Report for Proposition P61/2010 – cont
Housing Development Fund cost/benefit analysis Report for Proposition P61/2010
Housing Development Fund
The following report is presented in response to P61/2010.
1. Background
The Housing Development Fund (“HDF”) came into existencewas created in 2000 and initially the Finance and Economic Committee and now the Treasurer of the States is accountable foto support the development of social housing in the island.r its financial affairs.
2. The Aim of tThe Housing Development Fund
The Housing Development Fund’s purpose is:
‘To help meet the requirements for the development of social rented and first time buyer homes as identified in the ‘Planning for Homes’ report (RC10/99), which was in updated December 2006 (RC 94/2006) and subsequent strategic reports, primarily in the urban area, to a good standard and specification at a reasonable cost’
The Scope of the HDF Scheme is:
The HDF Housing Development Fund does not fund the whole cost of a housing scheme, but provides the Housing Committee with bridging finance to develop properties for onward sale. The scheme bears the cost of land acquisition and development which is then recovered on the disposal of completed sites.
The HDFHousing Development Fund provides a mechanism for funding housing developments undertaken by the States, as well as providing subsidies (where necessary) for developments undertaken by other providers of social rented housing (such as Housing Associations) and, if necessary, for certain private sector ‘first time buyer schemes’. In the case of first time buyer properties it provides an interest subsidy to enable the cost of the scheme to be repaid from its rental stream or sales receipts. The States approved P74/99 and P84/99 on 7 July 1999 and thereby the creation of the HDF Housing Development Fund to be administered by the former Finance and Economic Committee.
The Housing Development Fund provides interest subsidy for those Housing Trust properties acquired under the former Housing Development Scheme Account and supports the development of social rented housing on rezoned sites by capping the interest liability of Housing Trusts to a maximum of 6%.”
3. Housing Development Fund Accounts
Detailed Financial Accounts, including an Income and Expenditure Account and Balance Sheet for the HDF Housing Development Fund are prepared annually and presented as part of the States of Jersey’s Annual Accounts since 2002. Attached as at Appendix 1, are the relevant pages from the above mentioned accounts dating 2002 to 2009.
Also aAttached as at Appendix 2 is a comprehensive Funds Flow Statement for the HDF Housing Development Fund from 2000 to 2010, detailing the Fund’s receipts, payments and transfers and expenditureover life of the fund.
4. Cost / Benefit Analysis
A comprehensive Financial Statement for the Fund from 2000 to 2010, detailing all the Fund’s income, expenditure and transfers is included at Appendix 2. The following paragraphs consider the funding, benefits and costs of the Housing Development Fund.
The Fund has enabled the provision of significant social housing development including 986 social housing units (1 to 4 bedrooms) and approximately 130 first time buyer properties, by supporting Housing Trusts through development subsidies and the provisions of letters of comfort so they could obtain independent borrowing.
The on-going management and maintenance of these properties is the responsibility of the Housing Trusts and is funded through rental receipts.
This has enabled the development of social housing by Housing Trusts without the need for the cost of such developments to be fully and directly funded in advance from the States capital programme.
Attached at Appendix 3 is a schedule of the social housing developments that have been enabled through the Housing Development Fund.
The following paragraphs consider the Fund’s main areas of income and expenditure.
4.1 Level of Financing from the StatesFunds Received
From 2000 to 2010, the HDF Housing Development Fund had has received voted funds from the States of £51.5million, plus additional fundstransfers of £1.3 million transferred from the Housing Department, which were utilised pursuant to the Scope of the Schemes as explained above., resulting in the building / development of 986 social housing units, plus approximately 130 ‘first time buyer’ properties. The HDFFund also generated approximately £9.5m of income from the assets it had held, including rent, sales receipts and interest.
In 2008, the Minister for Treasury and Resources agreed to rationalise the asset holding of the Housing Development Fund by incorporating into the balance sheet of the Housing Department, those properties performing the function of social rented housing units and to Property Holdings, those sites with potential for redevelopment. As a consequence, the HDFFund transferred £16.4m of property assets to the Housing Department and Jersey Property Holdings in 2008 at nil value.
4.2 Funds Expended
Funds spent from the Housing Development Fund fall into three main categories: development subsidies, interest rate subsidies and costs related to property assets. In addition, there are interest charges incurred by the fund at various points in time.
Level ofDevelopment Subsidies given to Housing Trust and Associations
The HDFFund paid capital development subsidies from 2000 to 2010 equating to £20.2million for to support the development of projects where rental levels awere too low to sustain scheduled loan repayments, for example the project at Le Coie. A total of 8 pProjects that received such subsidies which are summarisedreported below.
| £’000 | Units |
Berkshire Hotel | 6,428 | 113 |
Cannon Street | 1,430 | 41 |
Parkside | 1,197 | 19 |
3/5/7&7a Ann Street | 2,392 | 32 |
Le Coie | 8,355 | 96 |
Others | 354 | |
| 20,156 | 301 |
Interest subsidies paid, from 2000 to 2010 pursuant to Letters of Comfort issued equate to £12.2m.
Interest Subsidies
Interest subsidies paid, from 2000 to 2010 pursuant to Letters of Comfort issued amounted to £12.2m.
Thirty -two Letters of Comfort issued to Banking Institutions dating from 1996 to 2007 are currently in force. The Letters of Comfort were issued in order for Housing Trusts to access affordable borrowing from financial institutions to build and develop properties. This enabled the development of social housing without the need for direct funding from the States capital programme.
