Can public sector guarantees help get Britain building again?

Nez Zein and Imogen Fisher look at the role public sector guarantees can play in unlocking housing delivery.

The new government has emphasised its ambition to build new homes at a rate the country hasn't seen for decades and the sector eagerly awaits its plan on how this will be achieved. One thing is clear, the Labour government will want to make its mark.

A generational housing crisis cannot be changed overnight and it may take some time for policy decisions to bear fruit but there is a window of opportunity for the new government to look beyond the tired norms and think outside of the box to support new housing supply--in fact, innovation is perhaps expected.

If there isn't enough cash in the bank to support such an ambitious house building target, then government will need to consider what other levers are available to it to achieve that goal.

For decades, the accepted method of stimulating affordable housing supply and economic growth was direct government funding - injecting capital into developments to plug viability gaps and stimulate delivery of additional affordable housing.

This has been a tried and tested approach that worked effectively whilst there was available cash. Until the end of the 1990s, the level of government funding typically matched 100% of the cost of building an affordable dwelling. In more recent years, particularly since the crash in 2008/2009, grant levels have been squeezed.  The Affordable Rent initiative, designed to support supply with much reduced grant has, given the wider economic headwinds, been unable to keep pace with demand.  The continuing impacts of the Right to Buy and shift of subsidy from supply to demand side support for the PRS market has exacerbated both the cash and delivery position.

Now with economy still in "recovery mode", it is perhaps time to consider other sources to work alongside the conventional capital grant programmes to help de-risk projects and attract private investment.  

Backed by Government

Whilst the affordable housing sector has evolved dramatically over the last few years, bringing in new institutional investment, stakeholders are looking for ways to unlock new housing delivery and there are further opportunities for the private and public sector to work together to keep the sector moving forward.

Financial loan guarantees are a way for a public body to indirectly fund businesses by providing a commitment to take responsibility for the debt and liabilities of another party that may arise, lowering the cost of borrowing and therefore unlocking investment.  These guarantees can help stimulate growth, de-risk projects and address market failures.  Moreover, their use to support housing delivery is not new.  They have been used in:

• the building of new affordable homes through the Affordable Homes Guarantee Scheme which provides low-cost loans to housing providers and which has received a £3 billion increase to its funding in February this year designed to deliver a further 20,000 new affordable homes;
• the private rented sector to unlock new investment by institutional investors to increase the supply of new, purpose built and professionally managed private rented sector homes through the Private Rented Sector Housing Guarantee Scheme;

Typically the public sector guarantee sits behind the obligations of a borrower to repay a loan and interest thereon.  A public sector guarantee as an indirect investment means that the tax payer's money does not have to be deployed whilst also having the benefit of generating additional revenue through fees.  However, as with any financial commitment, the risk of providing guarantees will need to be carefully considered and monitored, particularly given that an economic shock in the sector or more widely could result in multiple guarantees being called upon at once. Naturally, the treatment of such guarantees on the balance sheet at national or local level will need to be reviewed and assessed but, if that hurdle can be passed, it is something open for government to seriously consider as a route to the prize of more housing and more economic growth.

In looking at such guarantees the public sector entity providing the guarantee will need to have certainty around the level of the potential liability if the guarantee is called, the risk that it will be called, the period for which the guarantee is being provided and it will need to charge an appropriate fee. Insurance may be available to mitigate against some of that risk. 

Public sector guarantees could have a wider appeal than guaranteeing the entirety of a borrower's liability under a loan.  In an environment where the government is strapped for cash and there is pressure on institutional investors to deploy capital in an edgy market, it may be that public sector guarantees can be the catalyst to stimulate that investment.  A public sector guarantee does not have to be structured so as to guarantee the entire liability of another, but can be deployed against specific risks – offering targeted protections for institutional investors while limiting the exposure of the public purse.

In other words, the power of a guarantee "backed by Government" should not be overlooked, particularly where cash is not as available as it once was.

Nez Zein is a Senior Associate and Imogen Fisher is a Partner at Trowers & Hamlins.