Agenda item

(Director Communities) To consider the attached report (FPM-027-2016/17).

The Director of Communities reported that, in April 2014, the Council Housebuilding Cabinet Committee had reviewed the resources available for the Council’s Housebuilding Programme and options available for expanding and accelerating the programme. Members noted that one of the drivers for the review had been the increasing amount of one-for-one replacement Right to Buy (RTB) capital receipts (141 Receipts) that were accumulating and which needed to be spent if the Council was to avoid paying over such receipts to the Government. The Committee was advised that the Cabinet had subsequently decided to:

 

·                 increase the number of affordable homes developed in Phases 3-6 of the programme from 20 to 30 per year;

·                 extend, in principle, the programme by a further 4 years to 10 years with an additional 30 new affordable homes provided each year;

·                 make no decision on the most appropriate way of funding an extended Housebuilding Programme, but that consideration be given at an appropriate time in the future, and before any commitments are made or expenditure incurred;

·                 seek grant funding from the Homes and Communities Agency (HCA), initially, for Phase 2 of the Housebuilding Programme at Burton Road, Loughton; and

·                 re-profile the Council’s HRA Self-Financing Reserve, in order to release funds for the Housebuilding Programme in earlier years of the HRA Business Plan, by increasing contributions to the reserve in later years, whilst ensuring that sufficient resources have been accumulated within the Reserve to repay the first loan on maturity; and

·                 develop a contingency plan to purchase properties from the open market, should the amount of 141 Receipts still be in excess of the maximum amount that can be spent on the Housebuilding Programme, in order to avoid having to pass any 141 Receipts to the Government, with interest.

 

Members were reminded that, in September 2015, the Committee had considered a report on the options available to ensure that the HRA did not fall into deficit, as a result of the Government’s requirement that all social landlords reduce rents by 1% per annum for four years from April 2016. The estimated loss in rental income to the HRA had been assessed at that time at around £14m over the following four years and around £228m over the following 30 years and the Committee had considered a number of options to recast the HRA Financial Plan for the future, including:

 

·                 ceasing some or all of the funding currently available within the Financial Plan for future housing improvements and service enhancements for HRA services;

·                 reducing investment in improvements to the Council’s housing stock and reducing the Council’s Modern Home Standard accordingly;

·                 reducing/ceasing the Housebuilding Programme; and

·                 further borrowing for the HRA, repaid by the end of the Financial Plan period.

 

The Director of Communities reported that the Committee had concluded that, since no immediate corrective action was required at that time, no major decisions should be made to re-cast the HRA Financial Plan until further information became available on the effect of the Government’s separate proposal to require the sale of higher value void properties. The Committee had also agreed that the HRA Financial Plan and the options available should be reviewed again, once the financial implications for the Council of the requirement to sell higher value void properties were known, and that decisions for the future should be made at that time.

 

The Committee noted that the current position with the Housebuilding Programme was that:

 

·                 Phases 1 and 2 were on site, with the first properties at Phase 1 due to be handed-over in March 2017;

·                 Section 106 affordable properties at Roydon were also on site, with development agreements signed with the developer;

·                 contractors had been appointed for the 34 homes in Phase 3 (Epping, Coopersale and North Weald);

·                 planning permission had been granted for all the development sites in Loughton planned for Phase 4;

·                 planning applications were currently being determined for the sites planned for Phase 5 (Buckhurst Hill); and

·                 planning applications were being submitted and determined for sites planned for Phase 6 (at various locations).

 

The Director of Communities reported that, under the Housing and Planning Act 1996, the Government intended to charge an annual Higher Value Voids Levy funded from the sale of higher value void council properties, calculated individually for each local authority. Members noted that details of how such arrangement would operate were still awaited and that the earliest that the proposed levy would be introduced was during 2018/19.

 

It was reported that, in order to progress with investment decisions for the HRA, the Housing Portfolio Holder had agreed to undertake the further HRA Financial Options Review in two stages, as follows:

 

·                 Stage 1: Based on what the Council knows now – to enable the Cabinet to make decisions on the future of the Council Housebuilding Programme (Phases 4 to 6) and whether or not it wishes to reduce investment in the existing stock from the Council’s Modern Homes Standard back to the Decent Homes Standard; and

·                 Stage 2: If and when a decision is made by the Government on the proposed introduction of the High Value Voids Levy, the implications will be modelled at that time to identify the required actions to mitigate the assessed financial impact.

