Going to Scale: How a National Housing Fund Can Unlock Britain's House Building Capacity - Thinkhouse
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Prosperity Prosperity Prosperity
November 2016
Going to Scale:
How a National Housing Fund Can
Unlock Britain’s House Building Capacity
Philip Callan, Phillip Blond & Edward DouglasAbout the Authors Philip Callan is the Managing Director of PCA: following roles in the chemical industry and distribution Philip held senior roles in the health service, the London fire brigade and the Housing Corporation before founding PCA in 1988. He has led approximately 40 mergers and advised on the creation of around 25 new housing organisations. Philip was seconded in to government to lead the review of housing delivery that created the Homes and Community Agency and lead a series of interventions to promote change within the housing sector. Phillip Blond is the Director of ResPublica. Edward Douglas is a senior policy and projects officer at ResPublica. ResPublica Acknowledgements ResPublica would like to thank our partners Peabody, Aster Group, Great Places and Network Homes for their kind support for this project. We would also like to extend particular thanks to Stephen Howlett, Chief Executive of Peabody, Bjorn Howard, Chief Executive of Aster Group, Matthew Harrison, Chief Executive of Great Places, and Helen Evans, Chief Executive of Network Homes. Finally, we would like to thank JLL for their analysis and modelling. About ResPublica The ResPublica Trust (ResPublica) is an independent non-partisan think tank. Through our research, policy innovation and programmes, we seek to establish a new economic, social and cultural settlement. In order to heal the long-term rifts in our country, we aim to combat the concentration of wealth and power by distributing ownership and agency to all, and by re-instilling culture and virtue across our economy and society.
Going to Scale
Contents
Introduction 2
1. The need for a fresh approach 4
2. The ask of Government: A new fully returnable public investment in housing 6
The National Housing Fund 6
Structured and sustained investment 7
How would the Fund work? 8
Case study: The National Housing Fund model 9
Building capacity, increasing production, creating new homes 10
Case study: Operation of The National Housing Fund 14
How does this differ from the Government’s Home Building Fund? 15
3. What could The National Housing Fund deliver? 16
4. Why other approaches are not sufficient 20
Comparative analysis of other proposals 22
Conclusion 24
1Introduction
The Brexit vote in June spoke to the The challenge we face is twofold. Firstly, and
deep divisions - in wealth, education and most importantly, we need to change the
opportunity - in our country. Factors such current structure of the housing market so
as class and geography interacted with that we finally build more homes. Secondly,
age and culture and produced a result that in light of the current barriers to ownership
manifests the urgent need to re-orient we need to build good quality homes
policy and priority towards those who have for rent and give those who live in them
lost out over the last 30 years. more long-term tenure security, as well as
“The real problems with the a pathway to owning the house that they
UK house building industry Nowhere is this need for a fundamental currently rent.
are number, pace and scale. reorientation of policy and direction more
We believe we have the clear than in housing. Home ownership The question of course is: what policy change
rates have reached a 30-year low.1 A baby will deliver housing at the pace and scale
answer – a guaranteed buyer boomer at age 30 was 50 per cent more likely we need? What we do know is that private
each year for ten years for a to own their own home than a millennial sector house builders alone will not meet
minimum of at least 40,000 today of the same age. Over 1.2 million the nation’s needs. Over the last 35 years,
and up to 75,000 new homes people languish on housing waiting lists on average, the private sector has built less
in England, while more than 6 million face than 150,000 homes a year – 50,000 short
a year.” tenure insecurity and no prospect of asset of the Government’s current target and
accumulation in the private rented sector.2 up to 150,000 short of some independent
Prospects for moving from renting to owning assessments of our housing need.5 What this
are now so low that only a minority of renters shows is clear: the current housing market,
under 40 are trying to save for their own as presently constructed, cannot build the
home.3 So extreme is this trend that PwC housing the country so urgently needs.
forecasts that the number of households
renting privately will match the number of If a One Nation agenda is to move from
households buying with mortgages – 7.2 political aspiration to practical reality, a
million – by 2025.4 good start would be a new way forward
on housing and ownership. That means a
The acute instabilities and pressures that the policy intervention that delivers the types of
housing crisis has brought to many people homes we need, at the scale we need them,
are well known. When your landlord can whilst offering those on medium and low
decide whether you have a home or not; incomes new prospects for tenure security
when the National Living Wage barely covers while renting and ultimately a path into
rent in houses at the bottom end of the home ownership.
market; when you no longer believe your
children will one day own a home of their The last few years have seen a range of
own; then policy must change. schemes on both the demand and supply side
to address these twin interrelated problems.
2Going to Scale
On the supply side, the Government has The question we need to ask is: what (be they public or private) of enough
sought to support housebuilding across policy can deliver new homes at the scale capacity who can build fast enough at a
a range of housing types and tenures – we need? What measure over a sustained great enough scale. Why? Because builders
schemes such as the Build to Rent Fund, period of time can propel a dramatic largely rely on sales to determine the pace
the New Homes Bonus and the Builders increase in house building sufficient to of build and will only build at the rate they
Finance Fund have helped. But they have bridge the gap between current delivery can sell. And though the demand for houses
not delivered at anything like the scale we levels and the Government’s one million is enormous those able to buy represent but
need. Last year’s housing starts reached homes target? a small proportion of the overall demand.
