Government evaluation of Capital Letters highlights ‘over-optimistic’ business plan and lack of commitment from members

Capital Letters launched with 13 council members, and ambitions to boost its membership to 25. Under its initial business model, the firm would find private landlords with properties to let at Local Housing Allowance (LHA) rates, the maximum housing benefit level the government covered. 

They would be matched with local authority members, allowing them to discharge their duty to house people by offering them a tenancy.

This plan included the ambition that member boroughs would transfer their existing private sector leased (PSL) portfolios to the company. However, no boroughs ever transferred their PSL stock to Capital Letters.

The evaluation said this was down to “the practical challenges of transferring individual leases and a view among some boroughs that the costs of Capital Letters managing their properties outweigh the benefits, or that they can achieve these benefits in other ways”.

Another key assumption in the business plan was the transfer of procurement staff, which also proved “unrealistic”. This was down “to risk aversion among the boroughs to transfer or second experienced staff to an untested entity, to staff reluctance to transfer”.

MHCLG does highlight the firm’s successes, including procuring around 6,500 properties and reducing competition between boroughs for a limited pool of properties, therefore reducing the power of landlords to play boroughs off against each other and drive up rents.

But the firm’s model was ultimately impacted by LHA rates, which have not kept pace with rising private sector rents. Raising LHA rates, a key ask of the sector, was not addressed in last month’s Autumn Budget.

Part of the lack of commitment from member boroughs was the need to see benefits before joining, in addition to “insufficient stakeholder engagement before and in the early stages of Capital Letters’ mobilisation”.

The MHCLG report also identified a lack of management involvement in early decisions, and challenges in finding other sources of income.

The report concludes: “There was over-optimism about the willingness and ability of boroughs to transfer staff to Capital Letters, and thus build the critical mass needed to eliminate inter-borough competition and avoid conflicting objectives, and the lack of any transfers of PSL stock has hampered its ability to reduce the use of temporary accommodation by boroughs and enable them to discharge duty.

“This and the challenges of finding alternative routes to becoming a landlord in its own right have also made it challenging for Capital Letters to build a significant income stream to replace MHCLG grant funding.

“The reluctance of boroughs to transfer experienced staff also made it more challenging for Capital Letters to mobilise and quickly build procurement capacity.

“This was compounded by other issues, notably the implementation of an IT system which had to be replaced, delaying the implementation of a common platform until September 2020.”

Sue Edmonds, chief executive at Capital Letters, said: “We welcome the publication of the report of ATQ’s independent review, which provides an objective and balanced appraisal of a range of stakeholder views about Capital Letters’ achievements, challenges and opportunities.

“The report highlights the issues Capital Letters faced in securing an independent, sustainable future, particularly in relation to the company’s first business plan, the operating environment and the company’s lack of assets, collateral or guarantees with which to leverage funding or partnerships.

“The consequence of this was that the ambitious plans for Capital Letters were impossible to achieve, resulting in the difficult decision to close the company.

“We fully support the key lessons set out in the report which, if applied in the future, could make a significant difference to the success and outcomes of a similarly ambitious, creative and innovative solution to collaborative endeavour.”

A spokesperson for London Councils said: “In the face of the most severe housing and homelessness pressures in the country, boroughs are determined to work together and try new approaches to securing accommodation for homeless Londoners. It was in this context that Capital Letters was established.

“However, London’s housing situation worsened even further in the subsequent years, making it very difficult for a pan-London initiative to succeed.

“We’ve seen immense turbulence in London’s private rented sector, especially in the aftermath of the COVID-19 pandemic. Boroughs were contending with a 41% reduction in private rental listings – a key factor driving up homelessness rates and making it even harder to procure accommodation in the private rented sector.

“It is clearer than ever that over-reliance on the private rented sector is holding us back from finding sustainable solutions to the housing and homelessness emergency.

“Ultimately, we need far more social and other forms of affordable housing – and we are committed to working with the government to boost delivery in the capital.”