More local authorities are launching private companies to bring forward build-to-rent stock. Alexander Peace looks behind councils’ decisions to re-enter the housing market
On the face of it, the 36-home Moda development launched in Stratford, east London, last month resembles many of the new housing schemes being brought forward to cater for the UK’s private rental sector.
And like other new PRS operators, the developer, Red Door Ventures, has announced plans to build 3,000 rental homes over the next 10 years, to cater for the UK’s fastest-growing housing tenure.
But unlike Essential Living, Greystar or M&G, Red Door Ventures is not backed by international or institutional capital. It is a wholly owned subsidiary of Newham borough council.
And it is one of a growing number of council-owned companies set up to build and manage rental stock. Ealing, Manchester, Runnymede and Cambridge councils are also building homes for market rent.
With just 8,820 homes built by local authorities across England in the past five years, it may seem surprising that councils are branching out on their own.
But before the proposed changes to Right-to-Buy, authorities were already exploring new ways to provide affordable housing stock, get the best value from their land sales, or provide proof of concept to attract more development.
And while the new companies may seem like just a good way of increasing supply, there are a number of different factors behind the councils’ decisions to take on their own house building once more.
Filling a gap in the market
For many, the prime reason for development seems to be stimulating investment from others into private rental housing. Both Manchester and Ealing are walking the walk to prove the concept, and give confidence to future investors.
Deborah McLaughlin, chief executive of Manchester Place which, through Matrix homes, is providing several hundred homes for rent, says: “Our original idea was to fill a gap where the market was not delivering. If we see the market step up to the plate, we are not going to compete with them.
“We wanted to demonstrate that the PRS does work in the North and Manchester in particular, and we are using it as an accelerator of the product.”
Pat Hayes, executive director of regeneration and housing at Ealing council, which set up Broadway Living in 2014, echoes this sentiment, and says it is not about competing with other PRS operators or housebuilders, but about bringing forward sites that would otherwise not be built.
“What we are doing is in-fill development on small sites. No private developer would ever do those as private rent,” he says. “But with a company of your own, a council can bring them forward and create a portfolio of 150, cumulative, rather than individual sites.”
Councils are also using the vehicles to dictate the level of quality they want from the PRS.
“The purpose is to raise the standards in the PRS and to offer mixed and longer term tenancies, alongside giving certainty over delivery,” adds Tony Clements, assistant chief executive at Newham council.
“Then there is the long-term value opportunity for the council, at a time when revenue is very tight.”
Income and investment
Generating income from council assets is another advantage of developing and holding sites for the PRS.
For the moment, the majority of the schemes are being brought forward on council-owned land. Rather than selling the family silver, councils are able to generate a long-term income stream.
Dr Anthony Lee, senior director of development consulting at BNP Paribas Real Estate, says: “In common with the way councils are dealing with property portfolios more generally, they are also trying to convert assets to generate an income stream and subsidise their core activities.
When Runnymede council in Surrey was looking into the development of its shopping centre and accompanying flats, it originally sought a buyer, then decided to do it itself, creating RBC Investments to hold and manage the PRS assets.
John Rice, head of commercial services at Runnymede, says: “We do not leave land wasting away. We use it – and use it for new housing. We are building and we are using the income from that to support local services.”
Setting up a separate, private company to own and manage the stock conveys financial advantages.
In Ealing, Newham and Runnymede, the council is borrowing money from the Public Works Loan Board, then lending it to the PRS company. As this is repaid, the council gets an income stream, while the development vehicle gets cheaper funding than if it went to the private lending market. It also means councils can bypass limits to housing revenue budgets.
This allows councils to be more competitive, and bring forward sites that would not be viable for private developers.
“The council borrows the money, then lends to us [the company], and it has to lend at a margin. We would borrow direct from the markets if it was cheaper, but it’s the practicality,” says Hayes.
But it is still money borrowed, and this means that councils need to be prudent with the cash.
“That pioneering is good in theory, but obviously it is public money, and if one of these goes wrong, that’s when the whole thing might fall apart,” says Lee.
Clements is comfortable with Newham’s business model. He says: “We are not required to make a short profit out of it, so we are quite relaxed in terms of the peaks and troughs in the market. Could the rental market tank in such a way as to make the scheme not viable? It’s a risk, but seems a quite remote one.”
And alongside generating income, an important incentive is supporting local investment and the economy.
“There are three objectives. The first is to create the most commercially advantageous offer for the residents of Runnymede; the second is place shaping; and the third is to support the local economy,” explains Rice.
No one-size-fits-all approach
The different operators stress they are not there to replace social housebuilding or solve the housing crisis on their own.
“It’s not the silver bullet or panacea that will accelerate housing delivery. It’s one of a portfolio of things to keep the market moving,” says McLaughlin. “It’s ‘as well as’, as opposed to ‘instead of’.”
Nor is it a way to dodge Right to Buy and other government proposals. Hayes warns: “If people approach it that way, they are wrong. From our point of view, this is a way to build market-rented stock.
“We will continue to build council stock. It’s not a way to generate massive amounts of revenue, or go into the market against private developers or housing associations – or dodge Right to Buy.”
Long-term plans also vary. When Ealing’s Broadway Living was first set up, it intended to sell the units, but instead decided to keep them, and its plans remain small scale. Meanwhile, Newham’s Red Door intends to build 3,000 homes over the next 10 years.
When publicly available land dries up, or council funding, some do not rule out borrowing from the private sector, or buying more land. But the fact they are private companies means they are not going to be kept if they are not profitable.
“We would not rule out selling at some point,” says Hayes. “It’s not council-owned council housing. This is Broadway Living-owned rental housing that’s in the market.
“It allows us to model good practice, and demonstrate the viability of the model to the private sector. But if we had hordes of new private rental stock coming up, we would change.”
Councils in the housebuilding business
MANCHESTER Matrix Homes
Matrix Homes was formed as a partnership between Manchester city council, Greater Manchester Pension Fund and the Homes and Communities Agency. The council has provided the
land for Matrix to develop 240 homes spread across five sites in Chorlton, Wythenshawe and Gorton.
EALING Broadway Living
Broadway Living was set up in 2014 and aims to deliver more than 1,500 homes in the next five years by bringing forward schemes that other developers would not. Planned schemes include 76 flats at Copley Close, 300 at the council-owned High Lane estate, and 450 at Perceval House. Homes will be provided at market and discounted market rents, for low-cost home ownership, shared ownership,
or for market sale.
CAMBRIDGE Vehicle planned
In the summer of 2015, Cambridgeshire county council announced plans to use 34,000 acres of farmland it owns to build homes for private rent and sale. It intends to set up a subsidiary company to develop three initial sites of 1,200 units. The first of these, a 350-home development at Slade Farm in Burwell, may be entirely rental accommodation. Funding will come from the Public Works Loan Board.
NEWHAM Red Door
Red Door is a private, yet 100% council-owned company, funded through council-provided loans. It intends to build upwards of 3,000 homes over the next 10 years, despite the borough recently reaching the limit of
its borrowing capacity. All homes will be available for residents at market rent or below.
BIRMINGHAM InReach
Birmingham council set up InReach, a wholly owned subsidiary of the council, in March 2015 to deliver private rental housing. Planning was submitted for a 92-home development at St Vincent Street, Ladywood, with all homes at market rent. Though as yet InReach has just the one development, in its annual accounts the council said it expected the level of development deals to increase in 2015-16.
