Planning, development and financing new build

Transcription

1 Planning, development and financing new build Sustained investment in housing of all types 24 th October 2013 Simon Smith

2 Introduction Overview of the traditional New Build Local Authorities Landscape Housing Association Opportunities Institutional Investment Business Plan Factors and Risks

3 New build: overview PUBLIC PRIVATE HRA COUNCIL COMPANY EQUITY/JOINT VENTURE TRAD. HA MODEL 4 potential routes for delivery (and multiple variants of) SPV/ALMO/Council company vehicles to use for development? JVC/Private Equity deals tend to be more scheme-based LAs need to be clear on powers 3

4 The traditional and basic model EXTRA SUBSIDY A traditional scheme BUILD COSTS LAND GRANT BORROWIN G Land low value or zero Little or no additional subsidy 50% grant 50% borrowing financed from rents The underlying fundamental fact... Social/affordable rents are not high enough to be able to finance a mortgage on the whole cost Subsidy (in the form of grant) is needed to make it stack

5 External factors or grant substitute? Assuming that a level of subsidisation for the scheme is required to enable borrowing to be funded within years... What other sources (other than government grant) are available to subsidise social rent schemes? 1. Cross-subsidisation from market/shared ownership sales 2. Reserves, capital receipts 3. Explicit cross-subsidisation from other properties Conversion to higher rents a new source in the mix Market renting provides profits to help fund borrowing 4. Equity or other forms of institutional investment A positive move but needs to pay a return (like paying interest on the investment made by the institution)

6 All in the mix summary of all factors Scheme factors Balance of funding Subsidy Build costs Management Repairs Major repairs Inflation Debt costs Rent levels Borrowing that can be sustained Requirement for subsidy Previous: Grant as a requirement Now/future: Grant as a fixed input... Government grant Capital receipts Sales proceeds Shared ownership proceeds Market renting Higher rent conversions ( Institutional investment )

7 Financing models All housing needs finance and all affordable housing needs subsidy (from somewhere)... What are the prospects for funding and subsidy? Sources of funding PWLB Banks Inst Inv HRA borrowing under the cap Prudential borrowing in a new/different vehicle Joint ventures with HAs/Other providers Bond market Institutional investment Opportunity cost Sources of subsidy HCA grant how to access? Mixed tenure schemes sales RTB (additional) receipts Disposals of some schemes to reinvest for others Health/Other Resources Reserves and revenue

8 Affordable rent As PRS overtakes social as %age tenure, AR and other products could offer a wider spread HCA programme was over-subscribed Risk of maxed out finances for HAs Development consortia including LAs/ALMOs Risks of existing loan renegotiation for many HAs Role of local authorities in terms of tenancy strategies Reliance on conversions not a long term policy Risk of affordable rents becoming unaffordable

9 From traditional social to affordable rent Trad Social Aff Rent No of units Build costs 100, ,000 Grant (or other subsidy) 50,000 24,000 Net funding requirement 50,000 86,000 Rents Voids and bad debts 2.0% 2.0% Management Repairs Future major repairs (from yr 6) Inflation 2.5% 2.5% Interest on debt 5.5% 5.5% Conversions 0 20 Both schemes similarly fundable 600, , ,000 0 Social debt profile ,000, , , , ,000 0 AR debt profile

10 Local Authority Landscape HRA New Build HRA Whole site and Joint Ventures HRA -Institutional Investment ALMO build (or) through subsidiary GF Local Housing Companies GF Institutional Investment

11 LAs HRA under self-financing All authorities are better off 1. Increase in assumed major repairs allowance Rise to 1.726bn = increase of 460m ( 48m in the Eastern Region) 2. Retaining rent income as rents increase 300m+ underneath target rent which will be made up over time 3. Ability for many to borrow up to the borrowing cap but unevenly spread Headroom total 2.87bn ( 233m in the Eastern Region) 4. For debt take-on authorities, a cheap debt gain 85bps on 13.5bn = m ( 27m in the Eastern Region) A small number struggling in short term decent homes A larger minority with medium term pressures The vast majority with some borrowing and potential revenue to invest vast majority looking at some form of new build... 11

12 HRA build: key features and trends Traditional approach to council housing Generally on land already in the HRA Infill or other brown- and green-field sites Regeneration and redevelopment a key feature (to increase density or increase bedrooms) Mix of finance Borrowing via PWLB likely to be in separate HRA pool using headroom beneath the borrowing cap can link loans to schemes Non-borrowing finance from receipts (RTB and other non-pooled receipts), HCA grant funding (22 have contracts in place or pending) and other reserves (revenue reserves may not be inconsiderable for many authorities following the settlement) Tenancies and rents Secure tenancies but Localism Act gives flexibility Choice of rent policy (HCA/RTB funded new build outside of rebate limitation arrangements)

