Self financing the story so far: how we are building again

1. Self financing the story so far: how we are building again CIH South East March 2013 Steve Partridge, Director CIH Consultancy

2. Introduction • Business planning: progress to date • Research and key issues • Asset management and new build • A word on... governance and viability: Voluntary Code

3. Towards the second year • A positive picture... • Sensible prudent decision making to get ‘over the line’ • Some LAs pushing ahead straight away with new build programmes • Many taking time to review asset management in more detail • Most have considerable resources to invest

4. Business planning research • Sponsored by ARCH (primarily) plus NFA/LGA/CWAG • Objectives • What is in place for business plans and asset management? • How is the sector responding to self financing? • Research actual financing behaviour in practice • Link also to NFA-led work on borrowing rules: Let’s Get Building • Methodology • Survey/research; schedule of visits and potential follow-ups • Analysis of national and local/area-based positions • Timeline towards the end of February

5. Business plan issues: rents • Sept 2012 RPI – 2.9% • Medium term to settle to 2.5%(!) • Rent increases averaged RPI+1.5% across LAs last year – the last year when ‘government guidance’ could be claimed • To what extent has rent been an issue locally? • Range of experiences growing quite quickly • LAs potentially looking at changes to Rent Policy

6. Business plan and rents • Flexible local responses to greater potential freedoms • Declining rate of increase in the run up to convergence • RPI+0.5%+’negligible’ • Smoothing the path to convergence • Future for rents and rent policy • Rent regulation driven by Limit Rent mechanism - what will happen to Rebate Limitation post-Universal Credit? • Prospects for rent policy across the whole sector? • Opposing drivers for current and investment spending... balancing investment in growth with affordability and welfare reform • And if changed... What form of regulation?

7. Rents and investment • Changes to long term rent assumptions could fundamentally affect fundability, viability and sustainability in the HA sector • RPI only -> retrenchment and dis-investment • For the ‘national’ HRA, RPI + 1% -> adds (at NPV) • £5bn to cashflows over 30 years at 6% • £6.5bn to cashflows over 30 years at 5% • Linked to relaxation of the debt cap - new homes potential of up to 50,000

8. Business plan and welfare reform • Progress on understanding implications • IT and bank account access • How much are you investing in communication and preparation? • Expect a spike in arrears • Driven by HB reduction in the very short term and introduction of UC in the short-medium term • What will happen when the spike has peaked? • Return to current / previous arrears levels quickly • Return to current / previous arrears levels gradually • Levels out at a higher rate for the long term • Continues to rise • What to assume – whether and how to deploy reserves

9. Business plan and welfare reform • Key issues arising from the demonstration areas? • Collection rates • Definition of vulnerability • Switchback arrangements • For the business plan, most have increased bad debt provisions: average 2-3% but up to 5% in some cases • What (more precisely) is at risk of non-collection? Working age Non-working age On benefit Not HB Vulnerable Tenant-direct payment Will pay Arrears Time to S/B

10. RTB progress • RTB update: agreements in place... • Slow start – but signs of movement in many parts of the country • Number of authorities in ‘reinvestment’ scenario growing weekly • Beyond the self financing settlement numbers, all additional receipts retained

11. New build council housing • A landscape with growing diversity and flexibility - already • A persuasive narrative... • Appetite for new build ‘under the cap’ already demonstrated • Stimulated exploration of other options: ALMOs and SPVs, JVCs and institutional investment • Working closely with pension funds, insurance companies, private equity • Self financing has opened the debate: by no means is this just about ‘council housing at social rent in the HRA’ • Range of tenures and flexibility around ‘products’ • Capacity and knowledge is also growing

12. “Let’s get building…” • Boosting construction • £1 on building, 92p stays in the UK • £1 on construction -> £2.84 of GDP • £1 on housing, 56p returns to exchequer (36p tax/benefits) • Government represents 30-40% of construction demand over time • Households and the need for affordable rented homes • 83,000 per year demand over extended period • LA and ALMO appetite • 3,000 LANB programme – ”just like that” • Lower cost of borrowing, lower need for grants • The path of ‘least resistance’ to economic growth

13. Raising or abolishing the debt cap…? • Councils will deliver programmes from the headroom that they have (some borrowing but mainly revenue/reserves) • A three-way ‘lobby for growth’ • Changing borrowing rules • Abolishing the debt cap • Raising the debt cap – on a formula- or bid-basis • “Let’s get building” • New build in plans – our estimate 20-25,000 in first 5-10 years • Financial capacity overall up to 200,000-250,000 homes: need land(!) • £7billion capacity and appetite - 60,000+

14. HRA vs ALMO (Subsidiary) vs SPV (1)... • HRA council housing... • The traditional route, social/affordable rents and service charges • Rebate limitation in place – what future under Welfare Reform? • Part of wider asset management strategy • Procurement options in-house, ALMO, RP... • If via a Subsidiary (which could be an ALMO, not necessarily) • Build or acquire through the company • Caution on consents – SoS consent required on sub-market transfer to council company, but... • RP-route to general consents • More flexibility on rents, tenure differential (RTB)

15. HRA vs ALMO (Subsidiary) vs SPV (2)... • A Special Purpose Vehicle or Joint Venture Partnership in which the LA is a partner... • Need to be clear on inputs • Need to be clear on returns • Pension fund investment consultation • REIT initiative should not be ignored • What can LAs bring to the table? • LAs have multi-option approaches – nothing mutually exclusive • Some issues that LAs are exploring • Market renting directly in the GF? • Market renting in the HRA? • What could tenancies look like in SPVs? • Land and asset transfer to ‘off balance sheet’ vehicles

16. A word on Acquisition Strategy • Rationale • A ‘core’ level of stock growth that can continue despite risks in scheme completion (eg delays in planning) • Buffer against additional RTB receipts and no shovel ready schemes • Opportunity to reduce costs of management – economies of scale / avoidance of estate issues • Inclusions? • Meeting specific housing needs • Specific property types in specific areas • Link to empty homes strategy • Opportunities when they present

17. Voluntary Code: progress/next steps • Steering Group: LGA/ARCH/NFA/CWAG • CIH in partnership with CIPFA • Initial planning and consultation complete • Broad support for a self-regulatory Voluntary CoP • Focus on viability (BP) and governance (risk) • Areas of debate... • Support vs Compliance: Accreditation vs Self-Certification • Costs: one-off entry and ongoing support • Next steps: further work commissioned to... • Draft a Code plus supporting material/guidance • Develop administration and sign-up process • Formal consultation Principles Provisions Guidance

18. Summary • As self financing moves to year 2, keys for success... • Appetite is there: building capacity, skills and expertise • Additional finance is likely to be there across most councils • Options to build are varied – but we should keep up the pressure on the debt cap • Number of models – nothing mutually exclusive and success breeds success... • A bright future – potential now beginning to be sensed