Housing Matters

Renters' Rights Act 2025: What Councils Need to Know

Fri, 01 May 2026 16:30:12 GMT

Phase 1 of the Renters' Rights Act 2025 came into force today, 1 May 2026, introducing the most significant reform of the private rented sector (PRS) in a generation. For local authorities, the Act has direct and material implications for temporary accommodation (TA) procurement, homelessness prevention, and housing options strategy. This note summarises the ten key provisions and sets out the impact on TA and homelessness services for each.Key Provisions and Impact Analysis

The table below sets out each of the ten key provisions in force from 1 May 2026 (unless otherwise noted), with a summary and specific impact assessment for Councils' TA and homelessness functions.

Abolition of Section 21 (No-Fault Evictions)

From 1 May 2026, landlords can no longer evict tenants without a valid legal reason. All possession claims must now be brought under Section 8, using specific statutory grounds.

Section 21 notices were the single largest trigger for statutory homelessness presentations in England. Their removal should, over time, reduce the volume of households presenting as homeless following end of tenancy. However, the transition period creates short-term ambiguity — landlords who served valid S21 notices before 1 May 2026 can still apply to court until 31 July 2026. Councils should expect a temporary surge in presentations before any reduction materialises.

Abolition of Fixed-Term Assured Shorthold Tenancies

All tenancies (new and existing from 1 May 2026) become periodic assured tenancies with no fixed end date. Tenants must give two months' notice to leave.

This removes the certainty of tenancy end dates, which Councils have historically relied upon when sourcing and managing private sector TA. Properties used for TA under licence or short-let arrangements will need to be reviewed. For councils using PRS properties as TA, the rolling nature of tenancies makes exit planning more complex and increases the risk of landlord withdrawal from the TA supply pool.

Reformed Section 8 Grounds for Possession

Grounds have been updated. Landlords seeking to evict for rent arrears now require three months of arrears (increased from two). Notice periods for possession on grounds of sale or family occupation have been extended to four months. New student possession grounds have been introduced.

The higher arrears threshold before mandatory possession gives councils more time to intervene and prevent homelessness through rent arrears. However, it also means landlords of TA properties face longer periods of financial exposure if a TA household fails to pay, which may deter PRS landlord participation in council TA schemes unless mitigation (such as risk pools or top-up guarantees) is offered.

Ban on Rent in Advance (New Tenancies)

Landlords cannot require new tenants to pay more than one month's rent in advance. This does not apply to tenancies entered into before 1 May 2026.

Many Councils and their TA supply chains have historically paid multiple months' rent in advance to secure PRS properties. This provision limits that lever for new arrangements, potentially reducing the attractiveness of TA placements to private landlords and constraining the supply of emergency accommodation at a time when TA demand remains at record levels.

No-Discrimination Provisions

Landlords may no longer refuse to let to prospective tenants on the grounds that they have children or receive benefits (Universal Credit, Housing Benefit, etc.). Affordability assessments remain permitted.

This is directly relevant to councils' ability to discharge homelessness duty into the PRS. 'No DSS' practices have long constrained councils' access to suitable PRS properties for families and benefit-dependent households. These provisions, properly enforced, should widen the accessible supply pool — though enforcement will be key (see below).

Prohibition on Rental Bidding Wars

Landlords must advertise a fixed asking rent and cannot accept offers above it. Penalties of up to £7,000 apply.

In high-pressure markets such as London (where a number of Haverly Consulting's clients are based), this provision is significant. Bidding wars have driven TA costs higher as councils compete with private renters. Dampening this pressure should, at the margins, reduce the cost per unit of procured TA — though structural undersupply will remain the dominant driver of cost.

New Decent Homes Standard (DHS) for PRS

A reformed Decent Homes Standard will apply to the private rented sector for the first time (timetable: Phase 3, provisionally 2035–2037). Awaab's Law — requiring landlords to address damp and mould within set timescales — will also be extended to the PRS.

A significant number of councils' TA placements are in PRS properties that currently fall below the existing social housing DHS. When the new PRS DHS takes effect, councils will need to audit their TA stock against the standard. Non-compliant properties will either require upgrade (with landlord cost implications) or exit from the TA pool. Early action on stock condition surveys is advisable.

Pet Ownership Rights

Landlords can only refuse pet ownership requests in writing and with a fair reason. Unreasonable refusals are prohibited.

A secondary but practical impact for homelessness teams: households with pets are among the hardest to house in TA. Removing the blanket ability to refuse pets may modestly widen access, though most TA is in self-contained units where this will be a landlord-by-landlord negotiation.

Private Rented Sector Database (Landlord Registration)

A national PRS database requiring landlords to register properties and provide safety information is due in late 2026 (Phase 2).

For housing options teams, this will be a valuable enforcement and intelligence tool — enabling councils to identify unregistered landlords, cross-reference TA placements against compliance data, and target enforcement resource more effectively.

Enforcement Powers (Local Authorities)

Expanded local authority enforcement powers came into force on 27 December 2025, including powers to investigate illegal evictions and poor housing standards. However, a March 2026 FOI investigation found significant variation in council readiness, with only five of twenty major councils confirming operational readiness for 1 May 2026.

