One of the main methods of social housing delivery is turnkey acquisitions.
This can be done in several ways. Firstly, the housing association or local authority may agree to purchase the completed units at a pre agreed price. Secondly, each development above 10 units is subject to Part V obligations which requires the developer to assign some portion of the new development as social housing. The third way is through the purchasing of additional units above developer’s Part V obligations on new build schemes and unfinished estates, while maintaining and creating sustainable communities.
The approved Housing Association can enter into contract to acquire the units prior to completion but the agreed acquisition price will not be paid until the units are complete and ready to be handed over. Negotiation on the final design and specification can occur during the development period between the contractor / developer and the Approved Housing Association who may determine that unless certain amendments to the proposals are made that it will not be possible to enter into Contract.
Historically, the answer was for the State to build Social housing and to lease these at almost nominal rents to those who could not afford to become owner-occupiers. At one time, half the housing output of the construction industry was for council housing, but that stopped when the State turned off the money tap.
No substitute process was put in place and the seeds of the current crises were sown. Many are calling for that old process to be restored but that is impractical for two reasons. Firstly, an absence of the required State funding and, secondly, the inability of councils to build up their design and management teams to the scale required to turn out 10,000, or 20,000 houses each year.
For the councils to ramp up staff and use the contractor method of procurement would take years. So, we need to change our housing procurement process to release the energy and inventiveness of our construction industry.
The traditional speculative developer is carrying four separate risks as follows:
- The risk of getting planning permission and other regulatory approvals;
- They have to finance the land purchase usually over a period of years while securing planning permission;
- They have to construct the houses and infrastructure at a viable cost;
- They are dependent on a purchaser being able to afford the house.
In the UK and Europe, in between the contractor and speculative developer approach lies a third procurement model that is ideal for providing high volumes of houses at affordable prices. It is known as the “‘Turnkey” approach. It is used extensively by UK housing associations and by large investors. The core difference in approach is that the four risks of development outlined above are managed and mitigated by spreading those risks among the stakeholders.
Here’s an example to illustrate the clear benefits of this process:
Landowner A wishes to sell his land and believes that planning permission and services will be available for a housing development. He comes to an arrangement to sell his land to a Turnkey developer B, but the deal is subject to B securing planning permission that B then applies for using his specialist professionals.
Meanwhile, an investor or housing association C, seeking to acquire finished housing on a Turnkey basis is willing to commit to buy the completed houses.
Developer B enters a Turnkey contract to sell the completed houses and offsets his buyer risk. A deal gets agreed and documented and the risks go to the parties best suited to take them.
The landowner A takes the planning risk (for which he receives a higher land price). The investor C takes the risk of the being able to find occupiers. That leaves only the construction risk for B. By specialising only in this niche part of the housing market, B builds up a high degree of expertise both in design and in achieving economies of scale.
Generally, such arrangement works well but they do need skilled management. Here at Social Housing Co. we can provide this skilled management as well as helping identify and construct agreements with the landowner, developer and the Housing Association.