Lifting the cap on borrowing for Housing Revenue Account new build

Contacts

Contacts
For more information please contact:

Jeremy Cookson
07967 720857
jeremy.cookson@capita.co.uk

Ian Green
07973 397774
ian.green@capita.co.uk

Keith Finch
07717 583727
keith.finch@capita.co.uk

The Prime Minister’s announcement at the party conference yesterday to abolish the government-imposed cap on housing revenue account borrowing has been universally welcomed. The removal of the cap does away with an unhelpful and anachronistic control on how UK plc funds new housing. Our expert council housing finance team here at GL Hearn and Capita have produced this insiders’ guide to the announcement and the likely response from MHCLG and councils themselves. It’s also clear that the lifting of the cap will work alongside existing local authority development company vehicles, strengthening and complementing that activity.

 

Background

The introduction of self-financing for the Housing Revenue Account (HRA) in April 2012 was accompanied by a limit on the amount of housing debt that each authority could hold.

The Limit on Indebtedness Determination (as amended), set the maximum amount of housing debt as defined by the HRA Capital Financing Requirement (HRA CFR) as the maximum of:

  • The self-financing valuation for the authority plus any capital financing provided by the authority before 1 April 2012 to support a new build scheme agreed with the Government but not included in the self-financing determinations

  • The closing HRA CFR on 31 March 2012, calculated in accordance with the formula in the Item 8 Credit and Item 8 Debit (General) Determination 2011-2012 Amending Determination and rounded up to the nearest £’000 (inclusive of the settlement payments / receipts).

Annex A to the Limit on Indebtedness Determination defined the calculation of the HRA CFR. Annex B specified the amounts for each local authority.

The intention of the limit was to control public sector borrowing in accordance with Treasury requirements.

In the Autumn Budget for 2017 the Chancellor, Phillip Hammond announced there would be an additional £1bn of borrowing available to local authorities in areas of high affordability pressure.

In this context the Mayor of London issued a prospectus for Building Council Homes for Londoners and the Government issued its “Additional HRA Borrowing Programme” for authorities outside London. Bidding for both was due by the 30th September 2018.

Meanwhile the Government published its Green Paper: “A new deal for social housing” in August 2018 setting out a commitment to build more homes that local people can afford including a new generation of council homes.

As we have previously commented, unlike most investment in public services, social and affordable rented housing generates a long-term income stream and so there is a strong argument that HRA borrowing should be based upon prudential principles rather than the government-imposed cap.

Announcement

On 3 October 2018, Theresa May announced at the Conservative Party Conference that “solving the housing crisis is the biggest domestic policy challenge of our generation” and that “it doesn’t make sense to stop councils from playing their part in solving it”. To reflect this, she announced the scrapping of the Government cap on how much councils can borrow against their HRA assets.

The MHCLG press release states that the HRA borrowing cap for council house building will be lifted. It is not clear if this implies some restriction on borrowing that does not relate to new building.

It is understood that the £1bn additional borrowing headroom (announced in the 2017 Budget and referred to above) was significantly oversubscribed. The Government interpretation being that councils are ready and willing to commit to both large and small scale new building projects to deliver the homes their communities need.

Early indications were that the cap may not be lifted until next year’s spending review and because this will affect Government borrowing may come at the expense of cuts elsewhere. However, the press release goes on to say that the cap will be lifted as soon as possible, with further details confirmed in the forthcoming Budget.

Technical determination changes will also be required.

What does this mean for Councils

Without doubt this is good news for councils wishing to build more homes for social and affordable rent. Until now many councils wishing to invest have been constrained because they have been unable to borrow to meet the net investment costs, after taking account of retained RTB receipts and other available resources.

These councils will be able to borrow more, particularly while interest rates remain low, apply accrued retained RTB receipts, which might otherwise have had to be repaid to government (with interest), absorb the new housing into existing management and estate structures and use the additional net rent income to finance the additional borrowing.

However, depending on a council’s circumstances there may still be a case for establishing a housing company. Although the debt cap has often been a strong motivation for establishing a company there remain other reasons why a company solution might be preferred:

  1. Affordability within the HRA – Following four years of rent reductions many HRAs are struggling to break even and are relying on accrued balances. Additional interest charges associated with increased borrowing may not be affordable and scope to increase income is further limited by the current proposals for regulation of rent. For these councils lifting the debt cap will be of little help.

  2. A company will be able to develop mixed tenure housing, including market rent and market sale housing both to address housing needs across the tenures and to cross subsidise the social rented housing.

  3. A company solution offers the potential for revenue benefits for the Council’s general fund. These may come from:
  • margin on lending by the council to the company
  • spreading the costs of corporate services where SLAs are agreed by the company
  • distributable profits from the company

Against these positive factors there are particular disadvantages with using a housing company. These include corporation tax, stamp duty land tax and capital gains tax. However, to varying degrees these factors can be mitigated through tax efficient corporate structures.

Partnerships with developers, housing associations and other local authorities continue to offer other benefits, including accessing skills and economies of scale as well as sharing risk.

Conclusion

The stated intention is that this move will enable councils to deliver up to 10,000 additional homes per year and also to diversify the house building market with councils being better able to develop sites that might not be sufficiently profitable for private developers.

Local authority representatives have long argued that prudential borrowing for new housing should not be constrained by caps but should be assessed on the basis of value for money and affordability. Lifting the debt caps releases these councils to assess their options without the HRA route being ruled out, not because borrowing wouldn’t be prudent but because of an arbitrary cap.

 

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Unlike most investment in public services, social and affordable rented housing generates a long-term income stream and so there is a strong argument that HRA borrowing should be based upon prudential principles rather than the government-imposed cap.