1. Housing Research Sharing risk and strategic approaches to cross subsidy Ian Laight Principal, Housing Research consultancy www.housingresearch.co.uk

2. Housing Research Background Housing General needs & specialist housing Development funding Consultancy Public & NFP roles HCA’s VOPAG District Councillor & Care NFP Board member Special projects Regeneration partnerships SPVs and JVs Distressed assets Housing Research Former design co- operative

3. Housing Research Current work Public Sector Procurement advisor for Extra Care projects, procedure advice, tender document writing, bid evaluation ‘Test’ appraisals for ECH and Care proposals alongside soft market testing Housing and care market analysis and strategy work, tenure & terminology advice Not for Profit providers Older people’s strategy advice Market Assessments and Pricing Assessments for ECH and Care proposals Operating costs forecasts Development advice, procurement and team assembly For Profit providers Business plan writing for funding purposes Market Assessments and Pricing Assessments for ECH and Care proposals Bid writing for ECH, Care, Housing and Regeneration programmes Research Database of completed schemes in UK, USA and Canada from visits and ‘mystery shopping’ Records tenures, scheme features, costs of occupancy Market characteristics and making customer choice tangible US Market Assessment methodology adapted to the UK and being continually refined

4. Housing Research Capital funding headlines Risk stages Risk sharing structures Cross subsidy opportunities Risk management measures

5. Housing Research Capital funding headlines Changes to everything we were used to? Few actively lending banks (Co-op) Shorter term lending (5-6 years) Low loan to cost ratios (50%) Higher rates (6%) Housing hangover (down valuations, low rate of sale) High yields on care homes (7-9%) Even higher residential portfolio yields (10-12%) + less grant funding, chipping of revenue streams, pressure on reserves & equity trapped in part completed projects

6. Housing Research Capital funding headlines Where are the White Knights? Institutional investment Slow start to actual commitment after tax reforms New specialist funds beginning to form Risk of investors’ unrealistic expectations for rent reviews Issues of scale and unfamiliarity REITs yet to gain traction High net worth individuals Overstated size of potential pool High returns expected Terms may be unacceptable SIPP consortia Multiple individuals with a typical £100k commitment Terms loaded with advisors’ fees Pension mortgage selling risk Separate development & operational stage consortia

7. Housing Research Risk stages Strategy Lack of clarity in drivers and priorities Misunderstanding of market Mis-appreciation of organizational strengths and weaknesses Development At risk exposure to internal and external costs before projects become proceedable Realistic success rate Drain on equity Construction Transfer of risk = loss of control of outputs? Transfer of risk = cost premiums? Supply chain issues Fill up Difficulties of pre selling specialist housing Slow decision process, importance of trust Reliance on slow moving chains Operation Unreliable operating costs forecasts Achieving a balance between capital and revenue in forecasts Challenges of churn and changes in the needs or priorities of residents

8. Housing Research Risk management of stages Strategy Define terminology, capabilities and desired outcomes Set parameters for overall partnerships and individual projects, including operational objectives Define exit triggers for partners with backstop measures Desktop test the project appraisal as a notional site through both development and operational stages Development Effective early filtering of opportunities against parameters Commission and employ the evidence base to promote schemes & target potential residents Forecast the costs of occupancy as part of the design development process Cost control and internal process checkpoints, based on the evidence base and appraisal updates Stress test appraisals for cost and revenue variances including varying tenure mixes Use the planning consultation process to build forward interest from potential residents Construction Define priorities for the selection of a delivery partner, eg funding offer, experience, cost Decide what level of risk is acceptable before choosing the form of contract to be used Resource operational and customer care roles ahead of fill up to create confidence Fill up Tenure flexibility Assisted move offer to engage with chains Operation Regular review of operating emphasis and costs

9. Housing Research Risk sharing structures Joint Ventures Special Purpose Vehicles Deferred Payments Overage Payments

10. Housing Research Cross subsidy opportunities Multiple Sites Multiple Uses Mixed Tenures Revenue

11. Housing Research Risk management measures Joint ventures Purpose, risk allocation and exit triggers must be defined at the outset Objectives must be complimentary Beware marriages of convenience Special purpose vehicles Governance and management of SPVs must be clear and transparent Limited Liability Partnerships are the most frequent form for SPVs Default situations must be evaluated as part of setup process, with backstop dates & step in provisions Deferred payments Very effective in reducing scheme funding costs if land values are significant Can be extended to include income share triggered by legal completions / occupancy levels Overage payments Simplicity preferred even if this prevents an overage clause trapping all of the potential uplift Can become overly complicated if linked to multiple uses and tenure flexibility Benchmark figures must be understood and achievable

12. Housing Research Risk management measures Multiple sites Requires careful programming to prioritise surplus generating sites, rather than greatest need Extends delivery period so ‘stand down’ provisions required to control costs Possibility of part completion of the programme should be recognized and planned for Multiple uses Flexibility required in what uses are acceptable but with defined timescales and prioritized outcomes Adds further unpredictability to delivery so relies on honest reporting to maintain confidence Mixed tenures The fill up rates and achievable revenues of differing mixes must be realistically evaluated in appraisals Tenure flexibility will maximize the fill up rate but the limits must be pre defined in appraisals Revenue Operational income from care & support can be captured to contribute to capital costs ‘Buy back’ pre emption rights can offer operators with opportunities to upgrade units and control availability Deferred management fees can improve affordability by reducing entry costs and regular service charges But most of all - understand the market for your product High level demographics are only the start Assess the market for specific combinations of location, accommodation and services

13. Housing Research Risk management measures Housing Research Market Assessment process Site location & offer Define site characteristics Define catchment boundary / boundaries Analyse catchment demographics Check access to services Local Housing & Care markets Sensitivity analysis Eligibility criteria Tenure mix Pricing Optimisation Executive summary

14. Housing Research Thank you Ian Laight ianlaight@housingresearch.co.uk 07734 159303 www.housingresearch.co.ukwww.housingresearch.co.uk and www.extracareplus.co.ukwww.extracareplus.co.uk www.housingresearch.co.uk