After a tough few years for social housing, the new Homes & Communities Agency chief Andy Rose tells Matt Ross that with smaller grants and fewer bank loans, his aim is to create a safe and attractive space for private investors.
What encourages people to invest in infrastructure? Andy Rose has been brought into the Homes and Communities Agency (HCA) as a man who knows the answer. With the banks reluctant to put loan finance into housing projects, property markets still soft outside the South-East and the budget for social housebuilding a shadow of its former self, the government is keen to build confidence among potential capital investors – and this is Rose’s strong suite.
A former investment banker with a background in infrastructure finance and public-private partnerships (PPPs), Rose was recruited by the Treasury in 2009 to set up its Infrastructure Finance Unit: a response to the credit crunch, the unit worked to keep businesses’ cash flowing into Private Finance Initiative (PFI) projects. Then, as chief executive of the finance unit’s parent body Infrastructure UK, he played a key role in producing the National Infrastructure Plans in 2010 and 2011.
In April, Rose became chief executive of the HCA: created in 2008 by merging regeneration agency English Partnerships (EP) and affordable housing regulator and funder the Housing Corporation, the communities department agency oversees the ‘registered providers’ of subsidised housing – largely housing associations – and handles both a set of infrastructure and housing funds, and a substantial portfolio of properties inherited from EP and the regional development agencies. Importantly, it is also the body that will, from 2015, take on responsibility for securing and selling departments’ surplus property assets (see box below).
Rose has little experience of the housing sector – but the government didn’t want a housing whizz; it wanted an infrastructure expert. “Housing is a form of social infrastructure,” he says. “Like economic infrastructure, it’s a long-term asset that requires long-term investment and a lot of private finance.” Look at Investing in Britain’s Future, he adds: “One of the things that’s really interesting is that you’ve got road, rail, energy and housing in the same line: that’s a signal that housing is seen as an important part of infrastructure, driving economic growth and jobs.”
Not a Trojan house
Despite his background in PPPs, Rose is eager to point out that he hasn’t arrived in the housing industry as a missionary for joint ventures. “I don’t come in with a preconceived idea that PPPs are a good model for housing,” he says. “It’s a very complex sector, and there’s a great danger in coming up with the answers before you know the questions. I’m four months into the job, but still very much on a learning curve.”
It’ll take Rose a while to get his head around the “fiendishly complex” housing sector – but the basic principles behind building investor confidence, he believes, hold true across most forms of infrastructure. “The key thing [for investors] is confidence: not confidence that they’ll make their return, but confidence that they have the tools to understand the risk,” he says. What’s more, investors contemplating moving into an industry want to “understand what the future pipeline of activity looks like. One of the reasons we developed the [2010] National Infrastructure Plan was to try to give confidence to investors and the supply chain – industry and finance – that they have a good appreciation for what type of transactions are coming forward.”
So investors seek clarity and certainty about the risks they face. Is political risk one of the most difficult to assess? “It’s a very difficult risk to analyse, absolutely,” he replies, explaining that confidence is particularly badly hit when governments impose changes retrospectively. “Political risk wasn’t really on the agenda in western Europe for a long time,” he says, but “because times are tough across western Europe – and southern Europe in particular – you saw decisions being made which investors had quite an adverse reaction to.” Rose cites the Spanish government’s retrospective cuts to solar feed-in tariffs: “Investors had always taken comfort in the fact that the future may change, but it’s very unusual for a government to change the rules on prior investment,” he notes. What’s more, political risks can be “quite binary”: whilst economic and commercial factors often eat away at profit margins, political decisions can render a project non-viable at a stroke.
Today’s uncertain European economic and political environment, then, is not the best backdrop for Rose’s mission to boost investor confidence – and he is undoubtedly starting from a low base. Figures released in June revealed that affordable housing completions (ie. building work finished) within HCA-supported programmes fell 20% between 2011-12 and ’12-13. Rose responds that this is due to a hiatus between funding programmes: “Inevitably, there’s a dip in completions following the tailing off of one programme and the stepping up of another,” he says (though it cannot have helped that the government imposed a massive 80% cut on the social housing budget in 2010).
Now, Rose points out, housing starts (ie. building work begun) are up, following the allocation of a new tranche of funding. However, the proportion of affordable properties amongst these completions was 85%, whilst the proportion amongst the starts was 63% – so fewer affordable homes were started within HCA schemes in 2012-13 than were completed: the number of affordable homes being built with government cash continues to decline.
Meanwhile, the other main route by which affordable housing is subsidised – ‘Section 106’ agreements between property developers and local authorities – has suffered badly from falling land values, skittish lenders and weakening developer bank balances. Many have been scaled back, Rose acknowledges, to get the builders on site: “Because we’re in a different economic climate, some of the Section 106 deals became very difficult to deliver on a commercial basis,” he says, “so there’s clearly been a strong push for renegotiation. We’ve actively participated in those negotiations and tried to work sensibly with our partners, because people are not going to invest shareholder money where they can’t see how they’re going to make a return.”
Show them the money
If there are plenty of factors making investors cautious, however, Rose believes the 2013 spending review provided one of the key catalysts for investor confidence: certainty about the future pipeline of activity. Until June 2013, he says, investors were “very sensitive” about “the sense of a cliff-edge [in affordable homes funding] in March ’15, with very little visibility about what came after it. And what came out of the spending round was £3.3bn for affordable homes over the next three years, plus ten-year social rent escalation at CPR [consumer prices index] plus 1%. That gives confidence to plan for the long term.”