143,500 – 56,500 less than the 200,000 What can change this? We believe we
needed each year over this Parliament to hit We believe that much of what is asserted have the answer – a guaranteed buyer
the Government’s own targets.6 to hold up house building, such as land, in the form of a new National Housing
planning and finance, are not the major Fund running each year for ten years for a
On the demand side, initiatives such as problems they are commonly held to be. For minimum of at least 40,000 and up to 75,000
Help to Buy have helped those eligible, example, across England there is currently new homes a year. What follows outlines our
buy homes. But they have been too planning permission for 460,000 homes that plan for a National Housing Fund that would
concentrated in one part of the market, are yet to be implemented, an increase of do just that.
raising demand without sufficiently raising 25% since 2013.7
supply and thus increasing prices for the
millions of people unable to both save to No, the real problems with the UK house
buy and pay increasingly high private rents building industry are number, pace and
while they do so. scale. We do not have enough builders
1 Clarke, S. (2016) “Home ownership struggle reaches Coronation Street”, 2 August 2016, Resolution Foundation [Online]. Available at: http://www.
resolutionfoundation.org/media/blog/home-ownership-struggle-reaches-coronation-street/ [Accessed 3 November 2016].
2 DCLG (2016) “Table 600: numbers of households on local authorities’ housing waiting lists, by district, England, from 1997” [Online]. Available at: https://www.gov.
uk/government/statistical-data-sets/live-tables-on-rents-lettings-and-tenancies [Accessed 8 November 2016].
3 PwC (2015) UK Economic Outlook, July 2015 [Online]. Available at: http://www.pwc.co.uk/assets/pdf/ukeo-jul2015.pdf [Accessed 3 November 2016].
4 PwC (2015) UK Economic Outlook, July 2015 [Online]. Available at: http://www.pwc.co.uk/assets/pdf/ukeo-jul2015.pdf [Accessed 3 November 2016].
5 House of Lords Select Committee on Economic Affairs (2016) Building more homes (HL 2016-17, 20)
6 DCLG (2016) “Housing starts and completions hit 7-year high”, 26 February 2016 [Online]. Available at: https://www.gov.uk/government/news/housing-starts-
and-completions-hit-7-year-high [Accessed 8 November 2016]. Total housing supply, including new builds, conversions and changes of use, increased by 171,000
between 2014 and 2015 – see DCLG (2016) “Live tables on dwelling stock (including vacants)” [Online]. Available at: https://www.gov.uk/government/statistical-data-
sets/live-tables-on-dwelling-stock-including-vacants [Accessed 8 November 2016].
7 Local Government Association (2016) “Mapping unimplemented planning permissions by local authority area” [Online]. Available at: http://www.local.gov.uk/
mapping-unimplemented-planning-permissions-by-local-authority-area [Accessed 8 November 2016].
31. The need for a fresh approach
On average, over the last 35 years or so a post-Brexit economy. Repeated investment
just under 150,000 new homes have over the next 10 years would provide
been built each year in England, with just the essential stimulus for construction
139,690 homes completed in 2015-16. This infrastructure investment, the development
total comprises output from all types of of long term skill supply, innovation in house
builders, but the overwhelming majority building and it would finally unlock major
were produced by the private sector house development sites, since there would be a
builders (some 111,000 homes in 2015-16) certainty of demand to enable them to be
“The Government has set and housing associations (26,000 homes in built out at scale.
a target of building one 2015-16).
million homes over this It would also act as a stimulus to reconfigure
Parliament – equivalent Projections agree that to cope with both both the housing associations sector and
migration and new household formation the lower capacity private sector builders. In
to 200,000 each year - but 250,000 new homes need to be built each terms of the housing associations this plan
on average, over the last year. This is without addressing the 800,000 would release the embedded capacity of a
35 years or so just under homes shortfall in new supply that extends sector containing, on current figures, around
150,000 new homes have back to the year 2000. This lack of supply has three million homes and a total asset value
a deeply adverse impact on housing costs in excess of £138bn. This investment would
been built each year in and job mobility. substantially enhance the pace at which the
England.” larger associations were able to move on
As stated above, we believe that contained from being SME developers to producing
herein is a clear and credible policy proposal 4,000-plus homes each annually as larger-
that could, if backed by the Government, scale homebuilders. The National Housing
create at least an extra 40,000 and up to Fund would accelerate the rate at which
75,000 homes per year with a fully repayable they could expand their development by
£10 billion annually invested by the providing them with a guaranteed purchaser
Government into a National Housing Fund for part of their building programme.
created in partnership with major housing
associations. We envisage this scheme These associations would also build further
running initially for ten years. capacity into the mid and lower tier of
the private house building market, being
The immediate gains from this proposed the natural partners for those developers
scheme are potentially enormous: adding, producing anything from 300 to 2,000 homes
on 2010 figures, 0.4% to GDP and up to annually. The interaction of those developers
£2.4bn of tax receipts each year, as well as with the larger associations in the Fund
supporting as many as 200,000 jobs.8 The would in turn enhance the capacity of these
impact would be realised, given the swift SME developers turning them into similar
impact of housing construction, within 12 engines of housing production.
months and represent a significant boost to
4Going to Scale
Housing Delivery Across England
Housing Delivery Across England
400,000
350,000
300,000
250,000
Annual Completions
200,000
150,000
100,000
50,000
0
Private Housing Associations Local
Enterprise Authorities
Source: DCLG, JLL
Figure 1 - Breakdown of historical housing delivery, by sector (1946-2015)
The private sector will only build at the scheme that seeks to build more homes infrastructure investment required, hence
pace that it can sell and with the market must concentrate on housing associations the recently announced Government
already slowing, the future pace of and SME private sector builders to facilitate fund to finance such investment is most
production will reduce further to match the sustained expansion of output. welcome. Equally estate regeneration
anticipated sales. Government-funded The previous five years under the Coalition to create more economically mixed and
intervention on the demand side may help Government focused on support for sustainable communities is on the policy
to speed sales but there is scant evidence first-time buyers through schemes such agenda as are issues around housing
to demonstrate that additional homes as Help to Buy. Housing then dominated conditions, availability and price in the
would be produced as a result. last year’s general election campaign and private rented sector.
was followed by early action to introduce
Housing associations, on the other hand, Starter Homes and extend the Right to However, despite such measures the house
have demonstrated the ability to build Buy. These actions have not addressed the building market, as currently configured,
more homes and create innovative fundamental issue of a lack of supply. will not meet the supply deficit and a new
methods of funding new homes for sale solution is required.
and rent. Associations have the potential to The appetite for policy-makers has now
dramatically increase production but the rightly shifted to supply side issues looking
fragmented nature of the sector prevents at for example, unlocking major housing
the effective use of associations’ embedded sites shunned by the private sector
capacity. It is our view, therefore, that any because uncertainty of sales prevents the
8 Savills (2010) The Case for Housing [Online]. Available at: http://pdf.euro.savills.co.uk/uk/market-insights/the-case-for-housing---spring-2010.pdf
[Accessed 8 November 2016].
