Housing's catwalk

Gordon Brown’s vow, a few days into his premiership, to provide 70,000 affordable homes per year by the end of the decade produced a flurry of headlines suggesting a radical change in policy direction.

But a few days later, at the launch of the housing green paper, housing minister Yvette Cooper promised only 60% more funds for pretty much a doubling in affordable housing provision – against a background of soaring land and construction costs. Even if this funding arrives – and it is by no means certain until the Comprehensive Spending Review is announced – it seems clear that radical new models for providing affordable homes will have to be adopted if that target is to be achieved.

John Walker, chief executive of English Partnerships, says: “The Comprehensive Spending Review will be a fairly tight settlement. We will need more mechanisms to help deliver affordable housing.” The local housing company (LHC) is clearly one of the mechanisms Walker is referring to. Announced in the green paper, this is a specific form of “asset-backed vehicle”, a joint venture between public bodies (in this case local authorities) and private developers, aimed at taking advantage of publicly owned land.

Duncan Innes, English Partnerships’ regional director for London and the Thames Gateway, is responsible for the first wave of LHCs at 14 locations around the country. He says: “It is a special vehicle set up by the local authority, using public land as an asset, together with a development partner, who will construct, sell and manage the actual housing.

“We expect the LHC to deliver at least 50% affordable housing, with most of that additional shared-ownership housing without grant. It converts the value of the land into shared equity housing, but the local authority also benefits from the growth in value over time on the retained equity.”

The developer is expected to raise funds for construction and part of the land value – keeping debt away from the public sector balance sheets – and provides the sales expertise.

Innes adds that EP is already working with the councils in question – Leeds, Nottingham, Sheffield, Newcastle, Wakefield, Sunderland, Dacorum, Harlow, Peterborough, Bristol, Plymouth, Wolverhampton, Manchester and Barking and Dagenham – to draw up a delivery plan. The first companies should be in place by the end of the year, with site activity starting in 2008.

However, LHC sites will be subject to the same commercial pressures and planning obligations as any other new housing sites. Some units will be sold on the open market and there will be requirements for social housing. Admittedly, there is an aspiration to provide more shared ownership than in conventional sites, but it seems that the main purpose of the vehicles is to unlock public sector land and increase open market supply. Indeed, the expectation is that most of the increase in affordable housing will come from new models provided by housing associations or other providers. Registered social landlords such as Notting Hill have already set up private development wings aimed at subsidising their affordable activities.

There are already companies providing affordable housing – at least that of the shared equity persuasion – without grant. Alistair Baker, chief executive of Merlion, one such company, says: “We have been doing this since 1991 and have built 1,000 units so far.” Merlion’s model is simple: they sell 75% of the value of the property, while retaining the remaining 25% – on which no rent or interest is ever payable. There is no limit to a buyer’s stay and the property can be bought wholesale at any time.

Housing associations are overstaffed and don’t operate on a commercial basis. We can make a profit from affordable housing

Alistair Baker, Merlion

“We acquire Section 106 sites where there is no grant,” adds Baker. “Because we raise 75% of open market value, we can pay the developer up to 70% of open market land value, and make a small margin. We also make a margin on any long-term growth in the equity we retain.”

He is adamant that Merlion can do this simply because it is more efficient than a housing association. “Our fixed overhead costs are between 4 and 8%, compared to 14 to 18% for a housing association. They are overstaffed and don’t operate on a commercial basis. In theory we can pay the same they pay and make a profit from affordable housing.”

Like Merlion, the Asset Trust buys “affordable” sites off developers but, unusually, it can deliver “social rented” homes as well as shared ownership, all without grant. According to Vivian Prosser, its executive director of development, this is down to the long-term nature of its investment, which comes from private equity as well as the Royal Bank of Scotland.

“There will be a value on that 25-year rental flow, which can be refinanced,” he says. “It is a long-term revenue stream and we are just taking a particularly long-term view. Rents increase at the retail price index plus 0.5% – for us it is a good investment.”

It is clear, however, that it is not just developers and investors that the government wants to see sharing equity with those now priced out of the housing market. It wants mortgage providers involved, too.

Also in the green paper is an aspiration to roll out and expand the Open Market HomeBuy scheme, the “shared-equity mortgage” in which buyers only need to raise 75% of the price of a home found on the open market. The remaining 25% is lent with no charges or interest for

at least five years by a combination of the government and private lenders, including the likes of Halifax and Morgan Stanley subsidiary Advantage. In return, they share in the increase in the value of the home. The paper stated: “We believe the private sector can play a greater role in offering shared-equity mortgages or shared-ownership homes, and want to see far more competitive projects on offer.”

The government has appointed former Deloitte senior partner Brian Pomeroy to examine the options and has expressly stated that it wants products that enable purchasers to buy just 50% of a home chosen on the open market.

It seems there is an abundance of models available to increase the availability of affordable housing. But one thing is clear: there is not going to be a massive increase in social housing provision. Shared equity of one form or another is the main form in which Brown’s much-publicised push for more affordable housing will come, if it comes at all.