A new development model combines revenue from rents and sales with income generated through renewable energy technologies. Anna Cook explains
A not-for-profit development company is in discussion with a number of social landlords and local authorities across Wales and the south west of England to build social rented homes through an innovative funding model.
The organisation, Community Development Capital (CDC), has been busy working with local authorities and housing associations demonstrating its development model, which combines revenue from social rents and sales with income generated through renewable technologies, to fund the development of social rented homes via off balance sheet funding.
The development company is a joint venture between Warm Wales Cymru Gynnes (WWCG) and the Building Research Establishment (BRE). As a community interest company, WWCG, through its work addressing fuel poverty and retrofit with social landlords allows it to understand the demands on housing providers. BRE is a charitable building assessment organisation and so the partners are ideally positioned to bring their extensive experience and strengths to the projects.
The model is available to local authorities, registered social landlords and private developers to build affordable, energy efficient homes. In line with Welsh Government thinking on mutuals and cooperatives it is underpinned by the idea that it is the ‘community’ which can benefit from these developments and not just the developers and investors, as was often the case with the Private Finance Initiative.
There is restricted social housing grant available through Welsh Government at present but the primary benefit of this model is that no social housing grant is required. This is achieved by working directly with clients, stripping out developer profit, at approximately 15 per cent, and capitalising on energy savings benefits. In effect, this cost-effective procurement route takes advantage of a cross-subsidy from energy savings and incentives to fill funding gaps. It involves modelling a sensible blend of mixed tenure housing and renewable energy benefits, which can include both on and off site cash generation. The funding model is highly flexible and can be used to develop not only new build schemes but refurbishment, retrofit and remodelling schemes. It also takes advantage of Energy Company Obligation (ECO) grant on refurbishment projects and applies equally to vacant property partnerships. Through the scheme, landlords contribute
land or buildings into a special purpose vehicle established to develop the homes – and, unlike other schemes, the RSL takes 100 per cent of the development value at the end of the lease. WWCG then works out a model using a combination of cross-subsidy from different tenures and income from renewables owned by an energy supply company (ESCO). The ESCO generates income from a combination of the feed-in tariff and the renewable heat incentive. Residents benefit from energy costs at 10 per cent below the best available market rate.
‘This makes a huge difference and it is why we are generating high levels of interest, as many funding models take a large percentage of the remaining asset and have unattractive inflation allowances,’ says Craig Anderson, development director of Community Development Capital, part of Warm Wales Cymru Gynnes – a community interest company set up in 2004 to regenerate communities and help eradicate fuel poverty. ‘Our funding model is robust, prudent and transparent, clearly demonstrating all cost assumptions. It is framed entirely from the user perspective and is developed in true partnership.’
At the end of the period of the loan, the ownership of the remaining properties transfers to the landlord and the ESCO continues to provide fuel at 10 per cent below open market rates for residents. In this way the model delivers both affordable and sustainable homes, and also addresses the fuel poverty issues faced by many social housing tenants.
Workshops are offered to potential customers where the financial model is demonstrated in detail. The model is not prescriptive and client teams actively participate in all aspects of the data input and development. In this way landlords have a full understanding of the model and the way the scheme will be delivered. The model is completely transparent on an open-book basis, with all costs detailed, including the on-costs element of the build.
Technical assessments of the scheme are carried out by BRE and funders then uses investment from life and pension companies to provide 30-year loans to repay the development costs. Investors in the model/ESCO, which comprise landlords, residents and other investors, receive a return which is agreed and stipulated in the model at the outset. The landlord receives a management fee to maintain and administer the properties, which is well within Welsh Assembly guideline levels. Schemes in more advanced levels of discussion currently range from 14 homes though to 245 – the most advanced being a 78-home development.
Explaining the model, Phil Roberts, executive board member of Warm Wales Cymru Gynnes, says: ‘The principle is to deliver as many social rented homes as possible from a scheme. We are taking out any development profit from the process, making a significant difference to the viability of schemes.’
Anna Cook is the CDC funding specialist. For further details, visit warmwales.org.uk, tel: 01639 825960, twitter @warmwales