Finance Archives - Red Brick

Councillor Dave Ward returns from Kosovo with lessons in development finance. He argues that allowing the land and development supply chain to share in the upside of apartment sales can lower the barriers to entry for smaller housebuilders.

I have just returned from Pristina, Kosovo where I got my new apartment ready for a summer rental to a couple of German students who are volunteering there for the summer and needed a place to stay.

As Chair of Planning at the London Borough of Merton, I am always interested in housing and planning policy, particularly around building new homes and it was very interesting to see and learn about the differences between the UK, specifically London, and Pristina.

Firstly, the scale is a lot smaller, Pristina is a city of nearly 150,000 people, just over eight per cent of the total 1.8 million population of Kosovo, and growing. This quite closely compares with London’s 7m people, roughly 10% of the total population of the UK.

So both cities are the centres of government, the financial sector, the media and the headquarters of many national and international businesses and other organisations. As in London this attracts a higher population as people come to the capital for work, which then leads to housing pressures.

Pristina is in the middle of a housebuilding boom. The block where I now live (for some of the year) is ten storeys, with roughly 60 apartments varying in size from small studios to three-bed apartments. It is one of at least eight similar blocks, either completed or under construction, just within a few hundred metres, in an attractive location just ten minutes walk from the city centre.

The most interesting thing I discovered about housebuilding in Pristina is they way it is financed which is very different from the UK. Typically a developer will find some land upon which a block could be built, purchase it from the original landowner, pay contractors to build the block, and suppliers for the materials, then when it is complete, sell or rent the homes and try to make a profit, just like here.

The difference is that the original landowner, contractors and suppliers are often paid, at the end of the project, in completed properties.

For example, the company which supplies the concrete struts which form the frame of the building might, instead of cash, upon completion of the project receive a floor, 6 or 8 properties which they can sell, keep or rent as they wish. The same for the building contractors, glaziers and anyone else involved in the project.

I was surprised at this and wanted to know more so, as I was due to meet the owner of the company which built the block I live in, I asked him about it.

His company usually funds around half of the construction costs of a new development in this way. It is kind of a loan, without interest, but it is more expensive. He estimates that building a new block of apartments would be 5 to 10 per cent cheaper if paid up-front in cash. This is a compensation for the contractors, for instance a building firm. They need to pay their workers, purchase the materials and do their work, paying up-front, on the promise of a number of properties upon completion, not knowing for certain what they will be worth at that stage. They are taking much of the risk, and therefore take a higher return.

This model is used widely in Kosovo and has been borrowed from nearby Turkey where this has been the norm for development for some time.

The practical implications of this are that housebuilding is slightly more expensive, but easier to do for those without huge amounts of up-front capital. So building is not dominated by large developers funded by the major banks or the very wealthy. A relatively small company, such as the family firm which built my block, can get into the housebuilding business and deliver new homes from very small beginnings.

Property prices and rental values in Pristina are, like London, higher than the rest of the country. They are much lower than London in actual terms, but also lower in relative terms compared to average income, wages and cost of living in Pristina. Housing is genuinely affordable for those on modest or low incomes.

To rent an apartment like mine – 2 bedrooms in the centre of town – a single person would need a salary around the middle range in Pristina. A couple sharing would find it more affordable. This is for a sought-after area near the centre of town. Move a few miles out, a bus ride from the centre and rents and prices become comfortably affordable for the lower paid.

Could this be replicated in full or in part in the UK? Could we open up housebuilding to smaller entrepreneurs, to housing associations, non-profit organisations, and to Local Authorities to build new housing, without the need for huge amounts of capital up front?

I think it is worth looking into.

Dave Ward

Dave is a Labour Councillor in the London Borough of Merton where he is Chair of the Planning Committee. He represents the ward of Colliers Wood.

TWITTER

Monimbo

Senior housing policy expert writing under a pseudonym.

I hesitate to say that the government has published its final proposals for the self-financing of council housing, since they’ve made so many announcements about it they are rivalling the quantity issued by the previous government. And strangely enough, despite this the broad shape of the package is pretty much the same as that put forward by John Healey when he offered his ‘prospectus’ last year. One key difference, of course, is that a prospectus implies choice, whereas the current package will – after a bit of negotiation around the edges – be imposed by statute from April 2012, on all 171 councils that still have housing stock.