52. The Ask of Government:
a new fully returnable public
investment in housing
The National Housing Fund gains to the economy would more than
justify the Government’s investment, with
This report demonstrates how the £2.4bn in economic growth potentially
Government can use historically low funding gained in the first year. The Government
“The National Housing Fund costs to create a functioning housing could pace in and negotiate any return over
market through measured investment and above costs that it would look to recover.
would provide a secure and
in new supply. Its scale mirrors previous
sustainable route to increased intervention by Government into a series The Fund would access funds via low-cost
production of new homes. of broken markets and successful past long-term Government borrowing such
It operates in addition to interventions to boost housing supply; as bonds, a route the Prime Minister has
especially from 1951- 1971. But it would be already rightly suggested the Treasury should
the existing sales or grant-
structured to support greater diversity in the examine (for example, 50-year gilts at c.1.5%).
subsidised new homes market and would expand building across
market. For developers, all types and tenures. As such, it would equip The Fund would be a joint venture
it provides a guaranteed the market to genuinely meet people’s between Government and the housing
needs at different points in their lives across association sector and be created through
purchaser of new homes, and
the country and across income ranges. a traditional private company structure
would build up the capacity with shares. These would be held equally
of SME developers and This intervention would be delivered through by the Government and the participating
housing associations over the the creation of a yearly National Housing Fund associations.
formed with a group of housing associations
long-term.” who would bid to join each year of the Fund. The Government would secure the long-
term funding and on-lend to the Fund.
The Fund would operate with Government The associations would begin to buy out
providing funding through 50-year gilts the Government’s shares (in, say, year 11).
and the associations providing the exit The share purchase would be at a nominal
route for Government by agreeing to buy value with the associations then taking
out the Government’s share at an agreed sole responsibility for the future repayment
point. Adopting this financial instrument of the initial loan of £10 billion. The Fund
approach would ensure that the would, however, commit to continuing to
intervention would not add to the deficit. provide properties of particular tenures
Moreover, the immediate and sustained for specified groups. The Government
6Going to Scale
would retain the option of retaining Structured and sustained rented housing. It highlights the potential
some of the shares – perhaps as ‘Golden investment gain to the public sector of utilising part of
Shares’ – to ensure the continuing mission the output for specific groups of employees,
and social purpose of the fund, such that This proposal envisages Government such as nurses, the police force, teachers, and
current funds and any surplus is available investing £10 billion annually over the next other key workers.
to finance on a national basis an ongoing 10 years to deliver at least 40,000 and up
social mission. to 75,000 additional homes per annum Notwithstanding questions surrounding
into a National Housing Fund. The Fund the classification of housing associations as
The associations, as controlling would serve as guaranteed buyer for these public sector bodies, (legislation to change
shareholders in the Fund, would be free to homes, delivered by housing associations this definition is currently planned), the debt
trade shares or invite additional similarly and/or SME builders and offered as market in the Fund, however it was classified at the
minded and suitable investors to join, such and submarket rented homes. With a Fund outset, would progressively move off the
as local government pension schemes. in place to act as a guaranteed buyer of Government’s balance sheet from year 11.
new homes over the long-term, this would
Crucially, though, the embedded value of
provide counter-cyclical support to deliver
the Fund would be captured within the It would not impact on the Government’s
more homes and build capacity amongst
Fund and its inherent social mission. The current efforts to introduce new regulations
housing associations and smaller builders.
charitable status of housing associations By raising capacity of housing associations to reclassify housing associations as private
would prevent any leakage from housing and medium and small developers, it would sector bodies because the Fund would
provision as only those upholding the improve the long-term health and capacity operate as a private limited liability company
mission and purpose of the fund could of the housing market. with an initial issue of 1,000 shares. These
retain and reinvest the ongoing returns shares will be owned by government and the
of this investment. Hence, this approach Our analysis shows that this could enable founding housing association members. In
is significantly more attractive than those national output to climb to 200,000 the unlikely event that housing associations
based on other sources of investment that homes per year over the next decade remain classified as public sector bodies in
generally leak public surplus into private and then be sustained at that level. It 2028, government should have the ability
return. In short the surplus generated would be a transformative long-term to offer its shares to mission driven private
by the fund over its 50 year cycle would intervention with the Government sector organisations or social enterprises,
remain dedicated to the public good investing and acting to challenge and (providing they abide by the founding social
and constantly replenished by rents and change a dysfunctional market. ethos of the fund) ensuring that the National
sales which would be reinvested in new Housing Fund is not classified as public
homes and/or social projects aimed at An intervention at this scale would give sector vehicle at that point.9
improving the education, health and the Government an immediate return on
well-being of those who rent or buy these its investment via the direct gains that flow
homes. Such an approach would speed from the construction of these additional
up the realisation of larger sites and boost homes. In addition this proposal considers
regeneration, representing a massive the subsidiary benefits of a restructured
ongoing public endowment. housing market, where the additional output
positively impacts on the type and cost of
9 The Housing and Planning Act 2016 includes a number of deregulatory measures that will tackle the issues flagged by the ONS. These focused largely on the
relationship between the regulator (the HCA) and the sector. These deregulatory measures must have commenced before the ONS can reconsider the status of
housing associations. The National Housing Fund would not affect the role of the HCA nor efforts to deregulate the sector; nor would it change ownership or control
of housing associations.
