Changes in funding for social housing could create a premiership division of contractors, but those that cannot build in volume could find themselves left out in the cold, writes Mark Smulian
SOMETIME in September, some lucky house builders will open letters from the Government offering them free money.
These will be the fortunate ones, trailblazers in a new approach to social housing in which builders can compete against housing associations for funds for new build projects.
The initiative is kicking off with a £200 million pilot this autumn under the banner New partnerships in affordable housing'.And from next year, nearly £4 billion will be available, at least in theory.
Those who manage to win the bids could become part of a super league of house builders that control projects rather than simply act as contractors to housing associations.
But many will be disappointed. Last month the Housing Corporation - the quango that channels public funds into social housing - announced it had received 60 bids for the pilot, totalling £1.7 billion.The pilot was oversubscribed eight times.
It is likely that those missing out will be the builders that are constrained by planning restrictions to provide only a few affordable homes each year.
The corporation is looking for volume - for contractors that can easily take on 400 or more homes per bid.
Those that pre-qualify for the pilot will be in a strong position for next year when the corporation's whole £3.9 billion budget for new social housing - known as the Approved Development Programme - is opened up to bids.They will not have to prequalify for a second time.
Corporation chief executive Jon Rouse says the pilot 'represents a historic step change for the affordable housing sector, which has clearly demonstrated its enthusiasm for the challenge in this response to the opportunity' Those on the sidelines may consider it odd that the pilot scheme is being launched barely six months before the full programme starts. But this is a measure of the hurry the Government is in, desperate to gain the better value it thinks is available from a combination of builders' know-how and economies of scale in modern methods of construction.
Concentrating the pot of gold on a few builders with the necessary clout and volume will deliver more affordable homes for the same cash, the Government believes.This is a vital consideration, particularly in the high cost growth areas of the south-east.
But to understand the scale of this change it is necessary to look back only three years.At that time, any housing association could bid to the corporation for development funds. If successful, the association would then appoint a builder as a contractor.The new approach potentially reverses that relationship because the builder would have the money to appoint the association.
Hundreds of associations could and did develop homes. In the interests of better value, the corporation last year cut the number to 71 'development partners'.
Now it has said the only bids likely to succeed for the New Partnerships programme will be those that can provide 400 homes or more, and a similar approach will be taken when the full Approved Development Programme is opened up.
It is easy to see that a super league of builders involved in affordable housing could develop, all partnered by the largest housing associations.
Partnerships between builders and associations are not compulsory but they are expected to become common because a builder that successfully bids for funds must ensure that the resulting homes are managed to the same standard as they would be by a housing association.
And as the contractors are finding out, 'management'means a great deal more than ensuring that homes are well maintained. It can include decisions on who should be housed, rent collection and arrears policy, care support for aged or disabled tenants, and how to combat anti social behaviour.None of these are areas in which most builders have any skills.
So associations and builders have a powerful incentive to collaborate, with each doing what it does best.
Terry Fuller, chairman of the House Builders Federation's affordable housing group and a key figure in the lengthy negotiations that have led to the New Partnerships programme, says builders attracted by the corporation's new policy 'have the skills and confidence to get in there and get on' 'I know £200 million is not much to split around, ' he says.'However, the Approved Development Programme becomes open to builders from next year and if you prequalified for the pilot then you do not need to qualify again for that.'
He adds that the Treasury insisted the corporation should open up the Approved Development Programme even with the pilot only just started 'because it wanted to get things going' 'Volume will be particularly important for modern methods of construction, ' says Mr Fuller.
'If you split a £200 million pot 10 ways you do not do a lot for efficiency and delivery.
You must do it in such a way that you get the benefits of economies of scale.'
The need for large volumes is most acute in modern methods of construction, where economies are scale are expected to substantially cut the cost of housing components.
Most house builders are perfectly capable of using these techniques, but, as Mr Fuller argues: 'If someone is asking for timber frame, volume is necessary to bring the cost down, so [the corporation] needs to allocate to four or five house builders who have the volumes there.'
Economies of scale and volume will mean only a few builders will share the in the Approved Development Programme, he says.
'There were 500 developing housing associations, that is now down to 71 and is expected to fall further, so what does that tell you?' says Mr Fuller.
He predicts that a maximum of 50 builders will get money from the Approved Development Programme.
Some builders have already had a good look in the mouth of this Housing Corporation gift horse and thought better of applying for New Partnerships, either because they think they are too small to qualify, or because they dislike the strings attached.
Ivan Bell, director of sustainable communities at Linden Homes, says: 'We could have bid for it but we did not.My understanding is that the Housing Corporation is looking for those who build thousands of homes for housing associations a year, and we build 300 to 350 at best, so our view was that we do not really have the volume.'
Like many builders that are not specialist affordable housing contractors, Linden's social housing output comes about through 'section 106' deals - planning conditions imposed by councils that state how many affordable housing units a builder must provide on a site where it intends to build for sale.
These are imposed usually in high cost areas and the corporation increasingly takes the view that builders should pay for the affordable homes out of the development's total value, without the need for any public funds.
'The Housing Corporation has said that if a developer applied to provide housing association units under s106 it would be unlikely to get a grant because they have got to build them anyway, ' says Mr Bell.
Peter Blades, land director of Banner Homes, is sceptical about the programme for similar reasons but was also deterred by the prospect of tangling with the red tape that comes with public funds.
'We would love to get grants, because that would give us complete control over building affordable homes, ' he says.'But there are disadvantages. For example, you have to work in an open book way because it is public money, and that can be difficult in some cases.'
There is also a new breed of animal stalking social housing that could compete with builders for the Approved Development Programme funds, but which may also offer rich pickings, particularly to those that carry out refurbishment.
'Arm's length management organisations' is a mouthful of name for what are semiautonomous council housing departments.They are owned by councils but operate independently, and have access to additional government money to deliver the - fairly basic - decent homes standard in council housing by 2010.
ALMOs are trying to negotiate a future beyond 2010 in which they would have considerable financial freedom to invest. If they succeed, many will give high priority to demolition and replacement of homes that have reached the end of their useful life and some may build new homes anyway.
The spur to do this is that they need to transform even the most problematic council estates into desirable residential havens if they are to safeguard the rental income from their properties long term. So beyond 2010 they will have some substantial refurbishment, rebuilding and new building budgets to spend with builders.
The catch is that many ALMOs took their parent council's direct labour organisation with them, and they see using these as a protection against rising industry costs.
Either way, enough money is pouring into social housing to herald a profitable future for builders in this field for several years.