You could practically hear the sigh of relief as the 3rd May deadline passed for registered providers to submit their bids to the Homes and Communities Agency for grant funding under the Affordable Housing Programme 2011-2015 Framework.
Registered Providers have had their heads down working up their offers to the HCA since the launch of the framework in February. The offers that they have submitted are basically their requests for grant contribution to part-fund new development projects. However, under the new framework, RPs have to demonstrate how they will subsidise the costs themselves from their own financial resources. To help the RPs generate additional financial capacity, they have been given new freedoms and flexibilities by the government in terms of the rent levels they can charge (up to 80 per cent market rent) and the length of tenure they can offer (a minimum of two years). This new model of potentially higher rents and flexible tenancy is known as ‘Affordable Rent’ and is the main housing product supported by HCA funding.
Furthermore, RPs have been given the right, or even encouraged, to also convert properties that they are re-letting to the new Affordable Rent model. Whether you agree or disagree with this approach, it is clear the aim is to reduce the need for capital grants from the government by allowing RPs to raise additional revenue themselves by increasing rent levels. However, as usual with new initiatives, it has not proved as straightforward for all RPs as one would hope.
Let’s start by considering funding and treasury issues. Some RPs may need extra funding to support their proposed Affordable Rent development programmes. This however is not as simple as it sounds. For example, we know that there is a reduced supply of funds in the current economy. To secure what funding may be available, RPs are having to pay higher prices and fees. Lenders are also taking a different approach; they are offering short-term commitments of typically five to seven years compared with 25-35 year periods in the past.
The new Affordable Rent model potentially raises covenant issues for RPs and funders. Lower grants mean higher debt per unit. Security cover requirements mean that unencumbered assets will be required to support the borrowing; a lack of unencumbered assets could curtail the programme. It could be claimed that Affordable Rents will generate additional income to support the higher debt per unit and increased borrowing costs, but this is not the case in every area where 80 per cent of market rents is equal to or less than normal social housing rents.
One of the most significant issues is gearing covenants. Gearing is normally defined as the ratio of grant plus reserves to debt. Clearly, lower grants per unit means higher debt and the gearing position rises exponentially. Should the gearing covenant be breached, it is a default event and will trigger the potential re-pricing of loans with an impact on income and expenditure.
RPs have also struggled to balance the aims of operating a financially-viable business with a proactive development programme and operating as a landlord with a social purpose. While it is not impossible to do both, some RPs and particularly those with a high tenant representation on their boards find converting re-lets to Affordable Rent uncomfortable.
Now the deadline has passed, the HCA will be considering and analysing the offers they have received from RPs. It is likely that the offers will vary in size in terms of numbers of units to be provided but also in terms of the level of grant required per unit. It is expected that the majority of RPs’ offers will comprise new developments in the South of the country as this is where the Affordable Rent model will generate higher additional financial capacity because market rents are generally higher than in the North.
It will be interesting to see the level and type of bids received in relation to numbers of units to be provided, grant required per unit and geographical spread of the new units to be funded and delivered. It is clear that some RPs are concerned that the potentially higher rents that can be charged under Affordable Rent will result in an increase in voids and rent arrears and if this risk is realised, it may have an effect on their loan covenants with their funders, resulting in re-pricing at a higher cost.
RPs want to be seen to have a ‘seat at the table’ and will therefore want to maintain relationships with the HCA by submitting offers under the framework. However, their approach may well have been to submit conservative offers which will be low and carry manageable risk. As a result, many RPs will have smaller development programmes than in previous years, unless of course there is a quick improvement in the property market which would allow RPs to develop outright sale properties and cross-subsidise development programmes.
What we have noticed is that it is more than the strategic approach that RPs have had to wrestle with. Some RPs have development appraisal models where the software is not suited to this new Affordable Rent tenure. As mentioned above, there is potentially more risk with the Affordable Rent model and RPs need to model different scenarios and sensitivities to assess the possible impact on their development programmes and business plans.
Tribal thinks the challenges have been imposing but not impossible. With the right tools, such as BluTek’s BluBrik development management software, and with knowledgeable and skilful advisors, the challenge of creating and delivering bids that make sense to all the stakeholders can be met and overcome.
Keith Harley is assistant director for government & society at Tribal.
