Last week we carried a piece by Graham Martin called Funding affordable rented homes – are Insurance Companies the answer? about the interest being shown by Insurance Companies in getting into the affordable housing market, and the innovative ways of structuring loans that might make investment a realistic proposition. Here Peter McCormack, the Chief Executive of Derwent Living, explains how they blazed this trail.
Derwent Living, a registered housing provider based in Derby, was the first organisation to get direct pension funding of social housing. In September 2011, Aviva’s own staff pension fund invested £45m to enable us to purchase 850 tenanted social rented homes from the Home Group. This was part of a larger portfolio of 1150 homes which we bought.
The funding mechanism is based on a sale and leaseback over 50 years. Derwent pays an annual lease premium to Aviva and this rises at RPI each year. The starting cost of funds is 3.9% and if RPI averages 2.5% over the 50 years the cost of funds is circa 5%. The properties revert to Derwent as freehold at the end of the period. Tenants are fully secure as assured tenants of Derwent Living. Aviva is not interested in day to day management and only requires that the total size of the portfolio is maintained leaving us to substitute properties and manage assets as necessary. Aviva have launched a £1 billion fund.
At a time when conventional borrowing is expensive and comes with onerous conditions this is a valuable new source of funding. It does not require asset cover and for Derwent gives us a more balanced loan portfolio where we already have £300m of loans with conventional funding.
Derwent was able to make this breakthrough because of our longer term relationship with Norwich Union then Aviva where we used sale and leaseback for market rented housing and invested in a Jersey based Unit Trust run by Aviva to provide student accommodation. These successful enterprises gave Aviva the confidence to work with us on social housing.
We do plan to try and use more Aviva funding for new affordable housing. Unfortunately the HCA only awarded us funds for a 123 unit programme, however we will use our commercial profits of circa £2m a year to cross subsidise and provide a further 500 homes without public funding.
Derwent may be a model for the future where 40% of our turnover is ‘commercial’ enabling us to work without public money!
Peter McCormack
Tag: Housing investment
Even 18 months in, this Government’s most commonly-used phrase is ‘the mess we were
left by the last administration’. It’s beginning to wear thin, especially as the imminent new recession is clearly the result of events and actions that have taken place since Cameron entered No 10.
It is no surprise that any good news is not credited to the last Government. And one area where there has been a bit of good news is in annual housing completions. What is absolutely clear is that these are the legacy of Labour and have little if anything to do with Messrs Pickles and Shapps, whatever they say.
The number of social rented homes added to the stock in 2010/11 (therefore started under
Labour) was 39,170 (of which 30,780 were funded through the Homes and Communities Agency), continuing an upward trend that started in 2004. In addition there were 21,460 additional ‘intermediate homes’ including intermediate rent and low cost home ownership. Total additional ‘affordable’ homes topped 60,000 and the mix between social rent and intermediate homes of roughly two-thirds to one-third seems about right when judged against needs.
Of course even this scale of output is not enough, but the trend was in the right direction despite the recession. The Labour Government had realised that the most effective way to get growth in the economy and meet needs in the community at the same time was to boost housing construction. 60% cuts in the programme showed that the Coalition did not share this analysis.
The legacy of this Government in 2015/16 will look very different. They will bust a gut (and housing association finances while they’re at it) to try to keep the total affordable figure as high as possible, but the sub-headings will look very different. The new, mis-named, ‘Affordable Rent’ programme will be there, at rents of up to 80% of market rent and possibly averaging about 65-70% depending on the outcome of the negotiations between associations and the HCA after the intervention of many councils trying to keep rents down.
The figure for ‘social rent’, let within the current ‘target rents’ policy, will inevitably plummet. From the patchy information available, there appear to be virtually no social rented homes in the ‘affordable housing’ contracts awarded by the HCA so far, so new social rent homes will only become available from planning gain schemes, councils building directly, and the few councils who have refused to have anything to do with ‘Affordable Rent’.
The picture on the ground – social rented lettings coming through to homeless people and
people on the waiting list – will be even worse than the new build programme implies. A proportion of social rent lettings (no-one knows how many yet) will be stolen from the social rent pool and put into the ‘Affordable Rent’ pool to help pay for the programme.
The Government will continue to mask the real implications of their policy with bluster. They will use the figures for ‘affordable housing’ and ignore the importance of social rent to people on low incomes and to the policy of encouraging people into work. They will continue to claim that the same people will benefit from ‘Affordable Rent’ as benefit from ‘social rent’ despite the fact that people on the ground know that this just isn’t true in most parts of the country where market rents are high and rising rapidly. To add to the confusion, they will continue to say that ‘Affordable Rent’ is ‘social housing’. Orwell’s Ministry of Truth would be pleased by these efforts.
