HCA contractor partnerships: The right ingredients

The Homes and Communities Agency’s recent initiative to partner with contractors (as distinct from housebuilders) for housing delivery is something that has been talked about for quite some time. Companies such as Bouygues, Wates and Skanska have access to a competitive supply chains and the challenge will be how to bring these into play.

There is not yet much detail about the initiative, which was launched last week as part of the government’s Building Britain’s Future campaign. The HCA refers to a series of workshops over the summer to model the idea. What we do know is that the HCA will use its own or public sector land to attract contractors into partnerships to develop housing.

I assume there will still be a requirement to build mixed-tenure communities, so there will be an element of open-market sales risk (although there are other intermediate tenures that could mitigate this). The contracting sector has limited appetite for open market risk, as, in my experience, does the HCA. Therefore, the solution is likely to lie with how the risk is shared. Of course, I would expect large proportions of the schemes to be affordable tenure, which has no sales risk.

The model should have a number of ingredients that promote success. No upfront payment for land, no requirement to maintain overly inflated land values and the ability to share and mitigate risk being the most obvious for the contractors.

The model should also be cost efficient, with units being built with a contracting profit (typically at 5%) rather than a developer’s margin (typically at 20%). If the partnership were set up as a special purpose vehicle, it would be that entity that acted as the “virtual developer” and made a developer’s margin, which could then be shared between the two partners (the HCA and the contractor) in accordance with a pre-agreed equity split.

EC Harris is working on a similar model at the University of East London site where the public–private partnership of the housing association, London & Quadrant, and the contractor, Taylor Wimpey, share risk and profit in accordance with their equity participation.

The basis of a good model is there. The government needs to grasp the nettle, engineer the detail quickly and scale the opportunity up into something that will really make a difference.