13 HRA build: positives and challenges Positives In house (or ALMO) management and repairs likely to be minimal marginal additional cost Cost of funds likely to be the cheapest available via PWLB No VAT or other taxation leakage Revenue reserves may be growing quite quickly given headroom within the settlement subject to maintaining rent increases Issues and challenges Headroom beneath the debt cap is limited and, once used, takes time to re-establish Tenancy constraints may also operate members view of HRA as safety social rents Need to become HCA partner in own right bidding process passed HRA is a creature of legislation generally less flexibility around future use

14 LA Opportunities national and local New build from the resource base? Borrowing headroom 2/3 rds -> 25-30,000 HCA leverage levels Revenue and reserves could reduce leverage requirement and increase supply steady state -> 4-5,000 pa delivery? New build from the asset base? How many additional units from redevelopment of poorly performing assets? What is the potential for delivery on infill sites? Debt cap remains critical constraint 14

15 Raising or abolishing the debt cap? Councils will deliver programmes from the headroom that they have (some borrowing but mainly revenue/reserves) A three-way lobby for growth : recent progress Changing borrowing rules Abolishing the debt cap Raising the debt cap on a formula- or bid-basis Let s get building New build in plans our estimate 20-25,000 in first 5-10 years Financial capacity overall up to 200, ,000 homes: need land(!) 7billion capacity and appetite - 60, ,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000, With investment Existing system

16 Financing replacement 16

17 HRA Whole Large Scale Site Development Some authorities looking to develop whole sites with cross subsidy from market sale and shared ownership Transfer of land between GF and HRA Joint Ventures as a possibility of sharing risks/profits through build costs and sales 17

18 LA build via ALMO/Subsidiary A number in place as direct owners and managers or ALMO (charitable) subsidiary set up Typical approach HRA land moved over to ALMO SDLT issues may/not arise LA borrows and on lends to ALMO/Subsidiary to part finance development prudential borrowing to the General Fund, often with a premium and linked to a firm repayment schedule ALMO joins development framework (with developers/ha partners) Non-borrowing finance mostly HCA grant - can also allocate LA/RTB receipts directly as effective grant-funding for the scheme Rents at social to affordable (members and HCA an issue here) Theoretically, there are options to alter the ownership of the subsidiary Off balance sheet and able to borrow directly

19 LA/ALMO build: positives and challenges Positives Economies of scale all in the LA/ALMO family Cost of funds via General Fund (or HRA direct) likely to be cheaper than can be found in private finance, even with premiums from the LA Revenue reserves in the HRA could be diverted to the company as additional resources still gets the reserves spent in house As for direct ALMO option, may be opportunity to diversify offer in ALMO and additionally really brand separately Removes leakage of taxation As a separate (subsidiary) vehicle, options to take it in potentially more directions Issues and challenges CLG may still regard this approach as circumventing the debt cap HCA grant via LA or partnership, not direct Company does not have borrowing capacity in its own right (initially) Increases the layers of complexity and costs of/time to set up Many feel it might only be worth doing if scale could increase Irrecoverable VAT (ALMO)remains an issue

20 LA subsidiary outside of HRA/ALMO Under consideration at a small number of non-almo authorities Aim to enter the market for diversified housing offer Where tenure and rent flexibility might better sit outside the HRA Market renting (almost certainly outside the HRA) Properties for sale cross-subsidising other council investment in regeneration Opportunity to put non-hra land into a company No typical features but would cover GF prudential borrowing by the council, lent to the company Allocation of receipts and other sources of finance Management by third party (RP) or own HM services Returns accrue to the council care on trading and profit making Options around ownership 100% owned on balance sheet, returns to the council Joint venture on or off balance sheet

21 Private finance: traditional HA model For overall investment: stock transfer For scheme by scheme development: land transfer/s106 Stock transfer Affected by the implementation of self financing Valuation likely to be much higher than in the past What is on offer to tenants? Cost and nature of funds may be more expensive than CoCo All other features apply waiting for guidance but will be a stretch Land transfer the traditional model for development Land transfer/cheap in return for nominations ;borrowing entirely private finance by HA Usually grant funded or cross-subsidy/mixed tenure scheme Times changing: cost of borrowing, introduction of AR, mixed tenure schemes not delivering same levels of cross-subsidy Most LAs not exploring in-house or joint venture models for the future

