The need for increased housing delivery at pace and scale remains a priority for all councils. Over the last 12 months, we have worked with local authorities to support them in delivering these aspirations to provide more housing.
The purpose of this has been to increase supply in their areas and, in many cases, generate a return to contribute to sustaining front-line services. We have seen three clear themes emerge:
1 Borrowing options and alternatives to prudential borrowing
The 1% increase in interest rates that local authorities will have to bear when accessing borrowing from the Public Works Loans Board (PWLB) is currently a hot topic of debate. This increase was introduced by the Treasury in Autumn 2019 and has forced local authorities to consider whether more competitively priced financing exists in the external funding market and, if so, how best to access these potential rates and ensure commerciality of the deal.
Recently, for example, the market has seen one London borough raise around £75 million by issuing a bond that aims to compete with the PWLB certainty rate.
The trend to no longer default to prudential borrowing is likely to continue – this opens the door for organisations such as pension funds and institutional investors, who are keen to lend to local authority bodies. This brings together the continued appetite from local government to borrow on a long-term basis and investors’ desire to secure long-term, low risk fixed income.
From initial soft market testing with funders on various projects we have seen lending appetite increase in the market, particularly for projects at scale.
2 Agility of the private sector funding market to work with the public sector
It is evident that local authorities are now re-considering private sector funding for the construction and purchase of new housing assets, and there is an increased focus from the private sector to lend to local authorities. There is also further appetite to consider how solutions can be shaped to not only appeal to the public sector in respect to pricing but also fit with the financial environment it must operate within and the overall ethos of these organisations. We have seen interest in projects which are underpinned by robust strategies for economic growth and realising social value.
The entrance of new funding institutions inevitably brings an element of natural caution from the public sector which requires assurance that the solutions not only work for them but can be feasibly delivered.
3 Complexity of delivery and risk appetite
Over the last three years local authorities have taken a more strategic view on projects which are not “just about housing” but have an emphasis on “infrastructure first”, and the creation of place through high quality public realm and transport connectivity. Broader thinking and a commercial approach to delivery continues to be a priority on this agenda.
There is a push to deliver more and an appetite to consider models that are often more complex and innovative – however it should be noted that this often increases risk for the public sector and this change in risk profile should not be underestimated.
There is also a recognition that local authorities should actively explore the value that can be gained from partnering with other public sector bodies and agencies, while tapping into the expertise that the private sector can bring. Through this collaborative approach, risk can be shared and thinking can be developed in a more holistic, joined-up manner.
The hope is that local authorities can deliver the housing that we all know is needed, but in a manner that withstands scrutiny from wider stakeholders and generates returns that will contribute to the sustainability of local authority finances into the medium and longer term.
Local authorities accept that housing shouldn’t be just a numbers game but should rather focus on delivering quality housing to meet the needs of their residents, bringing together the best that the public and private sector have to offer.
Outlook for 2020
Provision of housing featured prominently in the Conservative party manifesto, published in November and following their success in the general election, effective policy implementation is now required to increase overall housing supply. Local authority participation and intervention will be key here.
With the local authority funding market set to continue to evolve, we consider the following areas to be key:
- A true understanding of the available delivery models – the complexity of projects continues to grow. This brings a need to be able to robustly appraise and identify delivery models that can meet your requirements while retaining the flexibility to adapt to changing circumstances.
- Commerciality around funding - new funders and products are coming to the market and in many cases look and feel different to the traditional products that many banks offer. Local authorities need to be able to robustly assess and understand the product to assess the risk profile for each party involved.
- Getting under the skin of the private sector funders and understanding what’s on offer, and driving the best deals in the market using a range of financial products, existing and new. To ensure the best deal this will require robust understanding of the market-place and the ability to work with the market to ensure the financial provisions are tailor made.
We expect that 2020 will see the more innovative, proactive and commercial local authorities make significant strides in their achieving their commitment to increased housing delivery.
Co-authored by Wayne Butcher and Ian Tasker.