UK: Delivery Of Affordable Housing – PF2 May Be The Answer

Last Updated: 17 March 2015
Article by Liz Jenkins

The UK is currently experiencing huge population growth: the birth rate is up, there is net migration from overseas, and the population is growing older, as people live longer. The growing population is felt particularly keenly in London and the South- East, which accounts for over 50% of the UK's population growth, with London absorbing about half of that number. With the population growth far outstripping the pace at which new homes are being built, the UK is facing a staggering affordable housing shortage that is only going to intensify.

It is clear that as the economy and population continue to grow, a combination of solutions are required to significantly increase the quantity of housing that is currently being built; in particular housing that is affordable and suitable for the elderly and those with social needs. Some of these solutions are practical and include: accessing more available land, whether publicly or privately owned, encouraging the development of brownfield sites, embracing higher density building in our cities and investing in technology and alternative methods of construction that will deliver faster and cheaper homes. Other solutions involve different financial models and the need to reintroduce PFI or alternative public private partnerships.

Finance is a factor

Ultimately, the demand for housing can only be met with both government funding and private investment. The Treasury has committed GBP 3.3 billion for 165,000 new homes across England over the next three years, and another GBP 3.7 billion through the 'Help to Buy' scheme. The Greater London Authority (GLA) announced there would be GBP 1.25 billion to support the delivery of 42,000 affordable homes between 2015-18, and proposed the creation of a London Housing Bank, with GBP 200 million earmarked for a project to speed up building on large sites.

A limiting factor in local development is finance available to local authorities. With increasing devolution to Scotland, there is growing support for London and other cities to have greater financial autonomy – including local control of Stamp Duty Land Tax, a degree of tax devolution, and local tax assignment – as greater fiscal independence would allow Local Authorities and the cities more flexibility in their approach to creating housing. Local Authorities and NHS Trusts are acutely aware of the need for providing suitable supported housing for the elderly and those with social needs in their area and, using the localism agenda, they are best placed to address this.

In order to finance suitable affordable housing the public sector can help stimulate capital investment by exploiting the inherent value of their asset base. One method of raising debt finance to fund infrastructure has been through using joint venture models or Local Asset Backed Vehicles (LABV), whereby the public sector body sets up a limited liability company along with their private investor, transferring its assets into the joint venture vehicle, whilst the private investor puts up the capital to cover the regeneration costs.

Tax Increment Funding (TIF) is another investment model gaining popularity. It works on the basis that local investment will increase the future tax base, and credit is leveraged against projected revenue. The Local Government Association (LGA) believes it "offers considerable scope for generating growth that would not otherwise happen", where high upfront costs would prevent infrastructure development.

PFI is successful and proven

However, TIF's are used to fund infrastructure from which local businesses can benefit – so this is not a model for developing affordable housing. Equally LABV's or alternative joint venture models rely on the underlying land having a certain value and often require cross subsidy from housing sales to underpin their success. Neither are really suitable for large scale affordable housing requirements in what might be difficult locations or require significant amounts of capital/investment. In this respect, although PFI has fallen out of favour since the financial crisis, it still remains a successful and proven method of procurement of affordable housing.

Manchester, Oldham, Leeds, Salford, Lambeth and others have all achieved large scale regeneration through using PFI credits to underpin the successful delivery of affordable housing in areas which desperately needed this. Prior to the comprehensive spending review in October 2010, there was GBP 1.6 billion of PFI credits available for social housing schemes, which was massively oversubscribed by Local Authorities desperately in need of this money to deliver affordable housing or regenerate large estates in their area.

Currently there are no PFI housing schemes. Those that have closed in the last couple of years have been the few that were allowed to continue post the comprehensive spending review. These included non-HRA Housing schemes such as those in Kent and Stoke, which provided supported social housing for vulnerable people. The Kent Housing scheme established 240 new units providing housing for older people, people with mental health needs and vulnerable/homeless people across five districts in Kent. It was a collaboration between the County Council, responsible for Adult and Social Care Services, and the district councils, responsible for housing; as it enabled small authorities access to PFI procurement, which independently, they would have been unable to access. Without PFI credits or an alternative public-private partnership model, it is unlikely these schemes could have been delivered.

PF2 may be the answer

With the proportion of the population living longer increasing, the need for affordable sheltered housing for older citizens is equally going to increase dramatically. The Government has invested time and effort in analysing the issues with PFI and providing an alternative PF2 model – so why not use PF2 as part of the solution to delivering more affordable housing?

Solving the affordable housing crisis for the elderly and vulnerable requires a mixture of approaches and the ability for the public and private sector to work together to finance and deliver significantly higher levels of suitable housing. The PFI/PPP model has been successfully used and may still be the best answer to avoid or mitigate this growing crisis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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