Local authority housing companies: getting back into building

Last December, research by Inside Housing magazine found that more than a third of English local authorities have already – or are planning to – set up their own housing companies.

The research showed that 98 out of 252 councils were considering the establishment of a private housing development company, or had already established one.  That’s a significant increase on the seven housing companies that existed in 2014.

The factors driving council housing companies

The 2011 Localism Act gave local councils the powers to establish their own private companies, enabling them to borrow money more cheaply and avoid government-imposed restrictions. A mixture of motives is now prompting local authorities to enter the housebuilding business. Some see the new companies as sources of additional revenue. In addition, homes built by these private companies are not liable to right-to-buy. The Inside Housing research also found that a number of councils want to target income generated on tackling homelessness in their area.

At the same time, councils are facing funding pressures. “Local authority budgets are biting more and more,” Croydon Council’s director of development Colm Lacey explained to The Architects’ Journal in February.

“For example, in Croydon we’ve lost more than half of our central government budget since 2010. That’s a slow drip-drip of a loss of resource. Quite quickly, you come to realise that you need to throw something else in to meet the gap.”

Most companies are being established as wholly owned subsidiaries of councils, while some are solely management companies, letting stock built by their parent local authority. Many are funded by councils borrowing money from the Public Works Loan Board at low rates and then lending it to the company at a market rate.

Early adopters

The types of councils establishing housing companies are very varied, from rural to urban, and across the political spectrum. There is also a wide geographical spread, with a growing number located in London.

Among the councils pioneering their own housing companies is Newham Council in east London, which established its Red Door Ventures company in 2014 to provide homes at market rents, with a third of profits to be invested in social or affordable housing. The company’s properties are built on land bought from the council by the company using a local authority loan. Already, three developments have been built, and planning permission has been given for two more.

Another council-established private development company is Brick by Brick, set up by the London Borough of Croydon Council in 2016. The borough owns a significant amount of land, but has found that procuring agreements with developers has rarely generated benefits to the council in terms of increased land values or development returns. In an interview with Local Government Chronicle, Croydon’s Colm Lacey explained the reasoning behind Brick by Brick:

“The model allows the council as land-owner, sometime finance provider and sole shareholder to extract value from the core components of development activity – funding, building and selling. It maximises both affordable housing supply and return from development activity to Croydon residents, and allows the council to reinvest in core services.”

 Learning from the pioneers: the upside and the downside

As more local authorities move towards establishing their own housing companies, they can learn from the experiences of early adopters, who can advise them on what to watch out for. This includes analysing council powers in relation to the establishment of a company, provision of funding, transfer of land, decision-making arrangements and potential conflicts of interest (for example in relation to planning).

At a time of acute housing shortages, the creation of house building companies takes on increased significance. Chartered Institute of Housing deputy chief executive Gavin Smart agrees that housing companies can help council deliver more homes, but warns:

“The downside is that the need to cross-subsidise might mean that their ability to produce new homes at genuinely affordable, social rents can be limited. It’s vital that they continue to prioritise building new homes at social rents.”

A rising tide or a drop in the ocean?

The trend towards council housing companies shows no sign of waning.

  • Cambridge City Council set up its housing company in January 2016, and the following May the company handed over its first rental property to new tenants.
  • The first of 128 new homes built by Gloriana – Thurrock Council’s housing company – will be completed this year in Tilbury. The development has been created to keep up with demand for homes from increasing numbers of people coming to work in the area, mainly in freight and retail.
  • Meridian Homestart is a company set up by the Royal Borough of Greenwich to offer high-quality homes for local working families to rent. These homes are let at 20% below local market rent levels in order to help working families who would otherwise find it hard to buy or rent on the open market.
  • A shortage of private accommodation has prompted Bracknell Forest Council to use its housing company to provide better and cheaper housing for homeless people.

At the moment, the contribution of council housing companies towards tackling the housing crisis is relatively small. Barking and Dagenham’s housing company, Reside, has so far delivered around 600 homes; while Blueprint, a joint venture between Nottingham Council and Igloo Regeneration, has completed 245 homes. That’s a drop in the ocean when compared to the House of Lords Economic Affairs Select Committee recommendation of 300,000 new-build homes each year.

Even so, housing companies have come a long way in a short time, and their rapid growth signals a much bigger long-term vision. As Sir Robin Wales, Mayor of Newham explains:

“We’re trying to correct 30 to 40 years of failure in the housing market, but it will take time.”