7The Ask of Government
How would the Fund work?
8Going to Scale
Case Study: The National Housing Fund model
The National Housing Fund provides a secure and sustainable 8. The national Housing Fund will provide an economic
route to increased production of new homes. It operates in close out for the end of site development taking on the
addition to the existing sales or grant-subsidised new homes remaining properties at the end of a development.
market. For developers, it provides a guaranteed purchaser of
new homes: 9. These factors will enhance the pace of development and
the efficiency of the capital employed. It will provide the
1. The Housing Fund does not compete for sales with smaller developers with a significant benefit enabling
developers as all homes are rented for at least 5 years. This them to grow their business. It is worth noting that most
is a crucial positive distinguishing factor compared to the of today’s major developers grew up as contractors
Starter Homes initiative. And they are sold to organisations for government in the 1950/1960s, under a similar
who specialise and excel in successfully managing large guaranteed buyer scheme.
portfolios of rented homes – housing associations.
The Housing Fund, repeated over 10 years, will foster new
2. Homes are let to economically active tenants who supply chain capacity stepping outside of the 10-12 larger
aspire to buy at a future date. This adds value to the rest developers who exert profitable influence on the market.
of the development as the homes are owned by one This has functioned to constrain the market by limiting to the
well managed landlord rather than an eclectic group of business models of its dominant providers and squeezing out
investor landlords. the market needs and hence the capacity of small builders.
3. Where homes are subsidised, they are targeted at The certainty of purchase will draw in new providers and enable
specific client groups, such as nurses, the police force, developers in the 11-40 range of development output to grow
and teachers. Again, it adds value rather than detracting over the next 3-5 years’ upscaling their output. Moreover, it will
from the value of the stock as social rent is often viewed provide the 3,000 or so small developers who produce 1-100
negatively in the eyes of some external purchasers. homes per annum with the opportunity to increase their output.
If each produced an extra 15 or so properties this would provide
4. Therefore, the sales to the Housing Fund do not diminish the additional 40,000 homes envisaged.
the value or pace of the sales of the developers’ own
sales product. In addition, housing associations have helped to produce
around 20,000 -30,000 homes per annum. With the significant
5. Certainty of sales to the Housing Fund will enable curtailment of grant the larger associations have sought to
developers, especially smaller developers, to secure become developers themselves, producing housing for sale
funding for their sites at a lower interest rate and lower to provide the subsidy required to sustain submarket rents.
equity hurdle (e.g. the banks may lend them 60-70% of The associations market has started to consolidate as the
development finance at 3 over base rather than 40-50% larger associations are seeking to establish themselves as
at 4-6 over base). scale developers. We believe housing associations with the
aid of the National Housing Fund could comfortably add
6. The certainty of sales will enable developers to produce at another 20,000 homes to their current level of construction.
an accelerated rate. For example, rather than a production
that allows for say 2-3 sales per month with 25 homes In short we believe that the proposal we advocate herein
being produced over a year the developer could produce can rapidly grow house building capacity in two previously
twice or three times as many homes knowing the dormant sectors and utterly transform the British housing
Housing Fund will take up these extra properties. market to everyone’s benefit.
7. This pre-sale will accelerate development as developers
can pre-sell the first and second phases of developments
establishing the essential presence on the site and giving
it initial depth to the market for that development –
thereby allowing the natural sales market to develop.
9The Ask of Government
Top Housebuilders by Annual Completions
Top Housebuilders by Annual Completions
16,000
14,000
12,000
10,000
Annual Completions
8,000
6,000
4,000
2,000
-
Barratt
Persimmon
Taylor Wimpey
Bellway
Berkeley
Redrow
Galliford Try
Bovis
Crest Nicholson
Bloor
McCarthey & Stone
Miller
Countryside
Willmott Dixon
Keepmoat
Lovell
Hill
Avant
Kier
Morris
CALA
Stewart Milne
Telford
Mount Anvil
Ballymore
Source: Housebuilder, JLL, Completions 2014
Figure 2 - Top housebuilders by annual completions
Building capacity, However, the bulk of the Fund’s activity At the same time, consolidation amongst
would give housing associations the means the larger producers has created a market
increasing production, to build more; and create joint ventures dominated by 10 or so companies producing
creating new homes with private developers outside of the top around 67,000 homes in 2015. These
ten house builders, using the skills, capacity companies exert considerable influence over
Crucially we envisage The National and enthusiasm of this group of developers the market, too often determining the pace
Housing Fund only buying homes to rapidly expand production. This co- and the scale of output.
that are initially for rent. We want to ordinated investment would help provide
avoid any economic displacement of what the market has singularly failed to do
This group has been highly successful
sales activity since our intention is to – tens of thousands of new homes on an
in lobbying successive governments
increase housing production – not annual basis.
to provide incentives to weather their
simply buy houses that would have
In terms of expanding capacity to build downturns in the housing market; Help to
otherwise been bought by others.
amongst the private developers, the house Buy is the latest in a line of such incentives.
