The decision to allow private sector housebuilders to bid for housing grant is about to turn the social housing world upside down. We look at some possible outcomes.

The great housing experiment
The great housing experiment

Big changes are afoot in the way affordable housing is funded. The Treasury wants to kick-start a housebuilding boom, but at value-for-money prices. To save the day, the ODPM is turning to the private sector. The Housing Corporation – the quango that distributes development grant to registered social landlords – is allowing private sector developers to compete for funds alongside a much-reduced list of eligible RSLs. The money up for grabs is substantial, totalling £3.5bn up to 2008.

Housebuilders appear to be jumping at the chance. In January, a pilot scheme to open up a £200m slice of the £1.67bn programme for 2005/06 received 171 expressions of interest from housebuilders, property developers and RSLs. In total, they were seeking £5bn worth of funding, 25 times the pot available.

But despite this bidding frenzy, housebuilders have mixed feelings about the new regime. Some evangelists foresee a brave new world of housing management where the line between private and public sector will become increasingly blurred. On the other hand, out-and-out cynics believe that opening the sector up to more competition won’t change a thing.

Housebuilders for …

Terry Fuller, director of partnering at Taylor Woodrow, is among the most enthusiastic advocates of the new system. Fuller is credited with persuading the Housing Corporation to take the plunge in the first place, and has submitted an “ambitious” bid covering “dozens” of sites.

“Taylor Woodrow has got a number of sites coming through the planning system with affordable housing, and we want control over our own destiny. For most housebuilders, it’s about certainty and controlling our resources a bit better,” he says. “We build most affordable housing anyway, through section 106 – this is just cutting out the RSL middlemen.”

As Fuller indicated, developers’ relationship with the Housing Corporation to date has been at one remove, acting as contractors to RSLs that have successfully bid for funding. Under the new system, they can bid alone or as part of a consortium that might include RSLs or private housing management firms. Fuller believes that bidding direct to the Housing Corporation should give the builder more control over the process, less bureaucracy, a choice of which RSLs they work with, and a chance to improve efficiency by standardising designs and specifications.

… and against

But other housebuilders don’t see the new system making that much difference.

“I need to be convinced that we need to change our relationship with housing associations,” says Colin Smith, managing director of Crest Partnership Homes, the affordable housing division of Crest Nicholson. “I’ve been working on affordable housing at Crest for 10 years and I don’t have any issues with working with a lot of associations. We’ve got a tried-and-tested process and we’re not looking to change that.”

But despite his scepticism, Smith has submitted a bid to the pilot programme. “It’s an additional source of funding that can’t be ignored. We have schemes that need grant, and if it’s going to go to developers it’s important to test the water. We will try to maintain relationships with our existing social housing partners. The fact that the grant is given to Crest Nicholson direct won’t change that we want to get them on board from day one.”

Even less enthusiastic is Michael Hill, business development director of Countryside Properties’ affordable homes division, In Partnership. “We wouldn’t want to develop the homes. The profit margin we’d require will be greater than that of a housing association. We can produce a more cost-effective bid if we do it in partnership and carry it out as a contractor, not a developer.

The only circumstance in which we would bid is if a housing association partner or partners wanted us to lead a bid because they felt we were more likely to secure grant.”

Smith and Hill’s argument, essentially, is “if it ain’t broke, don’t fix it”. But what if a surge of very competitive bids from developers pushes housing associations out of the running, and leads to a drop in contracting work? Direct bidding could break the system, and re-fix it to look entirely different.

Writing the rules

Housing associations need to clear a series of regulatory hurdles to get their hands on development grant, but the details of how the Housing Corporation will manage and regulate private sector bidders are still out for consultation. However, housebuilders agree that the rules in the pilot scheme will have dramatic implications for their cash flow and project costs.

Under the current system, RSLs receive 50% of their grant allocation when the development starts on site, and 50% on completion. But to avoid accusations that public money is lining the pockets of private bidders’ shareholders, the corporation has decided that developers won’t receive a penny until all the homes they have built are occupied. One housebuilder estimates that the cash flow hold-up could add between 5% and 7% in financing costs to the total cost of development.

Mary Lynch, strategy director at Lovell, points out that debt finance from banks is one of the few areas where private sector housebuilders have room to manoeuvre on development costs.

“The site is fixed by the planners, which means the amount of affordable housing is fixed and the price of land is the same for everybody. Build costs are the same because it’s always the housebuilder building the homes, so the only place savings can be made is the bit in the middle [procurement and financing savings]. We are a big player and for this grant to work, it’s got to work for people like us.”

At Crest Nicholson, Smith believes the delay could throw the feasibility of schemes into doubt. “On a large development, we could be getting grant three years later. The gap between completion and occupation is in the lap of the gods, and we have to wait until the letting procedure goes through and the last dwelling is sold - that could be a year down the line. It stops us having to go through very complicated hoops up front. But it depends how efficient your managing agent is. It’s not the private sector market I’m worried about, it’s a case of what the social housing market will be like in 2008.”

As a compromise between the strict regulation that applies to housing associations and the Housing Corporation’s need to avoid accusations of profligacy on public spending, Smith believes that grant to private companies should be paid on completion. At least one other housebuilder believes that its application includes a convincing – but commercially confidential – case to the corporation that its investment is safe and that it should give developers their money up front.