Enforcement capacity is the critical variable determining whether these reforms deliver their intended outcomes. Where councils are under-resourced for enforcement (the majority), landlords face limited risk of penalty for non-compliance. For Councils advising on TA strategy, this creates an asymmetry: the duties on landlords exist in law, but effective pressure to comply is patchy. This is an area where Councils may need to consider investment in enforcement capability to realise the TA supply benefits the Act is intended to deliver.

Overall Assessment for Local Authorities

The Renters' Rights Act is, on balance, a positive structural reform for councils' housing functions. The removal of Section 21 addresses the root cause of a significant proportion of statutory homelessness presentations; the anti-discrimination provisions open the PRS more equitably to benefit-dependent households; and the rent cap on bidding wars should moderate TA procurement costs at the margins.

However, three significant risks warrant careful management:

Short-term TA supply contraction: Landlord exits from the PRS — driven by uncertainty, compliance costs, and loss of flexibility — are already being observed in some markets. Councils dependent on PRS supply for TA will need contingency strategies.

Enforcement gap: The Act's protections are only as strong as local enforcement capacity. Councils that have not resourced their enforcement functions will find that landlord behaviour changes slowly, and the intended supply and quality benefits will be delayed.

HRA and General Fund cost pressure: For authorities with significant TA spend (the majority in London), the transition period creates near-term cost risk before any reduction in homelessness presentations materialises. Careful financial modelling of TA budgets through 2026-27 is therefore advisable.

Frozen Out: What a Rent Freeze Would Mean for Social Housing Budgets

Tue, 28 Apr 2026 13:40:43 GMT

Rachel Reeves is reportedly considering a one-year freeze on private rents in England, driven by the economic fallout from the Iran conflict and rising household costs. So far the conversation has focused almost entirely on the private rented sector. But what if the policy were extended — or pressure mounted to extend it — to social rents too?

The answer, for housing associations and local authorities, would be deeply uncomfortable.

The Numbers Already Don't Add Up

Social landlords are not sitting on comfortable margins. They are simultaneously expected to retrofit ageing stock to meet decarbonisation targets, address the backlog of repairs exposed by the post-Grenfell regulatory crackdown, and build new homes to tackle a chronic shortage. All of this is funded primarily by rental income.

The government's new Rent Standard, which came into force on 1 April 2026, gives social landlords a degree of certainty they have long lobbied for: annual rent increases at CPI plus 1%, and rent convergence from 2027/28, underpinned by a 10-year settlement. That settlement was not generous. It was, however, just about workable — enough to support long-term business plans and underpin future borrowing.

A freeze would rip that certainty away overnight.

The Borrowing Trap

Housing associations borrow billions from capital markets and institutional lenders to finance development and maintenance. Their loan covenants are built around projected rental income. A sudden freeze — even a temporary one — would:

Erode interest cover ratios, potentially triggering covenant breaches
Force boards to pause or cancel new development programmes
Increase the cost of future borrowing as lenders reprice risk
Delay the very housebuilding the government has staked its reputation on

For local authority Housing Revenue Accounts, the picture is equally bleak. Councils have only recently been given more borrowing headroom, and many have stretched themselves to restart council house building. A frozen rent line means frozen capacity.

The Maintenance Time Bomb

Beyond the balance sheet, there is a more immediate human cost. When income flatlines but costs keep rising — labour, materials, energy — something has to give. Historically, it has been repairs and maintenance. That is precisely what the Social Housing (Regulation) Act 2023 was designed to prevent, following years of neglect exposed after Grenfell and the death of Awaab Ishak.

A rent freeze, however well-intentioned, risks putting financial pressure on the very landlords now under legal and regulatory obligation to maintain decent, safe homes. The Regulator of Social Housing would face an invidious situation: enforcing standards against landlords whose income has been curtailed by the same government demanding improvement.

The Bigger Picture

There is a legitimate case that social rents in some areas have crept too high relative to local incomes, and that affordability is a genuine problem for many tenants. But a blunt, short-term freeze is not the answer in a sector already stretched thin.

If the government wants to protect social housing tenants from cost-of-living pressures, targeted rent rebates or enhanced housing benefit uprating would achieve that goal without destabilising the sector's finances. Freezing rents might make a headline. It would cost far more in cancelled homes, deferred repairs, and broken business plans than it could ever save tenants in a single year.

The social housing sector needs long-term certainty, not short-term politics.

This blog reflects the author's analysis of current reported policy discussions. The proposed rent freeze has not been confirmed by the Treasury.

Temporary Accommodation: When Does an Emergency Become the New Normal?

Fri, 24 Apr 2026 16:39:03 GMT

A new report from the Housing, Communities and Local Government (HCLG) Committee, published this week, paints a stark picture of where temporary accommodation in England now stands. Nearly 176,000 children are living in temporary housing. Nightly paid accommodation for families has doubled since 2022. Category 1 hazards are described as "commonplace." And subsidy rates remain frozen at 90% of Local Housing Allowance levels from 2011.

For housing finance professionals, none of this will come as a surprise. But the report is a useful moment to step back and consider what it means for local authority finances — not just now, but over the medium term.

The Financial Trap Councils Are In

The committee's report describes a "vicious circle" — and that framing is exactly right from a finance perspective.

