Waltham Forest Council’s joint venture paused for second time due to high gilt rates

Now the council has suspended JV2 for a second time without it having yet got off the ground. A housing strategy report presented to the council cabinet last week said: “A second joint venture [JV2] with Mears, purchasing private rented sector (PRS) homes for homeless households, is currently on hold due to high gilt rates making the model unviable. This will be kept under review over the next year.”

JV2 intended to purchase up to 400 homes to let on assured shorthold tenancies so as to discharge the council’s homelessness duties and enable households to leave temporary accommodation.

The council cabinet approved the scheme in September 2022 on condition legal agreements were finalised by the end of March 2023. However, due to “adverse market conditions” – namely, rising gilt yields – a financial model could not be agreed with Mears and JV2 was suspended.

But in June last year the council revived the plans. “Because of continuing increases in temporary accommodation costs and in view of recent increases in Local Housing Allowance (LHA) rates, the council has re-engaged with Mears to review the financial model,” a council report said at the time.

“A viable proposal has been developed, that responds to the need for more affordable homes, and delivers revenue savings for the council.”

This time the council set a deadline of 31 March 2025 to secure a “financially viable” bond rate and enter into legal agreements, failing which, JV2 would be suspended again.

Two factors had restored the scheme to financial viability by June 2024 – the ongoing rise in temporary accommodation costs and the end of the LHA housing benefit freeze. The council report last year said the cost per temporary accommodation property had risen 35% since September 2022. Meanwhile, the then-Conservative government had restored LHA to the 30th percentile of local rents, reducing the gap between LHA and private rent costs.

The combination of these two shifts “improved the financial model for JV2, offsetting the impact of the current bond interest rate, which remains higher than the rate assumed in the previous business case”, the June 2024 report said.

Based on financial assumptions at the time, the JV was predicted to save the council around £56 a week per property, compared with the cost of temporary accommodation, amounting to a £1.165m annual saving once all 400 properties had been purchased.

“The final agreed bond rate for the JV2 loan is dependent on the gilt market, which fluctuates daily,” the June 2024 report said. “The council and Mears need to commit to the JV at a time that optimises this loan rate and the financial viability of the JV. A 0.25% change in the loan rate will have an ongoing impact of £500k per annum throughout the 40-year life of the JV.”

The scheme would see the council offering the purchased housing to people in temporary accommodation or newly made homeless. The aspiration is for half the homes to be located in London, with a target mix of 60% two-bedroom homes and 40% three-bedroom homes. Properties bought outside London would be within a 15-minute walk of public transport with connections into the capital.

However, the June 2024 report warned that if house prices were higher than modelled, JV2’s acquisition strategy might be adjusted to buying more properties in cheaper locations.

JV2 would see the council guaranteeing payment of the rent when homes were unoccupied or there was a rent shortfall, as well as paying a top-up to the JV to cover management fees and profit. The rental income would repay JV2’s bond debt and interest, and fund repair and maintenance work by Mears’ registered provider subsidiary Plexus. Mears would bear the financial risk of over-running maintenance and repair work.

At the end of JV2’s 40-year contractual term, the council would purchase the homes from the JV partnership at a value equivalent to any outstanding debt.

Under the JV2 modelling, the average home in the scheme would cost £330,000 including fit-out costs – nearly a quarter more than under the first Mears joint venture that launched in 2018. The homes purchased under that first joint venture ended up costing 10% more than the modelling had predicted, meaning that 10% fewer homes were bought than originally planned – 330 rather than 365.

“To mitigate this risk under JV2, the property market analysis methodology to assess the purchase price has changed, with properties in the bottom 10% of the price range being excluded from the sample,” the June 2024 report said.

Mears Group said: “We remain fully committed to supporting the council’s vision of providing long-term, safe, well-maintained homes for those in need as opposed to short-term temporary solutions. We continue to work closely together to find a viable model for any potential second joint venture.”