Local Authority Housing Development

Text from a speech I gave at a Shelton Development Services seminar on 28 February 2018.

I started working in housing in 1992. Margaret Thatcher was behind us, but her legacy lived on. John Major was Prime Minister (It Woz The Sun What Won It) and we were still in recession with unemployment on the rise. Everyone sexually active was terrified of AIDS. The now ubiquitous Graham Norton made his debut on the Edinburgh Festival Fringe. Oh, and you’ll like this one – the Government cut the interest rate to 8% in an attempt to tackle the recession.

At the time, local authorities had all but ceased to build new homes themselves. By then, already well over a million houses had been sold under Right to Buy. By 1993, well over a hundred Councils had transferred their housing stock to housing associations, so housing associations were on the rise … but not even they still had access to 100% grant funding to build new homes.

I don’t need to tell you that in the intervening twenty-five years, there’s been an awful lot more water under the bridge. I’ve spent the vast majority of that time working in the housing association sector. I’ve been involved in several stock transfers and quite a few mergers. I’ve gone from the thrilling introduction of a single brick ‘phone to share between a team and filling in paper grant forms, … through the initial wonder of having email access internally and externally all from my own work desk … to bring your own device and we don’t care where you work as long as you get it delivered.

If we accept that for some years we have needed to build 200,000 new homes a year to keep up with demand, we know we’ve already built up a big fat shortfall in supply. The national average house price to earnings ratio is 7.6, but you can’t get a mortgage for more than 4.5 times your income. If you have children born between 1981 and 2000, then nearly 70% of them will still be living with you or renting by the time they’re 30. I’m very passionate about creating housing solutions for younger people, because the thought of living in the same flat as my step-son for another decade could definitely push both of us over the edge!

You’re here because you’ve already started to develop homes again yourselves, or because you want to. I’m here because I think you absolutely MUST. Do not hesitate any further. Don’t procrastinate, shilly-shally or dawdle. Definitely DO NOT PANIC. You’ve got this. It will be OK. There are people here to help, mistakes to learn from and triumphs to emulate.

I’m still scared to say this in front of my old housing association colleagues, but I firmly believe that LOCAL AUTHORITIES ARE THE NEW HOUSING ASSOCIATIONS. OK, well, I know you were kind of already there before the housing associations … but I’m framing this from my own career perspective.

Housing associations have become increasingly corporate animals. They’re now huge (and still merging) businesses. Some of them operate nationally, others across multiple regions. I don’t know about you, but my experience is that many of them have got a bit big for their boots and aren’t really that in touch with truly LOCAL needs anymore, which means that you probably don’t experience the same levels of partnership working with them anymore. Their business plans were quite dramatically affected by the Chancellor’s 2015 rent reduction, against a backdrop of having taken out hundreds of millions of pounds of bond finance that has to be serviced without breaching their loan covenants. That’s a different world to work in, and changes the focus of their new home delivery decision -making. They have to build to sell in order to generate cross-subsidy. They need to push up percentages of shared ownership to bring in capital early rather than wait for a drip-feed of rental income.

For the first time in ages, you have less restrictions than them, and you’re in a better position to deliver what your local population needs.

… but it’s a bit complicated, right?! I won’t embarrass you by asking for a show of hands, but I wouldn’t mind betting that most of the people in here have been daunted more than once. And if you haven’t, you’re definitely not doing it right!

Developing new homes is a complicated process, involving all sorts of other specialist processes, each with their own snags and foibles. You’ve got your governance, your legals, mega-bucks finances, getting planning permission, checking there’s not a water main under there or some buried Romans, all kinds of other risk assessments and mitigations, procurement and being OJEU compliant, preparing a spec that isn’t going to change once you’re in contract, complying with funding conditions and HCA audits, settings rents and service charges, avoiding creating some kind of dystopian nightmare place to live that’s unmanageable … and so on! If you’ve never done this before, there will definitely be a steep learning curve.