 

The Director of Communities explained that the Decent Home Standard had been introduced by the Government in 2000 to ensure that all social housing met standards of decency. Members noted that, following the introduction of self-financing for the HRA in 2012, when significant additional financial resources became available to the HRA, the Council had introduced its own Modern Home Standard, which was achieved through the delivery of the thirty-year maintenance programme to ensure that none of the authority’s housing stock had any building components that failed or lacked any reasonable modern facilities or services.

 

The Committee noted that the Council’s HRA Business Planning Consultant, Simon Smith, had been commissioned to undertake the Stage 1 HRA Financial Options Review. Mr. Smith attended the meeting to present the findings arising from his review, which analysed the HRA projections and impact of a range of options.

 

Mr. Smith reported that the financial modelling detailed in his report was based on data from 2015/16, in order to keep the analysis consistent with the reviews undertaken in the latter part of last year. It was noted however, that the modelling had been updated to take account of the following:

 

·                 the latest HRA and capital forecasts for 2016/17;

·                 the proposed HRA and capital budgets for 2017/18

·                 right to buy sales for Quarter 3 and revised estimates for the coming quarters; and

·                 the latest cash forecasts for Phases 1 to 3 and the Section 106 and market purchase acquisitions.

 

Mr. Smith indicated that the key changes between the 2017/18 position that was forecast in October 2016 and the current review were:

 

·                 rental Income was forecast to be lower on account of new build properties for Phases 1 and 2 not coming on stream as quickly as expected and the higher number of right to buys that have occurred/projected;

·                 higher management costs, matched with reduced expenditure to the repairs account (as a result of past erroneous coding);

·                 Repairs Forecast Costs had been increased for voids and planned improvements;

·                 interest charges were lower on account of reductions in the base rate, rather than increases that were previously modelled; and

·                 interest received was lower on account of percentage rates used for the calculations reducing from over 1% to 0.3% - based on latest performance and estimates.

 

The Chairman reported that members of the Communities Select Committee had been invited to attend the meeting in view of the significance of the HRA Financial Options Review for the future strategy of the Housing Revenue Account, the Council Housebuilding Programme and whether the Council continues with implementation of its Modern Homes Standard for existing Council properties. Mr. W. Marshall, the Chairman of the Epping Forest Tenants and Leaseholders Federation and a co-opted member of the Communities Select Committee, presented the views of the Federation with regard to the options considered by the Committee.

 

Option 1: Continuing with the full Housing Building Programme (at least until the completion of Phase 6) and maintaining the Modern Homes Standard for existing Council homes (the current policy)

 

This option would deliver the highest level of affordable housing, whilst maintaining the existing stock at a good standard, higher than that prescribed by Government as a minimum. The option also ensured that the Council maximised the 1-4-1 receipts it had and would gain as a result of increased right to buy sales, without paying any to the government.

 

Members noted that this option was likely to result in a capital shortfall of £30.016m in years 3 to 7 of the HRA Business Plan and that the Council would therefore be unable to achieve the modern standard for its properties during this time, unless the existing ten-year variable HRA loan was re-profiled or additional short term borrowing was undertaken.

 

Option 2: Continuing with the full Housing Building Programme and reverting to the Decent Homes Standard for existing Council homes

 

This option sought to deliver the highest level of affordable housing on identified sites but, in order to assist funding of the Council Housebuilding Programme, the level of investment on existing stock dropped from the Modern Standard to the Government’s minimum Decent Homes Standard.

 

Members noted that this option was likely to result in a capital shortfall of £12.213m in years 3 to 5 of the HRA Business Plan and that the Decent Homes Standard would not be able to be achieved in this timescale, unless the existing ten-year variable HRA loan was re-profiled or additional short term borrowing was undertaken.

 

Option 3: Ceasing the current Housing Building Programme and maintaining a Modern Homes Standard for existing Council homes

 

This option maintained stock investment in line with current plans, but continued the moratorium on the Council Housebuilding Programme and short to medium-term capital budgets.

 

Members noted that this option was likely to result in a capital shortfall of £15.918m in years 4 to 7 of the HRA Business Plan and that the Council would therefore be unable to achieve the modern standard for its properties during this time, unless the existing ten-year variable HRA loan was re-profiled or additional short term borrowing was undertaken.

 

Option 4: Ceasing the current Housing Building Programme and reverting to the Decent Homes Standard for existing Council homes.

 

This option would reduce both expenditure on the new build programme and the capital financing. Members noted that there was no capital shortfall arising from this option.

 

The Director of Communities indicated that it was also necessary for the Committee to formulate detailed recommendations to take forward its preferred option forward.