The debate needs to shift from numbers alone, important though they are, to the genuine affordability of the homes coming out of the programme. The idea being worked on by the London Labour Housing Group, defining a London Living Rent as a benchmark by which to assess whether rents are affordable or not, is attracting a lot of interest. Like the London Living Wage when it started, it would not be a technique for directly controlling rents but a campaigning tool which will have influence over rent-setting policies in the longer term.
The Government, the HCA and the housing associations who have signed up to HCA
contracts remain extremely coy about the rents they will charge for ‘Affordable Rent’ homes – one housing association board member I know says their officers even refuse to tell the board because of HCA confidentiality rules.
But the information will eventually come out and the ‘affordable’ in ‘Affordable Rent’
will be seen to be a complete con. And it will fall to the next Labour Government to deal with ‘the mess we were left by the last administration.’
The prospect that the UK economy will enter a long period of stagflation – low or no economic growth combined with high inflation – has increased markedly in the last few months.
An excellent report commissioned by Shelter on housing investment and economic growth, produced by a global economic consultancy, FTI Consulting, and written by eminent economists Vicky Pryce, Dan Corry and Mark Beatson, published last week, considers the arguments for an economic stimulus to promote growth led by an increase in housing investment.
The report makes a strong general case for an economic stimulus, showing how prospects for growth have diminished over the past year and arguing that the Bank of England’s quantitative easing of the money supply is insufficient and needs to be matched by further action in fiscal policy. It argues that the markets are now even more concerned by the threat of slow growth than the need for fiscal retrenchment.
The report concludes that “Action to increase investment in housing has attractive properties in terms of increasing growth quickly”. Housing investment in current market conditions would not add to inflationary pressures: there is spare capacity in the industry, unemployed skilled builders and outstanding planning permissions waiting to be built. And housing construction has a relatively low propensity to consume imports. The authors repeat the argument from the Barker report that construction is highly cyclical: it is often the first sector to go into a recession and the first sector to come out, so it is known to have economic leadership qualities.
Housing investment is a good stimulus for a number of reasons. Compared to many capital projects, it could be got underway quickly with early benefits. As an intensive user of materials and equipment, it has a strong beneficial impact on the supply chain, boosting jobs down the line. The report suggests that every £1 of demand for construction activity generates £2.09 of economic output as the effects ripple through the economy. It is labour intensive, bringing unemployed people quickly into jobs so they stop requiring benefits and start contributing taxes.
There is a debate as to the best method of undertaking a housing stimulus. Boosting private sector supply would only be effective if there is effective final demand, and there are problems with both mortgage availability and general affordability. A boost would therefore have to be either through direct public investment or through a subsidy to final private sector demand. It seems likely from the thrust of the evidence in the report that direct investment would be a stronger and more reliable option.
As the Chancellor’s Autumn Statement approaches, the case for additional housing investment should be made loud and clear. In making the case for extension of the right to buy to fund additional investment the Government has partly accepted the case. Ed Balls’ call for a repeat bankers’ bonus tax to fund an additional 25,000 homes puts Labour in a strong position, but there seems to be scope for a much more radical and far reaching plan that will tackle housing needs as well as providing a welcome boost to the wider economy.
The Office for Budget Responsibility’s Fiscal Sustainability report, published this month, makes very depressing reading for anyone taking a longer look at the future of the public finances. The Report, by the independent OBR (do we really believe that?) has forecast that public sector net borrowing would fall from 11.1% of GDP in 2009-10 to 1.5% in 2015-16 as government ‘fiscal consolidation’ (mainly cuts) is implemented, and that public sector net debt would peak at 70.9% of GDP in 2013-14 before falling back to 69.1% in 2015-16.
The new report looks to a much longer timescale, predicting greater pressures on the public finances in future decades. Primarily as a result of an ageing population (the proportion of the population aged 65 and over is projected to rise from 17% in 2011 to 26% in 2061) and cost pressures on health and pensions, they say that unchanged policies would lead to debt continuously rising on an unsustainable upward path. At the same
time, unchanged policies would lead to broadly stable revenues.
OBR say that additional fiscal tightening will therefore be necessary well beyond this Parliament. On their central projections, government would need to implement permanent tax rises or spending cuts of 1.5% of GDP (£22Bn) from 2016-17. They quote the same conclusion being made by the International Monetary Fund for western economies in their April Fiscal Monitor: “Although substantial fiscal consolidation remains in the pipeline, adjustment will need to be stepped up in most advanced economies, especially to offset the impact of age-related spending… From an even longer-term perspective, spending on pensions – and especially, health care – constitutes a
key challenge to fiscal sustainability.”
