Open house on £5bn pot of gold from council sales

Copyright: David Lawson - Property Week 1997

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A curious partnership of social housing enthusiasts and high-finance professionals cuddled in front of the TV this week, whispering comforting thoughts while  hanging on every detail of the new government's first Budget. Would the Iron Chancellor hand them a £5bn dowry to enrich an already consumated marriage? Or would he hack away the ties.

  The bonding of private finance and social housing has been one of the most unusual success stories of the last decade. Sandals and pin-stripes came together in a partnership that even Old Labour came to grudgingly accept. Lending boomed from a mere £8m to more than £1bn by last year. Now New Labour is set to exploit that relationship even further to help through pre-election commitments to reform public spending without hammering the taxpayer.

 The big question AFTER THE ELECTION was whether this would involve Gordon Brown handing over  the £5bn accumulated by local authorities from sales of council housing. At face value,  that would pay for another 70,000 homes. But housing associations would be able to double that number by gearing up with loans from a private finance sector increasingly eager for a stake in the buoyant property market.

   BUT THINGS WILL NOT BE  THAT SIMPLE. ENVIRONMENT MINISTER HILARY ARMSTRONG TRIED TO EXPLAIN TO BEMUSED MPS   EARLIER THIS MONTH THAT NEW RESOURCES WILL BE AVAILABLE BUT LOCAL AUTHORITIES WILL NOT BE GIVEN FREE ACCESS TO CAPITAL RECEIPTS. INSTEAD, THE 1989 HOUSING ACT IS BEING AMENDED SO THE POT OF GOLD CAN BE USED AS SECURITY FOR EXTRA BORROWING.

  COUNCILS CAN CHOOSE  WHETHER TO GO FOR NEW HOMES, REPAIRS, HOUSING ASSOCIATION PARTNERSHIPS,  OR PROPERTY TRANSFERS - BUT ONLY  WITHIN A STRICT SET OF GOVERNMENT GUIDELINES. THESE  AIM TO PREVENT A SUDDEN SPENDING BOOM. CENTRALISING THE POOL OF RESOURCES IS ALSO MEANT TO OVERCOME OVERCOME DIFFICULTIES WHERE LOCAL AUTHORITIES HAVE SEVERE HOUSING PROBLEMS BUT FEW STORED-UP ASSET RECEIPTS.

 'THIS IS A FAR SUPERIOR MECHANISM, AS IT WILL ENABLE US TO DIRECT RESOURCES TO AREAS WHERE NEED FOR INVESTMENT IS GREATEST,'  SAID ARMSTRONG.

  THE CRUCIAL DECISIONS ON THE SCALE AND PACE OF THE ADDITIONAL SPENDING WERE DUE TO COME OUT THIS WEEK AS PART OF THE CHANCELLOR'S DELIBERATIONS.

  But the squabbling over who gets their fingers into this pie have obscured issues which could have a much more important impact on the long-term involvement of private finance in social housing. This involves New Labour's attitude to ownership of the remaining £20bn of national stock.

  The Tories decimated council housing through the right-to-buy programme but held well known ambitions that the remainder should be switched to the private sector.  The 1996 Budget wielded carrot and stick to 'persuade' local authorities to transfer ownership to a new kind of body called a local housing company (LHC).

 Resources for repairs were cut and housing benefit levels limited, restricting councils' ability to spend rent surpluses on extra investment. On the other hand,  the government said they could keep 25% of receipts from stock transfers even if this did not cover outstanding debt.

LABOUR HAS SCRAPPED THESE DRACONIAN MEASURES, BUT LEFT THE DOOR OPEN FOR COUNCILS TO VOLUNTARILY CHOOSE THIS ROUTE IN A CONSULTATION PAPER THIS MONTH.

  The attitude of New Labour to this kind of transfer will be crucial. It will be a wrench for traditionalists to accept handing over council housing when they have been waiting so long for a Labour government to reverse Tory policies. But given that LHCs will essentially be housing associations - often dominated by members of the local authorities themselves - the idea could find growing favour among the new Treasury team looking for ways of containing public spending.

  It will also bring new hope to the private finance sector for new opportunities. The lending boom started when the insisted on switching housing association finance away from the public purse  is beginning to peter out, according to a study by Steve Wilcox of York University and Peter Williams, deputy director general of the Council of Mortgage Lenders.

  This has risen from a mere £8m in 1988 to just over £1bn but the overall housing cuts  are now starting to backfire. The Housing Corporation budget will fall drop from £1bn to less than £600m by the end of the decade. That means less development to involve  private lenders,  cutting their contribution to £700m.

   More than 100 lenders who now rely on this for a secure stake in the rising market will be looking for new outlets, and the transfer to local housing companies via large scale voluntary stock transfer (LSVT) looks their brightest hope if New Labour accepts the principles.

  The stakes involved are significant. Wilcox and Williams estimate £12bn of private backing has gone into  social housing and stock transfers over the last eight years. The vast majority is in conventional loans, with 45% of resources in England coming from banks, 32% from building societies, almost 20% from the capital markets and just over 3% via business expansion schemes.