If you enjoyed this post, take a look at some of our other housing blog posts:

Rent controls: lessons from Berlin?

 

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Image: James Carson

In March 2016, a study by the Centre for Economics and Business Research highlighted the growing problem of rising rents in the UK. The Cost of Renting found that the average private rent in England is growing at an annual rate of 2.5%, and forecast that rents were set to rise by 28% on average by 2026. The findings support recent studies suggesting that the UK is now the most expensive place in Europe to rent.

In contrast to the UK, renting in Germany is less expensive. For historical as well as economic reasons, only 43% of Germans are home owners (compared to over 70% in the UK). The rest rent their homes, making rent rises a highly sensitive political issue in Germany.

In recent years, Germany has been experiencing a housing shortage. Last year, the Cologne Institute for Economic Research reported that in 2014 the number of new flats and houses built in the biggest cities was 50% fewer than needed to cope with rising population numbers. As a result, rents in Germany have been rising more steeply.

Introducing rent caps

Last year, concerns about keeping homes affordable for tenants on average incomes prompted the German government to introduce legislation on rent control. The new law means that private landlords taking on new tenants can only raise rents by up to 10% above the local average for similar properties.

Even before the law was passed the state government of Berlin had announced that it would be the first city in Germany to introduce rent controls. In recent years, the German capital has been growing by around 50,000 people a year, putting greater strains on the city’s housing market. Rents in Berlin have risen on average by almost 53% in the past five years, and in some districts, by 79%.

The trend has raised concerns among Berliners that their city could be on the way to emulating London, where growing numbers of people are struggling with the cost of living in their private rented homes. The Cost of Renting report found that Londoners on average spend nearly a third of their disposable income on rent payments, and suggested that worsening rent affordability may push residents on lower incomes out of the capital. Rent control is one measure intended to prevent Berlin going the same way as London.

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Image: James Carson

The impact of rent controls

Within weeks of Berlin introducing its rent cap, there were signs that the move was having an immediate effect, with the average rents per square metre falling by 3.1%. But in February 2016, a survey of Berlin rents by CBRE found that the year-on-year rise across the city for 2015 was 5% (compared to the 2014 rise of 6.5%).

On the face of it, this looks like the new controls are not working. But the rent cap was always intended to slow down Berlin’s spiralling rents, rather than bring them to a halt, and on those terms the law has been effective. Moreover, while new rents for Berlin’s most expensive apartments rose by 5.7%, rent rises for the cheapest 10% of flats rose by just 2%.

And, as if to underline how serious Berlin is about tackling rising rents, in addition to the rent controls on private landlords, the Berlin state government has also introduced new rules for over 500,000 social and state-owned housing tenants, guaranteeing that rent rises will not price them out of their homes.

Lessons for the UK?

Since Berlin introduced rent controls, other German states, including Hamburg and Bavaria, have followed suit. This has prompted some commentators to wonder if the idea could help to tackle the UK’s housing crisis.

A recent report from Shelter highlighted the serious impact of rising rents in London:

“Those who find it difficult to pay their rent are likely to cut back on food for themselves or clothes for their children. Others get deep into debt to avoid going into rent arrears or to cover the high costs of frequently moving home. At worst, a growing number of London renters lose their home and become homeless.”

Although London has seen the steepest rises, other parts of the UK have also been affected. In April 2016, figures showed that rents on new tenancies in Greater London were, on average, 7.7% higher than a year ago. But in Scotland the increase was 7.3%, just ahead of the East Midlands with 6.8%.

Writing in the Financial Times, columnist Jonathan Eley acknowledged the differences between the UK and German housing markets, including the high numbers of renters in Germany and the larger number of properties owned by institutions (in contrast to the UK, where most private rented sector properties are owned by individual buy-to-let landlords). However, he concluded that the UK had something to learn from the introduction of rent controls in Germany:

“It is not perfect, but it does a much better job of balancing the interests of tenants and owners than the policies of successive UK governments, who have basically ramped up house prices without much thought for the long-term consequences.”

It’s still too early to say whether Germany’s attempt to tackle rising rents will have a long-lasting impact. But if the measures succeed in putting a brake on spiralling rents, there may be growing calls here to follow Berlin’s example.


Further reading
If you’ve enjoyed this blog post, you might also be interested in these previous posts:

Generation rent: are there lessons from Germany?
To regulate or not to regulate? Housing standards in the private rented sector
Support for the squeezed middle: could public subsidies tackle London’s housing crisis?

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