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International Models for Affordable Housing: Lessons from the United Kingdom
The Euromoney Egypt Housing Finance Conference - 25 May 2009
Trowers & Hamlins LLP Sceptre Court 40 Tower Hill London EC3N 4DXt +44 (0)20 7423 8000 f +44 (0)20 7423 8001 www.trowers.com
contact Tonia Secker (London) Sara Hinton (Cairo)e [email protected] e [email protected]
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Introduction■ What is affordable housing – the UK view?
■ Who delivers it?
■ What are we trying to achieve with new affordable housing?
■ Delivery models for new build affordable housing
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What is Affordable Housing?
■Low cost rental accommodation■ available for rent
■ sub market levels
■ made available to people whose needs are not adequately served by the commercial housing market
■ Low cost home ownership accommodation■ occupied on shared ownership/shared equity basis
■ made available to people whose needs are not adequately served by the commercial housing market
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Key requirements for delivery in the UK■ Long terms affordable housing use
■ Sustainability of design and construction
■ Regional fit
■ Sub-market rents and controls
■ Security of tenure
■ Move towards investment return on public sector subsidy
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Newbuild Affordable Housing delivery models
■ Recognition that State subsidy is necessary – unless rent levels are high
■ Gap between the costs of construction and ongoing maintenance and the level of associated debt which can be serviced by the rental income
■ Models which balance subsidy and private finance
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Delivery Models
■ Capital subsidy – short term payment
■ Private Public Partnerships – revenue payment over long term
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Capital Subsidy
■ National competition – operated by Government agency
■ Pot of available subsidy
■ Bid for grant – contribution towards acquisition and construction costs
■ Assessment against criteria
■ £2.7 billion allocated 2008/2009
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Basic Structure
Local Authority
Bank
Manager
HCA
Government
Tenants
DeveloperTenancy
Agreement
Loan
Direct Agreement
Grant Agreement
Management Agreement
RentchargeNominatio
ns
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Key Contract Characteristics – Construction Phase (1)
■ Base design and quality standards
■ Payment in 2 tranches – security required for 1st tranche
■ Payments linked to satisfaction of conditions and milestones
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Key Contract Characteristics – Construction Phase (2)■ Restrictions on disposals
■ Recovery grounds for default
■ Independent certification of works
■ Certification of final costs
■ Reporting obligations
■ Certainty for developer and State
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Key Contract Characteristics – Operational Phase (1)
■ Affordable housing use
■ Approved form of tenancy
■ Services Specification
■ Restrictions on rent levels – limited to an index
■ Restrictions on power to dispose of land
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Key Contract Characteristics – Operational Phase (2)
■ Rights against the land on default
■ Clawback of grant on disposals
■ Right to acquire
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Housing - PPP
■ State specifies in outline terms what it requires
■ Private sector consortia will then bid to deliver it
■ State gains use of an asset before it has fully paid for it
■ Private sector borrowing funds development; payment runs from practical completion
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Loan Agreement
Municipality
BankShareholders
Landlord
Residents
Direct Agreement
Project Agreement
SubcontractorsTenancies
and Leases
Cou
ncil
Dire
ct A
gree
men
ts
Equity SPV
SubcontractsRents
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Housing PPP - Development Phase
■ Clear specification
■ Defined delivery dates
■ Independent certification of practical completion
■ Consequences of late delivery
■ Monitoring
■ Funder step in
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Housing PPP
Payment flows when housing is operational:Government
Occupants
Funder
Project Company Shareholders
Subcontractor providing maintenance
and management
Payments for operation of housing subject to performance criteria
Repayment of finance
Equity Return
Contract paymentsLandlord
Project Company
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Housing PPP – Operational Phase (1)
■ Clear specification
■ Monthly payments to SPV – subject to performance
■ Availability deductions – only paid for “available” housing
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Housing PPP – Operational Phase (2)
■ Performance deductions
■ Catastrophic events – insurance
■ Who covers the risk of empty houses?
■ Termination for material failure – compensation
■ Funder step in to avoid termination
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Housing PPP – Longterm Ownership of Asset■ Who gets the housing at the end of the project?
■ State option
■ Landlord obligation
■ Key is total debt repayment
■ If no outstanding debt?