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Affordable Rent model offers no salvation for housebuilders

Category: News 01 February 2011

Affordable Rent model offers no salvation for housebuilders

On 14th February the Homes and Communities Agency (HCA) unveiled the funding framework for the 2011 – 2015 Affordable Homes Programme (AHP). Housebuilders and developers, however, will find it offers them little in the way of a Valentines Day present.

 

Central to the AHP will be the move allowing Registered Providers to let both newly constructed dwellings, and a proportion of their existing stock when re-let on an ‘Affordable Rent’ basis, which is expected wherever possible to be at an equivalent of 80% of open market rental value. In return for this freedom Providers are expected to stretch their balance sheet capacity to support additional borrowing in lieu of HCA funding. Consequently, the resources available at the table remain unchanged whilst considerable risk is passed to Providers both in terms of assessing the level of new rental demand, and in funding projects on a ‘payment by results’ basis.

 

Bids that do not include proposals for Affordable Rent (including proposals consisting entirely of homes for affordable home ownership) will not be considered for funding. Therefore, housebuilders and other Investment Partners that do not currently hold rental stock are effectively excluded from the process.

 

The framework guidance states that there is a ‘strong presumption’ that HCA funding will not be required to fund provision of Affordable Rent or affordable home ownership properties on S106 sites, and instances where such a request is made will be subject to open book scrutiny. Guidance suggests that the price paid to developers for Affordable Rent dwellings should not be more than the capitalised rental value of the homes, and competition amongst Providers in the early years of the programme is discouraged in case this contributes to an increase in developers’ profit margins or land value. 

 

Net of existing commitments and ring fenced specialist programmes, £1.8bn is available to fund new Affordable Rent and affordable home ownership schemes – this is expected to deliver 56,000 homes by 2015. No regional distribution of funding has yet been announced, other than an indication that London will continue to receive its disproportionate share of national resources.

 

The publication of the funding framework was accompanied by CLG announcing a consultation on proposed revisions to PPS3. Within Annex B a new definition of ‘Affordable Rent’ would be introduced, to distinguish that this is distinct from existing forms of Social Rented or Intermediate Affordable Housing.  As Pioneer have advised previously (which you can view here) many S106 agreements will require amendment to permit dwellings to be delivered on this basis. New applications should also ensure the new definition of Affordable Rent comprises the default rental tenure as only dwellings provided on this basis (even with nil-grant) will contribute towards Providers programme outputs, and therefore are likely to be in demand.

 

The new system creates added complexity to what were already burdensome bureaucratic procedures, and some more cynical than ourselves might suggest the design of the funding framework has been influenced as much by the desire to justify the continued existence of the HCA than the efficiencies it is alleged will be derived from it.

 

The HCA will assume responsibilities for the regulatory function of the Tenant Services Authority (TSA) in April 2012 and it is interesting to note that despite the HCA and CLG heralding the introduction of Affordable Rent tenancies, a TSA consultation on revisions to the tenancy standard remains open until 2nd March. You can view Pioneers response to the consultation here.

 

In summary, what upon first examination seems like a good idea is in reality likely to create more bureaucracy and top-down control from the unelected HCA at a time when all other policy initiatives are focused on Localism and pushing responsibility for decision making down the chain. It also seems unlikely that landowners, developers and the RICS will be willing to forego income by allowing Providers to make financial offers that don’t reflect the true value of their anticipated rental streams.

 

Pioneer is the leading consultancy to the development industry on affordable housing matters and we would be delighted to advise developers and landowners on how to maximise the opportunities arising from the introduction of Affordable Rent tenancies.



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