 

Members were reminded that outline planning permission had been granted in March 2016 for the development of 36 new homes, including 40% (14) affordable homes, at the site of the Council’s Nursery in Pyrles Lane, Loughton. Members considered arrangements for the future acquisition of the affordable homes element of the development, for which the Financial Options

Review Report had demonstrated that sufficient financial resources were available within the Housing Revenue Account, whichever option was chosen.

 

The Committee considered the options identified and the position of each with regard to the availability of 141 Receipts and their usage.

 

Recommended:

 

(1)      That, having had regard to the views of the Epping Forest Tenants and Leaseholders Federation and members of the Communities Select Committee in attendance at the meeting, Option 2 within the Housing Revenue Account Financial Options Review Report prepared by SD Smith Consultancy Ltd (being the continuation of the Council Housebuilding Programme up to at least Phase 6 of the current programme and the reversion to the Government’s Decent Home Standard), be the preferred  option of the Committee;

 

(2)      That the current moratorium on the Council Housebuilding Programme be lifted and that Phases 4-6 of the programme now be undertaken;

 

(3)      That, if possible, the 141 Receipts ‘temporarily’ paid to the Department for Communities and Local Government be recovered as soon as possible, in order to help fund the Housebuilding Programme;

 

(4)      That financial contributions received by the Council from developers through Section 106 Agreements, in lieu of on-site affordable housing provision, continue to be utilised for the Council Housebuilding Programme;

 

(5)      That, in the first instance, tenders be invited to undertake Phase 4 of the Housebuilding Programme;

 

(6)      That the phasing of the Housebuilding Programme be appropriately paced, with an acceptance that, in view of the anticipated continuation of a high rate of 141 Receipts for the foreseeable future, it is likely that some such receipts will still need to be paid to the Government;

 

(7)      That the Council revert to the Government’s Decent Homes Standard as soon as practicably possible, with reduced levels of stock investment, having regard to existing contractual commitments arising from Framework Agreements;

 

(8)      That the Director of Resources report to a future meeting of the Committee on the most appropriate way to arrange the required additional Housing Revenue Account borrowing;

 

(9)      That, at such time as the Cabinet consider the marketing strategy for the proposed sale of land at the Pyrles Lane Nursery development site in Loughton, consideration be given to whether the proposed sale should be subject to a requirement that the purchaser must enter into a separate Development Agreement with the Council requiring the affordable housing element of the development to be sold to the authority on practical completion, and how this could best be practically achieved; and

 

(10)   That SD Smith Consultancy Ltd be requested to undertake the Stage 2 of the Housing Revenue Account Financial Options Review at such time as a decision is made by the Government on the proposed introduction of the High Value Voids Levy, and that the review report be considered by the Committee in order to consider the issues, implications and action required to mitigate the assessed financial impact.

 

Reasons for Decision

 

The Cabinet had previously agreed recommendations of the Council Housebuilding Cabinet Committee for the expansion and acceleration of the Housebuilding Programme. In September 2015, the Finance and Performance Management Cabinet Committee had undertaken a review of the options to ensure that the Housing Revenue Account (HRA) did not fall into deficit as a result of the requirement that social landlords reduce rents by 1% per annum for four years from April 2016. At that time, the Committee had concluded that no major decisions should be taken until further information was available on the effect of the proposed requirement that local authorities must sell higher value void properties, but that the options be reviewed again once the financial implications of this Government proposal were known.

 

The Housing Portfolio Holder had decided to undertake the HRA Financial Options Review in two stages, with Stage 1 based on the currently available information, to enable decisions to be

made on the future of the Housebuilding Programme (Phases 4 to 6) and whether the Council wished to reduce investment in the existing housing stock back to the Decent Homes Standard. It was not possible to fund the Council’s current policy to both undertake the Housebuilding Programme and maintain existing properties to the Modern Homes Standard, without reviewing borrowing requirements and/or reducing capital expenditure, so it was necessary to review the options available and make decisions for the future.

 

Other Options Considered and Rejected:

 

All available options were set out in the Stage 1 HRA Financial Options Review Report considered by the Committee. The following options were considered and rejected:

 

Option 1: Continuing with the full Housing Building Programme (at least until the completion of Phase 6) and maintaining the Modern Homes Standard for existing Council homes (the current policy)

 

Option 3: Ceasing the current Housing Building Programme and maintaining a Modern Homes Standard for existing Council homes

 

Option 4: Ceasing the current Housing Building Programme and reverting to the Decent Homes Standard for existing Council homes.