Housing minister Grant Shapps has proposed a second round of the affordable homes programme. So are landlords financially fit enough to get back into the ring or are they on the ropes already? Carl Brown investigates
‘It is important that the sector does not sleepwalk into 2015 and then sit bolt upright and think “we’ve got a problem”.These issues need to be considered in advance,’ says Richard Parker, head of housing at consultancy Pricewaterhouse Coopers.
Mr Parker is referring to the future of social housing funding in a week when housing minister Grant Shapps told landlords that the affordable homes programme will not end with the current round in 2015 but is ‘here to stay’.
The £1.8 billion programme allows landlords to charge rents at 80 per cent of market rates - much higher than traditional social rents in many areas. They are then expected to use the increased rental income to attract private finance and fund the development of new social homes. This model means landlords must take on more risk and increase the amount of debt on their balance sheet.
Having signed up to the first round, several landlords have told Inside Housing over the past few months that a second round of affordable rents would leave them out for the count. This is because, having taken on more debt, they risk breaching conditions in loan agreements which measure debt to equity, and an increased exposure to funding from revenue (as opposed to capital) grant creates risk. Under this model, landlords are more reliant on uncertain income in the form of housing benefit and sales, which are subject to political or market change.
Mr Shapps’ comments have therefore led to growing concern about the prospect of a second round of the affordable homes programme.
‘We could continue for five years, but we can’t continue forever. This model eats straight into your capacity,’ says Mark Washer, finance director at 47,000-home Affinity Sutton.
‘There will be some form of intermediate rent with low grant, but it cannot be a simple continuation of the affordable rent model,’ agrees David Montague, chief executive of 66,000-home London & Quadrant.
Even communities minister Andrew Stunell this week conceded at the National Housing Federation conference in Birmingham that ‘from 2015 we will need to be looking at a different approach’.
A new stance
So, if affordable rents as they stand are not sustainable and the government is unlikely to increase capital funding, how could the model be adapted so landlords can build homes post-2015?
An early attempt to answer this question comes in the form of a report by PWC and L&Q, seen exclusively by Inside Housing ahead of its publication today. The report estimates that associations need to borrow £15 billion by 2015 to build the 150,000 homes they are expected to in the first round, as well as meeting refinancing commitments and stock investment needs.
It warns this means, ‘the sector’s capacity to continue developing would diminish swiftly. To maintain production beyond 2015, a sustainable pipeline needs to be established now’.
The report, entitled Where next? Housing after 2015, examines ways of getting around the capacity problems in the current system. It calls for a new, more flexible form of tenure, which would ‘straddle the social, intermediate and private markets and be open to everyone’. This would allow housing associations more freedom to set rent levels under the new funding programme.
Taking the upper cut
By moving all social rents to 55 per cent of market rent over 10 years, or an average of 35 per cent of net income, the report estimates landlords could create an extra £20 billion of borrowing capacity. Moving half of empty social homes to market rent would generate £5 billion, while if just 1 per cent of social tenants took up shared ownership £2 billion would be generated.
Money raised could be put into a fund, which could have mutual status. This would be held as a contractual liability on an association’s balance sheet and ring-fenced for the development of housing at below-market rents, the report suggests. It also flags up the possibility of using tax incentives and discounted public land to drive development.
Wayne Morris, chief executive of Spectrum Housing Group, who believes a second round of the current affordable rents model is unsustainable, says the level of rent flexibility suggested in the report is ‘absolutely what the sector needs’. He cautions, however: ‘It is not always straightforward for a housing association to do that. It [increasing rents to fund development] is debt-hungry.’
That higher rents could boost borrowing capacity is undoubted, but there are concerns about the impact on affordability, and landlords’ social purpose.
‘Affordable rents may not be the right solution,’ says Gavin Smart, assistant director of the National Housing Federation. ‘The social rent model evolved the way it did for a good reason, to provide long-term, affordable housing for people on low incomes or no incomes at all.’
Another factor to be considered is the impact of welfare reform and whether future governments will be happy to see the housing benefit bill rise to fund higher rents.
‘If you are charging higher rents, you and your lenders need to be confident you are going to get the income,’ points out David Hall, director at consultancy Sector.
Doubt over income also extends to returns from private sales, which are at the mercy of the property market. This was illustrated last week by an announcement from credit rating agency Moody’s that Hyde Group’s credit rating may be downgraded due to its reliance on profits from sales in an uncertain market.
Going the distance
Steve Douglas, a partner at consultancy Altair, has a simpler solution for changing the affordable rent model - extending the funding round from its current four years to 10 or 15 years.
‘Beyond 2015, if the government wants associations to use their reserves they have to sign them up to longer-term programmes to provide security,’ suggests Mr Douglas.
And what about councils? Under reform of the housing revenue account system they will be allowed to keep rental income. Could they use this new freedom to fund development? PWC has estimated previously that HRA reform has the potential to create £54 billion of investment for new homes. Sector figures point out, however, that councils are subject to borrowing caps, plus some will seek to pay off their HRA debt allocation rather than borrow more.
Unless the government (which may change in 2015) decides to re-introduce high capital funding, there are no easy answers to the question of how to fund new affordable homes.
Landlords have spent months in tortuous negotiations with local authorities and the Homes and Communities Agency about how to make the first round of affordable rents work. But the bigger question is whether the sector can survive a second round.
Key findings: Where next? Housing after 2015
- Housing associations would need to borrow £15 billion by 2015 to build 150,000 affordable homes
- A new flexible tenancy should be introduced which would be open to everyone
- Freedoms over rent and assets could release £20 billion of latent capacity
- Discounted land and tax incentives should be used to attract institutional investment