Following the removal of the HRA debt cap in October 2018, many local authorities are using their new found borrowing powers to accelerate development programmes.
However, in order to take full advantage of this new freedom, local authorities should take note of recent industry changes and consider how these may impact development plans. This article highlights three of these: changes to the right to buy regime, changes to the Public Works Loan Board and shortages of skilled staff.
Right to Buy
In recent years, local authorities have been understandably reluctant to invest funds in developing new stock when the right to buy legislation would then allow the new stock to be swiftly sold off at below market value.
To counteract this, from 2012 local authorities were granted powers to re-invest right to buy receipts for the provision of social housing. However practical problems have since emerged around how to re-use these receipts, particularly given that they cannot constitute more than 30% of the development costs. Local authorities are therefore finding that they still hold receipts after three years and face having to pay them back to the Treasury with interest.
Local authorities have therefore been keen to find methods to maximise their use of right to buy receipts but this has not proved straightforward due to restrictions on transferring right to buy receipts. The most problematic of these is not being able to transfer them to a body in which local authorities have a ‘controlling interest’ which captures traditional local authority-backed development companies.
This is now leading to local authorities seeking creative solutions. Many local authorities are setting up new independent community benefit societies (in which the local authority has no ‘controlling interest’) to develop sites which can then be gifted right to buy receipts. Local authorities can still retain some control by ensuring that the rules of the society cannot be changed without local authority consent or by loaning money to the society subject to strict loan covenants and conditions.
Some local authorities are also setting up housing delivery partnerships with housing associations or private companies in order to deliver social housing. For this model to succeed, the partners of the venture, who may have very different objectives, must be clear about each of their objectives and take care to adopt an appropriate corporate structure to reflect this.
The feedback to the Government’s 2018 consultation paper on use of right to buy receipts is still being analysed but the consultation paper hinted that there may be changes further afoot so watch this space!
Changes to Public Works Loan Board rate (“PWLB”)
Local authorities need more grant funding but that is unfortunately not on the table. Instead, PWLB monies allow all local authorities to borrow at the same rate (if central government chooses to lend). The surprise one percent rate increase to the fund*, whilst applying the brakes to local authorities’ previous activities including wholesale borrowing to fund commercial enterprises and taking risk (picked up by council tax increases), could open the doors to private equity houses, who can now just about compete with these rates.
To date, very few local authority bond issues have taken place because of freely available PWLB loans, (depending on the creditworthiness of the local authority involved); possibly a few more will now follow.
However, local authorities are still likely to look to the PWLB (now within HM Treasury auspices). For a financially savvy local authority, monies are handed out without too many questions in a matter of days without long negotiations on terms and conditions. The private sector will only be interested in the same demographic, that is certain creditworthy local authorities and not others, there would have to be very distinct market advantages for such local authorities to jump ship. Moody’s believe that the PWLB will continue to prevail for a majority of Councils, although there is evidence that conversations have started with the private sector. Let’s see where they go, particularly following the issue of the UK municipal bond.
Post-Brexit, will shortages of skilled staff in the construction slow down the rate of homes being built by alternative methods of construction?
Generally for modern methods of construction (MMC) fewer construction workers are required but they require different skill sets. Government initiatives are looking for the MMC sector to deliver another 80,000 jobs, mostly in the North. For example, Ilke Homes are employing and training 800 people from local communities having received £30m of grant from Homes England to stimulate jobs and production in the Northern corridor, (starting with Lego play!).
The MMC sector offers career opportunities in various disciplines not usually associated with construction, being in a warm factory and not on site for very long and specific MMC qualifications are in the pipeline. MMC is a chance to create a new industry, and revive communities, such as the Ilke Homes factory that replaced the Yellow Pages factory. It is much more than a sop to the economically inactive workforce in these post-Brexit times.
Perhaps we are asking the wrong question about MMCs. What is actually slowing down the rate of houses being built is availability of funding, acceptability of building warranties, and the initial cost of production which is at least 12% more than conventional construction for housebuilders. Readily available finance would unlock this, enabling some traction and economies of scale to gather pace, and for MMC to create a sustainable and thriving industry fit for the 21st century.