UK Housing Awards 2011 Excellence in Housing Finance and Development: Winner Rettie & Co, Springfield Properties and DCHA: Resonance at Moray Apartments, Edinburgh Summary In this climate of constrained government funding, attracting private finance into the provision of affordable housing is critical to meeting future demand and achieving national targets. The challenge lies in designing a model which, in the new economic landscape, satisfies investor aspirations and generates positive outcomes for the broad range of stakeholders. Matthew Benson of Rettie & Co has worked with the investment bank Execution Noble and Scottish Government since late 2008 to deliver Resonance - an exceptional model which achieves this and more. Moray Apartments in Edinburgh was the pilot scheme demonstrating the success of the Resonance model, with the first tenant moving in this Spring. Rettie & Co teamed up with Dunedin Canmore Group, City of Edinburgh Council, the Scottish Government and Springfield Property Fund to deliver the pilot scheme.
What did you set out to achieve? Resonance was conceived to address changing economic conditions and demands on housing supply. Specifically: Constrained funding from government for social housing A distant prospect of recovery in the traditional sources of bank finance for new homes The massive reduction in mortgage availability for first time buyers and low to middle income earners squeezing them out of owner occupation Under supply of affordable housing tenures which address their demand for mid-market or transitional rental properties The consequent reduction in first time buyers who seed sales in the housing market From people who are currently unable to buy but not eligible for social housing under existing tenures A drastically contracting construction industry suffering unemployment and long term loss of skills Medium / long term government housing policies in jeopardy - without a recovery in construction the government will be unable to meet its targets A steady flow of distressed land and part built property on the market. With minimal government funding available, innovative projects are required which will maximise value from limited public funds and drive new sources of private finance into affordable housing. Grant resources are constrained and grant subsidies per unit delivered need to reduce. The future of a robust approach to housing lies in ensuring a full complement of routes to home ownership and more choice for those who choose to rent by providing more housing options for low to middle earners. Fundamentally, because they need to be housed, and importantly, because they have the potential to become owner occupiers. Some of this demand can be satisfied by offering mid-market rental properties where rental level is set between the social and private rent levels in an area and can provide people with the opportunity to save for a deposit. We need to ensure a full complement of routes to home ownership and more choice for those who choose to rent. The Resonance concept addresses all of these issues. How were these aims and objectives met? Having identified the gap in the tenure market, Matthew Benson of Rettie & Co worked with the Scottish Government and investment bank Execution Noble to develop a financial model that addressed the issues set out here. Resonance was then piloted at the Moray Apartments development in Edinburgh.
How the model works Resonance provides a partnership to deliver affordable properties with the capital cost shared between an RSL and a private investor. The RSL borrows against future income streams to fund the cost of bricks and mortar, whilst the investor funds land costs. The RSL rents out the units at affordable rates and gets to keep a percentage of the units in perpetuity. The private investor benefits from any rise in capital value over an agreed period. The RSL borrows against the future income stream of the property Reduced borrowing cost is facilitated by a guarantee from local or central government against any shortfalls in rental income The funds borrowed by the RSL are transferred to the investor on completion of each unit and used to offset land and construction costs The properties are let on short assured tenancies Jobs are created in construction retaining skills for the future and protecting the future of housing delivery in Scotland The market for transitional or intermediate tenures which can lead to home ownership or long term renting in the private market is addressed Tenants have an opportunity to save towards a deposit These units, if let at a social rent, require grant support of up to 50% less than current benchmarks There is no risk to the RSL at the construction stage The repair onus on the RSL is minimised with new properties held on the scheme for only 5-10 years An agreed number of units is permanently retained by the RSL at cost price. These units can add to the RSL portfolio or generate a capital receipt for future leverage and investment. What challenges did the project face, and what lessons were learned? Investors like straightforward investments where the bottom line is clear. Some of the mechanics of Resonance may be complex, but the principle is straight forward. Preparation of a standard set of documentation and clear communication of the positive outcomes to public and private partners of utilising the Resonance model are key to it s success: Permanent social dividend of 2 units for zero grant That's 13% of the site with no s.75 obligation Stamp duty = 48k saving Limited procurement - fast to do deals No V.A.T. on management contract No S.P.V. running or set up costs No conflict removing tenants in year 5 Contracts are simple and cost effective No debt accruing on B/S of developer as in other structures Saves 50k+ of grant if the 2 units retained are used for social rent Mixed tenure communities created Capital released quickly to developer for re-investment all over again.