For goodness’ sake, don’t try and do it all on your own. There’s no need to, because help is at hand. For a start, you’re sitting in a room full of people that are at various stages of the same process. You work in a sector where there’s a culture of sharing good practice and of partnership working. There might be a bit of healthy one-upmanship … especially when a new shared service is on the horizon … but generally speaking, you’re all up for helping each other. Forums like this are a great opportunity to network and find out who’s doing something you’re also wanting to do.

There are also the Registered Providers. In the region I work, most of them seemed to have pulled out of doing development agency work in favour of using all of their internal resources on their own programmes. That probably isn’t the case everywhere in the country. They generally have loads of in-house expertise, and for a fee and a suitably worded Development Agency Agreement will deliver schemes on your behalf without you having to worry too much about lots of the things on my list of complexities. You’ll still need to practice being ‘a good client’ though. There’s no getting away from that one! You’ll need someone empowered in-house who’ll oversee your activities and co-ordinate all your internal interests into making good and timely decisions.

If your Registered Providers aren’t up for helping, then you could certainly go some way towards tackling a chunk of your practical delivery issues by hiring an experienced Employer’s Agent to provide you with an enhanced service. If they routinely work with Registered Providers, they’ll be familiar with many of the issues, including having been party to common management and maintenance debates and how to try and design them out. Again, you’ll still need a client representative that knows the territory and is empowered to make decisions on your behalf. In this scenario, you’ll have more responsibility for keeping your audit files up together, and you might well still need a separate solution for financial appraisals.

If you’re determined to do all of this yourselves either now or in the medium to long run, you’ll need to think about recruitment. You may well have some staff already in post who have a good knowledge of some elements, but you’re unlikely to have anyone with quite the right combination of skills to run the whole thing. You’ll need to do some specialist recruitment. I’ve written a separate SDS article about this which I’m sure you’ll be able to get hold of.

SDS have also written a special edition of their Development Manual for Local Authorities. This is designed to give you much more up-front information to help you get a proper strategy in place, get set up for what you want to do, and to know what to look out for. It then goes on to take you through the development process in headlines supported by plenty of detail. Using a manual also helps you do things consistently and provides extra support to less experienced staff. It also uses some key forms which can be incorporated into your internal approval processes to avoid any nasty shocks by the time you get to audit stage.

Now I just mentioned strategy. This is a real bugbear of mine. I’m sure that all of you lovely people here have got a coherent housing development strategy in place, or are working on one. Unfortunately, this isn’t the case everywhere. It’s important. It’s all too easy to take a scattergun approach, completely fail to focus and then either not achieve anything, or put your resources into the wrong thing. Before you embark on development activity, you should have a very clear idea of your most important WHYs. Look at the stats, talk to people, consult experts, prioritise and ARTICULATE. Be realistic but leave room to aspire. Make sure you have wide buy-in to your strategy and, when considering a project, consider its merits against its strategic fit.

Over the years I’ve seen a failure to have a clear strategy and follow it cause all sorts of inefficiency. You’ll get your ‘hopeless hobbyhorse’ projects that are never going to work but are always being brought up by someone. You need to recognise these, formally demonstrate that they don’t offer a strategic fit for whatever reasons and get them assigned to the dead pile. Then when they inevitably get asked after again, you won’t have to spend valuable resources starting from scratch – you’ll just produce the formal death warrant.

There might be the temptation to have a go at a bit of everything, particularly if you have multiple problems to address in your area. Unless you’re really well resourced, you just won’t have the capacity to spread your net that thinly. If you’re going to start at all, then you need to put your efforts into something important that has a good chance of working. With that under your belt, you may be able to attract more resources and spread your wings a little. You need to win hearts and minds, and to do that, you need to be able to show progress and success. Any vegetable gardeners in the room will be familiar with the practice of picking off buds so that you end up with a smaller number of well developed fruits, rather than lots of tiny bitter ones. Apply this principle to your development programme.

