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Councils turn builders: Why housebuilding is being reclaimed

Local authorities are set to finally turn a government policy shift in 2012 into a housebuilding surge in 2015 that could be lucrative for contractors.

2015 could be a big year for local authority housing.

This month, the Treasury is due to unveil a report expected to brim with ideas to beef up councils’ shrunken housebuilding capacity.

But 2015 is already expected to see an increase in council house development, albeit one of modest proportions.

As Construction News revealed last week, several councils are setting up housing development firms to drive their burgeoning building ambitions – a trend the Treasury review is expected to encourage.

And almost three years after wresting control of their housing budgets from Whitehall, many authorities are finally poised to begin commissioning new homes. Or so those advising them say.

Council builds still minority sport

This is all promising news for contractors waiting for councils to claw back the sort of impressive development prowess they boasted decades ago.

Despite the coalition’s proclaimed council housing “revolution” of 2012 – when scores of authorities were granted a share of £2.9bn of borrowing power – new build remains a minority sport in local government.

Number of councils starting new homes

Of the 326 authorities that post housing starts, only 34 began construction of new homes in 2013/14, according to Construction News analysis of official figures. Of these 34 councils, three-quarters built fewer than 50 homes each.

In one sign of recovery, total annual completions rose seven-fold to 900 in 2013/14 from the all-time low of 130 in 2004.

“Why are councils that have money, land and other assets not doing all they can to meet the housing needs of their local population?”

Natalie Elphicke, Treasury review

But this represents a mere 1.6 per cent of output across the industry. In their post-war heyday, authorities took credit for commissioning 84 per cent of new homes.

Natalie Elphicke, the housing finance lawyer who led the year-long Treasury review, is in no doubt councils could do more to drive supply – especially if helped by contractors.

“Some councils are performing very strongly,” she says. “Others have significant housing need; government has made money available to them which they haven’t taken up.

“It is reasonable to ask why councils that have opportunity, that have money, land and other assets are not doing all they can to meet the housing needs of their local population right now.”

Find a housing buddy

Ministers value the assets of local authorities at £220bn and are demanding they find greater efficiencies.

Ms Elphicke indicates the review will encourage councils to “buddy up” with contractors as a means of “delivering more homes in the right places and at the right price”.

“The evidence is that councils are most successful when working in partnership with others and where councils promote opportunities for housing in their areas,” she adds.

“That’s a £15bn to £20bn opportunity for housebuilders which has been left on the table”

Natalie Elphicke, Treasury review

The “re-activation” of council housebuilding could create billions of pounds of business for the housebuilding industry, Ms Elphicke estimates.

“For more than a decade there has been an ambition to increase housebuilding by about an extra 100,000 each year,” she adds.

“That hasn’t happened. That’s a £15bn to £20bn opportunity for housebuilders which has been left on the table.”

Proportion of councils starting new homes

So what have local authorities been up to since the 2012 “revolution”? What is driving the council housebuilding surge of 2015? And where might the opportunities for contractors lie?

Council advisers argue that authorities have not lain idle for the past three years.

They have instead fought to work out ways of getting back into housebuilding after decades removed from the game – all the while watching their income depleted by government cuts.

Groundwork prepared

Ian Doolittle, a partner at law firm Trowers & Hamlins, which has helped many councils plan housebuilding projects, says there is “lots of activity” preparing the groundwork.

The majority of authorities opted to “keep it simple”, he says, establishing standalone firms to run modest programmes of around 300 homes over a decade or so.

“Even a large authority that have their own R&M direct labour organisation is not able to do a capital new-build programme. They will look to construction firms to support them”

Ian Doolittle, Trowers & Hamlins

He believes 2015 will be a good year for contractors, as many councils move from strategic planning to commissioning homes. Few if any can carry out construction work themselves, Mr Doolittle adds.

“Generally speaking, even a large authority – even those that have their own repairs and maintenance direct labour organisation – are not able to do a capital new-build programme,” he says.

“They will look to construction firms to support them on that.”

Trowers & Hamlins’ assessment of local authority plans is reflected in official figures. These show a gradual increase in the number of authorities starting new homes over three years from 29 councils in 2011/12 to 34 in 2013/14.

In each of those three years, most started 50 homes or fewer and just 15 started more than 100.

Savills head of housing consultancy Mervyn Jones agrees many authorities will move from “strategic” to “development” stages in 2015.

“It has taken a while for councils to realise the potential they have following the reform of council housing finance three years ago,” he adds.

Income generator to offset cuts

Mr Jones also expects more authorities to develop homes to raise income, rather than merely to boost housing supply.

Turning land into homes for sale or rent can replace resources lost through government cuts.

“Councils have the land but, rather than sell it for a lump sum of money, they want to develop it to get an income stream,” Mr Jones adds. “They will want to work with development partners to sell the homes for sale.”

“The whole formula means we get housing built on public land which was otherwise redundant – and with no burden to the public purse”

John Anderson, Kier Living

One authority seeking to raise resources in this way is Kent County Council.

In a deal brokered with property services and construction group Kier, the authority has commissioned 152 new homes across three plots of land previously occupied by schools (see box).

