Housing Revenue Account reform – what next for local authorities?

David Isaacson looks at the options open to local authorities in the new housing finance landscape.

The reform of the Housing Revenue Account subsidy system has given those local authorities that own housing stock the opportunity, for the first time in a generation, to manage and finance such housing locally without central control.

On 1 April 2012, the Housing Revenue Account (HRA) subsidy system was abolished and replaced by self financing for council housing. Around £21bn of housing debt was transferred to 171 stock owning local authorities in return for full control over their housing stock.

Under this new system, local authorities are able to keep all of the rents received from tenants. After paying off any interest on HRA debt allocated by central government, local authorities are free to make local decisions on how to manage, maintain or improve their housing stock.  

What will this new freedom mean for local authorities and what are the opportunities ahead? Will a new housing building programme spring into life driven by local authorities?

The debt settlement and borrowing cap

The likelihood of an energetic house building programme in the short term may be optimistic. The allocation of HRA debt by Central Government varies from authority to authority with certain authorities seeing an overall reduction in the amount of housing debt they have and some who have received extra debt. At the same time the Government has introduced a debt cap on each local authority which will restrict the amount of money that they will be able to borrow in relation to their housing stock.

The difference between the allocated HRA debt and the debt cap has been commonly referred to as the “borrowing headroom”. Each local authority will have to consider its projected capital resources and needs for the housing stock over the long term as well as how it will service its housing debt and this may put the brakes on a rush to develop new affordable housing.

What are the options?

It is likely that the options for dealing with the existing stock and objectives for any new build housing will be driven by the financial capacity that is available in each HRA business plan and the political objectives of each local authority.

The first priority should be to address the investment needs of the existing stock but after taking account of these, local authorities may have spare borrowing capacity or surpluses that could be used to fund the development of new housing or purchase new housing from third party developers.

Each local authority HRA business plan will be different but it is likely that in the medium to long term certain local authorities will be able to generate surpluses and/or look to take advantage of spare borrowing capacity. This then points to whether the local authority looking to deliver new housing wishes to act as a developer outright or adopt an enabling role.

Ownership and management of social housing puts a local authority at the centre of its community and gives it leverage in addressing a wide range of social and other issues, in partnership with other agencies. But it does mean that a local authority will have to accept new responsibilities should it wish to develop outright.

Local authority as landlord – new responsibilities

If, after careful analysis of its financial capacity, a local authority decides to act as developer, the local authority will have to procure the construction of the new homes. Consideration will have to be given to whether the EU Procurement Rules will apply to the selection of a building contractor and if so, a robust procurement process will have to be put in place in order to avoid any challenges that could unravel the appointment.

The local authority would also have to absorb cost and income risks including in particular development costs and, if a scheme includes for sale units, the sale and timing of private sale proceeds.

As an alternative to being an outright developer, a local authority could use its spare borrowing capacity or surpluses to simply acquire and then own new dwellings that have been developed and funded by a third party developer. There may be an opportunity here for local authorities where developers are struggling to dispose of units and are prepared to sell at a good price.

Partnership working

Historically, the HRA subsidy system and ability of registered providers to obtain significant grant from Government encouraged local authorities to adopt the role of enabler. This was usually as the provider of land with third parties such as a developer and a registered provider arranging development finance, managing the new housing going forward and absorbing risk in the development.

Although the move to HRA self financing has opened up new opportunities for the development of new local authority owned housing, traditional partnering with a developer and registered provider is still an available option.

In this case, the local authority would enter into a development agreement with the developer/registered provider. The registered provider would be the landlord and the council could secure nomination rights for its tenants in accordance with an agreed form nominations agreement.

Joint ventures

A further alternative would be for a local authority to consider entering into a joint venture with one or more joint venture partners which would most likely be a developer and/or a registered provider in order to develop new housing. EU Procurement Rules would mean that the relevant partner would need to be properly procured. The advantage of adopting this approach would be that the local authority could maintain an element of control but also share risks and rewards with a joint venture partner.

If a corporate delivery vehicle option is taken, due consideration would have to be given to whether any local authority owned land is transferred to the vehicle. The transfer of property to a delivery vehicle may enable the development to be carried out without incurring excessive initial debt costs for land acquisition, and so may offer a greater return than a straight disposal of land directly to a developer.

But it is critical to consider the most advantageous tax arrangements when structuring the joint venture.

Taking the next steps

It is still very early days in the new housing finance landscape so it is difficult to assess any clear trend as to how local authorities are responding to the new financial freedoms. The need for investment in existing housing stock and the provision of new affordable housing is as ever pressing.

The reform of the HRA subsidy system gives local authorities a greater opportunity to influence and address these needs. Although there will be different political priorities for each local authority, the ability to plan long term and take brave decisions about the future of housing in each local authority’s community is a positive development for the housing market.

David Isaacson is a partner in the Commercial & Infrastructure (Projects) team at Bevan Brittan. He can be contacted on 0870 194 5014 or by This email address is being protected from spambots. You need JavaScript enabled to view it..