Stepping up to the plate

There is a consensus among housing professionals that councils must be part of the solution if the country is to build enough homes to meet growing demand.

The UK has only built the homes its citizens need when councils, housing associations and developers have all pitched in. But the council housebuilding picture has changed dramatically. In the early 1970s the highest number of homes were built – more than 360,000 homes – and 33% were built by councils. Last financial year 1.8% of the 172,080 built were by councils.

Councils are restricted from playing their part in this tripartite effort by several factors – the most commonly cited being a cap on their Housing Revenue Accounts (HRA) and restrictions on how they can use money generated from schemes such as Right to Buy.

But despite these pressures, in the face of growing need, with 300,000 homes per year required according to a recent report from a House of Lords committee, councils are taking action.

Inside Housing’s exclusive research found more than a third of councils – 39% – are attempting to readdress the balance and boost their building through housing companies. Housing companies are seen as a solution because they can operate outside of the HRA and are not subject to the same restrictions.

But are these companies bringing in income yet? And can their development plans make a serious dent in a market where demand increasingly outstrips supply?

So far these companies’ development plans are modest. Our research found most companies aim to build a couple of hundred homes over a 10-year period. This cautious approach is financially prudent but begs the question: are the companies meeting the growing demand for housing?

Jonathan Jarvis, a solicitor who advises councils on setting up housing companies, points out that often council-owned companies are building on council land. Their intention is to contribute to development, rather than take responsibility for meeting housing demand on their own.

“The reason they’re doing it is because they’re not happy with their local private rented market and the cost of temporary accommodation is too expensive for the quality it gives to local residents.”

Natalie Elphicke, chief executive, Housing & Finance Institute

Natalie Elphicke, chief executive of the Housing & Finance Institute, who recommended last year that councils should set up their own development companies, says the motivation is addressing need rather than bringing in income.   

“The most common reason that I hear for councils wanting to directly build is because of costs for temporary accommodation, quality of temporary accommodation, security for people in temporary accommodation and what in some areas they see as a lack of professionalism in the private rented sector,” she says.

“The reason they’re doing it is because they’re not happy with their local private rented market and the cost of temporary accommodation is too expensive for the quality it gives to local residents,” she adds.

Despite this desire to provide for those in temporary housing, Inside Housing’s research revealed housing companies are focusing their sights on private rented and market sale homes on the whole. There are only a handful that are solely planning to deliver affordable rented homes and only one – Wokingham Council – that is planning to deliver a majority of social rented homes.

South Norfolk Council said it was motivated to set up a housing company because there was a “consistent pattern of under-delivery” of housing against planning permissions granted. Last year only 459 homes were completed despite there being over 7,000 planning permissions in place.

The council formed Big Sky Developments which is developing two schemes of 107 homes, together with 4,300 square metres of commercial space, and is looking to develop a further 100 homes. 

South Norfolk said the direct development approach allows them to deliver an ongoing financial return, support local suppliers and generate jobs to drive the local economy.

“There remains little official data on the activities of these councils.”

The type of companies councils choose to set up are varied. There are companies wholly owned by the council, joint ventures with housing associations and joint ventures with private developers or institutional investors.

Mr Jarvis expects to see an increasing number of joint ventures between councils and housing associations or private developers as councils gear up their development plans and require more funding and commercial expertise.

Although Mr Jarvis questions why councils don’t form more joint ventures with associations, Ms Elphicke says there are “lots of good examples” where associations and councils work together.

However, she says councils might be inclined to avoid working with an association if it hasn’t been investing in the area. She says: “If an association isn’t actively building then sometimes the council decides to intervene in the market because they are stepping in to provide a broader range of housing where they see not enough has been delivered locally.”

She adds: “We’ve seen some dominance of housing associations in London and as they’ve got bigger and mergers have happened there’s some expression of concern from some councils that the housing association that used to be their local association isn’t interested in that area any more because they’re seeking the big profits in London. In some areas the council is stepping in because the housing association is not delivering.”

For many companies it is very early days, and only five councils have made any income out of the 41 councils who responded to our question on the state of their finances. Sheffield City Council has made the most income out of all the councils to respond. It has operated a housing company for five years and has made profits of just over £430,000 this year.

The majority are either still in the process of setting up their company and haven’t got any houses to show for their efforts yet, or are only expecting to see returns on their investments after at least five years of operating.

There remains little official data on the activities of these councils. Inside Housing understands before the Brexit vote that the Department for Communities and Local Government was planning to survey councils this year to obtain more information on the companies they have set up but this appears to have been shelved as the government grapples with Brexit negotiations. This led the Public Accounts Committee to warn councils may be taking on risk they can’t handle with these commercial ventures.

For housing companies wholly owned by councils the most common route of financing development seems to be through loans from the Public Works Loan Board. Councils obtain the loans at competitive rates and pass them on to the companies.

There is always a risk that councils will not be able to pay back these loans if the housing their companies develop doesn’t prove as popular as they expect. But in a market where demand is high and supply is low councils are confident they won’t be left out of pocket. Mr Jarvis says councils are being cautious with their commercial housing activity.

“That is one of the issues [housing regulator] the Homes and Communities Agency is grappling with housing associations now… about whether they think there’s too much exposure. But in my experience generally the activities of local housing companies tend to be relatively small scale,” he adds.

Ian Doolittle, a partner at law firm Trowers & Hamlins, says councils are only doing development on a scale that “minimises risk”. He adds: “My experience is that finance officers who are often involved in the on-lending into these vehicles are rightly very cautious, and these business plans are very carefully evaluated.”

However, Ms Elphicke says a pattern of behaviour she has seen in councils “time and time again” is when councils begin to develop their own homes: “It become part of an accelerated journey of getting involved in the housing market in a number of ways. So it’s not uncommon to then see two, three, four, five partnerships or joint ventures, a much stronger articulation of relative risk appetite to outcome, people looking at what’s right for a particular scheme or a particular site or outcome and partnering or entering joint ventures.”

She adds: “We have certainly seen that councils who have started on this path of being directly involved have made a much bigger contribution overall to their local housing markets because going through the process of considering how they’re going to be involved helps define what the needs are and how they can help.”

The attitude of the government towards these companies also appears to be softening. Last year previous housing minster Brandon Lewis warned councils not to use housing companies to sidestep government policies such as Right to Buy by moving stock into their companies. Jonathan Turner, head of housing at law firm Bevan Brittan, said the government was looking at requiring councils to account for the assets and liabilities of their companies within their HRA.

These warnings appear to have lost traction however, as the government focuses on boosting overall housing supply. Housing minister Gavin Barwell was recently asked what he thought of council-owned housing companies and said he had “no problem at all” with them.

As Mr Doolittle says: “The Autumn Statement has said to us that it’s all hands to the pump, and if local authorities can alleviate this pressing housing need then so much the better,” he adds.

As housing associations take up the government’s challenge to significantly up the number of houses they build, in a more modest fashion councils are joining them.

The local government sector may feel they’ve been left out of the government’s housing ambitions but this hasn’t prevented a significant number ploughing their own furrow. At a time when cutbacks are 10 a penny, the housebuilding ambitions of councils are to be applauded.