AHP0004

Written evidence submitted by G15

On behalf of the G15, the group of housing associations collectively providing over 650,000 homes across the country, I am responding to the Committee’s call for evidence on Affordable Homes Programmes since 2015. Affordable Homes Programmes play a critical role in enabling housing associations to supply much-needed affordable housing. Despite grant rates which remain low by historical standards, these programmes exert a major influence on the size and tenure mix of our development programmes. Our evidence to the Committee reflects G15 members’ experience engaging with Affordable Homes Programmes since 2015 and outlines areas which might be refined to maximise housing associations’ delivery of affordable housing.

Selection of tenures for which grant is available

A particularly pleasing aspect of more recent Affordable Homes Programmes has been the reinstatement of grant funding for social rent. Almost entirely absent from the 2015-18 programme, grant for the tenure reappeared in the 2016-2021 programme (albeit only in areas of “high affordability pressure”) and has also been made available through the 2021-26 programme. This has allowed G15 members to deliver a greater number of truly affordable social rented homes both inside and outside London. Across the country, G15 completions of homes for social rent were up 107% comparing 2020/21 and 2021/22, while starts of the tenure were up 38%[1]. Funding for social rent needs to be included and increased in future Programmes to meet the significant backlog of need for genuinely affordable housing.

Additionality of Government investment

Research by Savills on behalf of the G15, National Housing Federation and Homes for the North[2] has demonstrated grant allocated through Affordable Homes Programmes does not displace or crowd out homes that would otherwise be built by the private sector. Appraisal guidance employed by the Department has historically assumed supply-focused interventions are likely to have additionality of between 50% and 100%. That is, in the worst-case-scenario, one in two homes built with Government grant might otherwise have been built by the private sector. Savill’s research showed that, provided there is adequate land, development management and construction capacity, grant funding should have additionality of close to 100%. Thus, under the right conditions, grant issued through Affordable Homes Programmes results in the provision of genuinely additional affordable housing.

A call for the adoption of 10-year programmes

Post-2015 Affordable Homes Programmes have continued the practice of allocating Government capital grant subsidy for the provision of affordable housing on a short-term basis. Like their predecessors, the 2015-18, 2016-21 and 2021-26 programmes have lasted (or will last) for three to five years. These short-term funding cycles offer housing associations only limited certainty over future grant funding, especially as successive Programmes continue to vary widely in terms of their overall funding, grant rates and the selection of tenures for which grant is available.

Double or Quits[3], published by UCL in September 2020 with input from several G15 members, demonstrated how this unpredictability has impacted on housing associations’ delivery of affordable homes. Amongst other things, it has affected associations’ land purchasing behaviours, the nature of sites they have taken forward and their ability to collaborate with others. This has been reflected in pronounced peaks and troughs in delivery, with completions skewed towards the end of programmes. These irregular build patterns have had knock-on consequences for development costs,build-quality and the productivity of the housebuilding industry.

A move to longer-term funding, specifically doubling the duration of Affordable Homes Programmes from five years to ten, would address many of these problems. If administered flexibly and accompanied by adequate grant rates across a variety of tenures, 10-year funding deals could have a transformative effect on housing associations’ development capacity. Specifically, they would enable housing associations to:

• Build up longer and more consistent pipelines of development sites, thereby avoiding pronounced peaks and troughs in delivery
• Purchase more sites without planning permission and use the savings on land price to supply greater levels of affordable housing
• Take on larger and more complex sites, increasing the proportion of affordable homes delivered and the pace of delivery
• Accelerate a move away from acquiring homes from private developers through section 106 deals towards land-led development, thereby making the most of their place-making skills
• Intensify existing relationships including through joint ventures and forge new ones with building contractors, local authorities and private developers with benefits for the pace and scale of housebuilding
• Better fulfil their traditional role in continuing to build through housing market downturns (sometimes known as counter-cyclical delivery)

The need to review grant rates

Grant rates (the proportion of total build costs covered by Government capital grant subsidy) have fallen significantly from 75% in the 1990s to a recent low of 12%[4]. Post-2015 Affordable Homes Programmes have arrested and revered this decline, but grant rates remain low by historical standards. G15 members have adapted impressively to lower grant rates by increasing borrowing on private markets, drawing on reserves and generating cross-subsidy from market and shared ownership sales. But there are inherent limits to the degree to which the supply of affordable housing can be funded through these mechanisms, including covenants with lenders limiting the extent of housing associations’ borrowing.