As at 31 December 2009, total lending of £151.3million had been secured by Housing Trusts supported by States Letters of Comfort. The Letters of Comfort effectively cap the amount of interest Housing Trusts have to pay to banks by providing financial support for interest charged over and above a set rate. This means that if interest rates rise above the set rate (effectively 4% or 6%), then the Housing Trust will pay the bank up to the cap (i.e. up to 4% or 6%), and the Housing Development Fund would meet the excess (i.e. >4% or >6%).
The Housing Development Fund’s current balance of £6.0 million is subject to this contingent liability from the Letters of Comfort. While interest rates remain low, there will be no Interest Subsidies paid. This can be seen in the Summary Funds Flow Statement. If interest rates remain low (i.e. below the caps) then no Interest Subsidies would be payable. Conversely, if interest rates rise above the capped figures then the Fund would have to start paying Interest Subsidies to the Housing Trusts.
The Letters of Comforts are subject to periodic review and the Treasury Department, in conjunction with the Housing Department is currently carrying out a review of all the Letters of Comfort. If there are no changes to the Letters of Comfort the Fund’s current balance may be fully utilised, and even exceeded by future interest subsidies payable. Approximately 80% of the lending secured with the Letters of Comfort has over 15 years to run, meaning quantifying the value of this liability with certainty is impossible; the value will be subject to many unknown variables, particularly changing interest rates.
Current Fund Balance
The HDF hasFund balance, as at 31 December 2010, a net balance of unutilised funds of amounts to circa approximately £6.0 million (subject to audit) and is being held available to meet future financial commitments relating to letters of comfort only.
Cost / Benefit Overview
The HDF has enabled the provision of significant social housing development including 986 units (1 to 4 bedroom accommodations) and approximately 130 first time buyer properties, by given incentives to Housing Trusts so they could obtain independent borrowing. A benefit for the States not directly building / developing the properties is not to have to create an infrastructure to build, then manage and maintain them. However, had the States built / developed the properties internally then it would have the fixed assets, i.e. the 986 properties within its portfolio.
It should be noted that the Housing Department and Jersey Properties Holdings are receiving benefits in the form of rents from the properties transferred to them in 2008, which the HDF would have received. But by not having these assets, the HDF does not have the cost of managing or maintenance them.
Letters of Comfort
32 x Letters of Comfort issued to Banking Institutions dating from 1996 to 2007 are currently still in force. It appears that the form of the Letters of Comfort was initially approved by the Finance and Economic Committee around 1994. The Letters of Comfort were issued in order for Housing Trusts to procure preferential lending facilities, from financial institutions, to build / develop properties. This was the preferred option at the time as the potential expenditure far exceeded the States’ capital budget.
As at 31 December 2009, total lending of £151.3million had been secured by various Housing Trusts supported by Letters of Comfort issued. The Letters of Comfort effectively cap the amount of interest Housing Trusts have to pay to banks by providing financial support for interest charged over and above a fixed rate. This means that if interest rates rise above the capped rate (effectively 4% or 6%), then the Housing Trust will pay the bank up to the cap (i.e. up to 4% or 6%), and the HDF would meet the excess (i.e. >4% or >6%).
The HDF’s current balance of £6.0million is subject to this contingent liability from the Letters of Comfort. While interest rates remain low, there will be no Interest Subsidies paid. This can be seen in the Summary Funds Flow Statement. If interest rates remain low (i.e. below the caps) then no Interest Subsidies would be payable. Conversely, if interest rates rise above the capped figures then the HDF would have to start paying Interest Subsidies to the Housing Trusts.
The Letters of Comforts are subject to periodic review and the Treasury Department, in conjunction with the Housing Department is currently carrying out a review of all the Letters of Comfort. If there are no changes to the Letters of Comfort then this does mean that the HDF’s surplus reserves may be fully utilised, and even exceeded by future Interest Subsidies payable. Approximately 80% of the lending secured with the Letters of Comfort have over 15 years to run, meaning quantifying the exposure with any certainty is subject to many unknown variables. It should be noted that if the HDFs surpluses are exhausted, then Interest Subsidies payable would (if necessary) have to be made from States’ resources.
The report accompanying P61/2010 raised some specific questions and these are considered below.
Question – “The establishment of the Housing Development Fund was done with States approval. However they were due to develop satisfactory safeguards and a regulatory framework to govern it. Has this been done? – If not why not?”
Answer – The Terms of Reference attached as Appendix 3 outlines the governance arrangements for the HDF.
Question – “Another Question that arises is that the year-on-year spending decision would have been agreed as part of the annual process of approving budget and the annual accounts. Has this process included satisfactory monitoring procedures?”
Answer – Each development proposal funded by the HDF has either a Committee or Ministerial approval.
Question – “Also, now that the Committee structures have been replaced by the Ministerial arrangements, are there sufficient checks and balances in place over the management decisions and operation of significant funds such as the HDF and the associated capital and financial expenditure? – Also, what guarantees does the public purse have set against the monies given to Housing Trust and Associations?”
Answer – Since the change to the Ministerial structure, Ministerial Decisions have been given for all major expenditure / requests for support, and since 2006, only 6 Letters of Support have been issued. Each year accounts for the HDF are prepared as part of the States Annual Report and Accounts, which are audited and no qualifications have been given referring to the HDF accounts.
Question – “In 2005, the HDF accounts were re-stated to include a sum in excess of £8million – why was this?”
Answer – The £8million restatement in 2005 was for the recognition of the provision for the development subsidy payment in respect of the Le Coie development, which was not certain in previous years.
Appendix 1 – Housing Development Fund Published Accounts 2002 - 2009
2002
2003
2004
2005
2006
2007
2008
2009
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