22 HA landscape Affordable Homes Programme Mark 2 Extension of the Affordable Homes programme - 957million from to To provide 165,000 new homes No diversion from Affordable Rents Pressure on conversions to affordable rents for existing stock Allocation July next year Drop Dead Date (for completions) expected HCA to ensure delivery of surplus public sector land Concern over Welfare Reform may put looking after existing rental streams than development 22

23 HA landscape Homes Guarantees Programme Scheme to reduce borrowing costs for housing providers by guaranteeing up to 10bn of debt through the infrastructure (financial assistance) bill for both private rented and affordable rented properties As part of the announcement and in conjunction with home guarantee programme 225m to be made available for affordable housing with it allocated in July (for 13,800 new homes) with the budget increasing the allocation to 450million. Only for new schemes project limit of 5m Debt to cover 30 years Fixed Charge on property plus covenants Reviewed every 5 years 23

24 Build to Rent (1) Build to Rent Fund launched to stimulate new private rented housing supply and to provide opportunities for new institutional investment Sits alongside the private rented sector part of the Housing Guarantee Scheme though independent The Build to Rent is primarily to assist with the development phase (the Guarantee to assist with the long-term holding once built) Fund Initially set at 200million but increased to 1billion Fully recoverable, commercial investment where the Government will share the risk (or bridge) finance Scheme can cover development costs including land, construction or management costs. Once the scheme is fully let the developer will sell on its interest or refinance and repay loan/equity. 45 projects from Round 1 to support 8,000 to 10,000 homes Round 2 now open 24

25 Institutional Investment What are the types: Long-term: Sale/Leaseback schemes Short-term: Deferred Purchase Rent to Buy Build to Rent 25

26 Equity Investment - Intro Not one size fits all! Is this the Holy Grail for a generation? Investors are of different types, with varying requirements Key Factors include: Size, Return, Term, Exit strategy Risks: Income collection Management and Maintenance Construction and Development Political / Social risk Financial and Inflation (what has the investor built in) 26

27 Equity Investment Overview Pension Funds/Institutions Large Size Low Rental Yield Long Term 30yrs + Exit Strategy Fixed Low Risk Real Estate / Private Equity Small Size High Yield Short Term <15 yrs Exit Strategy Flexible High Risk 27

28 Long-Term Investment Usually Sale/Leaseback deals Low or no debt, focus on yield (not capital) Sale of land by LA or HA to investor via SPV Delivery of inflation-linked returns on initial investment Management and an income guaranteed provided by the housing provider Exit via reversion of properties to the HA at the end of the term On Balance Sheet (Issue with HRA re debt Cap) 28

29 Long Term Investment (2) Examples: London Borough of Barking and Dagenham: ( Longharbour) Genesis HG (M&G investments) Derwent Living (Aviva) Manchester Pension Fund 29

30 Shorter Term Options Deferred Purchase schemes Investors looking for a blend of yield and capital growth Focus on: Initial Yields Buying Low, selling high Timing and process for sale of properties Flexibility of Exit : off balance sheet (LA/HA) LA/HA purchase homes when their business plan has capacity LA/HA provides a guarantee level of rent in return for management and maintenance Interest from investors as an area of growth Emerging markets and products 30

31 Rent to Buy Property acquired/built without subsidy Property let to tenant at affordable/market rent 50% of rent is put towards purchase (deposit) of the property potential re new mortgage guarantee scheme Investor puts capital in, receives annual income and form of exit Examples of Rent to Buy/Deferred Purchase: Kirklees Council (QSH) 31

32 Build to Rent (2) Building Homes for Generation Rent by Social Finance and the Resolution Foundation 140million portfolio 778 rental homes what would be the return? In conjunction with 6 RPs building private rented developments with own borrowing Investors buy a portfolio of fully-occupied properties keeping rental income streams which are affordable RPs run properties on long-term tenancies Returns on income between 3.9% to 4.7% Could be improved if the Government Guarantee Scheme used 32

33 Business plans and welfare reform Business plan issues from HB/welfare reform Reduction in benefit entitlement reduces ability to pay and arrears rise Move to Universal Credit leads to significant increase in arrears UC exemptions: vulnerable/elderly/those in arrears evidence being collected in the demonstration areas Understanding the position of tenants and residents: IT and bank account access Many only beginning to understand the implications for specific tenant-groups low paid working families are a critical group 33