At the moment, the only way for housebuilders or developers to get the money up front is to sign the homes over to a housing association immediately. But Lovell’s Lynch points out that this is simply a return to the situation the corporation has been trying

to avoid: it has reduced the number of small and medium-sized RSLs active in development to a superleague of 50-70 preferred development partners so that expertise and efficiency savings would be concentrated. Lynch was not intending to submit a bid, but changed her mind after being approached by a number of RSLs and arm’s length management organisations with responsibility for managing council housing stock.

Playing a long game

Developers that choose not to sign the homes over to a housing association from the start have several options once they’re completed, each with their own certainties and risks.

The safer and more popular option, in the short term at least, is to sell the houses for a fixed price or at auction to an existing social housing landlord. Berkeley Partnership Homes intends to take this route, and affordable housing director James Walker echoes the views of many of his peers: “We’ve no interest in keeping the stock – we’re a developer, not a housing manager. It’s a completely different business – the City would slaughter us if we became a housing manager.”

But housing developers that do choose to make it their business can enjoy a guaranteed rental income from social housing, an attractive long-term investment given the acute shortage of affordable housing in London and the South. Taylor Woodrow, for example, intends to hold on to its Housing Corporation-funded homes and contract out the management to housing association partners, which it has already specified in its bid.

The company’s Fuller says that one of the main attractions of bidding and building directly is that it gives housebuilders the autonomy to choose exactly which RSLs it works with and how many. “Given that we’re a national housebuilder, we find

ourselves working with scores of housing associations. Our aim would be to have the country drawn up geographically, so we’d have London & Quadrant managing homes in one area, Airways somewhere else, Moat in another area. I can’t believe we’d be dealing with more than a dozen housing associations in the country over the next couple of years. It’s to do with partnering, working with people you get on with and streamlining the entire process.”

Direct bidding could also give the developer final control over their schemes, especially important as the government favours mixed-use developments and the scattering of affordable housing around developments rather than concentrating it in one corner. And, according to Lynch, one large developer has already taken the opportunity for greater autonomy one step further, and asked the prime minister if it can set up a housing association within its group structure.

She says: “Social housing may be a very small percentage in a large portfolio but you’ve got no control over it. RSLs can be imposed on developers by the Housing Corporation or local authorities. Where a housing association is really neglecting its responsibilities, either socially or on maintenance, that could affect the whole of what you’re trying to do. The developer feels its investment is too great to allow that.”

In general, Lynch foresees the lines between developers and developing housing associations blurring even more in the future. “I can see there may be a time in the future when developing RSLs will look so similar to [private sector] developers that the Housing Corporation will be calling up and saying ‘we’ve got a managing association in difficulties, would you take them into your group structure?’ In 10 or 15 years, I don’t think you’ll be able to tell the difference between some of the group structures. When I’ve voiced that opinion to senior government officials within the Housing Corporation, they have always agreed.”

Taylor Woodrow’s Fuller adds that the government’s “sustainable communities” agenda will also blur the boundaries between the public and private sectors. “When you’re building highly sustainable communities, you’re not just talking about housing, you’re talking about schools, shops, hospitals. The Housing Corporation wants to be associated with these sorts of scheme. As a major builder, we can do it better.”

Bureaucratic barriers

Cutting out the middleman and applying for Housing Corporation grant directly does have some disadvantages: namely, having to do all the arduous paperwork required by a government funding agency yourself. The prospect is worrying some builders. “There’s nothing in there that particularly frightens or concerns us – apart from the bureaucracy of the Housing Corporation,” says one housebuilder in line for grant.

Companies and consortiums that expressed an interest in January had to follow this up by submitting fuller applications by 8 April in the next stage of the process. These questionnaires ran to 25 pages and required detailed, but not unreasonable, information on each of the sites for which developers wished to receive grant.

“It’s not out of the ordinary,” says Brian Everett, housing initiatives manager at Bellway Homes, which has also submitted a bid. “It’s the sort of form you’d get when you go for a large regeneration project, although for a housebuilder that’s never been involved in public sector work, it probably isn’t the sort of thing they do every day of the week.”

A more intimidating prospect is the Housing Corporation’s creaking computer system (known as the Investment Management System, or IMS) which housing associations, and now developers, will have to use to submit their bids. At Circle 33 Housing Group, development director Howard Hughes claims he has the equivalent of one member of staff permanently filling out and updating all the online forms required.

But developers escaped the IMS for the pilot programme, and the corporation has promised that the most cumbersome elements will be rewritten in time for this autumn’s bidding round.

A final list of 10-15 successful private sector partners will be announced in September.

Worst case

  • Builders not receiving funding until homes are occupied are left out of pocket as the social housing market changes

  • It unbalances a system that actually worked pretty well as it was

  • Red tape adds up to 7% to the financing cost of a development and delays in handing over grant make large schemes unworkable

  • Developers’ share prices tumble as investors worry about housing management

Best case

  • Developers access up to £3.5bn in additional funding

  • Housebuilders build most of the country’s social housing anyway. The new system allows them to do it more efficiently

  • Builders are able to better link housing to regeneration and school and hospital building programmes

  • Developers can choose which social landlords they work with and reduce the number to cut bureaucracy

  • Housebuilders that become housing managers can guarantee a long-term income stream for themselves