How was the success of the project measured? Rettie & Co teamed up with Dunedin Canmore Group (DCG), City of Edinburgh Council, the Scottish Government and Springfield Property Fund to help deliver the pilot scheme. Having identified the gap in the tenure market DCG were very responsive to the potential of Resonance and keen to run a pilot. Moray Apartments in Edinburgh were identified and the investor approached. Springfield Properties PLC were identified as a build contractor with an excellent track record in the delivery of high quality affordable housing. The development has delivered 15 mid-market rentals two of which will be retained by DCG in perpetuity. Following the completion of the pilot project in Spring 2011, Rettie & Co, Springfield Properties and Dunedin Canmore Housing Association hosted an official handover to the first tenant, Mehdi Stuart, and formally launched the Resonance model. Following the presentation of a welcome pack to Mr Stuart, the Scottish Housing Minister, Alex Neil MSP said: Addressing serious housing pressures across the country presents a formidable challenge in a climate of increasing financial constraint. Rental guarantee models, such as Resonance, have the potential to help local authorities meet housing needs in their area by providing medium term affordable housing for mid-market rent. Mr Stuart who moved into his property at the beginning of April said: I can t thank Dunedin Canmore enough for the opportunity they have given me to have such a wonderful home. The apartment has a real wow factor and I m really impressed with the layout of the property as well as the neighbourhood. The view from my 2nd floor apartment is fantastic and I m the envy of all my friends. Not only does it have a great location it is also very affordable. Springfield Properties PLC and DCG have now joined forces on a property where Springfield will play the full developer role. Brunstane Apartments were bought from an administrator by Springfield Properties in 2010 and will be built out at their expense. Of the 35 one to three bedroom apartments 18 will be transferred to mid-market rental through the Resonance scheme. What were the key positive outcomes? As a result of the success of these partnerships Rettie & Co are rolling out the scheme countrywide using these developments to demonstrate how the model can attract private sector funding to deliver housing that otherwise may
not be built. A standard package of legal documentation and financial modelling has been developed to allow quick and easy site appraisal keeping deal costs to a minimum. This adds to the deliverability of projects and permits even the smallest of sites to be considered. The strategic and rigorous approach of the partners in the delivery of these homes has led to the successful development and piloting of a scheme which will have a positive long term impact on housing and construction in Scotland. How can you demonstrate that you have optimised the funding opportunities available? In this economic climate with limited funding available and what looks like a long wait for recovery in property values, Resonance enables the public and private partners to maximise on their investment and spread funds. In other words the model satisfies the desire of the RSL to deliver housing very cost effectively and of the investor to achieve a return: The RSL borrows against the future income stream of the property - for the model to work the stream needs to be strong enough to generate borrowing of around half the value of the building, as is the case with mid-market rentals Critically, reduced borrowing cost is facilitated by a guarantee from local or central government against any shortfalls in rental income. The stronger the guarantee, the lower the cost of borrowing. The lower the cost of borrowing, the greater the capacity to fund build costs and to keep more units in perpetuity The funds borrowed by the RSL are transferred to the investor on completion of each unit and used to offset land and construction costs No capital subsidy is required from government There is minimal call on the public purse and leverage on that call is maximised The RSL is able to offer properties for rental at minimal cost to the organisation. How has your initiative helped to maximise the supply of new housing in your area? Resonance has so far delivered 15 units on the pilot project, with a further 70 units currently in missives negotiation over 3 projects. This has kick-started construction on 4 Scottish developments and will deliver 21 units for in-
perpetuity mid-market rent to RSLs. Rettie & Co are currently reviewing and in negotiations on a wide range of projects between public and private investors, with the potential to deliver up to an additional 700 units across Scotland. How does your project help address either a current challenge, faced by many providers, or meet a current priority in your part of the UK? Resonance is an important step forward, demonstrating close private/public sector co-operation to advance the delivery of affordable housing. The structure is flexible and relatively straightforward to implement. Above all, it can deliver a permanent stock of affordable housing with the potential to secure stock at social rents at between 35% and 50% below current grant costs. The Scottish Government teams have been very proactive and constructive in progressing the ideas behind the structure. With a number of other sites now in the pipeline we look forward to being able to improve the structure further as the market evolves. Is your project influencing the way other providers work, will it help deliver improvements beyond those immediately involved? The initial success of Resonance was demonstrated through the pilot project and followed up at the launch event in March 2011, hosted by Rettie & Co, DCHA and Springfield Properties. As a direct result, 3 more projects are currently in missives negotiation and Rettie & Co are reviewing and in negotiations on a wide range of projects between public and private investors across Scotland. In total the 3 projects in missives negotiation and others under review have the potential to deliver an additional 770 units across Scotland that otherwise may not be built. This is creating a positive long term impact on the housing and construction industry in Scotland - not only on the public and private sector providers involved, but also all of the local communities affected by kick-starting construction on mothballed sites, creating jobs and supporting the local economy.