Local Authority concerns that a relaxation of section 106 agreements* could render social housing unaffordable illustrate the viability of real estate investment trusts.
Houses4Homes, which will shortly launch the UK's first residential REIT to provide finance for up to £700m of social, supported and extra care accommodation cited Dame Ruddoch's statement at Ministerial Questions to the Department for Communities and Local Government on Monday 17th September, when she said that without section 106 payments the social housing that would be built in her area would be too costly for the local population.
Phil Shanks, chief executive of Houses4Homes, said: "The government has a number of new proposals aimed at boosting building for the joint benefits of increased social housing and the creation of new jobs. In the process they seemed to have abandoned affordability. Affordability means to a maximum of 80% of market rent (HCA) but as our research has shown this rather crude measure is no help at all.
"For many inner city areas especially London market rents are extraordinarily high and even at 80% are out of reach of most ordinary working people. Coupled with this, development costs in those areas are high and any development with no form of subsidy will struggle to provide housing at market rent, never mind really affordable rent.
"Although relaxation of s106 makes sense from a delivery point of view, the withdrawal actually puts the new housing developments out of the reach of those who need it most."
Phil adds that this means that local authorities will have to look to their own dwindling resources to subsidise affordable housing development, in both cash and land.
"These resources are finite and need to deployed with great care. This is where the real power of the REIT lies. Not only does it provide finance at rates better than the large scale housing providers but it works seamlessly with other funding sources.
"Because a REIT can issue two classes of shares; ordinary dividend bearing shares and preference non dividend bearing shares, a local authority can inject the funds into a scheme to achieve affordable rent and at the same time retain ultimate possession of the value of the resources that it has contributed.
"When a particular need has trended out the site can be disposed of and all stakeholders, private and state, get their money back. That then protects the public fund from the unjust enrichment of the current grant system, while providing the means to meet future need."
*Section 106 payments are a contribution that a developer has to make as part of its planning consent. The object is to roll this payment into the delivery of affordable housing. Every development is expected to contribute a section 106 payment even where it is in itself a social housing provision.