Community-led housing is on the rise. The last year has seen the establishment of Community-led Homes London and the launch of a £38million GLA funding prospectus to support delivery. In June, London CLT were announced as the successful bidder on two TfL Small Sites and LB Croydon are inviting local organisations to bid to develop affordable homes on up to five council-owned sites.
But, questions do remain about the future of the sector. The current round of grant funding ends in 2023 and to keep up the momentum, groups need access to affordable finance.
On 4 June, there was another full house as Future of London brought together local authorities, groups, investors, development partners, tech platform professionals, mainstream banks, social lenders and social enterprises together for a workshop exploring the financial future of community-led housing. We kicked off with insights from four key stakeholders.
This is a good time for ambitious, community-led projects. Pete Gladwell, Head of Public Sector Partnerships at Legal and General noted that there’s no shortage of money, funds globally are actively seeking initiatives and opportunities.
£63billion of L&G’s £1trillon assets under management is the money of individuals, in the form of pension contributions and savings. Secure, long-term revenue streams are attractive to this type of patient capital, vital to ensuring society’s pension payments can go out, month after month. Projects offering these returns paired with social impact are much sought after.
Making the case for the positive role private investment can play, Pete urged against believing “not for profits have the monopoly on doing good”. There are a range of sources of finance, it’s about deciding what works for a particular project: social lender, local authority or long-term investor.
He urged groups to have faith: if a project is strong enough to attract and sustain volunteers’ time, why shouldn’t it also attract investment?
Right now, “there’s a real opportunity for those of us who have something we believe in to grab some of that money from the world’s capital markets … and actually do something fantastic with it”.
In London, the Mayor is working to address the barriers that access to finance, expertise and affordable land pose to community-led housing groups. Community-led development is viewed as an important vehicle for delivering additional homes and diversifying the housing market, while realising the London Plan’s good growth objectives.
Temitope Moses, Policy Officer at the GLA explained that extensive consultation with groups was carried out ahead of the London Community Housing Fund Prospectus. Findings highlighted the sheer diversity of approaches and the need for the fund to be flexible in response.
On the advice of London CLT, £10m of £38m was put into a revolving fund, ensuring a funding stream after the main fund closes in 2023.
Triodos Bank is a social lender, supporting CLH through both the offer of long-term funding and its advisory role supporting groups. Jeremy Pannell, Senior Corporate Finance Manager at Triodos, shared lessons from working with six groups across the UK:
- Groups need to understand the position of funders, particularly junior lenders who carry the most risk: these lenders need to know they can recover their money in the instance of overspend or delays. Quality financial modelling can help reduce risk, but this requires professional expertise.
- Banks and lenders need to be transparent with groups from the outset. This could involve difficult conversations about their view on self-build or the requirement for a right to sell at market value if the affordable units fail, but it’s better to know upfront.
- Local authorities have a critical role to play and it doesn’t have to be financial. Many groups have benefited from asset transfer or grant, but land could also come on a deferred consideration to ease cash flow. In some cases, LAs have provided “make or break” support, as LB Lewisham did by underwriting the GLA’s grant to RUSS.
Jeremy seconded Pete‘s assertion that there is money out there. With increased understanding and all stakeholders playing their part, CLH is ready to take a big step forward.
Drawing on her experience as Operations Director at the RUSS and 10 years as a voluntary chair of Brixton Green, Dinah Roake shared reflections on becoming “investment ready”.
RUSS’s model puts members at the heart of the development process but understands the value of expert guidance. While groups have tried to produce their own financial models, there’s no substitute for professional support.
The point was made: “you wouldn’t ask a voluntary team to provide the architectural drawings you submit to planning, or to manage a corporation’s taxes – why ask volunteers to draw up the model you submit to a bank?”
Bringing in the right expertise, at the right time, is key. LB Lewisham agreed to underwrite loans for RUSS, reducing risk and unlocking investment. Brixton Green sought to partner with a housing association, which could offer track record and be a “friendly face” for investors.
The project was attractive to potential development partner Places for People because:
- Planning permission was in place
- The local authority was supportive, working through a co-production Steering Group
- It would create a mixed income, mixed and balanced community
- Scale – 300 homes
- Flexibility was built into the financial model, to manage future ‘shocks’
- The project had community support, through a clear structured organisation
Ultimately, the local authority announced plans to develop the site through their own vehicle. Without a development agreement, no arrangements were binding.
Brixton Green’s future is uncertain but the RUSS and volunteers are now on site with a self-build community hub, with anticipated starts on their first 33 new homes in October.
In the ensuing workshop, delegates each elected to visit three of a possible five facilitated workstations. Each station was a assigned the challenge topic relating to financing community-led schemes.
A summary of each is provided below. If you would like further detail, please contact firstname.lastname@example.org
Unlocking Investment for large scale developments
Facilitated by Brendan Conway, Land and Development Lead, Community Led Housing London
While scale brings efficiencies and can offer attractive returns for institutional investors – the requirements for becoming “investment ready” are substantial. Why have we yet to see visions for schemes delivering hundreds of units realised in London, and what needs to happen to bring such development forward?
- As Pete Gladwell made clear, there are billions of pounds looking for asset-backed, long-term, investable opportunities. Community-led housing fits this profile admirably. We need to be more confident and embrace investor appetite.
- Sites are the holy grail for groups, no investor will be able to look at the opportunity without a site. Local authorities and the GLA can underwrite the whole deal if they are willing to pivot towards this long-term sustainable solution.
- Standardisation of the loan application process with a clear understanding of financial literacy is part of the action learning that groups need to embrace. This can be supported through the CLH hub and FoL events.
- Human relationships really matter – tell your story. Patient capital requires a patient approach from groups and investors alike: it takes time to build capacity and relationships through co-production and co-design.
