Breaking free to build homes

The mayor of Newham has just climbed onto a digger. It is the launch of the Labour London borough’s new wholly owned housing company and Sir Robin Wales is excited. He hangs off the side of the machine and poses for photographers, as his minders promise he will be down to answer questions eventually.

The reason for his jovial mood is apparent. The company will give the borough a way to break free from the restrictive shackles associated with the housing revenue account and build 3,000 new homes.

‘We hit the limit of our borrowing cap recently,’ says Sir Robin.

‘But we still had a desperate need for new homes in the borough, so we had to think of something else.’

Creating the rules
The Localism Act introduced a new ‘power of competence’ which greatly increases councils’ freedom to act innovatively, including setting up housing companies. This replaced a previous ‘power of well-being’ which could be used to set up companies, but was less clear and used less widely as a result. Setting up a company means they can set the tenure and rent, build homes which are free from right to buy and - crucially - borrow money to finance the schemes without affecting borrowing caps.

Newham’s launch of its company - Red Door Ventures - last week is the most high profile so far, but the borough is just one of a wave of councils likely to use these powers over the next few years.

‘It’s about creating freedom and flexibility,’ says Chris Wood, a partner at housing consultancy Altair, and board member of Meridian, a company created by Greenwich Council in south London.

Meridian was created with a gift of 30 properties from Greenwich, which it is currently letting at 80 per cent of market rent. The borough is about to make it wholly independent, which will give it further financial freedom to borrow.

‘At the moment councils are looking to explore options to increase housing supply, despite the constraints imposed under the terms of the HRA debt cap,’ says Jonathan Jarvis, a partner at law firm Devonshires.

These caps - which were imposed by the government under the self-financing settlement agreed in April 2012 - prevent councils from borrowing above a fixed limit. This can prevent large-scale building projects. But companies - which either sit in the general fund, or off the council’s books entirely - can borrow beyond these caps. Generally, the companies are independent entities, but are wholly owned by the council, which will be the sole shareholder.

Patrick Hayes, executive director for regeneration and housing at Ealing Council, which set up a housing company last autumn, explains: ‘We have a fairly large programme of estate regeneration, which uses up most of the borrowing head room.’

Additional borrowing power is not the only reason the council hopes to set up the company, which is expected to build 500 homes over five years.

Mr Hayes says the company will deliver a mix of tenures including market rent, which would be impossible if building through the HRA.

Bob Porter, head of health and housing at Shepway Council, which is in the process of setting up a wholly owned housing company, agrees that this was the main attraction of the model. He says: ‘We wanted to think about having greater rent-setting and tenure flexibility.’

Security and flexibility
In legal jargon, tenancies granted for a council-owned company are assured, rather than the traditional secure tenancies in most council homes. As well as flexibility in terms of rent and length of tenure, this removes properties from the right to buy scheme.

Rob Beiley, a partner at Trowers & Hamlins, which is working with councils to set up companies, says: ‘Most councils want to put the security of tenure back into the tenancy. On some schemes, they even wrote back in the right to buy, discounts and all. The point is this gives them the choice.’

This means schemes are often adapted for local conditions - South Cambridgeshire Council has established a company to provide homes for market rent, primarily offering three-year tenancies to match the university research contracts that draw many residents into the area.

The companies can borrow directly from banks and institutional investors, but councils often find it cheaper to provide a loan themselves, either from their own reserves or through borrowing from the public works loan board.

Newham provided a start-up loan to Red Door Ventures and continues to fund it through low-cost prudential borrowing. Broxbourne Council recently set up its company with a loan from large cash reserves accrued when it transferred stock to a housing association. With Bank of England interest rates extremely low, this is an attractive option for councils with a large cash reserve and a housing need.

Despite these positives, some councils have decided to steer clear. Wolverhampton Council rejected the idea, saying in council documents that it would require ‘significant legal and financial due diligence to ensure that it would not fall foul of Treasury rules or be open to challenge’.

‘I think the predominant risk is that government could direct local authorities to account for the income and expenditure within those separately owned vehicles within the HRA,’ says Mr Jarvis. Some councils may hold back until there is greater clarity, he says. Mr Jarvis says he would welcome the opportunity to meet with Communities and Local Government department officials to discuss the department’s stance.

Unlimited potential
However, a Newham Council spokesperson says there is little concern about these risks because the project will build much needed homes.

‘The council has found a legitimate way to deliver substantial numbers of market rent and affordable homes against a background of a failing market. It is hoped this would be applauded,’ she says.

‘As long as councils are making sure they are using their powers in a reasonable way, they shouldn’t have any problems,’ says Mr Beiley.

Despite any risks, Paul Price, director of the Association for Retained Council Housing, says the idea is taking root, with a recent ARCH seminar on the idea enticing more than 20 local authorities.

For councils looking to build large-scale housing schemes, the attraction is obvious. As Sir Robin says, Newham has no intention of stopping at 3,000 homes. ‘We are not setting a limit. We want this to deliver as much it possibly can.’