In March 2014 David Isaacson and Jonathan Turner commented on Housing Revenue Account reform, exploring whether using a Housing Development Vehicle was an answer to meeting long term housing needs (click here for the March alert). We followed this up with a well-attended and thought provoking seminar in London on Housing Development Vehicles.
Whilst our experience in recent months is that an ever increasing number of local authorities are setting up Housing Development Vehicles, from our engagement with the wider housing market-place we know there are other delivery routes that ought to be considered as part of any options appraisal – either on their own or in conjunction with a Housing Delivery Vehicle.
One such route is to source funding for a housing delivery programme from Pension Fund Investment. This article is a short summary from one such institutional investor on how they could support a delivery programme.
Long Harbour – Institutional Investment
Long Harbour is an alternative asset manager founded in 2009 and based in London. We work on regeneration schemes with the public sector, providing financing for the delivery of units on their land. These aim to be self-financing using the rents generated over the lease term. Fusing extensive project management, real estate development and structured finance expertise, our team delivers local authority-led projects, working in partnership with the public sector and construction contractors resulting in ring-fenced solutions requiring no capital outlay from councils.
Long Harbour offers local authorities tailored finance and project delivery management skills to facilitate the ‘affordable’ rent bracket within social housing developments that either directly fulfill a proportion of the acute and current need, or allow improved management of the movement of housing revenue account tenants into alternative accommodation that can support intermediate rent level, freeing pure social units.
Long Harbour seeks to fund 100% of the project costs in return for guaranteed lease payments from the local authority. The authority owns and operates the units throughout the lease period, so any surplus after the payment of the lease and operating costs is for the benefit of the council. Our return is purely taken through the lease payments and is fixed at financial close – we would have no access to project upside.
We see the lease payments as being secured in three ways:
- Through conservative cost, void and bad debt assumptions, we are satisfied that the project generates sufficient free cash flow, after deduction of voids/bad debts and payment of all operating costs to adequately cover payments to Long Harbour.
- The discount to open market rent included in the model forms a buffer which the council can utilise should economic circumstances change during the lease payments. Therefore the greater the discount, the more secure the lease payments.
- Finally the project is underpinned by the local authority covenant.
As a result of the above security we are able to offer highly competitive funding rates, however a condition of our funding is that projects are structured to be truly self-financing such that the authority’s covenant should never be called upon. With this in mind we establish the maximum capital commitment based on a blended rental income of circa 75% of open market rent.
Case Study: Barking and Dagenham
- Long Harbour has now completed a 477 unit scheme in East London on brownfield land.
- The team reached financial close within ten months of first introduction.
- Delivered ahead of time and on budget, it won national and international acclaim from the Partnerships Bulletin for ‘Best Alternative Deal Structure’ and the Municipal Journal for ‘Innovation in Finance’.
- Amongst other publications, it has been profiled in Inside Housing and Time Out. The latter praised it for creating ‘council managed housing that looks anything but.’
- The units are now occupied and let to local people at between fifty to eighty per cent of market rents.
- The scheme was totally driven by the requirements of the local authority and they remain responsible for its management and operation.
- The scheme consists of 311 terraced family houses of between two and four bedrooms and 166 apartments in a ten storey tower.
More on Long Harbour is available on their website at www.longharbour.co.uk
Please contact us so we can help you deliver your plans
We have up to date experience advising on the practical steps involved in setting up a housing development vehicle and advising on structuring and delivering housing projects. We would be happy to meet up with you and share our experiences with you. If you would like to set up a meeting to discuss in more detail, please contact us.