The new Government has shown it means business when it comes to addressing the social and affordable housing shortage and boosting development. However, more creative financial models that work for local authorities, lenders, private investors and registered providers are urgently needed if housebuilding targets are to be met.
With many registered providers feeling the financial squeeze as they manage customer complaints and deliver costly maintenance, repair and improvement (MRI) programmes to satisfy increased regulatory scrutiny, a holistic financial solution seems the best way forward.
Could private sector investment finance social and affordable housing?
There are several private sector investors, such as banks and pension and insurance companies, that are cash-ready to invest in building projects and help registered providers meet increasing housing targets. According to new Housing Minister, Matthew Pennycook, finding a way to use this liquidity to boost local housing provision, whilst providing the security that investors expect in return, will be key.
After the discovery of a huge funding shortfall in public finances, it’s clear the development of affordable and social housing will be unattainable without significant private sector involvement. If registered providers are to overcome the current financial challenges, investors must be encouraged to fund the development of more housing to fulfil this pre-election pledge. Fiscal incentives and support for investors could go some way to attracting this investment.
Is there scope for a new PPF3?
With the first private finance initiative (PFI) launched in 1992, and again in 2012, being proven unsuitable for use, could there be an opportunity for a public-private finance (PPF) initiative mark 3? Whilst PFI was initially led by the public sector acting as contracting authorities, PPF3 could instead be run through the combined authorities, that have expertise in procurement, project management and other relevant skills.
The combined authority would procure an SPV backed by stakeholders (which could include local authorities and housing associations) where each new place-based housing project would be funded through a mix of:
- Subordinated debt
- Equity
- Bank/investor loans
- Government support
Schemes should be structured to allow all the relevant stakeholders to hopefully profit from their PPF3 investment by owning a stake in these housing projects, which could also be managed by housing associations, and consist of a mix of affordable, shared ownership properties and market sale properties, as well as build to rent properties.
Implementing a new PPF3 framework would be time-intensive but go some way toward solving past PFI failings. In the meantime, other tactical changes could be made by the Government to increase investment in social and affordable housing. For example, a new centrally funded, grant-based scheme could be established to facilitate development activity led by local and combined authorities.
Alternatively, public sector pension schemes could be leveraged in support of housing in the local area. This could be incentivised through tax breaks and the provision of a government-backed guarantee or other contingent liability to protect stakeholder interests.
Key takeaways
There is an opportunity for all stakeholders to benefit from more creative financing solutions for the housing sector. With the Government pressed for time and money as the housing shortfall widens, here are some key actions for consideration:
- Private sector investment is available but will require fiscal incentives and security from the Government. A new PPF3 could be a viable solution.
- The past failings of the PFI must be considered for a new PPF3 to be successful. Could a PPF3 be run by the combined authorities instead?
- Local and combined authorities need to boost development. Could a centrally-funded, grant-based scheme or public sector pension schemes help?
For more information
For more information, contact Jon Coane.