Councils are caught between rising demand, a frozen subsidy rate, and a private market in which landlords are actively switching families from longer-term leases to nightly paid accommodation because the returns are higher. The result is that the cost per placement rises, supply becomes more volatile, and the council has no leverage to improve standards without risking losing the accommodation altogether.

Commissioning higher-quality accommodation — which is what the government, the committee and common decency all demand — pushes councils further into deficit on each placement, because subsidy rates do not come close to covering market rents for decent stock. This isn't a housing management problem. It's a structural balance sheet problem, and it needs to be treated as one.

What This Means for Your MTFP

For Section 151 Officers and housing finance leads, the critical question is whether your Medium Term Financial Plan reflects the true trajectory of temporary accommodation costs — not just current spend, but the risk of further escalation.

A few specific pressure points worth stress-testing:

Nightly paid accommodation volatility. If your authority is reliant on nightly paid placements, you are exposed to rapid cost increases with very little notice. A landlord can terminate a lease and move to nightly rates quickly. Your MTFP should model a scenario in which a material proportion of your current leased supply disappears within 12 months.

Out-of-area placement costs. The committee warns that as B&B usage is driven down, some councils may increase out-of-area placements or shift to other shared accommodation. Both carry financial risk — out-of-area placements typically cost more, and the reputational and legal risks of unsuitable accommodation are significant.

The Decent Homes Standard. The government plans to apply the revised standard to temporary accommodation from 2035. Nine years sounds distant, but capital planning cycles are long. If your authority owns or leases stock that will need to meet this standard, the investment requirement should be appearing in your HRA or General Fund capital programme now.

The Local Authority Housing Fund. The £950m available over the next four years is a meaningful opportunity, but it requires upfront capital commitment and long-term revenue modelling. Acquisitions funded through LAHF need to be properly appraised — the revenue savings from replacing nightly paid placements with owned stock can be compelling, but only if the deal is structured correctly.

The Strategic Case for Moving Upstream

The most financially resilient authorities we work with are those that have moved from reactive placement management to a proactive supply strategy. That means:

Acquiring stock directly, using LAHF funding, Right to Buy receipts, or other capital resources, to replace volatile nightly paid placements with owned or long-leased supply
Modelling the break-even point at which ownership becomes cheaper than continued nightly paid accommodation — in most markets, this crossover happens sooner than finance teams expect
Using institutional funding structures where appropriate — long-dated, inflation-linked arrangements that match the tenure of the need and remove exposure to short-term market movements

The Westminster City Council case, in which a 42-year institutional funding solution enabled the acquisition of 368 homes previously leased for temporary accommodation, is an example of what is possible when temporary accommodation is treated as a balance sheet question rather than a housing management one.

The Bottom Line

The HCLG Committee is right that the only long-term solution is more permanent homes. But councils cannot wait for national housing supply to solve a crisis that is burning through their General Fund budgets today.

The authorities that will be in the strongest financial position in five years are those that start treating temporary accommodation as a strategic finance issue now — modelling the risks, stress-testing the MTFP, and exploring supply-side interventions that reduce rather than compound long-term cost exposure.

If you are reviewing your temporary accommodation position within your MTFP and would like an independent perspective, we would welcome a conversation .

This post was written in response to the HCLG Committee report published on 22 April 2026, and commentary by Jules Birch in Inside Housing . All views are those of Haverly Consulting.

Section 151 Officers: Is Your Temporary Accommodation Strategy Financially Sustainable?

Fri, 27 Feb 2026 10:48:50 GMT

Temporary accommodation is no longer just a housing issue.

For many councils, it’s now one of the most significant structural pressures in the Medium-Term Financial Plan.

Escalating nightly accommodation costs.
Lease expiry risk.
Revenue volatility without asset ownership.

The question is simple:

Are you managing a housing pressure — or carrying unmanaged balance sheet risk?

I recently led a 42-year institutional funding solution for Westminster City Council that enabled the authority to:

Acquire 368 homes previously leased for TA
Replace volatile nightly costs with structured, index-linked payments
Embed £33.5m of retrofit funding
Secure long-term control of supply
Retain unencumbered asset ownership at lease expiry

This wasn’t just a property deal.
It was a balance sheet intervention.

Institutional investors are actively seeking long-dated, inflation-linked public sector exposure. Councils with strong credit profiles can access that capital — if transactions are structured correctly.

For authorities heavily exposed to TA volatility, maintaining the status quo may be the highest-risk option.

If you’re reviewing TA pressures within your MTFP, I’d welcome a conversation.

Types of Local Authority Company

nhaverly@gmail.com (Nick Haverly) — Tue, 15 Sep 2020 17:36:59 GMT

There are a many different types of company that exist, but not all of them are appropriate for all types of activity.

The main corporate structures available to Councils are:

Company Limited by Shares
Company Limited by Guarantee
Community Interest Company
Community Benefit Society
Limited Liability Partnership (LLP)

The following paragraphs briefly describe each in more detail.