Initially, the Fund would support
existing schemes, accelerating the pace building market has historically been However, there is little or no evidence that
of development and bringing forward populated by many SME businesses focused these incentives increase overall output.
planned phases of construction. on their local markets; constructing homes
This would have the positive impact that are in tune with their local area. Over We argue that any attempt to boost
of encouraging production to be the last 25 years, a series of recessions has output should look outside this group to
maintained at current levels rather than been matched by a withdrawal of access supplement existing levels of delivery. Our
decline as the wider sales market slows. to funding that has decimated this industry proposal demonstrates how sustained
and seen the number of small builders investment in joint ventures with the wider
(building less than 100 homes each year) fall developer market will significantly increase
from over 12,000 to less than 3,000. capacity and drive up production of new
homes. Initially the Fund when looking
10Going to Scale
Top Housing Associations by Annual Completions
Top Housing Associations by Annual Completions
3,000
2,500
2,000
1,500
Annual Completions
1,000
500
0
L&Q
Orbit
Sanctuary
Notting Hill
Affinity Sutton
A2Dominion
Places for People
Catalyst
Peabody
Wheatley
Sovereign
Guinness Partnership
Hyde Group
Aster Group
Circle Housing
Stonewater
Adactus
Riverside
Moat
Genesis
Home Group
DCH
Family Mosaic
Paradigm
Wrekin Housing Trust
Source: Inside Housing, JLL, Total (private and social) completions 2015
Figure 3 - Top housing associations by annual completions
at the private sector will focus on the As the capacity of these developers The Fund would provide certainty
developers ranked 11-40 in terms of output. increased, the National Housing Fund of demand that would stimulate
This group produced 25,000 homes last could look to expand the number of infrastructure investment in building
year. The variation in output demonstrates developers it contracted with, thereby components and the construction
the rapid tapering of the market, with growing future capacity to sustain the scale workforce. Producers would know that
Countryside, the 12th largest developer, of increased output. there was a steady market seeking
producing 2,134 homes last year and components to produce an at least an
Springfield Properties, the 40th, producing For the last 30 years housing production additional 40,000 homes each year. The
just 455 homes. has been inescapably linked to the sales 11-40 developers would have the
market with its cyclical performance confidence to invest in jobs and capacity,
We believe that these SME developers have following the wider economy, as Figure safe in the knowledge that they have
the capacity to sustain significant growth in 4 illustrates. The cyclical nature of willing and able purchasers for their
output but are restrained by the structure of the market works against sustained output.
their current capital and project finance. investment in the essential infrastructure
to support house building. Each downturn These additional homes would initially
The Fund would address this by providing of the market reduces capacity as the as previously stated, be for rent, with any
these developers with a secured exit route workforce is shed, skills are lost and future purchase by tenants delayed to
for their developments. It would enter into component producers downscale. This in year six or, depending on conditions, to
joint ventures, shaping developments and turn creates inflationary pressures as the year 10 (therefore not competing directly
guaranteeing to buy completed homes at market improves, with labour and material with planned sales by house builders or
an agreed price. These contracts would be costs rising as short term demand associations). The rents could range from
structured to enable these companies to secure outstrips the much reduced supply. This heavily subsidised rents for key workers
project finance for their developments and is best illustrated by the requirement to through to market rent.
build out their sites at a much more rapid pace. import bricks over the last few years.
11The Ask of Government
Cyclical Nature of Housing Construction in England
Cyclical Nature of Housing Construction in England
240,000
220,000
200,000
Rolling 12 month completions
180,000
160,000
140,000
120,000
100,000
1979 Q1
1980 Q2
1981 Q3
1982 Q4
1984 Q1
1985 Q2
1986 Q3
1987 Q4
1989 Q1
1990 Q2
1991 Q3
1992 Q4
1994 Q1
1995 Q2
1996 Q3
1997 Q4
1999 Q1
2000 Q2
2001 Q3
2002 Q4
2004 Q1
2005 Q2
2006 Q3
2007 Q4
2009 Q1
2010 Q2
2011 Q3
2012 Q4
2014 Q1
2015 Q2
Source: DCLG, JLL
Figure 4 - Cyclical nature of housebuilding in England
Although producing the extra homes each performance of failing schools by being able be built, providing the essential next phase
year would have a measurable impact on to match a job offer to the best new teachers of the regeneration of Manchester and
the wider market, it is contended that the with attractive and affordable housing. retaining its economically active population
Fund could tackle asset inequality and as they move from apartments to houses.
social instability by using its scale to reset The Fund could provide a route to unlocking
the market rented sector. It could offer major housing sites that often stall as The ability of the Fund to guarantee
five-year or ten-year tenancies that provide they rely on sales to fund the essential purchase of future phases would provide
for security of occupation. Some of these infrastructure. As such, it could support the developers with the certainty of income
homes could be deployed to provide steps Government’s provision of infrastructure to push ahead with the infrastructure
to ownership; with options including the finance through the new Home Building investment, safe in the knowledge that
ability to fix the future purchase price at the Fund and lock this together with sites and it would be repaid as each phase of the
point of rental or save some of the rent into an accelerated scale of purchases. There are development was delivered.
a deposit scheme. numerous regeneration sites throughout
the country where many additional homes Similarly, the Fund would also accelerate
In the first year the Fund would focus on could be delivered. Many of these sites the pace of current building by the housing
expanding delivery and maintaining it at will deliver substantial benefits to the local associations themselves. The ability of those
an additional 40,000 homes per annum economy and act as a further boost to associations to pre-sell sales products to
as a minimum. However, it would seek to housing and associated development. the National Housing Fund will accelerate
work with Government and public service Without intervention these sites will lie the rate at which these associations
agencies to identify where additional fallow for years; examples include Holt become established as significant
housing would assist the delivery of Town and the wider surrounding district in developers of all forms of housing. Already
wider policy goals, such as addressing the Manchester where up to 4,000 houses could several associations have aspirations for
12Going to Scale
development programmes that would their existing programmes and would not
place them in the top 15 developers. In consume their funding or capacity, thereby
practice this part of the market will grow ensuring that the Fund genuinely aided the
slowly without the stimulus provide by our production of additional homes. Along with
proposed Fund, not least if there is a housing the SME developers the Housing Fund would
market downturn and a larger association act as a catalyst to transform these larger
encounters difficulty. The potential exists associations from smaller scale participants
for around 10 larger associations to fully in the development market to mainstream
enter the developer market producing, say, developers.
