In this chapter, we look in more detail at councils’ rationale for restarting building programmes, provide a picture of the current landscape of council-led housing delivery in London, and evaluate the potential contribution that this could make in the future.

What has driven councils to start building again?

There are two principal motivations behind the renaissance of council housebuilding.

Providing more housing

On the one hand, as suggested in the previous chapter, councils want to create more and better housing in order to both meet local needs and deliver better places. ²⁰ This means creating more affordable housing for local people through affordable and social rented units, ²¹ as well as providing market rental properties – responding to the poor quality of much private rented sector property – and properties for specific groups such as the elderly and homeless. ²²

Creating a financial return for the council

On the other hand, councils are setting up separate companies in order to generate financial returns in the context of austerity and cuts. London local authorities have seen their budgeted service expenditure fall significantly over the last eight years, from £7bn in 2010/11 to £6.3bn for 2017/18 (excluding education and public health). When population growth is accounted for, the fall is even steeper, from a budgeted spend per head of £879 in 2010/11 to £715 in 2017/18 (not accounting for inflation). Some of the largest reductions have come in inner London boroughs, with a fall in spending per capita of 33 per cent ²³ in Newham. ²⁴

How are councils contributing to housing delivery in London?

Spurred by the factors above, councils have adopted a variety of strategies to deliver more housing, shifting from approaches where councils simply sell council land – sometimes underpinned by a development agreement – to approaches where councils retain a long-term stake in development, such as joint ventures, wholly-owned companies and direct delivery. ²⁵ This report focuses on long-term approaches that are council-led (either through an in-house team or through a wholly-owned company) in order to try to assess how much councils can contribute by themselves, and to focus on the issues for councils. A previous Centre for London report looked in more detail at joint ventures with private developers and housing associations. ²⁶

We have undertaken a desktop review of whollyowned council companies and direct delivery initiatives in London, further refining results through a survey of senior housing officers in the 32 London boroughs in March and April 2018. The survey aimed to establish:

• whether councils were undertaking direct housing delivery;

• if so, what the scale of their direct delivery programme was;

• whether they had a wholly-owned company;

• if so, what their ambitions for this company were;

• whether they intended to set up a company in the future

The survey focused on wholly-owned companies aiming to undertake development, rather than companies set up to focus on the management and acquisition of homes. The latter do not provide additional housing, although they can be key in achieving the council’s objectives in providing housing for local people and relieving affordability pressures.

In total, we received responses from 19 boroughs, which are marked with an asterisk in Table 2.

Direct delivery

One approach that councils have taken to deliver their housing and affordable housing programmes is direct delivery – i.e. on-balance-sheet development of public land using in-house teams. ²⁷ Some local authorities have continued to build housing for a number of years using the HRA, their RTB receipts and in-house teams, sometimes in conjunction with a wholly-owned company.

There are currently 14 boroughs that aim to undertake direct delivery within the next five years – with councils such as Hillingdon including provision for this in their budgets, but not having calculated the number of homes they will deliver. Their targets for the next five years add up to approximately 10,900 homes in the pipeline.

Lewisham is an outlier in using an existing “arm’s length management organisation” (ALMO) – Lewisham Homes, which manages the council’s housing stock – as development agent and project manager for Lewisham’s direct delivery programme. This is an approach that may be favoured by other councils in the future. In Richmond’s case, as the council has transferred its social housing stock to housing associations, the approach has been to have a capital programme that supports housing association development.

In light of the recent GLA grant programme to support council housebuilding, and the future possibility for councils to bid for a share of the increase of the HRA borrowing limit (by up to £1 billion) – announced in the Autumn Budget 2017 and to be split equally between London and the rest of England– direct delivery by councils is likely to increase. Table 3 reflects the pilot deals struck under that programme between the Mayor and the Boroughs of Lewisham, Newham, and Waltham Forest. ²⁸

However, this approach is subject to a number of barriers which have in some cases driven the emergence of wholly-owned companies. We will look at these in the next chapter in more detail.

Case study: Hackney Council

In Hackney, private renters have seen rents rise by 20 per cent since 2011. House prices have risen 750 per cent in 20 years – the biggest rise in the country – and nearly 13,000 people are waiting for a council home.

In addition to an estate regeneration scheme undertaken directly by the council, Hackney’s Housing Supply Programme focuses on infill development, aiming to build 500 more new homes on underused council land – with more than 70 per cent for social rent and shared ownership.