Company Limited by Shares

This is the usual legal form for profit-making private companies and is where shareholders buy shares that allow them to earn dividends from the company’s post tax profits. Most Council owned companies are set up as this type of company, with the Council being the main sole shareholder. They invest all of the equity in the company and therefore receive all the dividends once the company is profitable. The basic purpose and benefit of a limited company is that it creates a separate legal entity which limits the liability of the Council (or any other shareholder) if the company ever becomes insolvent.

Company Limited by Guarantee

This form of company has no shareholders so there is no distribution of dividends. Instead the company has Members who each guarantee to pay up to £1 towards the company’s debts. All surpluses are then re-invested in the company or the community. This is the most common form of company for not-for-profit social enterprises. It is therefore unlikely to be suitable for a private rented housing company, unless there is no intention to earn a return on the investment.

Community Interest Company (CIC)

A Community Interest Company is based on a conventional company model, either limited by shares or by guarantee, with two additional features designed to ensure that its activities are undertaken for the benefit of the community.

Firstly, a CIC must submit to the Regulator on its formation a community interest statement that sets out the company’s benefit to the community. Secondly, the memorandum/articles of association must state that ‘the company shall not transfer any of its assets other than for full consideration’, except in cases where the assets are transferred to another asset-locked body such as another CIC or a charity, or the transfer is made ‘for the benefit of the community other than by way of a transfer of assets to an asset-locked body’.

However, the regulations do make provision for the payment of capped dividends in the case of a CIC limited by shares. As a result, once again, if the intention is to provide uncapped dividends to the Council, or potentially dispose of any of the properties in the future to a non-charitable entity, then this structure might not be appropriate.

Community Benefit Society

This corporate form, which replaced Industrial and Provident Societies, has members rather than shareholders, and as a result there is no share capital and no distribution of dividends. These organisations are registered with the Financial Conduct Authority rather than Companies House. They can be charitable, which offers tax advantages, but are not required to be registered with the Charities Commission. As a result, this form of corporate structure would also not be appropriate for our purposes.

Limited Liability Partnership (LLP)

Where two or more parties are working together to achieve a common objective, with the aim of combining their resources and expertise, there can be tax advantages to forming a LLP rather than creating a company limited by shares that is taxed as a separate entity.

For example, a Council could input land assets, whilst a private partner inputs equity capital and development expertise and staffing resources, to undertake a joint development producing homes for sale or long-term rent.

Typically, the partnership would share profits from the joint venture proportionate to the value of their investment in the arrangement. Each partner is then taxed separately in relation to their investment in the LLP, rather than the company paying taxes on the profits in its own right. This is known as being tax transparent and would result in the Local Authority receiving its share of the LLP profits tax free, as it is exempt from corporation tax, although the return to the Council would still probably be less than it would be if it was the sole shareholder in a company limited by shares.

The LLP structure can also make it easier to make changes to the partnership as it progresses, as opposed to issuing or selling shares in a limited company., although LLPs are still registered at Companies House and regulated like a separate company.

Summary

As you can see there are a number of structures that are available to Local Authorities. It is therefore essential that you seek legal advice to help you evaluate and recommend the most appropriate company type based on the strategic purpose you have chosen to pursue and the specific business activities, tenures, and delivery arrangements you intend to adopt.

There is not necessarily just one suitable legal form in each case, and there will be pros and cons of each company option available to you.

What is a Local Authority Housing Company and why set one up?

nhaverly@gmail.com (Nick Haverly) — Thu, 23 Jul 2020 08:55:01 GMT

For a Local Authority, setting up a commercial entity is a totally alien business and therefore it comes as no surprise that many local authorities lack the knowledge required to set up and operate their companies in the most successful, financially beneficial and tax efficient manner.

What is a Local Authority Private Rented Company?

Local Authority private rented housing companies are separate legal commercial organisations partly or wholly owned by a Council.

Unlike Housing Authorities, they are not subject to the Government’s housing finance system and the regulations that govern the operation of the Housing Revenue Account. They also sit outside of the Housing Act requirements on Councils and Registered Social Landlords.

Local Authority housing companies are also able to build and acquire housing for private rent to provide a revenue stream for the local authority. They are not subject to the requirements to rent under secure tenancies, and as a result are not subject to the Right to Buy. This means you won’t lose them, unless you choose to sell them.

As well as buying and building homes, they can also receive properties from the Council should the Council wish to transfer properties, but we will discuss the various ways of building your portfolio at a later date.

Why set up a Local Authority Private Rented Company?

The reasons for setting up a Council owned private rented housing company should inherently be linked to the Council’s corporate objectives and priorities. As a result, we first need to understand the Council’s purpose in setting up a company, and what it hopes to ultimately achieve.

In reality, there are probably a number of different purposes, however the main motivations tend to fall into one of two categories:

To meet housing needs across a variety of different tenures;
To generate revenue, replacing lost government funding and addressing growing pressure on Council resources.

When interrogating these two areas in more detail, typically main objectives that are sought are:

To generate income from private rented sector by acquiring private properties to let;
To have flexibility to amend rent levels that reflect local need and tenure demand.
To more efficiently fulfil our homelessness duty and reduce reliance on the private bed and breakfast sector;
To drive up local private sector letting standards;
To offer Assured Shorthold Tenancies rather than Secure Tenancies;
Reduce the potential loss of housing as a result of the Right to Buy.