2,000 to 5,000 homes each and therefore
adding approximately 20,000 additional Taken together, these factors will enable
homes over current output, if our proposal is development at a higher level and pace.
implemented. The Housing Fund would sit alongside
associations’ development programmes and
Although associations can access funding at Government could look to set a scale ‘hurdle’
a much lower rate than the SME developers when selecting the founder association
they have an understandably cautious members of the Housing Fund.
approach to risk and funding capacity limits,
both of which constrain the overall size of The associations would bring all of their
their development programme and the pace patient investor skills to the fore in assessing
at which they develop out sites – especially proposed developments and the ability
larger scale regeneration sites. The Housing of these new homes to sustain demand
Fund would enable them to better expand for rent or ownership over 25 years and
their risk appetite by providing a guaranteed beyond. The associations would ensure that
purchaser for part of an expanded the developments created economically
development programme. Moreover, the sustainable communities.
National Housing Fund would be outside
13The Ask of Government
Case Study: Operation of the National Housing Fund Model
Structure and ownership Funding and life of the NHF
The National Housing Fund (NHF) will operate as a private The annual NHF will secure funding via government gilts with
limited liability company with an initial issue of 1,000 shares. the expectation that government will seek 50 year funding
These shares will be owned by government and the founding at circa 1.5%. Each NHF would have a target life of 50 years
housing association members. until the repayment of the gilt. It is assumed that the gilts will
attract interest with full repayment in year 50 through the sale
Shares will be split between the government (50%) and the of assets at that point, or refinancing.
associations (50%). It is envisaged that there will be 5 founding
association members who will in total hold a 50% share in the NHF. Government would then on lend to the NHF, with
an undertaking from the associations to acquire the
This model will be replicated annually, with government government’s shares in year 11 (or enable a third party
holding 50% of the shares in each year’s NHF and the joining private sector body to acquire the government’s shares). This
associations holding the remaining 50%. It is envisaged that arrangement will provide the NHF with access to low cost
new association members will join each year, supplementing funding and maximise the number of homes that could be
or replacing the founding association members. acquired by that NHF. It will also enable the funding to be
classified as a financial instrument ensuring that the debt did
Therefore, each annual HIF will be established on a separate not count towards the government’s deficit calculation.
basis and identified as NHF 2017, NHF 2018, etc.
Drawdown rate
Sale of shares
The initial NHF will require a period of mobilisation and time
Government will have the option of requiring the associations to create relationships with developers. Government would
to acquire all or the majority of the government’s shares in raise £10bn of funding and allow the NHF to draw this down
year 11 of each NHF. This put option will enable government over an 18 month period as it acquired homes. Subsequent
to dispose of its interest in the NHF at a given point. For NHF will draw down funds over 12 months.
illustration, the first NHF will be established in 2017 and
government would then depose of its interest in 2028 Operation of the NHF
requiring the association in the 2017 NHF to acquire its shares.
The NHF would operate with a focused management team
The associations will have the right to acquire the shares at and board nominated by government and association
nominal value in year 11 of each NHF. It is acknowledged shareholders. The management team would be responsible
that the NHF should have greater value than the initial £10bn for drawing up the investment criteria and tenure mix for the
invested at the outset, however, the association shareholders portfolio, with both being agreed by the government and
will, by acquiring the government’s shares would be taking association shareholders.
on the responsibility for the eventual repayment of the £10bn
loan in 40 years’ time. They would then have the option to sell The management team would engage with a variety of
down some of these shares to third parties. developers, agree a product specification and purchase price
on completion. They would regularly review developments
In the unlikely event that housing associations remain during the construction phase and pay over funds on
classified as public sector bodies in 2028, government will completion. They would engage the associations to provide a
have the ability to offer its shares to appropriate mission comprehensive asset management service, providing for the
driven private sector organisations, ensuring that the NHF is management and maintenance of the homes within the NHF.
not classified as public sector vehicle at that point. The NHF would be accountable to government for the delivery
of the 40,000 homes and would negotiate with government on
the proposed portfolio mix on an annual basis.
14Going to Scale
Case Study: Continued
Mobilisation This team will form the mobilisation team and will start to
recruit the board and senior executive team that will run the
Assuming for the sake of example that the Autumn Statement NHF. Months 4-6 will progress discussions with developers to
initiates the creation of the NHF then a 6 month mobilisation a formal status and identify homes that could be acquired by
period is envisaged. the NHF within the coming 12 months.
Months 1-3 would focus on the creation of the NHF, the The aim will be to have a substantial programme of delivery
establishment of the investment criteria and the initial agreed by the end of the mobilisation period.
portfolio mix. A small team of skilled executives and
non executives have been identified offering substantial
experience of establishing new enterprises, funding,
institutional investment, property development and
management and operating with government agencies.
How does this differ from Moreover, this initiative as currently outlined them a better rate of return – which in turn
the Government’s Home does not address the issue of the purchaser. would result in lower costs to the Fund per
We believe that a separate, large-scale scheme.
Building Fund? intervention in the form of our Housing
Fund should sit alongside the Home Moreover, our proposed National Housing
The Government recently announced plans Building Fund. The National Housing Fund Fund would catalyse the growth of housing
for a new Home Building Fund. This will be would give certainty of demand to SME association delivery. It would encourage
worth £3 billion, consisting of £1 billion of builders as there would be a guaranteed the consolidation of the association
development finance to provide loans to customer (i.e. the Government via housing market by boosting the capacity of large
SME builders, principally aimed at increasing associations) over a period of 10 years. associations to rapidly expand their
diversity in the market and supporting This would attract new entrants and allow development delivery for homes. This will
innovation in construction; and £2 billion existing SME builders to increase their unleash their future potential to sustain
of infrastructure finance to allow housing capacity sustainably, as funding would be future development. As such, it would be
progress and prepare land for development. repeated on an annual basis that would give a more holistic approach to addressing
SMEs certainty of sale. our supply needs as it would raise market
Whilst this is a very welcome step in capacity through both SME builders and
the right direction, but it is a short-term With a Housing Fund in place, small housing associations.
intervention at a much smaller scale than developers could take an option on a
our proposal. Access to finance is a clear site and then approach the fund with
issue for many smaller builders and new a plan for development of that land.
entrants – and for builders using new The developer would then work up an
modes of constructions, lenders remain risk agreement with the fund on price, size,
averse in their approach to lending. But £1 layout and timing. An agreement to
billion is a comparatively small pot of money purchase from the fund would provide the
if we are serious about sustainably building security for SMEs to obtain development
up capacity in the market. It is likely to finance at a competitive rate with low
largely provide help to SME builders looking equity investment. This would free up their
to realise existing development plans. capacity to do more schemes and gives
153. What could The National
Housing Fund deliver?
