This Guest Article for REVITALIZATION was written by Daniel Partridge.
In the UK, where urban regeneration prevails over sprawl, the role that the Public Sector can and should play in funding, delivering and managing new housing supply is a highly contentious and divisive subject.
But for many Councils (Local Government Bodies), the need for market intervention is often very clear:
- Home ownership is becoming a dream that many people may never see fulfilled and those that do “get on the housing ladder” are doing so much later in life;
- Many areas experience a significant surplus of demand for social (public housing), and affordable housing which remains unmet, leading to long waiting lists and large numbers of families on housing waiting lists and in temporary accommodation;
- Whilst The UK’s Private Rental Sector (PRS) is evolving and is witnessing significant investment activity from institutional investors and specialist providers, it is often also characterized by high cost and low quality provision, relatively short tenures, little stability for renters and regular examples of over-crowding – especially at the affordable end of the market.
- Central government policies and chronic underfunding have forced Councils to innovate in order to create new funding and delivery mechanisms to generate the new affordable housing stock that their citizens need.
This final point is arguably the most fundamental, Councils have historically taken a very active and direct role in housing delivery, in the period between the late 1940s and 1950s, Councils built more homes than the Private Sector and were building some 100,000 homes per year up until the late 1970s.
However, for over a generation this has not been the case, Central Government policy measures introduced in the 1980’s and in the period since then have largely constrained the both the ability and resources available to Councils to directly deliver.
Despite a focus on stimulating Private Sector housebuilding and the evolution of the UK’s “Housing Association” sector (comprising private, largely non-profit making organisations that deliver low-cost social and affordable housing), these groups have been unable to compensate for the reduction in Council-led housebuilding over this period.
Whilst the reasons for these market failures are myriad, complex and interwoven, the implications of the under-supply on families and communities across the UK are a significant concern for Councils nationwide. So what are Council’s doing to tackle the issue?
Against this backdrop, the constraints brought about by centralized policies on housing delivery, together the loosening of restraints on Councils’ abilities to act commercially (brought about by the Localism Act 2011) have stimulated a new wave of innovation and direct delivery activity amongst Councils.
The Localism Act enables Local Authorities to undertake activities that are commercial in purpose through Arm’s Length Trading Companies, or Council-Owned Companies (‘CoCos’). Whilst in the early years such activity was focused on selling services (e.g. planning or parking control) recent years have witnessed a significant increase in the formation of CoCos to acquire, deliver and operate housing, predicated on objectives such as:
- Improving the quality of housing stock and tenant experience for local citizens;
- Tackling market failures and delivering more social, affordable or market-value private housing outside of the constrains faced otherwise by the Council;
- Re-investing the surpluses of development to meet local priorities and tackle economic leakage from an area; or
- Generating surpluses through an on-lending margin on debt borrowed by the Council, or an investment return on equity that can be repatriated back to the Council’s General Fund and re-deployed to fund front-line services.
As such, for many Councils, CoCos are their direct response to the housing challenge. Whilst estimates vary, it is commonly agreed that over 50 CoCos are actively trading and at least 100 more are being developed by councils across the country.
At PRD, we are actively involved in scoping, business planning, establishing and mobilising a number of CoCos at the cutting edge of this movement. This has included supporting the creation and mobilisation of the Homes for Lambeth group of companies, which was conceived to support the London Borough of Lambeth to tackle local market failures. Their investments are designed to deliver 1,000 new, high quality homes at social rent levels over 5 years, to deliver new housing across a range of tenures, and to help to regenerate a number of ageing social housing estates in the borough.
We have also recently supported Homes for Reading, which was established by Reading Borough Council to improve the quality of the local private rental offer for housing at market and sub-market rates by offering “Superior Renting from a Superior Landlord”.
Homes for Reading is a relatively new company that is now facing exciting opportunities and key decisions in planning for future growth, our role included supporting Homes for Reading to review its activities, organisation and plans across both the strategic and operational levels.
Whilst the potential benefits of CoCos are evident to many, it is fair to say that these companies take a significant degree of time and effort to successfully scope and launch, the difference in numbers between planned and active CoCos and the relatively modest volumes of housing reported as delivered to-date across the country are evidence of just this.
Through our direct experience of development delivery and in supporting development and regeneration delivered via CoCos, Special Purpose Vehicles and other partnered models that bring the public and private sectors together, we have identified that the following issues are amongst the most commonly faced challenges by councils seeking to mobilize companies of this type:
1. Effectively Managing Exposure To New Types Of Risks
Development is an inexact science and is complicated in the UK by the shortage of developable land, complexities in land title and ownerships and statutory frameworks of planning policy obligations. Furthermore, the availability of affordable funding, pressures on the costs of construction and the uncertainties of future demand for residential property are key issues that impact upon the risks and rewards that development brings.