  Scottish banks and building societies have fed almost £500m into the local market and the same has come from Welsh building societies for schemes in the principality. The much smaller Northern Ireland market involves only £10m.

  Stock transfers would restore the momentum. More than 50 councils have switched almost 250,000 homes over the last decade involving more than £4bn of private finance. But this represents only 7% of retained council stock. The 1996  Budget estimated  that further transfers will require  private funding  of around £20bn over the next decade. Some £500-600m will be required immediately for the 25,000-30,000 homes planned for transfer by eight local councils this year. If all planned transfers go ahead, this will rise to around £700m.

 The fact that these involve  homes being sold to newly-created, non-profit housing associations could be a powerful attraction  for the new government. These moves   ease the public sector borrowing burden in a way that cannot be attacked for selling off assets to greedy landlords.

 'The process can in many respects be more accurately characterised as a form of institutional and financial restructuring than one of disposal and acquisition involving two totally different organisations,' say Wilcox and Williams in the current Council of Mortgage Lenders Quarterly Economics Journal.

  Rapid growth in stock transfers is unlikely under a new government, they add, but point out that the idea has been accepted as one way of raising investment finance. As long ago as 1991 Nick Raynsford, then shadow housing spokesman, suggested local housing companies run by councillors, tenants and professionals. But Raynsford, who has a background running Shelter, was shifted from the housing post after the election.

 A major boost would come from manipulating these local companies out of the public sector borrowing requirement, which ministers are pledged not to increase. That would open the door for all  £5bn of local authority capital receipts to be recycled. Again, that is unlikely, as Labour rejected the idea before the election of changing  national accounting,  despite widespread support for new ways of classifying public borrowing.

  In that case, it would be better to distribute the money to housing associations than local authorities, as they will be able to gear up by borrowing private finance, expanding the number of potential properties, sat Wilcox and Williams. It would also help compensate for the continuing squeeze on social housing budgets.

 'Given the Government's pledge to keep within the spending plans set by the 1996 Budget there are limited prospects for an early increase in the levels of private finance required for social housing investment,' they say. But  'modest growth'  can be expected by the release of capital receipts.

  The longer-term picture is much more positive, though. Private finance had been a considerable success and with the continuing restraint on public resources, demand for rented property and backlog of repairs on existing social housing, Wilcox and Williams predict a continuing 'significant appetite' for private funds.

 Over the next decade, that could rise to some £20-30bn - which will  bring a  smile  to every banker's face. It could also finally bring in new sources of money. The giant insurance companies and pension funds are finally showing interest in this sector. Scottish Amicable started the trend a couple of years ago, buying a housing association portfolio. Dutch group ING took the plunge at the end of last year with a £6m deal - also in Scotland - and Norwich Union has put £10m into a similar deal in England.

  This is a tiny drop in the ocean of money available, however. Norwich Union alone has a £2.5bn investment portfolio. Specialist adviser Chaco, which put together the ING deal, says a clutch of further deals are waiting in the wings as fund managers overcome their prejudice against residential investment. Tranches of between £150m and £200m could begin to emerge if New Labour continues to convince that housing is no longer a political football.

  If the government's first Budget does nothing else for housing, reinforcing that message could do more in the long run for the sector than throwing £5bn of capital receipts to hungry councils.


Capital Finance for Social Housing in England

(£ at 95/96 prices)

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                  Local        Housing         Private

                  Authority    Corporation           

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87/88             4619         1248                0

88/89             4761         1266                0

89/90             4904         1210              137

90/91             6544         1328              193

91/92             3712         1467              208

92/93             3142         1935              268

93/94             2920         2542             1019

94/95             2790         1568             1076

95/96             2701         1174             1000

96/97             2380         1044              878

97/98             1907          650              765

98/99             1668          585              732

99/00             1427          534              717

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Source: Steve Wilcox


Large Scale Voluntary Transfer of English Council Housing

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       Councils  Dwellings  Price  Av price  Loan Setup    Treasury

                            (£m)   /home (£) (£m) Cost(£m) levy*

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88/89    2       11176       98.4   8740    130.7   2.9       -

89/90    2       14405      102.2   7090    123.5   3.0       -

90/91   11       45512      414.4   9110    708.4  21.9       -

91/92    2       10791       92.1   8540    176.5   4.9       -

92/93    4       26325      238.0   9040    319.0  12.2       -

93/94    9       30103      270.5   8990    455.3  13.9     22.8

94/95   10       40234      403.0  10020    741.9  22.1     52.8

95/96   11       44871      481.1  10720    966.6  23.2     48.0

96/97    5       22549      192.5   8593    419.5  10.8      9.6

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        54     245966      2292.2   9319   4041.4 114.9    133.2

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Source: Wilcox & Williams/ DoE

* 20% levy on 20% of receipts net of debt. Three-year payment holiday from 96/97