Institutional investment needs to be a part of the development funding picture

Recognising all of this, one of NEAT’s closest council partners approached us to find an alternative funding route for an estate where the house builder JV had collapsed some years earlier. Last December, its cabinet approved moving to heads of terms on a long-lease investment (LLI) for the delivery of the first phase of a 600-home estate regeneration in east London.

The LLI gives momentum, resident confidence and decants capacity, and crucially will de-risk subsequent phases should the JV market return. 

“One aspect of an LLI that is well appreciated by both councils and the institutions is the simpler procurement route”

LLIs are treated with suspicion by council treasurers because they are index-linked – it is deemed much safer to borrow from the PWLB, albeit more expensive initially. As we’ve worked through the detail with the council, though, a few things have become clearer. 

Perhaps the biggest concern councils have is that their lease repayments will run ahead of the rent received from tenants. In truth though, this is not much different from the impact that various government rent reductions and freezes have had on council HRAs. The big institutions are sensitive to the issue – a reputational risk for them if it arises – and our east London deal will see inflation capped at year 30.

Set against that, the ability to create secure tenancies managed by the council, and to have the homes return freehold at the end of the lease term together with their income stream, are plus points.

Development and construction risk is perhaps the biggest concern councils should have, but often don’t, when they take on direct housing delivery. Working with a different north London council, NEAT has procured a contractor for a scheme with more than 100 homes that is 18% less than the council’s own tender four years ago, despite inflation.

“We appear to have strong support from both Homes England and the GLA in identifying a simple route through to delivery, and their likely endorsement of the approach could be the game-changer”

And while JVs always have an ‘open book’ accounting process, in my time at Barnet, I can honestly say that the council never saw any uplift.

One aspect of an LLI that is well appreciated by both councils and the institutions is the simpler procurement route. LLIs are a land transaction and, so long as the contract drafting is clear, there is greater scope for the council to pursue its objectives.

Will LLIs take off as a more mainstream funding route? LLIs do not add to HRA borrowing, so should come with a head start. We are now much closer to a more streamlined process and set of contract documents than when we started 18 months ago. We appear to have strong support from both Homes England and the GLA in identifying a simple route through to delivery, and their likely endorsement of the approach could be the game-changer.

On paper there ought to be a lot more interest: cash-strapped councils with huge repair and maintenance liabilities versus institutions desperate for schemes to fund. Looking more widely, Britain has an impending crisis with 700 large panel systems estates coming to the end of their life and not economically repairable – it seems unlikely that the state will develop a funding solution, but we can’t do nothing. 

NEAT’s reflections over the last 18 months are that there needs to be a language broker alongside the skilled development manager, to turn the council’s problem into an investable solution. More work is needed on institutions’ risk appetites, too.

That said, we’re in discussions with other councils, and continue to see institutional investment as part of the emerging council housing landscape.

Brian Reynolds, director of public sector partnerships, NEAT Developments