Hackney uses a self-funding direct delivery model, where the council builds homes for outright sale, which part-funds the social rent and shared ownership tenures Hackney needs. Hackney has recruited a skilled in-house development team of a similar scale to a large housing association’s. In addition, a separate brand, Hackney Sales, has been set up to sell and manage these homes, reinvesting profit into providing new social housing.

The borough takes a long-term portfolio approach: this means that instead of selling land to commercial housebuilders, the borough retains rent receipts and income, and can reinvest capital receipts. Unviable projects in one part of the borough are subsidised by others elsewhere.

The programme is primarily funded by a mix of prudential borrowing within the Housing Revenue Account borrowing cap, sales receipts from homes built for outright sale, capital investment, and Right to Buy (RTB) receipts. Hackney Council has limited headroom (borrowing capacity) within its HRA, so capital investment is generated by profiling the expenditure and receipts associated with individual projects over a number of years in order to remain within the debt cap. Borrowing is from General Fund balances and Public Works Loan Board loans, but the programme is also funded from receipts from outright sales, first tranche equity sales receipts from shared ownership properties, and RTB receipts.

Hackney estimates that with a modest flex of the Housing Revenue Account borrowing cap and the ability to fully reinvest their RTB receipts, they could build a further 2,000 homes through their current model. They estimate this could save £126 million in temporary accommodation costs, create nearly 9,000 jobs, and bring in nearly £200 million in stamp duty, income tax, corporation tax and council tax receipts to government.

Wholly-owned companies

The Local Government Act 2003 allowed local authorities to set up companies to make a profit, and the Localism Act 2011 further eased restrictions, allowing councils to do what any other company or individual can do, unless explicitly prohibited. ²⁹ Local authority companies can be wholly or partly owned by the council; this report focuses on the former.

In terms of housing, this means that these companies can develop, buy and manage properties within and outside a local authority area. ³⁰ Since then, many councils have set up council companies, supported by both the government-commissioned Elphicke-House Review into the local authority role in housing supply (2015), ³¹ and the Housing White Paper (2017). ³²

In terms of funding, housing companies are capitalised in different ways. Previous research ³³ suggests that the principal sources are loans from the Public Works Loan Board (PWLB), which can be drawn down by councils through prudential borrowing and then lent on to a subsidiary company with an interest rate margin providing a revenue stream to the council; ³⁴ and council equity investment, which is mostly land at market value. Other sources of funding, in addition to councils’ own land and finance, have included commercial borrowing and developer contributions. ²⁹ Although companies can be complex to set up, they can generate long-term financial returns to support council services, and unlike new social housing built through the HRA they are not subject to RTB. ³⁶ A detailed “How To” guide has been published to help councils navigate the financial and legal complexities of setting up companies, and considers options depending on specific council circumstances. ³⁷

How many wholly-owned development companies are there in the capital?

There are currently 17 boroughs that have active wholly-owned development companies, with homes in the pipeline or building underway. This represents a total of 12,700 homes for approximately the next five years. We also received evidence that some boroughs (namely Brent, Hillingdon, Kensington and Chelsea, Redbridge and Southwark) have set up housing companies that are not yet active but could be in the future – depending on the business case and decisions taken by the administrations formed following the May 2018 council elections.

The split between affordable and market housing varies between housing companies. Tower Hamlets decided to set up two distinct companies, one aiming to provide market housing (Seahorse Homes) and the other a community benefit society aiming to deliver affordable housing (Mulberry Housing Society). Greenwich’s Meridian Home Start was converted from a wholly-owned company to a community benefit society in 2014, and is not-for-profit and not council-owned. ³⁷ In Barnet, Opendoor Homes was established as a Registered Provider and wholly-owned subsidiary of Barnet’s established ALMO, Barnet Homes. Finally, some boroughs that are able to pursue direct delivery, such as Hackney and Wandsworth, stated that they didn’t feel a wholly-owned company was required for them to deliver housing.

Case study: Brick by Brick

Brick by Brick was established in 2016 by the London Borough of Croydon as a wholly- owned commercial company aiming to provide a mix of housing in the borough. It aimed to offer high design standards, policy-compliant levels of affordable housing, and commercial returns to the borough as shareholder.

