Arlingclose Ltd:
Independent treasury management services
Local Authority Housing
Treasury Advisory Perspective
Maidstone – 14th June 2013
Mark Swallow – Client Director
60 Moorgate London EC2R 6EL
Tel +44(0)8448 808 200
Fax +44(0)8448 808 205
www.arlingclose.com
Registered Office Barclays Bank Chambers Stratford-upon-Avon CV37 6AH
Registered in England No 2853836
Regulated by the Financial Services Authority No 417722
Arlingclose Limited provides independent advice
Local Authority Housing - Background
— LA's have been providing social housing since the 1920's
— Requirement to keep HRA dates back to Housing Act 1935
— Part II Housing Act 1985 – Powers to provide Housing and Other Accommodation
—
General Needs Housing
—
Other buildings associated with housing, shops and recreation grounds, land,
offices and hostels
— Local Government and Housing Act 1989 – requires local authorities to keep a ring–
fenced land lord account – HRA
— Since the 1980’s LA’s have been looking at alternative ways to deliver/provide
housing, legislative constraints have prevented innovation
— Impact of Localism Act – Some known's but more unknowns!
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Local Authority Housing – Supply
– Local authorities in
England owned 1.69
million dwellings on
1 April 2012, a decline
from 2.81 million on
1 April 2001
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
and Demand!
–There were
1.85 million
households on
local authority
waiting lists on
1 April 2012
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Not Just LA Housing
– The government estimates
that 232,000 additional
households could require
homes each year to 2033.
–In 2012, only 115,600 new
homes were built in England.
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Self Financing – Something New?
– Self-financing based on authorities ‘buying’ themselves out of a negative housing
subsidy position or receiving a lump sum in lieu of future positive subsidy receipts
– It was a ‘once and for all settlement between central and local government… a
one off allocation of debt’ after which all responsibility for maintaining social
housing stock rests with local authorities
– Authorities are now able to plan long term for the investment needs of their assets
and service levels in consultation with tenants
BUT – constraints still exist
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Borrowing Cap
– Powers to put a limit on an authority’s indebtedness (the cap) are included in the
Localism Act 2011
– Government considers that it is necessary, due to the current fiscal position, to
maintain control on local authorities’ debt
– Set to continue, at least until the next spending review – 26th June - Change to
policy?
– The cap restricts the ability of authorities to take on additional borrowing under the
Prudential Code, even if the borrowing is affordable by the HRA
– Investment is therefore curtailed although the cap
– The determination states that the cap will only be seen to be breached at the end of
the financial year, allowing authorities some short term flexibility
– The future proposed accounting changes to the treatment of leases will affect the
calculation of the debt cap.
– LGA have recently calculated that 60,000 homes could be built if cap did not exist
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
The Only Option?
– No change to the legal position regarding housing provision
– Ring-fence remains around HRA housing
– Subsidy system no longer exists providing “freedoms” to provide more housing
– But debt cap exists which puts a constraint on new housing provision
– National borrowing limits are close to the limit so even non HRA housing provision may
be under pressure
So what is the alternative?
- Find alternative solutions!
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Alternative Solutions – Use Your Balance Sheet
– Local Authorities hold substantial assets on their balance sheets, both in terms of
physical assets and cash resources
– Depending on your Corporate Objectives/Priorities you can use this balance sheet
strength to provide solutions;
– Solutions to housing delivery – new homes on existing land holdings, financial
support to housing schemes – reserves or borrowing capacity
– Solutions to current low investment returns – replace interest receipts with rental
income and provide capital appreciation
– Alternatively someone else can use your balance sheet strength to generate improved
investment returns and provide a housing delivery solution
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Special Purpose Vehicles (SPV)
– A number of successful Special Purpose Vehicles have been used around the Country
to deliver property/asset projects
– In many of these partnerships the local authority commits land to the SPV and
establishes a contract with it to protect the Council from potential losses or delivery
failure
– The SPV oversees development through contracts with developers and Registered
Providers (RPs
– In this way it is not a delivery agent, and does not take development risk, this is
taken by the developer/RP
– Usually there is no upfront land payment or equity contribution from the developer or
RP but they guarantee future payments to the SPV
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
SPV - Structure
Land
£
Co-investment
Partner
Council
Possible
Prudential
Borrowing
Potential land value / reinvestment
towards
s.106 / wider regeneration benefits
JV Co
Return on investment and
share of sales proceeds
Sale proceeds
Procure Works / Services Upfront Infrastructure and Planning
Plot 1
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Plot 2
Plot 3
Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Plot 4
Local Housing Companies
Joint venture between the public and private sectors, with local authorities
'investing’ land in the development process and private developers and other
investors providing funding to an equivalent level
The suggested benefits are that Local Housing Companies will:
— Increase the supply of a range of homes, including affordable homes
— Allow local authorities to invest land in housing development to capture a share of
increasing land values
— Position local authorities at a stronger point in the centre of the development
process
— Provide opportunities for a range of investment and development players to become
partners of local authorities
— Create quality schemes with wider consumer choice and tenure options
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
LHC - Structure
Equity committed (working capital
and development equity)?
