Cross-subsidy: Take your partn

Partnership between the public and private sectors, particularly in the delivery of mixed and balanced housing developments, is critical to the creation of sustainable communities. Cross-subsidy allows landowners, generally local authorities, to fund urban regeneration projects by combining a mix of land development opportunities, including housing for sale and/or commercial properties. Income generated or projected from the sale or rental of homes and commercial properties is used to raise the finance to enable the principal social housing schemes to be realised.

Cross-subsidy to the rescue

Upper Horfield in Bristol has undergone over 80 years of decline leading to condemned homes, high unemployment and money problems for most residents. Bristol council decided it would be cheaper to demolish the 658 homes and rebuild the entire stock from scratch, but found it difficult to obtain public funding to do so.

The solution presented itself through cross-subsidy which led to the creation of a partnership between the council, registered social landlord Bristol Community Housing Foundation (BHCF) and a private developer.

1 Development appraisal

The developer was selected by: Bristol council, which owned the sites for development; Bristol Community Housing Foundation, established to develop the Horfield regeneration project; Ark Consultancy, the development manager; and Turner & Townsend, cost consultant and employer’s agent.

The client had obtained outline planning permission for the scheme, based on building 800 units, half to be affordable units and half for open market sale. It was part of the contractor development partner’s responsibilities to obtain detailed planning permission for the scheme. This allowed optimisation of layout during the second stage, and the flexibility to change the mix. All construction would be carried out by the contractor development partner, which would also take the risk of disposal of the open market sale units.

2 Procurement

The procurement process was based on a two-stage approach, the first stage comprising of the submission of proposals in the following areas:

• Pre-construction fee
• Pre-and post contract programmes
• Comments on the drawings provided
• Proposed supply chain for the second stage
• Preliminary costs fixed for the second stage
• A “ceiling price” carried forward to the second stage
• A risk register

The contractor development partner was responsible for assessing the construction costs an all associated risks with regard to infrastructure, services, local authority and statutory approval, adoption of roads and sewers, fees, charges and payments for the completion of the development. The council took responsibility for initial decanting in phase 1, together with the demolition, while the future phases 2, 3 and 4 became the responsibility of the housing association.

4 Quality of construction

As part of the selection process quality and cost proposals were kept separate; the cost proposals of only those organisations that achieved the quality threshold were considered.

Financial proposals relied on cross subsidy, whereby the developer would construct houses and flats for open market sale, with part of the return making a contribution to the construction of affordable housing. The basis of the agreement was that across the sites within Horfield a minimum of 400 homes would be provided as affordable housing to an agreed mix that was specified as part of the employer’s requirements.

5 The financial model

The financial model relied on value being achieved both in terms of the build cost of the affordable housing, and the sales values proposed for the open market sale units. The ‘ceiling price’ submitted as part of the first stage was then developed through the second stage using an open book approach with the selected contractor development partner’s supply chain.

Part of the requirement was full visibility in terms of financial appraisals. This meant that detailed development appraisals were returned as bid documents including build costs for affordable and open market sale units, infrastructure works, fees, marketing, etc, together with sales values.

The project programme was phased over six years, and so to be accepted any financial model had to be robust in its view of projected inflation. Although a tender, the client needed to be assured that the financial model could be delivered over the life of the contract, and final selection was on the basis of the development appraisals in their entirety. Bovis Homes was selected as Bristol Community Housing Foundation’s development partner.

6 Bridging the funding gap

Using this method still meant a shortfall of around £16m and here the Royal Bank of Scotland came in. Bristol Community Housing Foundation was able to secure Bovis Homes’ construction costs at 2002 prices meaning that there would be no fluctuation in costs over the time taken to finish the development. Encouraged by this, the Royal Bank of Scotland then agreed to fund the shortfall.

7 What were the advantages?

The partnership has created a much more sustainable community by facilitating a more appropriate mix of bungalows, houses and flats, rather than all family homes, as well as regenerating an area of obsolete housing with a mixed-tenure environment of affordable housing, shared ownership and out right sale.