Disappointingly, I have also been surprised just how many local authorities have set up companies to undertake activities that they already have legal powers to undertake themselves, without the need to go down a corporate structure route.

For example, a common misconception is that you need a company to develop housing to sell at market value. This is not true, as Councils already have the legal powers to do this, even if they have an HRA.

Even more bizarrely, I have heard, on more than a couple of occasions, from Local Authorities that they have set up housing companies simply because they saw everyone else doing it!

I cannot stress how important it is to understand whether a company is required or not at the very outset. Setting up a company can be a complex and time consuming business, and if you are able to meet your objectives using existing powers , and avoiding the need to set up a company, then I would strongly encourage you to do so, or at least discuss the matter with a consultant with experience on such matters, in order to really understand whether it is the best route or not.

Can Right to Buy Receipts be used to buy S106 Properties?

nhaverly@gmail.com (Nick Haverly) — Mon, 25 May 2020 16:32:17 GMT

This week a former client asked me for advice regarding the Council using Right to Buy receipts to purchase developer-led S106 homes, following the Registered Provider pulling out of the proposed purchase from the developer.

This isn't the first time that this topic has been raised so I thought I would respond more broadly, with my view.

The Right to Buy scheme was introduced in 1980, to help council tenants in England buy their home at a discount.

The scheme was reinvigorated from April 2012, with maximum discounts being increased from as little as £16,000 in some areas to a maximum that now stands at £82,800 across England and £110,500 in London.

Since then there has been a surge in the number of homes sold under the RTB scheme - with 79,119 homes sold between 2012/13 and 2018/19.

The intention of the policy, as well as to encourage home ownership, was to increase the receipts available to Local Authorities and encourage them to use those increased retained elements of the Capital receipt to invest in replacement affordable housing.

There are rules about what qualifies as eligible spending and how Right to Buy Receipts can be used. Put simply, there are three ways of delivering the replacement housing:

The Council builds new affordable homes,
The Council acquires homes that are not already let as social or affordable housing, or
The Council grants to Housing Associations or Registered Providers to deliver these new homes within the same guidelines.

The wording in the original DCLG (as it was then) agreement is not overly specific on the subject of developer-led S106 sites, however given that the Local Authority is able to use such funds to provide its own 100% affordable developments and indeed it can be used to deliver the affordable element of any mixed tenure development that it wishes to undertake itself, I do not see how purchasing such S106 properties using retained Right to Buy receipts would be against the policy, providing the development has not benefited from other central government housing support.

This opinion has also been tested and proven in a number of Local Authority areas over the past few years.

In 2015, Epping Forest District Council entered into an agreement with Linden Homes to purchase S106 affordable properties at Barnfield in Croydon, using Right to Buy receipts and other HRA capital resources.

In 2018, Brighton and Hove City Council stepped in to purchase a number of affordable homes from Developers as none of the City's five housing associations wanted to take them on. This can sometimes be due to the number of homes not being sufficient to see the RP's minimum, but also, more often of late, is that RPs are acting more commercially and being far more selective as to what properties they take on.

In 2019, Cambridge City Council agreed to purchase fourteen S106 affordable homes from Hill, on its development on Clerk Maxwell Road and former Trinity College Tennis Courts

In addition, London Borough of Tower Hamlets also has the purchase of Developer-led S106 affordable housing as a key option within their Strategy for using Right to Buy receipts.

PWLB - Is it all it is cracked up to be?

Thu, 02 Apr 2020 14:45:20 GMT

Just before our worlds were turned upside done by COVID 19 and the resulting lockdown, HM Treasury issued a consultation document on 11th March 2020 which sought to amend future lending terms of the Public Works Loans Board.

The Public Works Loan Board (PWLB), which is a subsidiary of Government’s Debt Management Office (DMO), accounts for approximately two thirds of all Local Authority (LA) debt, which at the end of 2018/19 totalled approximately £114bn.

It is therefore essential that all Local Authorities read and understand the implications of the proposals and respond accordingly.

The HM Treasury consultation document can be found here: PWLB Consultation

At the outset, the introduction to the consultation states:

Local authorities invest billions of pounds of capital every year in their communities. The government supports this activity in part by offering low cost loans through the Public Works Loan Board (PWLB). However, in recent years a minority of councils have used this cheap finance to buy very significant amounts of commercial property for rental income, which reduces the availability of PWLB finance for core local authority activities.

The proposed terms suggested in the consultation document are centred around preventing Local Authorities using PWLB to fund yield earning assets. However, it cannot be forgotten that it is the revenue returns from these income generating assets that have helped to keep many services open during the recent austerity measures and Gershon efficiencies before that!

The consultation suggests that the new terms would require each Local Authority's S151 officer to declare that they do not have “purchases of investment properties” as part of their approved capital programme, and by having any such scheme in their Capital Programme, they would be unable to access PWLB funding for any scheme for that year. The collection of this data will be done annually through the Delta system and would require each LA to disclose their capital programme for the forthcoming year.

Such "outlawed" schemes would usually have one or more of the following characteristics:

buying land or existing buildings to let out at market rate;
buying land or buildings which were previously operated on a commercial basis which is then continued by the LA without any additional investment or modification;
buying land or existing buildings other than housing which generate income and are intended to be held indefinitely, rather than until the achievement of some meaningful trigger such as the completion of land assembly.