The recent rise in inflation also reveals a shortcoming of fixed grant rates. Above-CPI build-cost inflation[5] has eroded the value of grant awarded through the 2021-26 Programme, meaning housing associations are covering a greater than anticipated proportion of total construction costs. Members report increases in materials and labour costs of between 15-30% in some areas. That at a time of considerable budgetary pressures as expenditure on fire safety and retrofitting grows. In Double or Quits, UCL made the case for a more flexible approach to grant, with rates indexed to a measure of build-cost inflation to safeguard the supply of affordable housing in eras of fluctuating inflation. We would like to see this flexibility trialled through the next Affordable Homes Programme. We would also recommend Government reviews grant rates in light of the likely less-than-expected rise in housing association rents in 2023/24 (and possibly beyond). Below-forecast rental income will reduce housing associations’ development capacity unless grant rates are increased to compensate for lost income.

Increasing application of conditionality

Recent Programmes have introduced new forms of conditionality to the funding of affordable housing. For instance, rented homes built with capital grant subsidy through the 2021-26 Programme are subject to the new model and right to shared ownership. In London, developments of ten or more homes built through the Mayor’s Homes for Londoners Programme 2021-26 must achieve net zero status. These conditions are on top of other requirements such as the introduction of the Future Homes Standard from 2025, which will add at least £5,000[6] to the cost of building a home. To date, G15 members have been able to accommodate these extra conditions/requirements. But with the cost of building new homes rising and housing associations’ already stretched budgets coming under further pressure due to differential inflation, extra Government funding will be necessary to ensure these new forms of conditionality do not jeopardise the supply of affordable housing.

Absence of funding for regeneration

Like their immediate predecessors, post-2015 Programmes have lacked sufficient funding to support residential regeneration. Housing associations are only able to claim grant on additional new units and not replacement units (for which the historic grant level is insufficient to fund replacement). The need to improve stock condition to meet Decent Homes Standards and carbon reduction targets (EPC Band C by for 2030 and Net Zero by 2050) mean an increasing proportion of social housing stock will require wholesale regeneration in the coming years. Besides funding new development, future Programmes will need to fund increased investment in existing homes. 

Reflections on the Strategic Partnerships

Our members’ experience of the strategic partnership models introduced by the GLA and Homes England has been mostly positive. The programme-wide as opposed to scheme-by-scheme approach to grant funding has improved members’ agility in responding to development opportunities and been symptomatic of a more trusting relationship between housing associations and their funding bodies. The more flexible approach to grant drawn down is highly-valued. As is the limited degree of flexibility to switch homes from one tenure to another pre-completion to reflect prevailing market conditions.

Nevertheless, as a relatively new model for funding affordable housing, there are still some areas which might be tweaked to optimise performance. Our Homes England strategic partners have noted officials have sometimes ‘micro-managed’ delivery, seeking a level of detail more befitting of a scheme-by-scheme approach to project management. One noted Homes England’s financial audit has become more onerous with 100% of transactions now requiring scrutiny, including any historic expenditure. The ‘hands-off’ approach to project management promised in the establishment of the strategic partnerships has not always been evident on the ground. There is also a sense Homes England could be more flexible in rules attached to the provision of grant. Housing associations’ development programmes have been subject to many delays over the last few years, first with the widespread disruption associated with Covid-19 and now with spiralling build-cost inflation and contractor insolvencies. Yet, for the most part, Homes England has stuck steadfastly to its grant programme timings, risking forced return of grant rather than its application to deliver affordable homes. More generally, inflexibility over the application of Recycled Capital Grant Funding (RCGF) means that this grant cannot be efficiently applied to schemes and is at risk of having to be returned in some cases

In summary, Affordable Homes Programmes continue to play a critical role in facilitating G15 members’ delivery of much-needed affordable housing. Future Programmes would better facilitate our role in addressing the housing crisis with:

• continued and greater availability of grant funding for social rent
• an increase in duration to 10 years – with increased flexibility over grant rates to reflect prevailing rates of build-cost inflation and other budgetary pressures affecting housing associations
• availability of grant funding for investment in / regeneration of existing homes
• various tweaks to the strategic partner model to maximise flexibility

We look forward to engaging further with the Committee following its call for evidence. Please do not hesitate to contact me if you require further information or if we can be of further assistance.

September 2022