Alternative Funding Models for Affordable Housing: Lessons from Scotland. Kenneth Gibb

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1 Alternative Funding Models for Affordable Housing: Lessons from Scotland Kenneth Gibb

2 Overview Background and Context-setting The Baseline Models New Approaches for 2011 The Longer Term Agenda A Critical Appraisal Conclusions, Lesson-learning and Beyond

3 Context Tenure change in Scotland: - growth of home ownership but average age of first time buyers growing - doubling of private renting - shrinking of social housing as a whole - absolute and relative growth of housing associations Why the growth in associations: - preferred builder of social housing - purchaser of council housing through stock transfer - successful model

4 Funding Affordable Housing in Scotland Most or virtually all social housing built by housing associations but growing importance of shared equity (also grant-funded) Upfront capital grants with private finance (mortgage) as residual paid out of rents Housing benefit for low income tenants paid direct to landlord and can be 100% Key variables are overall capital programme and per unit grant Council building (loan funded with revenue deficit grant) ended in 1980s, shift to improvement investment but capital grant and public loon finance build began again in 2007

5 Devolution context Scottish Parliament devolved in 1999 Block grant from Westminister no borrowing powers (but councils do) Capital spend comes out of block within 3 years spending reviews Context of growth in spend till Scottish Nationalist Party come to power minority in 2007 and majority in 2011 Accelerated spend followed by big cuts

6 Some Context Fiscal austerity: big cuts and restructuring of capital spend in Scotland Affordable housing new supply way adrift of unmet need (circa units) Table 2.2 Scottish House Building to Year Social starts Social completions Total starts Total Completions ,101 3,204 22,014 20, ,142 4,603 21,677 22, ,515 1,873 20,510 20, ,282 4,033 22,646 23, ,699 3,916 22,315 22, ,658 4,262 23,178 22, ,707 3,809 22,274 22, ,621 3,368 27,049 23, ,406 4,024 27,003 26, ,127 4,698 26,367 24, ,584 3,237 28,419 24, ,214 4,125 26,592 25, ,765 4,913 19,593 21, ,580 5,919 15,372 17,474 Source: Scottish Housing Statistics Webpage accessed September

7 What s to be Done? Policy agenda in 2007 Objective to maintain affordable new supply. Something has to give: - greater emphasis on councils - mid market rent (special purpose vehicle) - much reduced grant for associations - shared equity - long term injection of alt private finance Let s look at these in more detail

8 Table 2 Current Funding/Subsidy Options Grant type Duration (years) Average Scottish Government component per unit Housing Association Grant Council house building incentive Intermediate rent (MMR) New Supply? Comment K Yes New lets almost wholly to lowest income deciles. Planned approvals fell from 3421 units in to 2117 in K Yes Severely constrained by LA borrowing limits, new lets as above. Planned approvals grew from 1276 in to 1784 in K Yes Currently not on any significant scale. Uses short assured tenancies. Rents at 80% of market rent and targeted at economically active but low to moderate incomes. New Supply Can be sold on 55K Yes Targets customers similar Shared Equity capital receipts to MMR. Planned (RSL) recycled to approvals are of the order Scottish government of 260 units in New Supply Can be sold on 23K Yes Currently being piloted. Shared Equity capital receipts Target customers as (Developer) recycled to above. 108 units are Scottish planned for government National Housing K Yes Short assured tenancies. Trust (Guarantee) Rents and targeting largely as for MMR units are approved for Source: Scottish Government (2010) note the comments column is reprinted from the original with the authors additional comments in italics.

9 Council Build Programme 25-30K per unit Prudential borrowing Demand-led Affordable rents? Supply pipeline working well but borrowing capacity? Convenient and pragmatic response

10 Table 4.2 Scottish council building programme, Local Authority Population Rounds 1-3 total Rounds 1-3 Grant ( m) ( ) Allocation (Units) Aberdeen City 210, Aberdeenshire 241, Angus 110, Clackmannanshire 50, Dundee City 142, East Ayrshire 119, East 104, Dunbartonshire East Lothian 96, City of Edinburgh 471, Falkirk 151, Fife 361, Highland 219, Midlothian 80, Moray 87, North Ayrshire 135, North Lanarkshire 325, Orkney Islands 19, Perth & Kinross 144, Shetland Islands 21, South Ayrshire 111, South Lanarkshire 310, Stirling 88, West Lothian 169, Scotland 5,168,500 3, Source: Scottish Government Housing website ( Environment/Housing) accessed September Note: councils who had undertaken whole stock transfer excluded (Western Isles, Argyll & Bute, Glasgow, Inverclyde, Dumfries & Galloway, Scottish Borders), plus others not participating: East Renfrew, Renfrewshire and West Dunbartonshire.

11 National Housing Trust SPV partnerships between councils and private developers Mid market rent based on local housing allowance/housing benefit market rent ceiling loan raised from public sector Sold on after 10 years so exit route key Public modest loan guarantee Demand? First phase lessons but Government remains keen to deliver a further 3000 New variants on their way

12 Table 4 National housing Trust Round 1 Local authority Aberdeen 50 Edinburgh 600 Dumfries and Galloway 100 Dundee 75 Falkirk 100 Highland 50 Scottish Borders 100 Stirling 50 Maximum number of homes sought Source: Scottish Government website, accessed March Note: Glasgow, East Renfrewshire and East Lothian dropped out after initially expressing interest. However, at least one of the three, Glasgow, has definite plans for future NHT activity.

13 Shared Equity HA as partner Substantial grant Mixed tenure, entry level purchase and regeneration uses Help to developers but mortgage market problems remain Niche and symptomatic

14 Housing Associations End of investment programme as we know it after 20 odd years Challenge fund for investment and innovation for councils, associations and partnerships Reduction of benchmark grant to 40K and implication of cross subsidy Review of first two waves of funding

15 Longer Term Agenda Alternative debt funding bonds raised on existing stock security/income Pension funds/private equity etc investment: - SPVs with guarantees - leasing models - other variations Key questions of risk and governance

16 Appraisal Rent levels and affordability Appetite to innovate across different stakeholders Public & private finance debt constraints Cheap land and planning agreements Role of guarantees Demand and cross subsidy The small matter of housing benefit reform

17 Conclusion The system was unsustainable and expensive; opportunity from crisis? Appraisal is mixed but not all bad by any means Key is economy/housing/lending recovery Needs assessment required Lack of strategic control and much uncertainty Lessons from elsewhere? Apart from HB we are starting to look more like non-uk affordable housing delivery