The proposals suggest that even if an LA chooses to fund investment property purchases from other sources, it would still forego the ability to access PWLB funding.

Is it right for Central Govt to restrict how LA's fund individual schemes within their capital programmes, and actually, is it really a major problem if they do? Is this the stimulation that LAs need to rethink their old traditional ways of financing anyway, and embrace new unrestricted alternatives?

Whilst it is accepted that PWLB rates are indeed low, PWLB rates currently remain 180bps over gilts, and the recently promised special social housing discount of 100bps means that PWLB for those housing schemes are still 80bps over gilts.

As gilts are secured from the global capital markets, there are clearly other investment institutions and pension funds that also invest in long term gilts at the same rate as the DMO who then seek to on lend, offering maturity, annuity and EIP loans – many at margins that are more attractive than PWLB’s 180 and 80bps.

As a result, a savvy Local Authority could easily access alternative and cheaper funding from private funders at better rates than they currently do, bypassing the need for PWLB in its entirety, and they can use the funds for any purpose they wish!

So whilst this wouldn’t be a problem for the LA (in fact it would actually be better and cheaper), this could be a problem for HM Treasury, as they clearly benefit financially from the margin that they make from their on lending, and should LAs choose to borrow from institutions who are cheaper and less restrictive in how funds are utilised, then this will ultimately have a knock on effect to HM Treasury's bottom line.

So what would you do?

Financially benefit your Council and have the freedom to invest in yield earning assets if you so wish (in line with the Prudential Code and after a resilient and robust financial appraisal has been assessed), or
Forego that financing freedom and potential income earning revenue stream, simply to ensure that HM Treasury obtains the financial returns that they desire from their investment activity?

It doesn't sound like a particularly difficult decision to me, with my localism hat on, wanting the best for my communities!

If you are interested in discussing alternatives to PWLB then please get in touch.

Will the Local Authority acquire the commercial/investment property?

Fri, 20 Dec 2019 16:50:04 GMT

This paper is the final part of our three part summary of CIPFA's guidance on Local Authority Investment Property Investment.

Where an authority is able to determine that it has legal powers to acquire commercial property and that it would be reasonable and prudent to exercise those powers, the final step in the process will be to confirm that the Local Authority wishes to proceed with an acquisition.

Particular attention should be paid to the following areas:

The Corporate Strategy
Investment Strategy
Property Strategy
Competence

The Corporate Strategy

A Local Authority seeking to invest in commercial/investment property will need to recognise that the activity has significant corporate implications. One such implication is that Government and the CIPFA Prudential Code have expressed views that it is not deemed to be a legitimate activity if an investment held purely for revenue raising purposes requires borrowing authority.

Other issues that might arise is the limited supply of property within the Local Authority’s own geographical location, and the possibility that the Local Authority, with access to cheap PWLB borrowing, could find itself distorting the local market as it is able to outbid other private investors who cannot access such favourable terms.

Where property is being acquired outside an authority’s area, then by definition the acquisition will be in the area of another local authority. Questions might be asked about the extent to which this would be helpful to the strategies of the other authority for its own area.

Authorities will need to take robust positions in relation to these issues.

Investment Strategy

Where the acquisition of commercial property does not have a continuing service objective, then the asset should be part of the Local Authority’s investment objectives, contained in the annual Capital Strategy. It should be noted however that investment properties are very different from other, more traditional, investment instruments:

Investment in property is often regarded as a long-term activity, whereas local government has traditionally sought to manage its surplus cash balances using relatively short-term instruments.
Investment properties have a very different balance of security, liquidity and yield from most financial investments – the potential volatility of income will be particularly important for bodies required to balance the revenue budget on an annual basis.
Acquisitions normally involve substantial transaction costs that will need to be taken into account when assessing yields.
Holding the investment will require active management by the authority (or an agent) and may involve ongoing expenditure to run the property and keep it in the required condition.

Authorities undertaking investments primarily for a commercial return should also ensure that these are subject to enhanced decision making and scrutiny, due to level of risk being taken on and the potential impact on the sustainability of the Authority.

The Investment Strategy should set out clearly the governance processes, which should include:

consideration of different investment characteristics and risks, and the investment asset allocation appropriate to the authority, confirming when property investment might be appropriate and fixing its place in a balanced approach to the management of the authority’s balance sheet
how the authority’s overall risk appetite will be determined including overall limits on investments and risk exposure, included by sub-category if appropriate
the process by which the authority will bring forward opportunities, develop and approve outline business cases, consider full business cases and make final decisions allowing for sufficient scrutiny of decision making
appropriate arrangements for professional due diligence, including arrangements for obtaining external advice.

The Investment Strategy should also set out clear methods and procedures for monitoring and managing the performance of its investment portfolios. This could include reviewing market values, market conditions, and other risks that may affect the security, liquidity and yield of the portfolio.

Property Strategy

Local Authorities will need to ensure that any investment properties are accommodated and managed as part of their overall property strategy.

