Removal of the HRA debt cap – is there still a role for the Local Housing Company model?
With the removal of the Housing Revenue Account (HRA) debt cap for local authorities (something that Scott Dorling and Ian Doolittle wrote about in the last edition of Quarterly Housing Update), questions have been raised about the longevity of the Local Housing Company (LHC) model, not least because the LHC model was devised to a large extent, as a means of allowing local authorities to develop new housing outside of the constraints of the HRA regime.
Whilst it is clear that the removal of the debt cap will make some LHCs moribund, recent months have demonstrated to us that there remains real interest in the LHC model and that for those authorities that have established (or are in the process of establishing) LHCs there are significant development and acquisition projects that will still be delivered by LHCs and notwithstanding the removal of the HRA debt cap. There are three principal models that seem to be emerging for LHCs.
1. Market sale model
A significant number of LHCs remain solely focused on the delivery of housing for market sale, either as a means of producing a financial return for the local authority in its own right or (perhaps more frequently) as a means of providing a degree of cross subsidy for affordable housing elsewhere on a development.
For some authorities with a focus on the generation of capital receipts from development for sale, the LHC has morphed into the entry point for local authorities into joint venture structures (either with housebuilders or housing associations) and this is a trend that we expect to see continued.
2. Market rent model
There remain many LHCs whose remit remains to focus on a market rent product, especially in the context of the need for local authorities to become financially selfsufficient from next year (and for most local authorities the revenue generation of a housing company providing a rental product is more important than producing capital receipts via a sales programme). 5 Spring 2019
3. The "squeezed middle" model
Perhaps the most interesting model is the emergence of an LHC rental model which looks to address unmet housing need which sits between the mainstream general needs and a market rent product (in other words what politicians might well describe as the “squeezed middle”).
This might be exemplified in some areas by a focus on key worker accommodation; elsewhere it might be focused on workers in low paid (perhaps unstable) employment but in either case, focused on people who cannot afford a market rent but who not sufficiently in “need” to find themselves close to the allocation of “traditional” council housing or nomination to a housing association property.
Some groundbreaking work is likely to emerge here as authorities look to develop flexible rent products and use the freedoms of the company structure to enable the implementation of a “living rent” product. The use of a company structure for this sort of approach is something that is likely to become ever more important with the advent of the new Rent Standard and for the first time the regulation of local authority rent by the Regulator of Social Housing and with that, difficulty in being able to operate an intermediate rent product within a council's HRA.
It may come to pass that one of the (perhaps unintended) consequences of the removal of the HRA debt cap will be an (arguably much needed) greater clarity of purpose for the LHC model as they no longer seek to be "all things to all people". In particular authorities that have retained stock, whose focus is on delivering housing for a different client group than mainstream general needs affordable housing.
We are likely to see local authorities running a "twin track" approach to housing development, with affordable housing delivery once more being delivered through the HRA and for that development to sit alongside "something else" in an LHC structure.