In this section, we look at the potential one bed, two bed and three bed homes
buying power of the Fund, across four main for each of England’s nine regions. The VOA
scenarios: an even geographical spread; a sample group includes a blend of flats and
regional focus; and focus on London and houses. Rental growth as forecast by JLL
the South East; and a two phase approach. has been built into our analysis.
The full methodology on which this
“The National Housing analysis is based is outlined in JLL’s report, Unit mix
Fund could deliver released alongside this publication. We find
between 40,000 and that the Fund could deliver between 40,000 We have used the below indicative unit
and 75,000 additional homes a year. mix, which is typical of current Built to
75,000 additional homes Rent schemes. In reality any variation on
a year - finally bridging
Assumptions this could be purchased by the Fund,
the gap between but a weighting towards higher value
current levels of delivery Rents two bed and three bed units would of
course reduce the overall buying power
and the Government’s of the Fund.
Monthly median rents were sourced from
housebuilding target.” the Valuation Office Agency for studios,
Unit Mix
Studio 10%
One Bed 40%
Two Bed 40%
Three Bed 10%
16Going to Scale
We have included studios because many Scenarios East. By adopting this strategy a theoretical
private rental housing development total of 593,800 units or an average of
schemes will include studios to comply We have started by look at the buying 59,380 units pa could be purchased.
with local authority development plans. power of the Fund across a number of
We have also looked at one scenario in geographical scenarios. The issue of Scenario 4: Initial London and South East
which studios are removed to assess additionality is addressed in the following focus followed by regional focus – 73,850
delivery potential in line with the Fund’s section. homes per annum
attempt to support the ‘squeezed middle’
and young families through the delivery Scenario 1: An even regional spending JLL modelled the potential buying power
of slightly larger mid-market rental and allocation – 80,475 homes per annum of the Fund combining an initial focus to
rent-to-buy tenures. London and the South East in the first five
JLL modelled the potential buying power of years, followed by a regional weighting
Yield assumptions the Fund assuming an even allocation of the in years 6-10. This is considered the most
£10bn pa in each of the nine English regions. sophisticated of the strategies modelled
The model is priced on a gross yield By adopting this strategy a theoretical total of allowing for greater power. By adopting
basis, exclusive of management and 804,750 units or an average of 80,475 units this strategy a theoretical total of 738,500
maintenance costs. In reality, the Fund pa could be purchased. units or an average of 73,850 units pa
will buy on a net yield basis, and this could be purchased. See Maps 1 and 2 on
would result in a reduction in gross rent Scenario 2: A regional focus – 94,400 the following pages for a visualisation of this
as well as the yield. This gross-to-net homes per annum spread.
leakage, which JLL has typically found
to be 25% in the current Build to Rent JLL modelled the potential buying power Scenario 5 – impact of removal of studios
sector, will ultimately result in the same of the Fund assuming the £10bn pa Fund from scenario 4
buying power for the Fund as has been was weighted significantly towards the
modelled for this report. North and Midlands. By adopting this JLL modelled the same as Scenario 4, but
strategy a theoretical total of 944,000 removed studios from the mix and re-
Transaction costs units or an average of 94,400 units pa adjusted to 45% one beds, 45% two beds and
could be purchased. 10% three beds. By adopting this strategy
Agent fees, legal fees and Stamp Duty have a total of 721,800 units or an average of
been factored into the model. Scenario 3: A London and the South East 72,180 units pa could be purchased.
focus – 59,380 homes per annum
JLL modelled the potential buying power
of the Fund assuming a weighted allocation
towards London, the South East and the
17What could The National Housing Fund deliver?
Map 1: Distribution of Fund Allocations Years 1-5 (Scenario 4)
Key – Green 0-5% | Yellow 5-15% | Orange 15-20% | Red 20%+
18Going to Scale
Map 2: Distribution of Fund Allocations Years 6-10 (Scenario 4)
Key – Green 0-5% | Yellow 5-15% | Orange 15-20% | Red 20%+
19What could The National Housing Fund deliver?
Impact of the Fund on Housing Delivery
Impact of the Fund on Housing Delivery
250,000
Forecast
3
200,000
2
150,000
Annual Completions
1
100,000
50,000
0
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2023-24
2024-25
2025-26
No Investment Fund (f) Investment Fund Min (f) Investment Fund Max (f) Historic Delivery
Source: DCLG, JLL
Figure 5 - Impact of the Fund on housing delivery
How many additional homes Based on JLL’s modelling, the realistic
would be delivered? maximum additional housing delivery that
could be created through the Fund is 75,000
As we have seen, the proposed Housing homes per annum, which is illustrated
Fund has significant potential to deliver by line 3. The minimum likely additional
new homes. We now consider how many housing delivery as a result of the Fund is
of these would be truly additional units.10 40,000 homes per annum (line 2).
In order to understand the potential
housing delivery increase as a result of the
Fund, the above graph has been created.
Line 1 shows a baseline housing delivery
forecast for the next 10 years without
the introduction of the Housing Fund.
This is based upon JLL’s annual housing
completion forecasts.