Council
Partner
Assets
Equity committed
(working capital and
development equity)
Payment of purchase price reflecting
value of asset on satisfaction of
conditional contract
JV Co
Framework agreement with
call-off contracts: exclusivity
Site 1
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Site 2
Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Site 3
Prudential Borrowing
– A local authority is able to raise finance under its prudential borrowing powers, in
order to develop affordable housing
– This funding could be provided as a loan to an alternative housing provider e.g. a
Registered Provider
– Could be used towards direct development or setting up an alternative delivery
vehicle such as a local housing company/SPV
– Borrowing cap issues avoided (HRA not national)
– Recently arranged a £20m 5 year deal at 3% return for local authority (cost of funding
to RP)
– Potential future market for local authority to Registered Provider lending?
– Capital/Revenue distinction required
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Institutional Investors
–Almost unlimited cash chasing high quality investment opportunities
– Pension Fund Investors – seeking quasi government risk with inflation linked returns
– Leasing type arrangements – balance sheet treatment could cause problems
– Various types of guarantees – default risk, capital value risk underwritten by LA
– Co – Investment models – non bank mortgage schemes
Providing attractive investment opportunities to investors –
providing the right housing mix for local authorities?
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Current Central Government Initiatives
– A 2010 report by property group, Savills, estimated that "help Britain building" could
add 1% to the output of the economy
– £570 million Get Britain Building investment fund for developers. This will help to
build new homes on development sites that have stalled, haven’t started or are
classified as being on hold
– Identification of enough formerly used, surplus public sector land to support up to
100,000 new homes and are looking to sell this quickly to
– New Homes Bonus. This is a grant to local councils for increasing the number of homes
and their use
– Loan guarantees for housing developers that are backed by government to encourage
the building of more social and privately rented housing
– Encouraging a wider range of investors to build houses for private rent with our Build
to Rent Fund
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Current Central Government Initiatives
– Reduction in regulations on house builders to make the planning system more
efficient and effective, and are offering finance options to self-builders from a
specially created fund of £30 million
– Helping community groups to build new homes through the Community Right to Build
which became law on 6 April 2012. It is now easier to bring vacant and underused
public land back into use through the Community Right to Reclaim Land
– Helping buyers with the NewBuy Guarantee scheme, which started in March 2012 and
allows buyers to get a mortgage on a new-build homes with only a fraction of the
deposit they would normally require. More than 70 housing developers and 6 major
lenders now offer the scheme
– Councils can also use Private Finance Initiatives for housing refurbishment and
regeneration, where other grants or funding wouldn’t have been enough to make the
changes needed
Use H M Government PLC’s Balance Sheet?
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
What Can You Do?
– Contribute land and other assets – existing holdings, purchase of new sites.
– Use planning levers and tools - Local Plans should set out very clearly what is
expected in terms of quality, design, typology, scale, infrastructure and affordable
housing
– Implement infrastructure tariffs – CIL
– Fund infrastructure - facilitate the physical and social infrastructure that will attract
developers
– Use funding models and incentives – New Homes Bonus, CIL, TF.
– Consider ALL alternative approaches – BUT consider their
impact on your current and future financial position!
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
The Role of Arlingclose
– Working with partners to explore AND DELIVER housing options
–Independent – one size does not fit all
– Developing a toolkit of options to present to clients
– Will soon have a track record of delivery
– Best placed in terms of TREASURY ADVISORY, CAPITAL FINANCING and ACCOUNTING
expertise – can assess the impact on the balance sheet
Arlingclose – Well Placed and Resourced to Help You
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Summary
– Local authorities have a central role in the provision of housing
– Central Government have given local authorities the freedom and opportunity to
think innovatively, although constraints still exist
– Opportunity to provide investment in existing stock as well as meeting the needs of
the local community through new homes provision
– Housing delivery drives economic growth and delivers other tangible benefits (Social,
Health Etc)
– Local authorities can show the leadership and innovation that is needed, and can
build on this by aligning resources and funding, providing infrastructure and services,
engaging with developers and businesses
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties
Questions?
Mark Swallow CPFA - Technical Client Director
Arlingclose Ltd
60 Moorgate
London EC2R 6EL
Mobile: 07875 330826
E-Mail: mswallow@arlingclose.com
Web: www.arlingclose.com
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Local Authority Housing Seminar
Confidential - not for disclosure to third parties