Tony Travers’ informative blog on the OBR report in Public Finance can be read here.
The crucial aspect of OBR’s analysis is the phrase ‘on unchanged policies’. As David Blanchflower regularly and convincingly argues (for example here), if we want a better future we shouldn’t be starting here. The ConDems austerity policies have led to a collapse in consumer confidence and rapid fiscal tightening has severely reduced the prospects for future economic growth, which would bring with it better revenues and reduced costs in unemployment. He thinks double dip recession is still a possibility, depending largely on what happens in the USA. Without Obama’s monetary and fiscal stimulus unemployment in the USA could already have been 25% rather than 10%, and similar, if smaller, impacts could be projected here.
The OBR report does not seem to assess the impact that fiscal tightening has on demand in the wider economy, appearing to believe public sector spending is only a cost burden, and that cuts in the public sector provide the room for increases in the private sector. Blanchflower is particularly strong in showing that this is not the case.
It is interesting to note that in the OBR report the words housing and investment do not appear (at least not on my search). Blanchflower has particular concerns about the potential increase in negative equity amongst homeowners if interest rates rise, but it seems a weakness that OBR never distinguish between different types of spending, and especially between capital and revenue. To OBR, borrowing is borrowing and no
distinctions are made. Gordon Brown’s first fiscal rule, that borrowing over the cycle should equal investment, with government income covering government revenue spending, aways seemed like a correct approach, and is a good place to get back to. But it doesn’t tell you exactly how much investment there should be. Construction has always been a sound purpose for public borrowing and the benefits have been described many times: reducing pressure on government revenue deficits, strong social outcomes and better underpinning of other public objectives (especially in health), and, crucially, a high multiplier in the private sector as the initial investment leads to increased spending in the wider economy.
We know it will take a generation of increased housebuilding to bring housing demand and supply closer to equilibrium. There is no prospect of that whatsoever under current policies. But it would be interesting to see what impact a major housing investment and construction-led economic stimulus, lasting for 20 years, would have on OBR’s dire long term projections for the 2020s and 2030s and beyond. The economic future is not yet outside our control.
An early glimpse into the new edition of the UK Housing Review, to be published at the start of February, reveals that investment in social housing has reached its highest level for 20 years but is due to plummet again when the cuts take effect in April 2011.
The review describes how overall gross social housing investment in Great Britain rose again in 2009/10, to the highest level in real terms for almost 20 years – up by over 80 per cent since the previous decade. The strongest annualised growth was seen in Scotland. Taking account of all private finance investment, the Review concludes that “the last two years have seen overall investment in social housing at its highest sustained level (in real terms) for three decades”.
“Going right back to the 1970s, in only in one earlier year – 1989/90 – was expenditure higher. This resulted from a coincidence of exceptional factors – peaking right to buy receipts in the late 1980s housing market boom, together with landlord action to pre-empt government spending restrictions that were announced before they took effect.”
For the Chartered Institute of Housing, which trailed the Review this week, Director of Policy and Practice Richard Capie said: “The last two years have seen record investment in social housing across Britain, both from central government and importantly through private finance. This allowed the provision of more homes, essential community regeneration and important improvements in existing homes. We have now entered a very different era, with 50 per cent cuts in cash terms to housing budgets in England and around 19 per cent in Scotland. We are in the midst of a housing crisis with fewer than half the homes we need being built. This latest research shows the sheer scale of the dramatic cuts we are now seeing in new housing. These are a body blow to first time buyers, low income households and the construction sector.”
Figures on cuts to housing investment for 2011-14 for England are taken from the National Affordable Housing Programme which was £8.4bn in 2008-11 and will be £4.5bn in the three years from 2011/12. Accounting for the inclusion of mortgage rescue and the recovery of empty homes this represents a cash terms cut of 50 per cent. In Scotland the draft budget prefigures a cut in housing and regeneration spending from £488m to £393m, a cash cut of 19 per cent. The Scottish Federation of Housing Associations estimates that allowance for spending brought forward in 2010/11 means that the real reduction in 2011/12 will be over 30 per cent.
The starkness of the figures adds strength to the points made by Tony in his post on how the anti-recession stimulus is running out with potentially dire consequences for the construction sector of the economy.
The website of the UK Housing Review is http://www.york.ac.uk/res/ukhr/index.htm 2010-11 and contains a wealth of statistical and financial information about housing in the UK. It is edited by Professors Steve Wilcox and Hal Pawson.