It’s now the HCA’s job to use that funding to catalyse investment and development. Having taken a good look at the organisation, Rose proclaims himself pretty satisfied with its structures and staff – he’s been “reassuring people that there isn’t going to be some fundamental change,” he says – but as the HCA’s grant-funding programmes are gradually replaced by “recoverable or returnable investments”, the agency will need new capabilities. In most new HCA schemes, he says, “we are expecting to recover a percentage of that investment, if not all of it, and that requires different processes and skills.” Here, at least, Rose is ready to confess to “preconceived ideas” – in this case about “how a financial institution would approach that kind of activity”; and whilst he won’t quite admit that the HCA has got it wrong in the past, he notes that there are “certain issues that, if you have a background in finance, you’d want to focus on.”
One of the surprising things about the HCA’s programmes is just how many there are: nearly 20, covering everything from refurbishment cash for empty homes to the chancellor’s controversial Help to Buy scheme. Wouldn’t it be more efficient to have a smaller number of more flexible schemes? “I… yes, I mean.. I’ve got to be careful what I say,” Rose falters, suddenly cautious. “But I think having a lot of schemes is not ideal. The point about flexibility is important. Our local partners often say they’d like to have the flexibility to apply our programmes from their local point of view.”
The HCA’s multitude of funding programmes is, it seems, a legacy of ministers’ tendency to announce a dedicated funding stream for every new issue that emerges – a tendency constrained, but not eliminated, in Cameron’s government. “The reality is that as government thinking moves on, at the next fiscal event government will decide where it prioritises its spending,” says Rose – and it’ll then launch a new scheme aimed at “empty homes, or the private rented sector, or large sites... If we could create more flexibility or have fewer programmes, it would be better.”
Just a regulatory guy
However, Rose is quick to add that the HCA – like the other government units in which he’s worked – is not a policymaking organisation, and thus can’t rethink its funding streams from scratch. As he did in Infrastructure UK, he has a role in “helping to influence policy from the perspective of the market you’re trying to develop – because the better the policy, the easier the delivery side.” But “we don’t design the policies, and that’s a really important point that tends to get missed when you’re dealing with an arm’s length body.” As a result, Rose resolutely ducks questions on the nature of the policies he’s been asked to implement. (The notable exception is the localism agenda, with which he proclaims himself “very comfortable”, even if it means the HCA losing funding powers to the local enterprise partnerships or core cities. “There’s no territorial issue at all for me,” he says.)
Rather than a policymaking body, the HCA is a fund manager and regulator – and on this latter role, the HCA chief expresses views that may surprise those who’d like to stereotype this former keen golfer, business studies graduate, banker and financier. “I’m passionate about the regulatory function,” he says, explaining that a changing funding model and an increasingly risky market will require the HCA to sharpen up its regulatory act. (see news)
“If you look at where the money [for affordable housing] is going to come from, grant funding is not going to be growing and growing in today’s world,” he explains. Post-credit crunch, banks are charging much more for loans to support housing projects: “Therefore the capital markets are going to be a critical provider of capital to this sector, and effective regulation is one of the things that’s going to provide the confidence for that capital to flow.” Meanwhile, as the HCA reduces its grant funding streams in favour of recoverable investments, social housing providers are looking for new ways to pay for land and construction projects – with housing associations selling or renting homes at market prices, for example, and “for-profit entities” coming into the market.
It’s the HCA’s duty to “make sure the regulator is fit for purpose in an increasingly risky market – because it is unambiguously the case that it’s becoming riskier,” says Rose. So to ensure that it’s “appropriately resourced to regulate this market,” Rose wants to charge housing associations annual fees: the government backed its plans in June, and the HCA will be consulting in the autumn.
Asked how a stronger, fee-charging HCA regulatory function sits alongside the government’s rhetoric about reducing the ‘burdens on business’, Rose is clear: “I don’t view it as a burden on business,” he says. “It’s about making sure you have an environment where long-term capital from institutional investors flows into the sector, which is absolutely critical to a healthy market.” The housing associations have given the idea a mixed reception, but Rose says to them that “you should be the ones cheering for this and wanting it, because it provides confidence to investors, and you need those investors for your market development.”
The limits of confidence
Rose sounds less confident about the HCA’s huge legacy portfolio of sites inherited from EP and the regional development agencies. “There are loads of them,” he acknowledges, “and our goal is to get them into the private sector or a local partner quite quickly.” The HCA will put in just enough money to make a site sellable, but he’s clear that “we’re not going to be a long-term investor” in most. Many of these properties lay unwanted throughout the boom years, and the HCA has just been handed a new set of coalfields sites, so the agency will have quite a task to off-load them. As Rose points out, “certain sites are worth negative values!”
The HCA chief is also less sure of himself on how the benefits reforms will affect social landlords’ willingness and ability to fund new homes. “There are so many different dynamics that feed into the registered provider deciding its comfort level with building out its housing,” he says, providing a long list before neatly changing the subject.
A second question on the same topic produces a similar response – but small wonder. As Rose says, he doesn’t make policy; his job is confined to managing land, handling funds and regulating registered providers, with the aim of fostering the market conditions that will produce 170,000 affordable homes during the Parliament.
Rose is, he says, “confident” that the HCA will hit that target. If it does so, it’ll be because investors too are confident that this is a market in which they have clarity about the risks they face and the future pipeline of activity. By detailing public funding for three years and permitting a decade of social housing rent rises, Rose believes the 2013 spending review gave registered providers and financial institutions “a lot of confidence to invest for the future.”
Housing associations are well aware of the challenges facing them, he says, but things have come a long way since the doldrum days when the housing market was falling, the developers were struggling, and the social housing budget was collapsing. Perhaps, in this important section of our economy, a corner has been turned. “From the conversations I have,” he concludes, “people are fairly bullish.”
See also: News: HCA bucks trend for lighter regulation