Kier Living executive director John Anderson says the model involves no extra expense or borrowing costs for the council and allowed it to retain ownership over the land.

“The whole formula means we get housing built on public land which was otherwise redundant – and with no burden to the public purse,” he says.

Homes from empty schools in Kent

Kier Property is helping Kent County Council convert three redundant school sites into 150 new homes, funded with what the developer describes as “intelligent finance”.

Under this model, an institutional investor has agreed to bankroll the development in exchange for income guarantees.

This income will be raised by leasing the completed developments to a housing association for a fixed period.

Such an arrangement allows Kent to retain ownership of the land while creating its own income stream.

Kent CC has made no secret of the challenges faced by cuts to its budget, which it expects to shrink by £206m over the next three years.

Mr Anderson says Kier is in talks with several authorities about similar models and that one is “motoring very quickly”.

“Councils are looking for a predictable income. We are having more and more conversations motivated by creating income rather than capital.”

How to convert surplus land

Another organisation helping to hook up construction firms with council housing commissioners is Cornerstone.

Describing itself as a ‘social investment company’, it is led by former local authority chief executive Tim Byles.

“With all the cuts in the public sector, there has been quite a loss of capacity and organisational memory of how to convert surplus facilities into assets”

Tim Byles, Cornerstone

Cornerstone aims to help public bodies find “practical solutions to delivery problems”, such as the conversion of surplus land into new homes. This is an area where many councils lack “day-to-day expertise”, Mr Byles says.

“With all the cuts in the public sector, there has been quite a loss of capacity and organisational memory of how to convert surplus facilities into assets,” he adds.

Cornerstone is currently involved in the delivery of some 1,000 properties, including a scheme with Devon County Council to build affordable homes.

In April, the firm aims to establish a new ‘social infrastructure development’ framework through which public bodies can access its services and the construction firms it appoints.

Mr Byles hopes to attract a range of large and specialist construction firms to join the framework, through which he expects some £3bn of business to flow. Successful bidders will be selected later this year.

Councils market share of new homes output

The Homes & Communities Agency is also looking to help councils get housebuilding projects off the ground, with the government body’s role set to expand in 2015.

Its chief executive Andy Rose tells Construction News the agency will take on an “enhanced role” in getting public sector land ready for housing development.

The HCA will “add value” to redundant land with development potential and “speed up their sale to help increase the supply of housing and increase economic growth”, he adds.

As well as picking which council housing developments the government funds, the HCA also runs a procurement framework, which is compliant with European Union rules.

“We welcome conversations with other investors…and will engage with landowners and developers to create a development pipeline”

Jeff Smith, Manchester City Council

Called the development partner panel, it was established in 2013 and has been joined by 52 local authorities seeking to procure work from construction firms.

To date, some £2bn of housing development deals have been agreed through the panel, based on projects’ average construction costs.

With the current framework due to expire in 2017, competition for places on the next panel is likely to take place next year.

Grand ambition for Manchester

The HCA will also this year take on a frontline role in residential development in Manchester, a city exploring a range of innovative means to finance housebuilding (see box).

The agency’s director for the North-west Deborah McLaughlin will from next month head up Manchester Place, a joint venture company established with Manchester City Council.

Manchester’s joint venture investors

In addition to Manchester Place, the city has established two further joint venture companies to drive housing growth.

Last year it set up Matrix Homes, working with the Greater Manchester Pension fund and the Homes and Communities Agency, to build 240 homes for private rent and sale.

Under this model, the HCA and the city authority will supply the land, while the pension fund provides the investment.

The homes will be built by Wates Living Space and management services provided by the housing association Places for People.

A separate JV has been established with the Abu Dhabi United Group, the private investor which owns Manchester City FC. 

The group has agreed to build 830 homes in the first phase of its development plan across two areas of the city, most of which will be let at market rates.

According to the authority’s executive member for housing and regeneration Jeff Smith, this aims to stimulate a “faster and wider interest in the city’s housing market”.

“We welcome conversations with other investors…and will engage with landowners and developers to create a development pipeline,” he said at its official launch late last year.

Compared with many other authorities’ more modest plans, Manchester has grand ambition.

The city wants to find space for 55,000 new homes by 2027, setting up a pipeline of 4,500 homes a year on average. It will certainly be one to watch.

Another authority with ambitious plans is Thurrock, which has set up a standalone firm to drive the development of 18,500 homes by 2021 (see box).

But as our analysis indicates, Manchester and Thurrock are outliers in terms of ambition.

Few authorities are returning to the heady days of the 50s and 60s, when combined outputs were in six figures rather than three.

This year will at least see modest plans translate into real commissions for contractors, while more ambitious authorities get their dedicated development firms up and running.

The 2015 council housing surge may be modest, but it could be the start of something big.

Getting affordable builds going

Thurrock Council established the standalone firm Gloriana in 2013 to help kick-start the development of thousands of new homes.

The Essex authority plans to begin 18,500 homes by 2021 and will rent them out at 80 per cent of market rates – a level the government officially sanctions as ‘affordable’.

Its first business case to develop 350 homes in the Tilbury end of the district was approved last March.

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