Bags of capacity – now to housing delivery
HRAs have been freed up and councils are starting to invest, but some remain cautious, writes Steve Partridge. He suggests that a minimum of £10bn of additional borrowing could be undertaken sustainably to help deliver the affordable homes that are desperately needed.
It is now ten years since the Housing Revenue Account (HRA) self-financing settlement. Time flies – and it’s sometimes easy to forget just what a big deal this was, and not just for those of us closely involved at the time with the former Department for Communities and Local Government (DCLG).
Before 28 March 2012, the former HRA subsidy system was an anachronistic redistributive system that used to take rents from one part of the country and allow them to be spent in another part, with byzantine calculations that attempted to make the distribution “fair” – but which only resulted in virtually every local authority saying it was “unfair”. Worse still, the whole system had gone into credit – meaning rents from council tenants subsidising other DCLG budgets. Around half of authorities had given up – and turned to stock transfer to escape the system.
On that day, everything was realigned with a gigantic debt settlement – worth £29bn in total. Subsequently, authorities have been able to keep all their rents to do with as they and their tenants wish.
Except that until October 2018 there was a cap on borrowing – finally lifted by then prime minister Theresa May; a fitting final move to freedom and flexibility as the centenary approached of the Addison Act (which had paved the way for the development of council housing in the UK).
Why was this done? Partly it was about process, partly to limit the future subsidies available for stock transfers. But, mostly, the argument had been won that councils could and should play a positive role in delivering new homes.
My career has taken me from Birmingham (120,000 homes at the time) via consultancies, the Chartered Institute of Housing and currently to Savills. Having worked with virtually all HRA authorities in some form or another in the last 20 years, I see the appetite, from officers, members, and tenants, for councils to really get building again. The Office for Budget Responsibility thought the sector could get to over 9,000 new homes annually, but currently it’s well below that.
Having worked with virtually all HRA authorities in some form or another in the last 20 years, I see the appetite, from officers, members, and tenants, for councils to really get building again.
National capacity
At Savills, we produce a detailed financial analysis of the council housing sector. The most recent data is published here. We’ve consistently found that, while there are plenty of great examples of authorities committing to large-scale building and regeneration programmes, at a national level, the experience to date has been relatively cautious. To be clear, there are signs across the country that investment is on the increase, the latest full year to March 2021 being the largest annual increase in debt since 2012, but some have not yet invested.
While there are plenty of great examples of authorities committing to large-scale building and regeneration programmes, at a national level, the experience to date has been relatively cautious.
Our work highlights what we can learn from the housing association (HA) sector, with £90bn+ of private debt and not one pound ever defaulted in 40 years. As finance professionals, we are familiar with the kind of covenants and ratios applying in the private finance arena: for HAs there are EBITDA-MRI interest cover, loan to value, gearing, asset cover and debt:turnover.
For HRAs, we have developed a parallel set of capacity metrics – not quite directly comparable given the quirks of HRA accounting rules, but highlighting the scope for additional investment – where increasing borrowing would not, in a private finance arena, be questioned.
When applying standard covenants to our metrics, a minimum of £10bn of additional borrowing could be undertaken sustainably. Taken at the individual authority level, this could be considerably higher. Any investment in new homes increases future value, leading to growing future capacity … essentially the HA growth model that has been so successful.
A minimum of £10bn of additional borrowing could be undertaken sustainably. Taken at the individual authority level, this could be considerably higher.
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Actually, the basic comparators tell the story well: HRA average debt £17k/property compared to HAs £30k+/property; HRA cost base some 20% lower than HAs. There are many more. In turn, HRA average debt:turnover is lower and interest cover (taking into account major repairs charged to revenue) is around 1.8 – a number of points above the HA sector.
It’s even better than that in some ways – as the job of the s151 officer authorising prudential borrowing is to take a prudent risk-based approach under the Code, not to face a set of hard covenants in a facility agreement.
Of course, it’s more complex at the authority level. Metrics are guides, and we’d certainly not want to suggest an authority stop investing at lower rates of interest cover, nor pile into a big programme if there is plenty of theoretical capacity. It’s about risk, and the local housing market circumstances.
But the overall picture is clear: HRAs have been freed up, they’ve started to invest but there is so much more that can be done.
The job of the s151 officer authorising prudential borrowing is to take a prudent risk-based approach under the Code, not to face a set of hard covenants in a facility agreement.
Investment tools
One of the adjuncts to the abolition of the debt cap in 2018 was the formal requirement to report HRA-specific prudential Indicators. The extent to which these are in final accounts seems relatively inconsistent.
The Welsh Government has committed to a standard set of reporting metrics. In England, it’s down to each authority, and whether the focus is on interest cover, the marginal impact on rents of borrowing incrementally or simply the level of debt overall, some form of review within each authority is likely to lead to a conclusion that investment in more homes is sustainable.
None of this is to minimise the challenges, the main ones focusing on: lack of internal resources to deliver new build programmes, recent build-cost inflation and the prospect of decarbonisation competing for future borrowing.
At the same time, meeting these challenges can only really be founded on a meaningful analysis of capacity, a bespoke investment framework applying locally for each HRA, members and tenants bought into the decision-making and a comprehensive risk register.
These are the tools, but the prize is a big one. Given the housing crisis is not getting any better ten years on from self-financing, converting all those hard-won freedoms and flexibilities into new affordable homes for local people is a challenge worth taking on.
Steve Partridge is director of Savills housing consultancy. He will be speaking at the Housing151 conference in London on 25 May 2022.
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