Andrew Lycett, chief executive of RCT Homes, explains progress so far with its development subsidiary and the next steps in its plans for extending affordable housing supply without grant
RCT Homes was established in December 2007. Since that time we have witnessed an unprecedented tightening of credit availability and affordability, reductions to social housing grant, welfare reform and a local authority housing Revenue account settlement. These changes in external environment have led to an increasing need for innovation to increase housing supply. we have also seen the rise of generation Rent, as more are locked out of home ownership, unemployment and energy prices rising. All of these have made establishing and sustaining your own home more challenging.
There is a pressing need for rapid new build activity to provide quality affordable homes to meet this growing need. In response, Wales is leading the way in developing a number of innovative models of which our new development subsidiary, Porthcwlis, is one.
What is RCT Homes seeking to achieve?
RCT Homes wants to make a real difference in regenerating our neighbourhoods. New build brings inward investment and raises aspirations whilst providing housing matched to local needs, for example, to address the impacts of welfare reform. Our WHQS investment and retrofit energy efficiency programmes have delivered a real transformation over the last five years. We wanted our new build activity to make a similar impact but recognised this would be constrained by declining grant levels.
We wanted our new homes to be affordable, achieving Code 4 standards at Code 3 build costs, access long-term finance at competitive rates, reduce development timelines, unlock RSL, public sector and developer land banks whilst removing the reliance on social housing grant. We realised this could only be achieved by gaining economies of scale through a significant sustained investment programme, greater than what we could achieve alone. The board agreed to test the appetite of the market for a large-scale scheme and to seek out potential partners.
What makes the Porthcwlis-Bellerophon model unique?
Development subsidiary Porthcwlis was established in February 2012 to procure an OJEU compliant ‘turnkey’ solution, to enable access by any RSL or local authority across Wales. The approach was intended to provide a complete solution of template house types, development and construction partners and pre-approved institutional finance, all supported by a joint venture legal structure, and legal documentation, straight ‘out of the box’.
The procurement has secured institutional funding of £1 billion, accessible in small tranches unlike a bond issue. There is a costed pattern book of 23, Code 4 compliant house types (many DQR compliant) designed with tenants. Individual schemes are appraised to ensure deliverability of affordable housing without grant using local housing allowance rates to set rent levels. It can deliver, affordable, market and social rent enabling tenure cross-subsidy as well as between sites within a portfolio. All build risk is transferred to the developer. The whole model is fully transferrable to other participants across Wales.
The equity in each joint venture is owned by the developer (in lieu of profit), landowner (in lieu of assessed land value) and operator (in exchange for taking out a 35 year lease), ring fencing their risks and rewards. The model also builds in a number of unique risk management features to offset future financial risks.
Can we achieve our aims?
We are edging forward. We appointed Bellerophon as preferred bidder in July 2012, signing the framework contract in January 2013. Funding is in place, enough to build 11,000 new homes over the next seven years. Welsh Government has been very supportive from ministerial and official levels, including considering revised sector guidance to facilitate the legal structures required, which we hope to be issued soon.
I was delighted to welcome tenants into our first pilot scheme, in Aberdare, of four homes built by Leadbitter in August 2013, enabling us to confirm cost and quality, which is exceptional. One of these units will be held as a show home for the next few months.
The board has just approved the first joint venture for 192 units, costing £18 million and involving no grant. It includes 37 new homes in Aberdare, meeting our ambition to increase supply in RCT. A condition of the model is that sites are introduced with planning approved and are viable at investment and management levels. Valuable lessons learnt about sites, working with local authority partners and board control of this new activity will benefit others.
This first scheme will release the financing for others who are developing their own schemes to follow. Over 7,000 plots have been appraised under the financial model for other potential partners by Bellerophon. We welcome any enquiries about setting up their own JVs under the scheme.
For further information contact Andrew Lycett on 01443 494406 or Andrewl@rcthomes.co.uk