10 We have taken into account current constraints on capacity, including the planning environment; labour force and delivery rates; housing association ambition
and land availability. This are outlined in full in JLL (2016) National Housing Fund: An assessment of the proposed fund’s potential to increase housing supply in England
[November 2016].
204. Why other approaches
are not sufficient
There have been a number of deregulation. However, this would risk
suggestions on how to intervene in damaging the important social aspect
the housing market to increase supply. of housing associations as it would risk
Below, we examine several recent and removing the wider role that registered
older ideas, including proposals to providers play in their communities and
invest in housebuilding at the scale in their tenants’ lives. Our proposal avoids
“There is widespread we are recommending. What we find this dilemma, whilst setting out a path for
support for a major is that there is widespread support for a returnable investment that would bolster
intervention of this kind in a major intervention in the housing public finances over the long term.
market. Many of these overlap with
the housing market. We our proposals – for example, Shelter’s In the table below, we look at a range of
believe that the National suggestion for a Growing Britain Fund other proposals for boosting housing supply.
Housing Fund is the only that would support housing association This details how these proposals compare to
proposal that addresses the development alongside large-scale our own, with green indicating where they
projects such as garden cities. at least match up to our proposal and red
problem of pace and scale indicating where they fall short.
of delivery over the long- What our analysis reveals is that these
term.” ideas have merit but would not address
the problem of pace and scale of delivery
over the long-term. In addition, some
would require legislation that would delay
implementation, lack in detail, or have
failed to articulate how they would spread
ownership directly. Our proposal does,
and crucially we have mapped the wider
economic impact and benefit to the public
purse of it.
Our analysis shows that the most
comprehensive alternative proposal
would see housing association building
rates boosted at a lower cost to the public
purse. Instead, housing associations
would be supported through large-scale
21What could The National Housing Fund deliver?
Table 1 - Comparative analysis of other proposals
Funding Requires
Name Funded by Funding to Returnable? Timescale
amount legislation?
Housing
National Housing Fund 50 year gilts
associations
£100 billion No Yes 10 years
Private sector One-off
Home Building Fund business, fund
Not specified £3 billion No Yes
(Government) focus on small running
builders until 2021
Not modelled,
but would
include housing
associations,
Growing Britain Fund
10 year gilts large scale Not specified No Yes 2020
(Shelter) projects such
as new towns,
cities, direct
commissioning
Not specified, Not modelled,
but government but would
grant and include housing Not Not
Homes for All (Renewal) institutional associations, modelled
No Not modelled
specified
investors investors, city
suggested regions
Government
through Help to
Better Financing, More Buy extension; Housing Not Not
Not specified Yes
Homes (Policy Exchange) deregulation associations applicable specified
to allow HAs to
raise own funds
Housing
associations
Housing People, Financing raise funding
through Housing Not
Housing (Natalie Elphicke equitisation to associations
£30 billion Yes
applicable
5 years
& Policy Exchange) raise funding
from e.g.
pension funds
Stephen Crabb and Sajid
Javid (Pledge during Government
Not modelled £100 billion No Yes 5 years
Conservative leadership bonds
campaign)
22Going to Scale
Gain to Number Number of
Builds capacity of Build to Security of Ownership Economic
public of houses additional
SME developers? rent tenure model benefit
finances annually homes to 2027
Yes Yes Yes - 5 years Yes 0.4% GDP £2.4 billion 60,000-90,000 At least 400,000
Yes but only in the Not Not Not Not Not Annual figure
Up to 25,000
short-term specified specified specified modelled modelled not set
Direct impact not Not No specific Yes but not Yes but not No specific No specific
Yes
specified specified model modelled modelled estimate estimate
Not specified, but
Direct impact not Yes - 5-10 Not Not Annual figure
Yes Yes 75,000 set as the
specified years modelled modelled not set
aim
Potentially Not modelled
Direct impact not Not Not £275 million
Yes No 100,000 per – requires
specified specified modelled per annum
year legislation
Potentially Not modelled
Direct impact not Not Yes but not Yes but not
Yes No 100,000 per – requires
specified specified modelled modelled
year legislation
Direct impact not Not Not Not Not
Not specified Not specified Not specified
specified specified specified specified specified
23Conclusion
We are building less than half the number 50 years each round of the fund will create
of houses needed to meet both population a massive endowment that can be used to
growth and tackle the backlog caused by help address not just the housing challenge
decades of undersupply; 1.4 million families in the country but potentially the myriad
sit on social housing waiting lists; private range of other disadvantages that can hold
“Our National Housing Fund rents have hit a record high and the average our fellow citizens back.
offers the British Government home costs 10 times the average salary.
A One Nation Government that is radical
a way to finally build the
This failure to meet demand is pricing and ambitious has no choice but to
homes it acknowledges it people out of the housing market, transform the housing market and finally
needs. Through the notion increasing intergenerational inequality get it to provide the homes so urgently
of a guaranteed buyer, we and for those for whom renting is the only needed. Our National Housing Fund
option, a record proportion of their income represents a serious and credible way to
reinvent the only formula that
is spent on housing. achieve this goal by establishing a new
has ever enabled the state to guaranteed buyer in the housing market –
build at scale. Crucially, we Our National Housing Fund offers the to deliver at least 40,000 and up to 75,000
will open up the market for British Government a way to finally build new homes a year to finally meet our
the homes it acknowledges it needs. housing needs.
the millions who need it to
The Fund we propose will offer full cost
work for them.” recovery for the public purse, or indeed
if the Government prefers it could even
offer a direct return over and above any
interest or management costs. Through the
notion of a guaranteed buyer, we reinvent
the only formula that has ever enabled
the state to build at scale. Crucially, we will
dramatically expand the capacity of two
relatively dormant sectors, the SME building
market and housing associations, such that
they too can build at scale and open up
the market for the millions who need it to
work for them. Finally, we believe that over
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