At the operational level, the effective management of voids, reactive maintenance and rental arrears is essential for successful business model, but these factors are also influenced by the wider market and economy in which tenants live their lives and make their housing choices.
Whilst many Councils will be activity in these areas to a degree, the added challenges of acting as a funder and deliver of development, and a manager of assets by way of the CoCo model introduces new areas of risk that require Councils to develop new effective disciplines and efficient models of operation.
2. Resourcing And Capacity Building
Significant sums of money are required to effectively capitalize what are essentially ‘Development or Asset Management Start-Ups’. Notwithstanding the significant, localized benefits that will be delivered over the medium to long-term, this can be a hard message to communicate to the local electorate during the period of austerity and sustained cuts that Local Government has experienced since the Global Financial Crisis. This can present challenges to planning and agreeing resourcing arrangements that must be effectively managed through communications and stakeholder engagement.
Furthermore, each CoCo needs to be able compete effectively in a wider marketplace that includes well-resourced, large and small private developers and Housing Associations and it will also need to be able to effectively and efficiently procure and manage contractors and service providers.
Given the newness of these areas of activity for many Councils and their officers, this will inevitably require the introduction of private sector skills and experience at the Board and operational levels, alongside training and support for any Council Officers directly supporting the CoCo. However, it is widely considered that there is a skills shortage across the UK’s development sector and CoCos can find it hard to compete in attracting top-talent. An effective recruitment strategy that is started early is therefore key.
3. Forging the New Relationship Between the Council and the CoCo
Setting in place an arms-length arrangement with a company that is significantly different to a Council can prove challenging to get right. In the first instance, the Council’s relationship may be multi-faceted, in that it may act as shareholder, funder, vendor of land, Local Planning Authority and provider of services to the CoCo.
Each of these different relationships is beholden to different Council controls and processes, as prescribed by its constitution; requiring careful organisational and operational process mapping to be administered effectively.
The roles and responsibilities for the individuals involved at the strategic and operational levels will need careful planning and support in order to deliver an effective separation of interests between the Council and the CoCo, to design-out potential Conflicts of Interest, to meet the legal and fiduciary duties of each and to develop a ‘close but separate’ working relationship.
For many CoCos, this has entailed removing Elected Members and Council Officers from Board positions, whilst ensuring effective controls are retained via Shareholder’s Reserved Matters, liaison and clauses within land, funding and planning agreements.
4. The Uncertainty Of Central Government Support For The Model
Whilst the Localism Act was introduced by the present Government and is endorsed by it, many commentators believe that Central Government support of the use of CoCos is less clear, given the potential implications for its overall strategies for public borrowing and debt.
Over the last year, HM Treasury has conducted a consultation on Prudential Works Loan Board (PWLB) borrowing, which is a key source of borrowing and on-lending that Councils use to support CoCos alongside other investment activities, which have become broader in nature in recent years, with incidences of Councils investing outside of their area for investment returns only are widely cited as warning flags that the Government may change its position.
During the past month the Prime Minister has announced the Government’s intention to lift the Housing Revenue Account (HRA) borrowing cap. For many Councils, the cap that was introduced in 2010 is a fundamental barrier to their ability to directly deliver new, high quality and affordable social housing. At the time of writing, the implications of this high-level commitment are uncertain and further detail will be revealed in the Chancellor’s Autumn Budget and in the coming months.
Such a move could potentially remove the some of the need for CoCos (although many have been established to do more than increase the provision of social housing) and there is a possibility that the alleviation of the cap on this borrowing may require a cap on other funding pots such as PWLB in order to avoid over-extending the public purse. However, the nature and extent of the breadth of this pledge is as yet unknown.
It’s clear that the introduction of the Localism Act has enabled Councils across the country to innovate and directly tackle the housing challenges faced by the regenerating communities they serve through the use of CoCos.
However, the levels of delivery achieved to-date, together with the inherent complexities faced in setting up and operating these companies successfully suggest that whilst CoCos will never become the answer to the UK’s housing challenges, they are establishing important roles as part of the answer for many parts of the country.
About the Author:
PRD offers substantive expertise in partnership structures, property development, infrastructure investment, Masterplans, the built environment and socioeconomic regeneration. PRD’s work focuses on bringing together and connecting key stakeholders in order to deliver effective, partnership-driven models for development and regeneration.
Daniel has over 18 years’ experience of working with the public sector, its stakeholders and partners, to structure and develop new strategic approaches for major capital projects and delivery partnerships which aim to realise community and wider economic objectives within the constraints of the prevailing economic climate. He is actively involved in scoping, establishing and mobilising a number of Council-Owned Companies (CoCos) and has board-level experience on housing and regeneration delivery ventures.