to the programme.

The council housebuilding properties are a mix of social rent (average rent in 2018/19 of £100 per week) and affordable rent (social rent + £3 per week, around 70 per cent of market rent).

Funding
Construction costs depend upon the type and size of home being built and range from around £85,000 per unit for a flat to around £185,000 for a four or five bedroom house. Each scheme is appraised financially and submitted as a full business case to the cabinet of the council. Notional land costs are excluded. Funding comes from a complex overlapping number of sources, including:
• HRA borrowing subject to headroom limits
• other existing HRA resources such as receipts from land sales 
• right-to-buy receipts (but these cannot be used with HCA grant)
• Homes England (formerly HCA) grant of £25,000 per unit but this is decreasing (see below)
• recycled surpluses from market sales, with cross-subsidy of approximately £20,000 per unit sold – by the end of March 2018, £20 million had been generated through house sales surpluses 
• Section 106 funding.

No new homes bonus money is used.

Additional motivations
Although the primary focus is the delivery of affordable/social housing, there are a number of additional objectives, including:
• Design quality: there was a strongly held belief in the local authority that much of the new housing in the 2000s was inappropriate – small, expensive to maintain/run and of poor design quality. BMHT is seen as a design exemplar, both locally and nationally.
• Regeneration of obsolete housing areas: developing new housing creates pride in the locality as well as reducing problems such as vacant and derelict sites and fly tipping. This links with the council’s commitment to work with and within neighbourhoods and communities to tackle such issues.  
• Meeting the needs of an ageing population by developing two-bedroom dormer bungalows for social renting – this addresses two interrelated issues: (i) the lack of appropriately designed housing that older people will accept and (ii) the ability to incentivise downsizing by older tenants under-occupying family homes. The first pilot project of 25 properties undertaken in 2013/14 released a number of family homes.  
• Job and training opportunities for local residents: through the development and construction process, with over 300 training and apprenticeship placements by 2016. The training programme, the ‘Building Birmingham Scholarship’, was launched in 2013 and involves the council working with all of its construction partners. Over 70 young people are now supported into higher education via this initiative, with many of the students now employed within the council’s workforce.
• Boosting the local economy: by creating investment worth over £2.12 billion in six years.
• Supporting SMEs: the council has set up a specific procurement route for delivering 15 or less homes with seven SME housebuilders.

Challenges
The major challenge is the financial viability of schemes. Key factors include:
• reduced Homes England grant rates
• increasing construction costs
• Government rent cuts which amount to a loss of £42 million from the HRA
• uncertainty and hence greater financial risk caused by Government proposals such as housing association voluntary right to buy.

Cross-subsidy (especially through mixed tenure schemes), which has always been an integral part of the programme, has therefore become even more essential. However, the local authority is faced with a challenge in some neighbourhoods where market sale is not attractive, thus making rental schemes unviable. This then requires the parcelling up of groups of sites for cross-subsidy to work effectively.

Additional benefits and opportunities
The success of the programme has generated a range of interrelated opportunities, such as:
• in-house expertise – for example urban designers, landscape architects, housing development skills (such as financial viability) and project managers. This is now being used elsewhere in the local authority
• mentoring and supporting other councils, leading to lesson learning for Birmingham City Council
• enhanced reputation/image of the city council in difficult times, especially the brand reputation of BMHT, because of high levels of tenant satisfaction (95 per cent-plus satisfaction ratings in annual surveys).

Development process
The council facilitates the development of social rent and market sale properties by the private sector by incentivising developers through redistributing risk. From a planning perspective, the council obtains planning permission and deals with statutory undertakers. The council designs the new homes (including those for market sale) on the basis of its ‘residential design guidelines’. The contract with a developer is for both social rent and market sale properties and payment is through a deferred land receipt and profit sharing, in other words ‘build now, pay later’.