Local authorities are becoming increasingly major players in the housing sector again, stimulated by the powers afforded to them by the General Power of Competence from the 2011 Localism Act and furthermore by the recent lifting of the borrowing cap on the Housing Revenue Account (HRA).
Many local authorities have set up local authority housing companies (LAHCs) to deliver housing that the commercial sector is unable or unwilling to provide but few are actually able to do so. There are more than 170 LAHCs across the country, commercial organisations owned wholly or in part by a local authority, able to buy land, build or manage properties outside the HRA and generate an income stream. With large temporary accommodation expenditure, heavily impacting on local authority diminishing revenue budgets, they do enable councils with or without HRA accounts to meet their varied needs.
But are these companies effective vehicles to delivering affordable housing or a means of raising revenue, are they truly commercial entities or a quasi-part of the public sector, and what is their future now the HRA borrowing cap has been lifted? These were questions addressed recently by a round table debate with London council leads on housing organised by Norse, which knows a little about how to make local authority companies work it is a 30-year- old venture wholly owned by Norfolk CC and the largest local authority trading company in the UK.
The round table was chaired by Lord Gary Porter, chair of the Local Government Association (LGA) who opened the debate with: ‘If you’ve got good housing you’ve got good services because housing is the heart of everything a local authority does and yet it’s still a Cinderella service.’ He added: ‘There are 176 LAHCs across the country and you’ll struggle to find two the same. Some are commercial, some set up to avoid loss of stock due to Right to Buys (RTBs), some to get a slice of the pie the private sector has enjoyed from their land for a long time.’
Setting up an LAHC is a business transformation project requiring a different culture, skills and business acumen. Participants discussed what makes a successful LAHC. There was general agreement that objectives need to be defined first. One participant opened with: ‘You need to decide what you want. What is your objective? What are you trying to achieve? Is it about delivering affordable homes, or socio-economic generation or income generation?’
Another participant felt that politicians and officers alike see housing companies as the vehicles for delivering their differing priorities, adding: ‘We have a housing company, 1000 units, mainly infill. But what is its purpose? I’ve got a housing cabinet member who thinks it’s for affordable housing and a finance member who thinks it’s for income generation.’ Another stressed the importance of good governance, adding: ‘You need to know what you want and also get the governance right. It’s often quite teccy, Councillors and chief officers get excited but to deliver you have to do the groundwork and get the boring stuff sorted, work out where the money’s going etc. The main challenge is delivering the homes, but getting the governance right makes it much easier.’
One participant summed up success as: ‘Get the buy-in from councillors, get the legal and finances sorted, get clarity and get sign-off’ while another said ‘if you set up a housing company you’re not going to get 1000 houses built from day one. You need to manage expectations.’
Keeping it simple was also important, one debater saying ‘the narrower the purpose of the company the more successful it will be’. Sometimes councils are too ambitious. Several participants said LAHCs need to be regarded as small businesses. One commented ‘They are expected to deliver like multi-nationals but the reality is they are just start-ups’. Another added: ‘We have our own local authority housing company. Our mantra is “keep it simple”. It’s effectively a start-up. The first few schemes won’t necessarily be massively profit-making.’
The membership of company boards needs to be right as politicians are not always best placed to be board directors with LAHCs ending up being micro-managed. One participant said: ‘The most successful companies have the freedom to do their own thing. Local authorities should be shareholders, not micro-manage. You need a figurehead for the company and not necessarily a councillor.’ Another agreed, saying: ‘There’s a tension between the council as shareholder and the independent board which if it becomes too independent then the council wants to change it.’ A similar point was made by a housing director who commented: ‘Councillors have got to have trust. They can’t expect decisions to be constantly referred back to them. Risk aversion is an issue. It’s up to officers to be clear to members and manage expectations. Members need to understand what it means to be a shareholder. The right approach is to have members as shareholders but not be on the board.’
Another issue is whether a LAHC is truly a commercial entity or a branch of the authority. Participants maintained it is a hybrid, one saying: ‘Local authorities aren’t trying to compete with private companies – it’s not what a local authority company is for’ while another said that ‘developers may want a 20% rate of return but LAHCs don’t need that sort of rate.’ A housing director added: ‘LAHCs are not the same as private companies. Why are we expecting them to fill the gaps that the private sector can’t and yet expect them to behave the same?’
Yet many LAHCs are set up to generate income which can then be ploughed back into affordable housing. One participant said: ‘There are housing targets to meet. I can do that without a housing company but a company generates income’, while another added: ‘If it hadn’t been for the housing company we’d have another 2% on the council tax as our company can cross subsidise other parts of the council’ and a further comment was ‘lots of councils are doing affordable housing but this may not be the driver as many councils are doing it for income generation.’
The LGA conducted a survey which found 94% of councils owning stock intended to use the new borrowing powers to invest in housing. Will this therefore reduce the need for LAHCs? One participant said ‘getting the borrowing cap removed was a game-changer’ while another asked: ‘If we can deliver what we want through the HRA why go to the expense of setting up a company?’ Another comment was ‘LAHCs were set up to get round HRA rules, make money or because the councils disliked private rented landlords.’
Lord Porter started the debate by saying that housing is still a Cinderella service – but will there ever be a fairytale ending?
The MJ/Norse round table participants
Lord Gary Porter – Chair, Local Government Association (round table chair)
Simon Herse – Chief operating officer (Norse Consulting / NPS)
Marina Robertson – Senior director (Norse Consulting / NPS)
Shifa Mustafa – Executive director of place, Croydon LBC
Mark Baigent – Director of housing and regeneration, Tower of Hamlets LBC
Matthew Essex – Operational director of regeneration and property, Redbridge LBC
Peter Matthew – Strategic director, housing, planning and communities, Hounslow LBC
Ken Jones – Housing advisor, Local Government Association
Marina Pirotta – Director, Public Select Limited
Nick Powell – Divisional director of housing, Harrow LBC
Mairéad Anne Carroll – Programme director, housing, London First
Stephen Pearson – Partner, Freeths
Jennifer Daothong – Assistant director, housing strategy and development, Waltham Forest LBC
For the latest in housing news, including a look at the councils embarking on large-scale housing projects, see The MJ Housing Supplement June 2019