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Rent rise fears as builders plan to run thousands of affordable homes for profit

Housebuilders are preparing to take on the management of tens of thousands of new affordable homes and run them for a profit, i can reveal.

The news, from lawyers working with some of the country’s biggest developers on the plans, has alarmed tenants and housing experts who believe it will mean higher rents, “mediocre repairs” and corners being cut.

The developers will be expected to meet the same standards as not-for-profit housing associations. But the National Federation of Builders (NFB) head of housing policy Rico Wojtulewicz admitted: “It is an absolutely fair concern that they [builders] wouldn’t do enough for their tenants.”

There are fears that the move will hit some of the poorest and most vulnerable in society. One housing expert is predicting that it will lead to builders switching homes from “social rent” at no more than 50 per cent of market rates, to “affordable rent” which can mean a discount of just 20 per cent.

At least 17 developers have begun consulting lawyers in recent months about setting up their own affordable housing providers with the first ones expected to be up and running within a year, i has learned.

The Home Builders Federation (HBF) says their members are being forced into the unusual step because of a growing new affordable housing crisis revealed by i last month. It has led to thousands of new affordable homes sitting empty and unused for as long as three years because housing associations that can no longer afford to take them on have “shut up shop”.

New affordable homes on Birch Meadow, Battenhall, Worcester, have been empty for more than two years because the developer has been unable to find a housing association to take them on Image via writer Keith Cooper
New affordable homes on Birch Meadow, Battenhall, Worcester, have been empty for more than two years because the developer has been unable to find a housing association to take them on

As a result some councils and developers have begun to switch these “Section 106” homes, built as a condition of wider planning deals, away from the affordable rental market towards home ownership models.

Now builders, who have seen entire developments held up by their inability to find landlords for the affordable homes they are required to build, want to start running rental housing themselves.

Suzanne Muna, co-founder of Social Housing Action Campaign, a network of housing workers, activists, and tenants, said the idea of housebuilders setting up for-profits was “absolutely going in the wrong direction”.

“Allowing construction firms to set up social housing arms will only magnify the problems of poor service and normalise the profit motive we are already seeing in the social housing sector,” she said. “They are profit-driven builders… they won’t care about keeping rent levels or service charges at affordable levels.”

Stuart Hodkinson, an associate professor in urban geography at the University of Leeds who studies the privatisation of state housing, predicts that builders will seek to “maximise the capital they can claw back” by switching the cheaper social rental homes to higher cost “affordable” rentals which are out of reach of most homeless families.

How affordable housing providers could double their rent

While registered affordable housing providers annual social rent rises are capped by government – this year the limit was 7.7 per cent – a switch from social to affordable rent could yield far bigger increases.

Research has found that in some areas “affordable” rents are more than double the social rent charged for equivalent properties.

While section 106 deals can include legal restriction on making such changes, cash-strapped councils are less able to check what happens to the affordable homes once they’re built, according to Stuart Hodkinson, from the University of Leeds.

The London borough of Southwark admitted in 2022 that it was “missing” a number of affordable homes pledged by developers in section 106 deals and had tightened its checks on them as a result. 

The council investigated a dozen cases in 2022-23 where types of homes built under section 106 did not match those promised in the agreement. In many cases, homes were being let at the a more costly “affordable” rent rather than the social rates specified in the agreement

Helen Dennis, its cabinet member for new homes told i this week that safeguarding the supply of social rent homes was an “absolute priority given the immense housing need” but that the investigations were expensive. “We will definitely need to think more about how these checks and investigations are funded.”

The NFB and HBF did not respond directly to the claims that their members running affordable housing would lead to higher rents. But they have said their members would be bound by the Section 106 planning agreements.

The Government’s Regulator of Social Housing says it will take action if social rent rise caps are breached. But it would not be able to stop rises in “affordable” rents so long as they do not exceed 80 per cent of the market rate.

Lawyers and housing consultants have told i they are helping 12 private developers to register affordable housing providers and advising more which are considering the move.

“We are working with a dozen or so private developers which are looking to establish their own for-profit registered providers,” said Rob Beiley, partner at international law firm Trowers & Hamlins. “They represent the complete spectrum of housebuilders from some of the biggest developers in the country through to major regional players.”

