Hand in hand

With the affordable housing shortage, public sector cut backs and pressure from central government to utilise public land to best economic effect, partnering with the private sector has never been more important, writes Helen Meyler. The best way for the public sector to achieve this does, however, remain a challenge.

Traditional methods, such as conditional development agreements with developers, securing overage if the scheme is ultimately successful, and stock transfers to housing associations are now not generally considered to secure best value for local authorities and both result in local authorities losing ownership and control of their social housing stock.  

The Coalition Government has also set its face against PFI, which is generally accepted by the industry as an overly complex, expensive and time consuming way of delivering new housing.  

Housing is not the only issue at stake though in the current economic climate, and regeneration of town centres and replacement of worn out public facilities will also be a victim of the public sector cuts, unless programmes can be preserved through innovative structuring, using public assets as leverage for private finance.

In this environment, the concept of Local Housing Companies (LHCs) and Local Asset Backed Delivery Vehicles (LABDVs), promoted in a green paper in 2007 by English Partnerships, have once more emerged from the shadows, but a survey conducted by Nabarro suggests that 35% of all local authorities are completely unfamiliar with these structures and there is an overwhelming concern that the structures are too complicated and expensive to launch.  This concern has been exacerbated by the structures being classified by Treasury as "novel, contentious and repercussive".  

Despite the fancy acronyms however, LHCs and LABDVs are no more than joint venture vehicles (either limited companies or limited liability partnerships) owned by the public and private sector on a 50/50 basis, resulting in the public and private sector sharing risk and reward equally.  

Establishing such joint venture vehicles to bring forward major housing schemes and regeneration is not without precedent, but does require the correct resource and understanding on the public sector side and full political support from members.  These joint venture vehicles are not right for every authority, but for those larger, better resourced authorities which can identify a portfolio of assets, a pipeline of regeneration stock and land and suitable partners, they can offer an effective conduit to tap into private sector finance and experience for both housing and regeneration.

The main attractions to the private sector of such a joint venture vehicle are the ability to use public assets to leverage in finance and to secure a long term development bank.  The main attractions to the public sector are the retention of long term involvement and control in the delivery of regeneration and housing on a "side by side" basis, and the retention of profit derived from public assets which can be recycled into future projects.

Some authorities voice concern about putting their land assets into a joint venture vehicle at the bottom of the market; others are concerned that the private housing market may not yet be strong enough to leverage in development finance.  

However, the long term nature of the projects ensure that the public authority will share in the increased value of public assets, and banks and investment companies can recognise the growth potential by securing land within the vehicle at this juncture of the cycle, particularly given the prospect of a shortage of supply in housing stock for some considerable time into the future.  The joint venture partner could be a housing association, the HCA or a developer/contractor.  

The current economic climate has also given rise to the prospect of institutional investors, such as Aviva, Legal & General or other long term investment funds, coming on board as the joint venture partner, and some funds have already shown an interest in investing in long term "affordable" rented housing for the 25 to 35 year age group who do not qualify for social housing but cannot afford a mortgage.  Having an institutional investor within the joint venture vehicle would allow the public sector to benefit from not only the long term investment return, but also the management expertise of the institutional investment partner.  If debt finance continues to be restricted, the public sector should perhaps look to equity markets as a possible source of development finance, and the government backed guarantee offered by public bodies must be attractive to such institutions.

For smaller authorities without a pipeline of land opportunities, structuring long term development arrangements via development agreements and side by side leases remains a perfectly workable option, although care must be taken when procuring the works and services of the private sector so as not to fall foul of the Public Procurement Regulations.

Help is at hand here though through the HCA Delivery Panel, which comprises the majority of the national housebuilders (Persimmon, Barratt, Countryside, Taylor Wimpey, Galliford Try) and contractors.  If the public sector signs up to a partnering agreement with the HCA, it can select a member of the Delivery Panel, who has already been selected by an EU compliant process, and this allows the public sector partner to avoid spending time and resource in repeating the exercise.

These more traditional methods do not however have the attractions or the benefits of long term strategic partnerships with the private sector, working side by side on the board of the JV vehicle, taking a joint and holistic approach to balancing financial, social, physical and economic considerations.

Helen Meyler is a partner at Davies Arnold Cooper.