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Redesigning development

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Hopes are pinned on public/private local companies to lift the housing industry out of its slump.

Every day, the news about the housing market gets bleaker. But while house prices may be falling, the mortgage squeeze means the hundreds of thousands of households on council housing waiting lists are not benefiting.

The government has handed councils a key role in solving this crisis via an innovative new form of joint venture known as the local housing company (LHC). Last month, as part of a package of measures designed to restore confidence in the depressed housing market, the government announced that it had approved four LHCs.

The 'first wave'

Barking & Dagenham LBC and Manchester, Newcastle and Nottingham city councils, make up what the government says will be the first wave of a new programme it hopes will deliver up to 50,000 new homes on council-owned land. Up to 50 LHCs could be established across England (LGC, 17 July).

The government bills the companies as a “radical partnership” between councils and the private sector. The idea is that the public sector supplies the land and infrastructure for projects, with private partners supplying matching assets in the form of cash and skills. The LHCs will develop a mix of social, shared ownership and private housing, the sale of which will cross-subsidise the affordable stock. The social-rented homes developed will be owned by the joint venture, which means tenants will not have the right to buy.

Duncan Innes, director of strategic land at the government regeneration agency English Partnerships (EP), is working with councils to deliver the programme. He says the joint ventures will vary from area to area depending on the nature of the housing and regeneration challenges the council in question is dealing with.

Shared profits

In some places, Mr Innes explains, the council could provide the land with the developer partner providing an equivalent amount of finance. Then, profits would be shared between the two parties. In other circumstances, he suggests, the public sector could contribute the infrastructure needed to service sites.

Whatever model is used, the initiative is designed to give councils incentives to ‘un-lock’ land they own for housing development.

So in what circumstances will LHCs work? “It requires 1,000 homes to make it worthwhile,” estimates Mr Innes. Up to 2,000 dwellings built out on a dozen sites over a 10-year period represents a good package for developers, he adds. It is only by operating at such a scale that councils will be able to justify the substantial costs of procuring this new form of special purpose vehicle.

Large-scale regeneration

Gwyneth Taylor, policy officer at the National Federation of Arm’s-Length Management Organisations, agrees.

Where a local authority has small parcels of land, like the redundant garages that litter many council estates, the LHC route will not be the right one to go down, Ms Taylor says. Instead, she believes, a LHC will make greatest sense where a council is looking at a larger-scale regeneration project involving substantial new build. An example is the sizeable rump of large, run-down, system-built estates, which have proved too costly to bring up to the decent homes standard.

But why should local authorities be interested in LHCs?

The big carrot is the degree of control offered by the housing companies. Councils will be able to retain a direct say over how the development shapes up through their stake in the joint venture.

The housing market

But there are pitfalls. The elephant in the room is the stagnant state of the housing market. With house builders laying off thousands of workers due to lack of demand from would-be home owners, there are question marks over whether the private sector has the appetite to enter into joint ventures.

“You can’t re-emphasise too much, this is an uncertain market,” says David Hall, director of Tribal Consulting. “If you are putting together a scheme that involves shared ownership, you have to be quite careful about how the market is changing.”

EP’s Mr Innes argues that the downturn makes the LHC model more relevant than ever. The entire model is designed to ‘de-risk’ the often-fraught residential development process, he explains.

The joint ventures provide developers with what they crave free land, which cuts the amount of borrowing they need to raise. With the clampdown on credit, Mr Innes argues, LHCs are one of the most attractive options on offer to developers.

'Offset risk'

Bill Shepherd (Lib Dem), executive member for housing and regeneration at Newcastle, agrees access to sites should be an inducement to the private sector. “We are providing the land that will allow the developer to offset a lot of the risk,” he says.

LHCs are long-term partnerships. The project Newcastle is working on will not be delivered for at least five years or more, by which time the housing market should have recovered, Cllr Shepherd argues.

But, with large sections of the house building industry effectively on strike, the pressure is growing for the public sector to pick up a bigger share of the tab.

Tribal’s Mr Hall argues in most councils land values will not be high enough to fully cross-subsidise the provision of affordable housing by an LHC. “There will have to be grant funding from somewhere,” he says.

Ms Taylor admits such a move may result in LHCs falling foul of the public borrowing rules. “There has to be an element of risk. Arm’s-length management organisations offer such a dilution of risk because the housing is not under the direct management of the local authority,” she says.

The willingness of the new Homes & Communities Agency (HCA) to support the new joint ventures will be crucial to LHCs’ success, given that it will have control over social housing subsidy. But, the HCA’s chief executive Sir Bob Kerslake has voiced concerns about the complexity of the model.

Joint venture finance is a particular source of complexity, says Mr Hall, who wonders if the special purpose vehicles’ covenant will convince lenders. “You have to have a very robust financial mode to ensure enough certainty to pay off debt,” he says.

“The biggest danger is if it ends up like the private finance initiative,” says Ms Taylor, referring to the decidedly chequered record of a previous attempt to bring private finance into affordable housing provision.

Just a handful of housing PFI deals have been approved, eight years after it was identified by the government as a of the three mechanisms available to councils for accessing decent homes investment. And the Treasury has ruled that PFI is not a cost-effective way of building new housing.

Those desperately in need of housing help will be hoping the LHC proves a better bet.

Newcastle housing expo

The West End of Newcastle is the land that the recent housing boom forgot. While house prices were skyrocketing elsewhere, the area remained depressed.

In the Scotswood area, at the heart of the West End, 1,700 hard-to-let and abandoned council homes have been demolished in a bid to transform the area’s fortunes. The site has now been earmarked as the proposed location of a housing expo, due to take place in 2010.

The aim is that the 300 homes built for the expo will showcase innovations in housing design and construction. The council sees the local housing company, given the green light by ministers last month, as the vehicle for delivering the site’s redevelopment.

Bill Shepherd, executive member for housing and regeneration (Lib Dem), says: “There’s a commitment to deliver a important development on that site. The LHC is one way we can speed up delivery in the long term.”

The council has shortlisted three partners to enter its LHC joint venture with which it is engaged in a competitive dialogue process. Cllr Shepherd is heartened by the continued private sector interest, despite the wider housing market worries. “We were worried they would be less keen to engage,” he says. And while the LHC approach involves a greater degree of control for the council, he insists that this does not equal confrontation.

“We don’t want to think of it being a confrontational approach, it’s completely different. We get the opportunity to be able to form a relationship from an early stage.”

Nottingham estates get a facelift

Nottingham’s local housing company has been set up to revamp the city’s peripheral council estates. “There was a growing feeling in the city council that there had been a lot of priority around the city centre,” says Dan Lucas, policy officer at the council’s arm’s-lenth management organisation Nottingham Homes. “We wanted to spread that out to the more deprived areas on the outskirts of the city.” He says the initial focus will be on deprived estates in the north-west of the city like Broxtowe.

“We are talking about significant development schemes that come from the demolition of existing properties and reconfiguration of existing estates,” Mr Lucas says, adding that the project is designed to introduce a greater mix of tenures into the council’s estates and improve their environment. The LHC gives the council the opportunity to decide the types and locations of new homes, as well as laying down design standards.

Nottingham City Council leader Jon Collins (Lab) says the authority wants to help would-be home owners struggling to get a foot on the housing ladder. “We are considering how best to assist first-time buyers to access suitable LHC developments, possibly through equity share and/or by co-operation with mortgage lenders,” he says. “The objective is to give local people access to the quality of housing in which they would want to live”.

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