Having a clear strategy should help you do things your way, although you’ll still have to make sure you have informed negotiators on your side. Developers are cottoning on to the fact that local authorities are starting up their own housing delivery efforts and have seen how keen you are to make progress. I’m by no means saying that this is always the case, but you don’t want to get taken advantage of. You will want to encourage an open dialogue with developers and landowners where development has stalled, if this means that you can unlock some progress. But you shouldn’t be doing deals at any cost. You need someone around that can look at a deal from both sides and work out roughly where the fair balance sits. If you’re agreeing a price you’ll pay for new homes, is it fairer to pay the cost plus a fixed percentage, or the market value less a fixed percentage? The answer to that question will depend on the circumstances of your area and that particular scheme. But as a public authority, you need to be sufficiently well advised to get the best overall deal for your area.

Maybe you’ve been approached by a pension fund or a hedge fund wanting to invest in your potential projects. How will you know whether those are good deals for you or not? If you’re in a position to borrow money direct for schemes in your own right, what advantages and disadvantages are there of looking at these alternative sources of funds? Perhaps they shift development risk from you to an external organisation, which definitely has its advantages. On the other hand, is the reward they propose for taking on that risk fair and proportionate? If rental payments are linked to inflation rates, how comfortable are you that the rents you can collect will keep pace with national inflation. If they don’t, what does your sensitivity analysis look like and how will you make up the shortfall? Assuming it’s at least a partial market rent level scheme, is it in the right place to attract a steady supply of tenants and avoid abnormal loss of income through voids? Will you have sufficient control over the quality of the product you’re getting … especially if ownership reverts to you once it’s a mature building.

So what’s around the corner, Mystic Meg, I hear you ask?

Hard to hear, but one of your peers might have a development scheme that goes so badly wrong that you all get to hear about it. It could happen … it almost certainly WILL happen … and what worries me about that is that it might slow the progress of the sector down or put some authorities off all together. PLEASE don’t let it. Even the most experienced developers have schemes that go wrong sometimes. You can do the best due diligence and still find an unexpected stash of asbestos buried on your site. Builders go bust mid-way through contracts. It can take so long to get something happening on site that labour and materials costs have skyrocketed and your financial appraisal looks sick, despite your commitment. Someone might build too many market rented flats in the wrong place and really struggle to let them. I want you to EXPECT that occasionally things WILL go wrong and be prepared for it. Use it as inspiration to get your strategy and risk management right up front. Interrogate mistakes (preferably those of others!) and use them as fertiliser for improvement.

I think that we have a real problem at the moment with construction capacity, and you might be really well placed to do something about it. The way things have evolved in the UK, we now have a cluster of huge developers who control swathes of land, and they’ll only develop it when they’re totally confident that they’ll make a profit and be able to pay respectable dividends to their shareholders. But where have all the small and middle-sized builders gone? Can you use your strategy and access to excellently priced borrowing capacity in ways that restore this vital part of the construction sector? It could be great for your local economies and create work opportunities for your young people.

You could be facing some interesting tough choices. When the RP I was working for starting adding outright sale into its programme to generate cross-subsidy, things started to feel a bit odd. Having spent years pushing to maximise affordable housing on sites, all of a sudden I found myself making viability arguments to planners justifying why we couldn’t afford to deliver the full policy percentage of affordable. I also discovered that the overheads of delivering homes through an RP were so much more than those of a small developer, that actually the developer could probably afford to deliver more affordable on a site than a housing association could. A lot of that was because of the various costs associated with regulation. As a developing authority, you might have to choose between building to enhanced standards versus maximising density. How you make that choice will have to be driven by your local circumstances, and if you’re trying to win land to build on as part of the same equation, you’ll have to decide how to compensate for any higher build costs or less homes per acre. You might have a strong conviction that UK homes are too small, or that garden sizes are impacting negatively on health and wellbeing … but if the flipside of addressing that in your layouts means you can’t actually make any schemes happen, then what will you do?

Well, I think it’s probably someone else’s turn to speak now. In these austere times, customer engagement and locally tailored solutions have taken a bit of a bashing. As local authorities you’re in a unique position to do something to turn that around. I’m really rooting for you to succeed as housing delivery organisations.