- What does large scale mean in the context of community led housing? Many community groups and their projects can be small, with units of less than 20 units. Small is beautiful and 10 x 20 unit schemes could have a greater impact than a 1 x 200 units scheme.
Articulating the social value of community-led housing
Facilitated by Charli Bristow, Research and Projects Manager, Future of London
The components that enable community-led development – be they disposal of a site to a group at below market value, a loan from an ethical investor or receipt of public grant – will nearly always be predicated on an understanding of a scheme’s social value. For groups seeking investment or land, articulating this value is key.
- To quantify or not to quantify? There is increasing pressure to put a financial value to social value outcomes and a growing body of work to support this, including HACT’s social value calculator.
- Homes England require a financial value for social value generated, generated via their calculator.
- Nationwide Foundation and Triodos don’t require a numerical value for from grant or loan applicants.
- Social value outcomes can be a key differentiator between the offer from a CLH group and other providers. The London Hub have a key role in working with groups to define and articulate the narrative around social value from the earliest possible stage.
- The delivery of affordable housing and social value outcomes underpin site disposals for less than market value. Objectives form part of the bid criteria for LB Croydon’s sites, weighted as a component of the tender and with no expectation to provide a financial value.
Facilitated by Stephen Hill, Director, C20 Futureplanners
Community-led schemes are often perceived as high risk, with the high interest rates imposed on loans seriously stressing the ability of schemes to deliver on their aspirations for affordable housing and social value outcomes.
- Managing the financial risk depends on being able to recognise and manage other risks, especially political risk and the sustainability of the CLH group itself and its governance.
- Sharing and capturing knowledge and experience is vital as everyone in the business of making a CLH project happen is at the limits of what they know.
- Expectations of good governance and fair, competent and consistent decision-making apply to all the parties involved in delivering a CLH project.
- Most CLH projects depend on some kind of local authority support and there needs to be a good reason for politicians to support a CLH project. It’s the CLH group’s job to find out what that reason is, and make sure it doesn’t get lost as a guiding principle for all those involved.
- The single most important risk factor in the delivery of a CLH project is trust between all those involved.
Funding the equity gap
Facilitator, Lev Kerimol, Director, Community Led Housing London
NB: this summary is abbreviated, with a Finance Guide forthcoming from Community Led Housing London.
Most banks (senior lenders) will lend 60-70% of the cost of a project (aka the ”debt”). Grants are most helpful if made available early on, but are unlikely to make up more than 10% of development cost. This leaves a gap of around 20-30% which would typically be the developers own capital, or equity. If you were buying a house, this would be the deposit to your mortgage.
Equity is where the greatest risk, and greatest returns are. The senior lender (bank) will expect to be paid back in full, in a prearranged way. Equity is first at risk if anything goes wrong.
Most CLH groups have limited capital. So, what can they do?
- Mezzanine finance has the character of both equity and debt. Also called junior lending, as this money will be first at risk, if things go unexpectedly. Therefore it has higher interest rates.
This could be addressed by:
- Flexibility in the Section 106 so that there are fallback positions on things like the level and nature of affordability, agreed via discussion with lenders.
- Council underwriting ie. the council agrees to pay off the lender if the project does not go as intended.
These measures would reduce risk and lower interest rates.
- Groups can raise their own money
- Members contributing their individual savings, if they have them, although timing/cashflow and trust in the project and organisation can be an issue.
- Loan stock – is unsecured investment in Co-operative Societies which do not give the investor voting rights. Typically other co-ops with reserves may invest, or individuals could invest, but investment must be based on a clear understanding of the project through a solid business plan.
- Community Shares – Community Benefit Societies can raise Community Shares which also give voting rights in the organisation. Community Share Offers can raise some money while increasing membership and participation, but will need a large well organised effort to make a significant contribution.
- Crowd funding – similar to the above, but with no voting rights.
- Council providing equity stake
Councils owning an equity stake in the scheme, or a percentage of the scheme.
- The value of land can form equity. Deferred payments or nil consideration transfers can help make use of the value of the land as equity, without having to find the capital for it.
- Another option is to defer the value of the land into a long-term annual payment. The ultimate fall back would need to allow the lender to sell the land off for it to be used as equity for the scheme.
- The council could place ‘step-in rights’ to allow the council to step-in and take control of the land and finish construction and try to pay back a lender, this could be seen as a form of underwriting.
- Council lending
The council could fill the gap, or even lend the full amount by borrowing from the Public Works Loan Board at very low rates and lending on to CLH groups with a slight mark-up. Risk perception will also have an impact here.
Facilitated by Oli Pinch, Head of Networks, Future of London
From crowd-funding to community shares to pan-European investment platforms, there’s no shortage of innovate models which could play a part in supporting this innovative form of housing. What are the options, and how could they work together?
- Tech/platforms – blockchain and sector disruptors like FinTech and PropTech can be used to speed up delivery by sharing real-time verifiable data that helps to build trust and understanding between parties. There aren’t platforms dedicated to CLH yet because the sector is small and disparate, but we’re reaching a critical mass where dedicated solutions could come through.
- Knowledge Sharing – platforms for peer-to-peer exchange and problem solving would help to build collective expertise. Some of this can come from central resources like the CLH Hub but a practitioner-led forum is needed to increase capacity and networks.
- Funding – a public-facing body of evidence might help attract more mainstream funding – Trusts, the GLA and public money are important to achieving this. Innovative solutions like having a CLH/CLT currency could help to reduce barriers and attract foreign investment.
This seminar was part of Future of London’s Foundations for Community-Led Housing project: a major programme of interactive events and action learning helping CLH groups and delivery partners to work effectively together.
Find out how to get involved on our project page.