Welsh powerhouse

It’s one of the biggest, boldest plans the UK housing sector has seen for years - but it hails from an unlikely source.

A 10,000-home housing association based in Pontypridd has come up with a £1 billion idea that - if it comes off - would see the Welsh Government smash through its 7,500-home house building target.

The association is RCT Homes and it appears to be on the verge of sealing one of the biggest ever deals in the history of Welsh housing. It has already set up a subsidiary company which, in just seven years, it hopes will deliver 11,000 affordable homes across Wales and the south west of England. All of this without one jot of public subsidy. If that’s not astonishing enough, the housing association has not built a single home in its five-year history.

This is hyperbole that the housing association itself has helped to fuel. Its finance director, Malcolm Wilson, states simply: ‘This model could transform the prospects for affordable housing in Wales.’

But how is the plan meant to work, and how did this relatively small organisation launch such a huge scheme? And, the £1 billion question, does anyone think it will work?

How it all began

The story begins in April 2012, when RCT Homes first announced plans to seek £1 billion of investment to fund a development project bigger than any carried out before in Wales. It subsequently launched a wholly-owned subsidiary company, originally called Devco Wales No 1 but later renamed, more snappily, Porthcwlis, which would tender for a development partner.

In August 2012, the company revealed it had joined up with developer Bellerophon Partnerships to offer a deal to local authorities and councils across Wales, Wiltshire, Gloucestershire, north and north east Somerset, Bristol, Bath and Swindon to build homes without public subsidy.

In theory, the deal works because councils or housing associations will contribute land and enter into joint ventures with Bellerophon, which will carry out the development. The developer says the financing is already secured with the promise of £1 billion of private sector money reportedly coming from investor Legal and General, although the company is silent when it comes to discussing the exact terms of the agreement. Once built, the homes will be rented at intermediate levels, based on local housing allowance, to allow for a decent return of around 4 per cent for the investor.

Three quarters of the income generated from development will service the investment, with the other quarter going to the landlord for the upkeep and maintenance of the properties. The idea is that the scheme will protect housing associations from construction cost risk because management will not be handed over until they are built. On top of this, the organisations involved will be able to benefit from any future increase in land value.

Mr Wilson says some organisations are already expressing an interest. ‘There are a number of other housing associations that are talking to us,’ he explains.

The landlords will not need to undertake a new Official Journal of the European Union-compliant procurement exercise because Bellerophon Projects has already been tendered for the work on behalf of the framework. The framework will help councils, housing associations and private developers to build up to 11,000 homes over the next seven years, RCT Homes claims.

The scale of the plan becomes even more apparent when you consider that the Welsh Government has set itself a target of delivering 7,500 homes by 2016 - a number it calls ‘ambitious’.

The housing association says its model has the potential to unlock two significant sticking points in the Welsh housing market: unused planning obligations and the use of public sector land. The problem is frustratingly simple: planning permission for housing developments often includes a stipulation that a proportion should be affordable homes, usually built by housing associations. However, many of these homes remain unbuilt as housing associations cannot find developers willing to build at below market price in an already depressed Welsh housing market without substantial grant subsidy.

‘It’s the major problem we’re hoping to tackle,’ says Mr Wilson.

Public sector organisations - including local authorities - are among Wales’s largest landowners but they too have found it almost impossible to build affordable housing without capital grants. In the whole of Wales in 2011/12, just 35 affordable homes were built on public sector land without the help of government grants.

Already underway

So RCT Homes’ plan of building at scale could be just the thing to kick-start development on tricky sites. Indeed, the first pilot for the scheme is already on its way. Due to be completed in June this year, four three-bedroom homes will be built in Cwmach, Aberdare, which will be compliant with level 4 of the code for sustainable homes and occupied by RCT Homes tenants. There are already plans to build another 33 homes on the same site.

The Porthcwlis framework will also start work on more than 90 new affordable homes in Rhondda Cynon Taf within the next six months, as well as around 100 in various other locations throughout south Wales.

So what about the key player in all this? While it is no behemoth, RCT Homes became Wales’ largest social landlord when it took over the ownership and management of Rhondda Cynon Taf Council’s entire housing stock in December 2007. Last year its turnover was £44.5 million, with a surplus of almost £6 million.

The numbers for the framework are truly eye-watering: if RCT Homes is to reach its target, it must facilitate the development of more than 1,500 homes a year.

But Mr Wilson is confident. ‘We’ve got the expertise already in the organisation,’ he says. ‘And we manage houses - we’re not doing any of the development risk because it is carried by the developer.’

There are questions as to whether the relatively small organisation has bitten off more than it can chew. Neil Logan Green, partner at law firm K&L Gates, says the organisation had no ‘demonstrable record’ of building homes - it hasn’t built a single house in its entire history - and so would be at a disadvantage.

‘We’ve got a number of clients who would be very happy to do that much social housing,’ he says, ‘but they wouldn’t do it in Wales. It’s pie in the sky. That’s not to say they aren’t willing, but I am sceptical.’

On closer inspection, perhaps by labelling the deal as a £1 billion lifeline, RCT Homes is over-selling it slightly. The agreement with the investor is, in principle, for £1 billion, but each case will be examined as it comes to the fore, each joint venture scrutinised so that the investor knows what it’s letting itself in for. Only then will be money be lent. It seems that L&G has put aside enough money to finance the scheme, but whether it will ever happen and over what timescale remains to be seen.

Part of a trend

The RCT Homes model follows a recent tradition of innovative funding plans in Wales. Schemes like the Welsh Housing Partnership have seen modest success: the Welsh Government, in partnership with Principality Building Society, is buying up homes using institutional investment to rent to people in need at an affordable level. In time, it will deliver around 280 homes for intermediate rent having levered in a total of £30 million.

The Welsh Government also launched plans to develop 700 homes at Ely Bridge using a social enterprise to transform the 53-acre former paper mill site and hopefully creating a sustainable financial model for delivering affordable and open market housing in the area.

Judy Wayne, director at housing consultancy Altair, explains that the RCT Homes plan is almost an obvious next step: ‘It is ambitious and it’s interesting because it’s novel for Wales, but actually we’re seeing a lot more diversity coming in now. It’s part of a trend,’ she says.

‘If councils have land which is available then there could well be interest. Like a lot of these deals, the important thing is doing the sums and being aware of the different housing markets that exist in Wales.’

Nick Bennett, director of Community Housing Cymru, which represents housing associations across Wales, agrees: ‘The sector promised that no stone would be left unturned in search for innovative ways to deliver more,’ he says. ‘RCT Homes are to be congratulated, alongside Ely Mill, the Welsh Housing Partnership and the Welsh Housing Bond - other innovative models emerging from the Welsh housing sector.’

Unsurprisingly perhaps, the Welsh Government has been hugely supportive of the move, with housing minister Huw Lewis openly praising RCT Homes for its innovation.

‘With tightening budgets, [the government’s target of building 7,500 homes] will prove quite a challenge so we are working hard to develop new ways in which we can attract other investment,’ he adds.

The next challenge is getting councils and housing associations to sign up. Mr Wilson, RCT’s aforementioned finance director, says this is going well.

‘We have spoken to Wales’ larger housing associations and they have all expressed an interest,’ he adds.

Although, at the time of going to press Inside Housing had been unable to find a single landlord which, either on or off the record, would confirm any interest.

It’s a brave new world for RCT Homes - suddenly the average-sized housing association is making waves. Whether the framework will work in the long term remains to be seen, but, for now, the team from Pontypridd have become some of the most influential people in UK housing.