Brick by Brick has a board of four directors, two of whom are nominated by the borough and two of whom are independent appointments. Its core delivery team currently comprises borough employees who are directly commissioned by Brick by Brick, and whose costs are charged to projects. Brick by Brick acquires sites (mainly from the borough) either at their book value, or at a Section 123 compliant residual value identified on the basis of a policy-compliant level of affordable housing delivery.

The company then appoints consultant teams (architects and engineers) and construction contractors (focusing on smaller and local firms where possible) to design and build the schemes. On completion, the company sells units either privately or as shared ownership homes. Affordable rent properties are purchased by Croydon Affordable Homes, an independent charity set up to own and manage affordable housing in the borough.

Brick by Brick has gained planning consent on 40 different sites in the last 12 months or so, and anticipates building 1,050 homes by 2020, of which 479 will be affordable. The first units will be completed in 2018. It is also negotiating land purchases and undertaking design work for a significant pipeline of future sites. A further 218 homes will be built as part of the first phase of the redevelopment of the Cultural Quarter around Fairfield Halls. For these first phases, the projected costs and revenues are as follows:

The borough provides development finance on a commercial basis, secured against assets. It borrows funds where needed from the Public Works Loans Board, though Brick by Brick may also seek other investors in the future. The borough’s returns consist of:

• Land receipts, including for land not previously identified as an asset (estimated to be £1.54m in 2018/19).

• Profit, set at a minimum of 15 per cent of costs for the private elements of schemes – compared to 20 to 25 per cent charged by private developers (estimated to be £9.28m in 2018/19).

• The difference between loan repayments from Brick by Brick and repayments due to PWLB (estimated to be £6.15m in 2018/19).

• The saved costs of staff working in the borough’s development team, whose salaries and on-costs are now counted as part of the capital cost of development (included in working capital, above).

In addition to these returns, Brick by Brick is investing £30 million into the redevelopment of Fairfield Hall, and is providing other workspace and community space within developments. Local people will have exclusive rights to buy new Brick by Brick properties for a limited period, and Brick by Brick report strong interest from local residents in their units for sale.

Brick by Brick considers that it has taken a conservative approach to cost and value inflation over the next five years, but has developed a risk management strategy that could include putting for-sale property into the private rented sector, or leasing it back to the borough to be rented out, in the case of a sustained housing market downturn.

The company has strong support from the current Croydon administration, though the opposition group on the council have said they would review its operations and some local residents have opposed the scale and tenure mix of some developments. Brick by Brick Chief Executive Colm Lacey argues that ultimately, the best guarantor of its survival is the successful delivery of high-quality affordable housing and financial returns to the council as a shareholder. He also has plans to develop new revenue lines such as providing development, design (via in-house architecture practice Common Ground Architecture) and advisory services outside Croydon in future years.

What is the potential for council housebuilding to boost housing delivery in London?

Councils are increasingly ambitious in their housing programmes, and council-led delivery has been growing since 2011, though it still represents a relatively small proportion of housing and affordable housing provision. London’s councils built more than 2,100 homes in 2011-2018, compared to only 70 homes in the preceding
seven years. ³⁹

Data on “starts” for 2016/17 and our survey findings suggest their output could grow considerably, with 12,700 homes planned through wholly-owned companies and 10,900 through direct delivery within the next five years – i.e. a cumulative total of 23,600 homes. Taking the yearly London Plan target of 65,000 new homes and adjusting it over five years, that means a contribution of close to eight per cent towards the targets set for London boroughs. (Key data limitations to be considered are that this is a snapshot of councils’ ambitions as of April/May 2018; and that it remains to be seen how many of these homes will actually be delivered within the next five years.)

Active London boroughs (see Table 5) would meet 10 per cent of London Plan targets on average through council-led approaches. This ranges from around 20 per cent in Newham and Camden, to nearer one per cent for outer London boroughs with smaller programmes and high housing targets such as Havering and Merton (see Figure 2 below).

There is a notable disparity in councils’ delivery plans. However, if every borough were able to match the 10 per cent average delivery of those councils that are building (see Figure 3 below), a total of 37, 300 homes could be delivered across the next five years across London.

The potential is considerable and represents a real step change in the efforts of councils to build more housing in a constrained context. But there remain a number of political and cultural challenges, as well as financial and legal complexities, that prevent councils from increasing housing delivery to its full potential. The next chapter will consider these.