Councils are using a variety of models to become a major ‘third force’ in housebuilding

Hence the confidence with which councils are building (or at least contemplating building) homes again.

Even those with no stock (and therefore no HRA) anymore are doing so – and many of these are going beyond the 200-unit maximum and accepting that they have to hold the homes in a reopened HRA. Liverpool City Council is the most high-profile example.

There are, however, still constraints that give councils pause. The HRA itself, existing or reopened, still operates by reference to the well-known ‘ringfence’ and councils worry about this inflexibility, when they contrast the self-financed HRA with their hard-pressed general fund. Politics may point to ‘council homes’ but financial considerations might point elsewhere.

Then there is the Right to Buy and this remains a major disincentive, notwithstanding the application of the cost-floor rule and the possibility of retaining (subject to the controversial replacement rules) receipts from sales.

The new regulation of council rents (from April 2020) introduces potential problems with viability or at any rate removes the flexibility inherent in Section 24 of the Housing Act 1985. Five years’ worth of Consumer Price Index plus 1% is attractive but the overall concept of regulation might be less so.

Finally, there are competing pressures for the use of surplus revenue. Converting rental income to capital (revenue contribution to capital outlay) to meet the expensive and pressing requirements of building safety means that servicing uncapped borrowing will be more difficult.

All of which explains why councils will continue to look closely at local housing companies (LHCs), ie companies wholly owned by their ‘parent’ council. They have been set up for various reasons.

Many have been aimed at sub-market housing, often to provide homes for key workers. Some have been positioned to ‘lead’ the local market, trying to encourage private sector developers to follow. A few have been established to assist with financial support for the general fund.

Many LHCs are still operating at a modest scale; some are yet to develop or acquire properties. Others, however, are developing at pace and scale.

For the most part LHCs have relied on their councils for funding, in the form of on-lent borrowing from the Public Works Loan Board – and so far the signs are that the increase in PWLB rates has not had a material effect, although the impact on development business plans are still being worked through.

“This spectrum of approaches to the delivery of new council housing affords plenty of scope for councils to adopt the model that suits their political and other circumstances”

LHCs have also begun to play a role in lease-based arrangements promoted by institutional investors.

In its simplest form a local authority will lease a site to an investor on a long lease and the investor will grant a leaseback to the LHC. The rent will be index-linked (subject to caps and collars) and the council will guarantee the LHC’s obligations.

If all goes according to plan, at the end the leaseback the council will purchase the remainder of the head lease and the council will be the unencumbered owners of the ‘council’ homes.

Then there is the role of partnerships – contractual or even corporate – between councils and developers or housing associations. They are often established in the context of complex regeneration schemes but they are also used for “pure” new build.

We are expecting to see more partnerships of this kind, particularly based on the limited liability partnership model.

This spectrum of approaches to the delivery of new council housing affords plenty of scope for councils to adopt the model that suits their political and other circumstances.

The potential numbers are very significant. The bulk of new homes may continue to be delivered by housing associations on the one hand and private sector developers on the other. But councils (directly or indirectly) are once more becoming a powerful third force.

Scott Dorling, partner, Trowers & Hamlins