The acquisition decision-making processes will need to address:

how much understanding the authority requires of local and wider property markets
the need to appoint external advisers and agents
how investment opportunities are identified
how options are to be appraised
the due diligence that will take place into individual options
confirming the reasonableness of the acquisition price
implications for the authority’s VAT partial exemption position.

Contingency plans will also be needed, in order to respond to any potential under-performance:

dealing with void periods and defaults on rental payments
strategies for falls in market value
exit strategy.

Competence

The complex nature of property investment means that it is essential for Local Authorities to be competent to take decisions to acquire, hold and dispose of land and buildings.

This does not mean that all the expertise and experience should be in-house, but members and officers must be sufficiently competent to understand and evaluate the advice they are given by external experts.

There should also be clear governance and sign off arrangements for the acquisition and management of commercial property, specifying decision-making powers and requirements for oversight.

A generally accepted principal should be that no decisions should be taken, unless:

advice has been obtained from advisers with appropriate expertise and experience (whether internal or external)
advisers have been provided with all the appropriate information relevant to the provision of their advice, including the factual details of the proposals and the authority’s risk appetite in relation to them
where advice has been obtained from a number of different advisers, the advice has been effectively consolidated, so that it is clear where it is mutually supportive or where there are differences of opinion
decision-makers have the appropriate skills to ensure that they are guided by the advice and not directed by it
the decision is fully compliant with the Wednesbury principles for reasonableness
the decision has been overseen effectively.

Should the Local Authority acquire commercial/investment property?

Wed, 04 Dec 2019 16:40:01 GMT

This paper is part two of our three part summary of CIPFA's guidance on Local Authority Investment Property Investment.

Once appropriate legal powers have been identified, an authority must then be satisfied that the proposed acquisition is reasonable. This should include the consideration of the Wednesbury principles of reasonableness, which seeks to ensure that when a Local Authority makes a decision it:

Has not taken into account matters which ought not to have been taken into account;
Has not refused to take into account or neglected to take into account matters which ought to have been taken into account; and
Has not based decisions on conclusions so unreasonable that no reasonable authority could ever have come to them.

In addition to Wednesbury Principles, the Local Authority should consider the guidance within Section 15 of the Local Government Act 2003, which includes the MHCLG’s Statutory Guidance on Local Government Investments and CIPFA’s Prudential Code.

The Investment Guidance

The investment Guidance seeks assurance that Local Authorities:

Support CIPFA’s view regarding not borrowing more than or in advance of need, purely in order to profit from the investment of the extra sums borrowed.
Require transparent reporting about the implications of an acquisition for the security, liquidity and proportionality of the investment and the authority’s risk exposure.
Recognise the need for appropriate capacity, skills and culture.

Whilst it is acknowledged that the Investments Guidance cannot prohibit the acquisition of commercial/ investment property funded by borrowing, Local Authorities not following the Prudential Code and the Investments Guidance are expected to provide an explanation in their published Investment Strategy. This means that Members of the Local Authority will have to endorse the strategy and make it publicly available.

Any decision to acquire commercial/investment property will therefore always be in line with appropriate governance and be both open and transparent.

CIPFA’s Prudential Code

With regard to the CIPFA Prudential Code, Regulation 2 of the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 (SI 2003 no 3146, as amended) requires Local Authorities to ensure that the acquisition and financing of commercial/investment properties are:

Affordable,
Prudent, and
Proportional

Affordable

Decisions must take into account all associated costs. Such costs can include:

Initial transaction costs
Maintenance costs
Letting costs
Tenant management costs
Void losses and bad debts
Interest costs on any borrowing
Minimum Revenue Provision (MRP) for the repayment of debt

The MRP Guidance requires MRP to be set aside where the acquisition has been partially or fully funded by an increase in borrowing. The cost of the investment property that has not been financed from other resources will be eligible for MRP, amortised over the useful life of the asset, up to a maximum of 50 years, unless the asset was acquired under a lease or private finance initiative (PFI) contract with a term of more than 50 years.

It should however be noted that paragraph 21 of the MRP Guidance does acknowledge that it cannot be prescriptive:

“... other approaches are not meant to be ruled out, provided that they are fully consistent with the statutory duty to make prudent revenue provision. Authorities must always have regard to the guidance, but having done so, may in some cases consider that a more individually designed MRP approach is justified ... the decision on what is prudent is for the Authority and it is not for MHCLG to say in particular cases whether any proposed arrangement is consistent with the statutory duty.”

However, any alternative MRP policy should always recognise that:

investment properties will be subject to wear and tear like any other property held by an authority, even if proper accounting practices do not require depreciation to be accounted for separately
the acquisition of an investment property will normally require incurring substantial transaction costs, which proper accounting practices will allow to be capitalised but which would not prudently be carried forward unfinanced indefinitely
in many cases, investment properties are only likely to hold their value if subsequent capital expenditure is incurred to replace components or refurbish the fabric of the building.
Any anticipated increase in market value should be balanced against the potential physical depreciation of the building.

Prudent

Decisions should be based on assessing the reliability of the costs and understanding the risks and impacts that any adverse changes might have on future projections.

