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affordablehousingcomment Blind man’s bluff

Housing Associations are bidding blind, but will have to borrow big,


This month the government is due to unveil the results of the National Affordable Housing Programme bid round. Despite all the public hand-wringing over the change to the new Affordable Rent regime, there will no doubt be sufficient bids to fill the 150,000 new homes target by 2015. What is different this time is that housing associations will have had no choice but to bid on the basis of assumptions about the future rather than solid knowledge and facts. Assumptions about the level of their programmes to be met by low cost home ownership schemes, assumptions about the volume of existing social homes they will convert to Affordable Rent as they become empty. Assumptions about the impacts of welfare reform on revenue streams, assumptions about their financing costs from lenders in a higher risk environment. Assumptions about the attitudes of local authority partners to flexible provision, as we await the appearance of their new strategic tenancy policies. And so on. That is a lot of assuming. So when the government trumpets its success in receiving the high quality bids it needed and publicly professes a ‘told you so’ wonder at all the fuss and noise beforehand, don’t be fooled. This is the beginning of a process, not its end. Within a year to 18 months, it is possible the system

some of the most sanguine of the brethren. Affordable Rents at 80

per cent of market level are designed to provide the revenue to compensate housing associations and other providers for the massive reduction in the capital budget for housing. The problem is that, whereas capital grant used

to go into the housing association’s coffers on day one, Affordable Rent requires associations to borrow enough money to build up front and use the revenues from rent payments to pay back the loans over the next 30 years. What is more, the small amount of capital grant that will still be paid now comes at the end of the development process, meaning an increase in short-term as well as long-term borrowing. In May, the Mayor of London’s Housing

Taskforce reported on how the Mayor’s target of providing over 33,000 new homes a year for the city by 2015 could be met. It indicated that delivering the 52,800 planned affordable homes would require new private finance of £11.6 billion. Under the old system, London’s housing associations provided around 500,000 homes in 20 years, borrowing £15 billion to do it. So the next four years will cost associations three

If much more public land were cheaply or freely available, perhaps as deferred equity investments, it could make a significant difference to development costs

could be unravelling before our eyes. Housing associations will fill the bid target because that is what housing associations do. If it is at all possible, they will find a way through whatever system government puts in front of them. Their third sector ability to mould themselves more towards public style or private style provision and ways of working depending on the prevailing political wind is what has marked them out as the most flexible operators in the market. But the scale of the challenge the current government has set is disconcerting even

quarters of the sum borrowed in the previous 20. Scale this up nationwide and It doesn’t take a genius to see why some are worried that there is a fairly fundamental problem. Business risk will rise rapidly for associations which want to continue developing and future capacity will drain away. Add in the potential damage to housing association income streams from the government’s welfare reforms, and it is no surprise that the cost of new finance is rising and some lenders have already started looking

for ways to re-price existing loans to the sector. Housing associations are being ever more creative in finding previously untapped or under- tapped sources of finance to ensure the show will stay on the road. But these also come at a price, and generally a higher one than under the old system. Higher risk involves a higher premium. It is inevitable. Somehow or another, housing associations will

have to keep these risks at manageable levels. There are ways to do it, including cutting their development commitments if necessary. Better would be for other organisations to come to the party to a much greater degree than they have in the past. For example, the risk could be spread if many more housing associations were able to use their assets to develop again. Also, local authorities will be unleashed from the restrictions of the Housing Revenue Account in 2012 and able to control the use of their rental streams, subject to borrowing caps. Some of that money could go into affordable housing development. Contributions from the New Homes Bonus and public land banks would help as well. If much more public land were cheaply or freely available, perhaps as deferred equity investments, it could make a significant difference to development costs. And if the government were finally able to unlock more private housebuilder and institutional investment into affordable housing that would spread the risk too. So there are ways forward. But the solutions

are not necessarily easy to negotiate. Government will need to play a key role in facilitating change. There are signs the government is recognising

that the Affordable Rent model will struggle and has begun the process of considering what comes next. If so, there will be a stampede of housing association bosses only too pleased to help with their deliberations. Like so much in the Coalition’s first year, Affordable Rent was rushed. sh

showhouse July 2011 | 59

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