Estates of insecurity

Bringing private money to inner-city housing requires sacrifices from local councils and better safeguards for investors. By Paul Gosling

Private capital will only transform the worst inner-city estates if central and local government make important sacrifices of principle, according to a new report published by the Joseph Rowntree Foundation. KPMG, the consultants and authors of the report, say that investors may need to take security against councils' best housing stock to safeguard their investments on the worst estates, and be given long-term repayment holidays on transferred stock.

The report, Investing in Urban Housing, examines why large-scale voluntary transfers to housing associations have seldom been achieved in the inner cities. Of 45 transfers, only one has been from an urban authority. All the rest have been in shire districts.

Labour-controlled councils, often in charge of the worst inner-city estates, have resisted losing control of housing stock, wanting estates to remain publicly owned.

And the private sector has been keener to invest in homes that have a ready re-sale value, rather than in estates where homes have little market value and where the right to buy has often been completely ignored.

Local housing companies influenced by councils, but not solely controlled by them, seemed to be a solution acceptable to Labour councils and to the Government.

The driving force behind them, the Chartered Institute of Housing, has argued that the companies should be regarded as bodies outside the public sector, free to borrow without the constraints imposed by the public sector borrowing requirement.

But KPMG believes that the creation of local housing companies will not, in itself, overcome the problems. The consultant says that some of the worst estates will not attract private finance unless big concessions are offered to investors. In particular, lenders will need to be offered effective security.

This might be by allowing investors to have the right to sell the council's best homes if loans cannot otherwise be repaid. Alternatives would include the council offering loan guarantees, or allowing a long- term deferment on capital receipts.

The report has been welcomed by lenders. A spokeswoman for the Council of Mortgage Lenders said the proposals "looked attractive and sensible at first reading, and are all good ways to enhance security."

Douglas Smallwood, assistant general manager of commercial lending at Halifax Building Society, said it would be helpful if local housing companies were given a chance to work in good quality suburban housing stock before they were expected to transform the worst estates.

Mr Smallwood added: "Decent security on higher-quality property is absolutely crucial. We need some security that is relatively attractive in places where people want to live. Then, if necessary, as properties became void we would be able to sell them on the market."

But Jeremy Wood, head of housing and business finance at Nationwide Building Society, said the principle of local housing companies remained flawed.

Although local authorities would only have one third of voting rights on the companies, in practice they would be able to exert enormous influence over them. Lenders needed reassurance that a future change of political control in an authority would not lead to a company becoming hostile to investors.

Key questions remain unanswered, said Mr Wood. "To what extent is the local authority still the controller of the stock of that company? We see the potential for a lot of difficulties in the transfer of control away from local authorities.

"It is the political risk that lenders don't want exposure to."

Mr Wood added that although some inner-city estates were so dilapidated they in practice have a negative value, this was less of a problem than the political uncertainties.

Another lender said its preferred option would be the transfer of a balanced portfolio, containing both the best and the worst of a council's housing stock.

But the Department of the Environment, which part-funded the report, rejected the views of the lenders. It "absolutely" rules out stock substitution as loan security, or deferment of payment for housing stock that is sold.

A spokeswoman said the report's proposals amounted to a requirement on the public sector to bear both the cost and the risk in making improvements.

The Association of Metropolitan Authorities takes a similar view. Matthew Warburton, housing under-secretary, said that local authorities were caught in the middle of a dispute between investors and government. He added: "I don't see any reason why lenders should be afraid of local authority- controlled housing companies. Local housing companies are easier to sell to authorities than outright transfers."

He said the only alternative was for government to authorise councils to borrow more to improve the housing stock themselves.

Graham Moody, a consultant at KPMG and lead author of the report, said that it was important to achieve a solution that was acceptable to all parties - tenants, councils and investors. The report only considered how investment might be attracted to non-profit-making organisations. Some opposition to the report had arisen because of a publisher's error which had made it seem that the consultants wanted investors to take equity stakes in share-held companies.