Andrew Cowan, a consultant at law firm Devonshires, said housebuilders which had been talking about registering affordable housing arms for years are now “closer to pulling the trigger” to set up registered affordable housing arms and wanted them in place “as soon as possible”.

“This is being driven by the lack of housing associations willing to take on Section 106 homes but also the realisation that they can do it,” he said.

i has learned that the scramble to find a quick solution has triggered an unregulated trade in “dormant” state-registered affordable housing providers.

Described as “ridiculous” by one observer, it means asking prices for such shell companies, including one with no staff or assets, are now hitting the £1m mark, according to several sources (see box below).

‘Ridiculous’ trade in shell affordable housing companies

Because registering a provider with the Government’s Regulator of Social Housing can take as long as year, some firms are seeking to buy existing registered providers that have been left dormant and largely unused by their owners.

“It’s a limited market and because of the scarcity, the prices for acquisition are going up,” said housing consultant Greg Campbell.”

A source familiar with one deal told i: “There have been absolutely ridiculous prices quoted for an existing organisation that hasn’t done much. It has no staff, no housing stock and no homes in the pipeline. Yet the owners turned down a seven-figure offer because they wanted more.”

A further three sources have confirmed to i that such deals are taking place and that price tags in the millions for providers with no real assets were not uncommon.

The Government’s Regulator of Social Housing said it required its registered affordable housing providers to consult any existing tenants and notify it of sales but had “no veto” to stop them.

The transfer of properties already being lived in may not be a major issue in these deals because more than half of the for-profit affordable housing providers on the regulator’s books have fewer than 100 affordable homes and ten have none.

But the regulator’s deputy chief executive Jonathan Walters said it was “very interested in who owns a for-profit organisation”.

“If a for-profit provider was sold and there was evidence that our standards were not being met under the new arrangements, we would take regulatory action,” he said.

Mr Beiley said building firms were starting a “new wave” of affordable housing providers and they would expect to make a “modest” profit from them.

This would represent a break from the norm in England where the vast majority of country’s 4.1 million affordable homes are managed by some 1,200 housing associations.

These are categorised as “not-for-profit” by the regulator because the money they make from sales or rents goes back into their business. Fewer than 80 of registered affordable housing providers are logged as “for-profits” at the moment and together they own around 20,000 homes.

Dr Hodkinson fears the building firms will treat affordable homes as “assets” to be squeezed for profit.

“Housebuilders have little or no experience of managing social housing and are driven by minimising financial risk to themselves and maximising short-term returns to shareholders,” he said. “They can also be quite ruthless in their pursuit of profit and may skimp on the repairs and maintenance of these homes.”

He added: “Housebuilders will also want a lot more control over the type of tenants in their homes. They won’t want people who are deemed too risky for rental income or tenancy management, such as the homeless, other vulnerable groups or people with unstable employment situations.”

But the builders say they are only stepping in because the decisions by housing associations not to buy Section 106 homes have left them with no choice.

A spokesperson for the HBF, which has a membership including some of the industry’s biggest names that collectively build 80 per cent of new homes in England and Wales, said: “As academics can correctly surmise, house builders do have limited experience managing affordable housing as normally that is the responsibility of other parties.

“Unfortunately, those responsibilities are not currently being met and so to enable desperately needed homes to come forward, builders are looking to find solutions, but in doing so are legally bound by the requirements of the Section 106 agreement.”

Builders prepared to invest to run affordable housing for years

Greg Campbell, a partner at housing consultancy Campbell Tickell, which has advised a third of the existing for-profit affordable housing providers, said there was a “good deal” of interest from private house builders about setting up affordable housing arms.

“We are in discussion with a number of developers and house builders which are interested in setting up a for-profit registered providers and have been approached by five in recent weeks,” he said.

Mr Beiley that building companies were prepared to make long term investments to address the affordable homes crisis. 

“Some see this as a 10-year issue,” he said. “Most of the clients we are talking to are looking to commit some or all of the affordable housing in their pipeline over the next five to six years to their registered providers: that is potentially, tens of thousands of homes over the next five years.”

“But this isn’t an overnight fix,” Mr Beiley added. “It can take over a year for their registration with the Regulator of Social Housing to come through.”