On the face of it, the figures involved look alarming, and no doubt some on the left will use them to oppose self-financing outright, as they did when Labour put it forward. The headline figure is that councils will take on around £19bn of new debt, to enable them (in effect) to buy their way out of the system. While the LGA originally demanded that all ‘historic’ debt be written off, this was always an unlikely call on public funds, even more so with Mr Osborne in charge at the Treasury. More recently, among local authorities there has been gradual and – almost – universal acceptance of the principle that extra debt would have to be taken on as the price for escaping from the so-called ‘subsidy’ system. (The word ‘subsidy’ increasingly means, of course, that tenants subsidise the Exchequer, not the other way round.) And the other side of the coin is that a minority of councils will have part of their debt paid off.

Inevitably, the Treasury had its fingers in this pie well before the general election. The cap on each council’s borrowing, which restricts them to the levels to be included in the settlement itself, was already envisaged in Labour’s prospectus. Not only that, but it was always likely that the Treasury would ensure that it kept the surpluses the government would have earned from council housing in the future, however much these are correctly argued to amount to ‘daylight robbery’ from tenants.

In terms of the arithmetic, the spreadsheet experts have so far concluded that the current deal is similar to, and perhaps even a bit better than, the one in John Healey’s prospectus. However, whatever the overall deal, what will matter to authorities is how their individual figures work out. Given that there is a fair amount of local detail in the latest paper, this is where the focus of interest on the figures is likely to shift.

There is already a danger, of course, that hard-pressed councils whose revenue support grant has been cut are looking at their housing revenue accounts to see if they can help make up the shortfall. Labour was alive to this, and included updated guidance about maintaining the ‘ring fence’ around the HRA in its prospectus. In the current document, the guidance has been dropped and there is only a brief reminder that the ring fence needs to be kept. It seems to me that it’s always been down to tenants to be vigilant on this issue. Their vigilance needs to be even greater when, after April next year, the only income to the HRA will be their rents. The first call on rents will be to pay the debt charges, then maintain the stock, then run the landlord service. Councils and tenants can’t afford to let any of their rental income be siphoned off to make good cuts elsewhere.

There remain several points of contention about the caveats in the overall deal the government has put on the table, and all of these are a result of those greedy Treasury fingers looking for the meat in the pie. The new one to emerge as part of Mr Shapps’ package is that councils will have to continue paying three-quarters of right to buy receipts back to government. Labour can hardly rail against this iniquity, since they introduced it, but credit was due to John Healey that through his package it would have been brought to an end. The Treasury have locked their fingers round this tasty morsel, and must now somehow twist the settlement so that it reflects 30 years of future stock losses through right to buy. This introduces a high and unnecessary degree of uncertainty, since predictions of right to buy sales are invariably wrong.

The Treasury also wants the facility to reopen the settlement if circumstances change. One of these might of course be a wayward forecast of the effects of the right to buy, but the very prominence of this caveat is making councils think that ‘self-financing’ might be maintained only as long as it suits the Treasury. This is not what the deal is supposed to be about.

However, it’s the debt cap that really grates with councils, in part because of the context of overall spending cuts. If it was a bad idea under Labour, it’s a far worse one when grants from central government and other sources of finance apart from borrowing are likely to be extremely scarce, to put it mildly.

The debt cap, the continued repayment of receipts and the constant threat that the settlement might be reopened are all eroding councils’ supposed autonomy. Interestingly, as was revealed last month, councils have an unlikely ally in the deputy prime minister, who is said to have asked for councils’ borrowing powers to be reconsidered in a letter to Eric Pickles about the imminent local government finance review.

Of course, if the Treasury were to listen, at last, to the case for taking council borrowing out of the main national accounts, they could use self-financing to get council debt off the government’s books completely. Council housing is anyway now classified as outside government by the Office for National Statistics. Because most of its income comes from charges (rents). Where councils have ALMOs, these are considered separate public corporations (like, say, the BBC). Taken together with likely changes to the accountancy rules about housing revenue accounts and the separating out of housing debt, this could be the moment for the Treasury to take a step towards giving council housing – like housing associations – real autonomy. However, none of us will be holding our breath.