Such considerations might include:

Inflation increases
Reduction in Market rates
Increasing void periods and rent arrears
Increasing interest rates
Reduction in strength of covenant, resulting in a smaller capital receipt upon disposal
Changes in the regulatory environment relating to landlord activities
Changes in property tax frameworks
Changes in local government finance regulation

Proportional

It is essential that the Local Authority’s revenue budget is not over-reliant on income from commercial property and that property income does not constitute an inappropriate proportion of the Council’s overall investment portfolio.

As a minimum, Local Authorities should follow the recommendations of the Investments Guidance and set an indicator for the ratio of commercial income to net service expenditure. In addition, it is recommended that a weighted average expected loss is calculated to ensure that the Local Authority has sufficient resources to meet any potential losses or ensure that actions are put in place to mitigate the risks, in order to protect the Council’s reserves.

Can a Local Authority legally acquire commercial/investment property?

Sat, 30 Nov 2019 16:41:33 GMT

This paper is part one of our three part summary of CIPFA's guidance on Local Authority Investment Property Investment.

Any decision taken by a local authority needs to be supported by an effective legal power and the decision to acquire commercial property is no different.

Proposals to acquire such property must be supported by legal advice that confirms that powers are available to justify what the Local Authority proposes to do, although this advice is not covered by CIPFA’s guidance.

At the outset, one key question is to understand whether the Local Authority is acquiring a property that will happen to make an investment return, or an investment that happens to be a property.

It is this key difference that will determine whether borrowing is justified to support such an acquisition, and accordingly, the it is imperative to understand which relevant power is being used to make the acquisition.

For example, the use of a property acquisition power would allow the use of borrowing powers, however, the use of an investment power may not allow the Local Authority to access the same source of funding.

So, is the acquisition using a Power to acquire a Property or an Investment?

Property Acquisition Powers

There are a number of powers that permit a Local Authority to acquire property (land and buildings), each with its own conditions as to how the power can be applied. These include:

Section 120 of the Local Government Act 1972 provides Local Authorities general powers to acquire land (inside or outside of their area) for the purposes of any of their functions, or to benefit, improve or develop their area.
Section 132 of the 1972 Act, permits the acquisition of halls and offices for public meetings and assemblies.
Section 9 of the Housing Act 1985 allows the acquisition of houses for the purpose of providing accommodation.

Where the above specific powers are not relevant, the general power of competence provided by Section 1 of the Localism Act 2011 gives Local Authorities the power to do anything that individuals generally may do, subject to certain constraints. One of these constraints however, is that charges for services provided must be limited (taking one financial year with another) to recovery of the costs of providing the service (Section 3) and that anything done for a commercial purpose must be done through a company (Section 4).

Where a proposal is in line with any of the powers mentioned above, the acquisition can be justified and subsequently would qualify the authority to exercise its power to borrow to fund the transaction.

If property acquisition powers are not exercisable in any particular circumstance, then reliance will, by default, be sought under investment acquisition powers.

Investment Acquisition Powers

Section 12 of the Local Government Act 2003 provides Local Authorities with general powers to invest for any purpose relevant to an authority’s functions and for the purposes of the prudent management of its financial affairs, however the Act does not define what constitutes an investment.

Government’s view, as per the updated Statutory Guidance on Local Authority Investments, is that non-financial investments such as commercial property fall within the general definition of investments. However, this opinion has not been tested in the courts and so is not a definitive interpretation.

This is important as if the acquisition of a property cannot be aligned with one of the Property Acquisition Powers discussed earlier, it assumes that the only remaining power available is Section 12 of the Local Government Act 2003.

To confirm this, where a property is being acquired solely to generate an investment return, then the transaction is also considered within the remit of Section 12 and must therefore be seen as a part of the prudent management of the authority’s financial affairs as a whole.

However, use of this power can be complicated if the intention is to fund the acquisition from borrowing. This is due to Local Authorities not being able to on-lend. This essentially means that a Local Authority can only invest its own surplus cash, rather than using the cash of other entities to invest. As a result, the power to acquire investments can only be used where an authority is using its own self-generated surplus cash. Ie it cannot borrow to invest.

However, if the Local Authority can demonstrate that it has undertaken internal borrowing, utilising surplus cash balances instead of using external borrowing, then there could be legitimate circumstances to externalise this internal borrowing and re-invest the resulting surplus cash in commercial/investment property.

To establish whether this is possible, the Council should review its Capital Financing Reserve and gross external borrowing levels. By comparing the extent to which the Local Authorities Capital Financing Reserve (excluding spend on investment property) exceeds its gross external borrowing, the Local Authority is able to identify the amount of external borrowing that could be raised for subsequent reinvestment in commercial/investment property under Section 12, as presented in the example below.

Capital Financing Reserve (exc spend on Investment Property) £110,000,000

Less Gross External Borrowing £85,000,000

Amount of external borrowing that could be used to fund investment property. £25,000,000

The key distinction between following a land and buildings route or an investments route through the legal powers is therefore crucial to questions about the use of borrowing to fund an acquisition. CIPFA’s view is that authorities must not borrow more than or in advance of their needs purely in order to profit from the investment of the extra sums borrowed. This position reflects the circumstances that local authorities must not borrow where there is no specific or projected need to borrow but an opportunity has been identified to make an investment return greater than the authority’s cost of borrowing.