Tenants fear that allowing developers to set up their own affordable housing subsidiaries will give them even more control over an already overheated housing market.

“We need more social homes but the question of who owns and controls them will have a really big impact on the Government’s wider strategy to solve the housing crisis and tackle inequality,” said Michael Deas, coordinator of the London Tenants Union.

He predicts “for-profit housing associations” will lead to “under-investment and cutting corners”. House builders also have a vested interest in keeping their profit margins high and that goes against the interests of those at the sharp end of the housing crisis who urgently need decent homes,” Mr Deas added.

“Giving more power to developers creates a real danger that we start undermining social housing as a whole.”

Fears of ‘mediocre repairs’ and ‘dilapidated’ homes

Ben Jenkins, a housing activist who advises tenants through his Housing Sector website fears developer-run affordable housing providers could “exploit” government funding regimes. “They could take funding and grants to build new homes, do mediocre repairs, then sell the buildings off 10 to 15 years later when they have become dilapidated.”

Joanna Lee-Mills, head of social housing development at law firm Shakespeare Martineau, says managing social housing required “a different mind and skillset compared to private development.“Developers will need to carefully balance their commercial interests with the social objectives inherent in affordable housing provision.”

Mr Wojtulewicz at the NFB, which represents small and medium-sized building firms, said concerns that tenants might not be as well served were “fair”. “Anything that comes forward would have to protect tenants and any concerns they have would have to be mitigated against,” he said. “We will have to make sure that there isn’t bad practice.”

Lawyers advising the housebuilders, however, point out that housebuilders’ registered affordable housing arms would have to meet the same standards as not-for-profit housing associations.

Jonathan Corris, a partner at law firm Devonshires, said he expected housebuilders to be “as concerned as the not-for-profit sector about the state of their stock and the management of it”. “They want to play an important role in supporting the sector as a whole in the investment required to improve the provision of housing,” he said.

The HBF’s executive director David O’Leary said the lack of housing associations in the market to take on affordable housing was a “major and growing problem increasingly threatening affordable and overall housing supply”.

“Establishing a registered a provider is not what developers would wish to be doing but they are left with little option because of the lack of alternatives in the face of an ongoing market failure,” he said. “Any organisation providing such services is required to comply with all relevant legislation and regulations and meet necessary standards in the long-term management of properties.”

The Government’s Regulator of Social Housing said: “We set rigorous standards that all social landlords need to meet, including for-profit landlords. They must be well run, financially viable, and provide safe and decent homes for tenants. We take action when landlords fail to meet the outcomes of our standards.

“We have experts who specialise in the regulation of for-profit providers and understand the complexities of their business structures. We received new powers this year to strengthen our regulation of for profits – including the ability to appoint board members where we have concerns, and see where the money from social housing is going within the wider corporate organisation.

“The Government sets a cap for annual rent increases in social housing, and our rent standard requires them to stay within it. We take action when landlords fail to do so.”

Builders are stepping in because housing associations have ‘shut up shop’

Builders say developments are being delayed because housing associations that used to buy Section 106 affordable homes have now “shut up shop”.

The delivery of affordable homes as part of private developments through Section 106 planning agreements accounted for nearly half of all new affordable homes in 2022/23

But more than half of the 30 top housing associations have now cut or completely stopped buying new Section 106 affordable homes, according to the results of a survey by Savills published in July.

That has left only a “limited pool” of willing purchasers. Three quarters of the associations say that a lack of financial capacity has hit their appetite for these homes.

Two thirds of the associations expect finances to restrict their purchase of Section 106 homes for at least two more years, some say more than five.

Housing associations’ budgets are being squeezed by the collective £6bn bill they face to fix unsafe cladding, according to the National Housing Federation (NHF) that represents them.

They have also had to boost their maintenance budgets by £1.2bn to deal with urgent repairs and rid up to 80,000 of their homes of serious damp and mould problems, according to the government’s Regulator of Social Housing.

Housing associations are also concerned that many homes built under Section 106 are “poor quality” and come with gas boilers which clash with their commitment to providing “low-carbon” homes with more eco-friendly heating systems, the NHF says. 

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