Emma Peters: We need to change the way we finance housing estate regeneration

Emma Peters: We need to change the way we finance housing estate regeneration

Money is often described as the root of all evil and that is certainly true in the case of estate regeneration. I’m convinced we need a new approach to funding it, and that finding one need not be difficult if we’re prepared to step outside the constraints imposed by a stringent public sector “prudential borrowing” code, exacerbated by ten years of austerity.

How do we currently finance estate regeneration? One approach is capital borrowing. For councils wanting to build council homes at council level rents and on council tenancies, that often means borrowing financed from their ringfenced housing revenue account – the HRA – which is funded by council rents.

But that method is difficult because, unlike with any extra new homes built, there is no additional rental stream to pay back the borrowing required to build the replacement ones. Basically, it’s like trying to double your mortgage when you haven’t done anything about increasing your income.

The rules of the game have changed in that there is no longer a cap on council HRA borrowing. But lifting the cap doesn’t help with repaying the resulting additional debt. Councils have to have sufficient capital assets in the first place to make sure they’re not bankrupted by what they borrow. There’s a prudential code, which they are still bound by. HRA’s have a 30-year business plan period, so we have to make this whole thing stack up over that relatively short time, and that is very difficult. 

Another source of regeneration finance in London is grant funding, which comes from central government via the Greater London Authority and the Mayor. London Mayors have quite a lot of discretion over how they use those funds, including the amount of money allocated per housing unit. The current Mayor is prioritising rented homes at social rent levels by giving more grant per unit than used to be the case, which is good. He is also prioritising new supply over replacement homes, and that’s arguably the right thing to do because we need more homes. However, it makes it very difficult to fund replacement homes, which is the starting point for estate regeneration.

Councils have had to look elsewhere for estate regeneration finance. They’ve found it from cross-subsidy, by working in partnership with housing associations and the private sector. We have got some fantastic estate regeneration programmes out of that – Woodberry Down in Hackney is probably one of them. But it’s getting harder to take that approach, as costs and values keep rising. 

This model is about building private, for-sale homes on an estate and investing some or all of the profit from their sale back into the estate to pay for the replacement homes and also various community facilities. If it’s the private sector involved – and it often is these days because housing associations often can’t afford to do it – those sales are also going to be required by the company’s boards to fund, at minimum, a 22.5 per cent profit.

But because of the continuing limitations on council borrowing and the scarcity of housing grant for replacement homes, increasingly we’re seeing local authorities going into partnership vehicles and joint ventures with private sector developers because it seems to be their best or only option. New commercial companies wholly owned by councils have been another way to produce cross-subsidy to pay for estate regeneration. 

There are consequences with these approaches and they are often in the form of things people who live on those estates hate most about the regeneration process. The first is that densities increase. That’s not necessarily a bad thing, but if you’re replacing social rented homes and leaseholders’ homes and you’re building new homes, and you’re making a significant profit and you’re funding community benefits, you’ve got to build an awful lot of private, for-sale homes. And if everything is being built within the site footprint of the original estate, you are likely to lose open space, you might lose amenities such as community buildings, you’re definitely going to lose parking spaces, and you’re going to get more tall buildings. All of this can be unpopular.

A second consequence is that the social mix changes in ways that might not be desirable. We’ve had mixed estates for at last 30 years because of the right to buy, private renting and home owners on estates and mix is often seen as good. 

But the cross-subsidy approach increasingly means building the kind of private, for-sale homes, which will generate the highest possible price, because so much has to be done with the money that comes from selling them. That means more private amenities, concierges, gyms, or maybe an exclusive garden for owner-occupiers in order to justify the very high prices that are being charged for those flats. And the social rent tenants start to feel like second-class citizens in their own communities.

A third consequence is that the estate’s leaseholders often can’t afford to move back on to the estate or even buy within the wider locality. There are some very good schemes out there to help leaseholders come back, but often they will end up with only an equity stake in a new home rather than owning it. They might still have the same value in that home, but for leaseholders that change is quite a big deal: they’ve done a lot to buy that house, they perhaps want to pass it on to their children, and they can’t necessarily do that because their ownership has become compromised.

Finally, overall, rents tend to go up. Returning tenants will probably get a deal whereby their terms and conditions remain the same, but that might not be the case for new tenants in new homes on new contracts.  

How can we finance estate regeneration differently in order to lessen these problems? The key thing is to stop thinking in terms of quick capital returns in order to enable the rapid pay down of debt, which is how the whole model works at the moment. Instead, we need to start looking at much longer- term investment for a longer-term revenue return, and that’s about leveraging a steady rental stream. It’s right that local authorities can now borrow more, but they should also be enabled to plan for repayment and continual reinvestment over much longer timeframes. 

For estate renewal in particular I think we should double the current 30-year business planning periods. We know that homes we’re building now will last for about a hundred years because that’s the standard we’re building to. And given that councils own the land, and could maintain the assets

over a longer pay back period, over 60 years rather than 30 it would be possible to make more than enough money from a truly affordable rental scheme to cover the building, on-going maintenance and debt finance. Councils could still go into partnership with housing associations and the private sector if they wished, but those partners would be paying for genuine extras that local people genuinely want, rather than maximising the number of homes for sale primarily in order to provide cross subsidy for affordable homes.

As a country we borrow far more recklessly for other things, such as bailing out financial institutions or perhaps paying for the economic shock of leaving established trading partnerships. Councils already borrow regularly to fund things that have no revenue stream at all, such as libraries or parks. Housing is very, very different because it generates rents. It makes business sense to leverage that income stream and it makes social sense too – more genuinely affordable homes mean more kids having access to a stable education because they don’t have to move frequently, more people signing on with a GP rather than relying on A&E and so on. Such changes could only be for the better.

Emma Peters is a director of Inner Circle Consulting. She has over 30 years experience working with boroughs, housing associations and private developers on housing finance and regeneration. Her article is an adapted version of a talk she gave at the recent OnLondon/London Society event called: How do we get estate regeneration right?

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1 Comment

  1. Why not take a new look at some of the radically different approaches used by past generations – for example the Great Western in Acton was built by the Great Western Railway to house staff who would not otherwise be able to afford to live in London. Similarly the Battersea Power Station built homes for its workers. London’s hospitals used to have nursing homes and the Police had “section houses”. Meanwhile other employers supported organisations from Peabody to the Salvation Army and YMCA or YWCA in building estates and hostels. Such approaches became unfashionable or died out with nationalisation and central planning after World War 2 but today London’s “Public” (alias Private) schools are only able to attract good young teachers because they offer rented accommodation in former boarding houses. Some of the banks are looking at deals for their younger staff and trainees in post-graduate student accommodation blocks.

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