Housing – Project detail
Image: Cambridge Ahead
Status (March 2016)
Tackling the affordable housing issue
It could be argued that one of the unintended consequences of the Cambridge Phenomenon is the spectacular growth in house prices in Cambridge. While there are many other factors influencing this growth there is an acute problem in the lack of homes that are affordable for the growing population. Housing is critical to the future success of the Greater Cambridge region and therefore features heavily in The Case for Cambridge.
Using the skills of the Housing group, the short term focus is to review and analyse the outputs from the Growth project team, to analyse and consider the outputs from the Local Plan Examination in Public, and to find pilot projects in Cambridge to test our thinking. One specific area we are focusing on is innovative funding structures and sources.
For 20 years Cambridge has been well known to venture capital and private equity investors from its high growth companies. This interest has now spread to the fixed income markets. Three years ago the University of Cambridge was introduced to the corporate bond markets with a highly successful, triple-A rated £350 million 40 year issue, which was heavily over-subscribed at slightly over 4%. Since then 18 colleges have issued a privately placed £150m 33-year bond, which again was well received at a similar coupon, and if anything rates have tightened in since then.
More recently, long term income strip pension fund investors have started to offer very long dated lease finance for specific rental generating assets on a non-recourse basis. Recent examples include:
- Addenbrooke’s Forum project, comprising a private hospital, hotel and conference and teaching facilities, has been offered 45 year finance by L&G.
- L&G and Aviva have offered 47 year non- recourse lease finance for graduate housing to two Cambridge colleges.
- A transaction for student housing has already closed with another college on similar terms.
Underlying this activity is confidence with the longevity and research success of the University and its colleges, and a growing recognition of the depth of economic and population growth arising from the high tech cluster. Data on corporate and research institution employment, showing growth rates since 2010 of between 7% and 9% per annum, and knowledge intensive employment of over 30%, underpins a good quality rental market and background capital value growth that has become highly attractive to private and institutional investors in the private rental market.
Using private finance to meet Cambridge’s housing needs
The City Deal agreement struck between the Government, the University of Cambridge, the Local Enterprise Partnership, and the three local authorities (City, South Cambridgeshire District and County councils) envisaged a programme of expenditure on housing and infrastructure investments of £5bn between 2015 and 2025, leveraging £4bn of private capital with £1bn of public funds. To address the joint housing requirements of the City, South Cambridgeshire and the University, a City Deal Housing Agency is being created. It is this vehicle that the partners envisage using to develop high quality, high density rental housing in and around the city and to finance this by means of long dated, non-recourse income strip lease finance.
Using such private finance to meet the housing needs of the area supports the wider aims of the City Deal, which will need to be built upon to address the need for transport and other infrastructure to support growth. Two central sites owned by the Cambridge City Council are under discussion. These would be leased to the City Deal Housing Agency, which would procure a construction contract to build apartment blocks to its exact specification. These finance leases which may extend to 125 years would be pre-agreed with the funding institution, as would the rental levels and the annual inflation uplift.
On completion of construction, the finance lease would be assigned by the Housing Agency to the funding institution, so the funding institution leases the site directly from the City Council. The funding institution would then enter into an operating lease agreement of 45-50 years with the Housing Agency for sub-letting to tenants, which could be a mixture of private, intermediate and social rent. On expiry of the operating lease, the land would revert to the City Council, with the funding institution utilising a break clause in its finance lease. The Housing Agency would be responsible for insurance and maintenance of the property, but the investors’ recourse, in the event of non-payment of the rent by the partners, would be to take the building and either re-let it or sell the leasehold interest.
The underlying cash flows to service the lease finance derive from the rentals paid by the tenants of the apartments, and the role of the Housing Agency is only to procure the apartment facilities. The operating lease would not appear on the balance sheets of either the Housing Agency or the City Council, and would not, we believe, form part of the public sector borrowing requirement. The intention would be to create a portfolio of such leases in and around the city to offer site diversification to investors.
At present these discussions are at an exploratory stage, but policy support for such a combined private funding plan as part of an expanded City Deal for Greater Cambridge, linked to additional flexibility for supporting infrastructure investment would clearly be very welcome.
We hope that the implementation of these innovative strategies will provide one of the answers to ensuring more appropriate and affordable homes are built as quickly as possible.