THE ISSUES

Resonance® was conceived to address changing economic conditions and demands on housing supply. Specifically:

• Constrained funding from government for social housing.

• A distant prospect of recovery in the traditional sources of bank finance for new homes.

• The massive reduction in mortgage availability for first time buyers and low to middle income earners squeezing them out of owner occupation.

• Under supply of social housing tenures which address their demand for mid market or transitional rental properties.

• The consequent reduction in first time buyers who seed sales in the housing market.

• From people who are currently unable to buy but not eligible for social housing under existing tenures.

• A drastically contracting construction industry suffering unemployment and long term loss of skills.

• Medium and long term government housing policies in jeopardy - without a recovery in construction the government will be unable to meet its targets.

• A steady flow of distressed land and part built property on the market.

With minimal government funding available, innovative projects are required which will maximise value from limited public funds and drive new sources of private finance into affordable housing. Grant resources are constrained and grant subsidies per unit delivered need to reduce.

The future of a robust approach to housing lies in ensuring a full complement of routes to home ownership and more choice for those who choose to rent by providing more housing options for low to middle earners. Fundamentally, because they need to be housed, and importantly, because they have the potential to become owner occupiers. Some of this demand can be satisfied by offering mid market rental properties where rental level is set between the social and private rent levels in an area and can provide people with the opportunity to save for a deposit. We need to ensure a full compliment of routes to home ownership and more choice for those who choose to rent.

The construction industry is suffering a downturn which is leading to unemployment and could lead to a serious loss of its skills base.

The Resonance® concept addresses all of these issues.

RESONANCE – THE MODEL

Investors like straight forward investments where the bottom line is clear. Some of the mechanics may be complex but the principle is straight forward. Here it is:

Resonance® provides a partnership to deliver affordable properties with the capital cost shared between an RSL and a private investor. The RSL borrows against future income streams to fund the cost of bricks and mortar, whilst the investor funds ‘land’ costs. The RSL rents out the units at affordable rates and gets to keep a percentage of the units in perpetuity. The private investor benefits from any rise in capital value over an agreed period. In other words the model satisfies the desire of the RSL to deliver housing very cost effectively and of the investor to achieve a return.

• The RSL borrows against the future income stream of the property - for the model to work the stream needs to be strong enough to generate borrowing.

• Critically, reduced borrowing cost is facilitated by a guarantee from local or central government against any shortfalls in rental income. The stronger the guarantee, the lower the cost of borrowing. The lower the cost of borrowing, the greater the capacity to fund build costs and to keep more units in perpetuity.

• The funds borrowed by the RSL are transferred to the investor on completion of each unit and used to offset land and construction costs.

• The properties are let on short assured tenancies.

• The private investor retains a right to reimburse the RSL and resume the properties for sale at any point subject to tenancy agreements.

• Normally the agreement would be in place for around ten years and at maturity the investor would reimburse the RSL all monies and take full control of the properties.

• Under most circumstances, the longer the deal lasts the better the return for the investor.

• The RSL retains an agreed number of the properties for no more than the cost of the bricks and mortar.

In this climate of constrained government funding, attracting private finance into the provision of affordable housing has become critical to meeting future demand and achieving national targets. The challenge lies in designing a model which, in the new economic landscape, satisfies investor aspirations and generates positive outcomes for the broad range of stakeholders.

Matthew Benson of Rettie & Co has worked with the investment bank Execution Noble and Scottish Government since late 2008 to deliver an exceptional model which achieves this and more.

RESONANCE – POSITIVE OUTCOMES

The concept achieves its aim of delivering positive outcomes for a wide range of stakeholders.

• The scheme makes it attractive for investors to develop distressed or part built sites which are currently offering good value for money.

• The investor is able to spread funds in what looks like being a long wait for recovery in values.

• As a result these sites, which are often becoming eyesores, go back into production.

• Jobs are created in construction retaining skills for the future and protecting the future of housing delivery in Scotland.

• The market for transitional or intermediate tenures which can lead to home ownership or long term renting in the private market is addressed.

• Tenants have an opportunity to save towards a deposit.

• No capital subsidy is required from government.

• These units, if let at a social rent, require grant support of up to 50% less than current benchmarks.

• There is minimal call on the public purse and leverage on that call is maximised.

• The developer is able to spread funds in what looks like being a long wait for recovery.

• There is no risk to the RSL at the construction stage.

• The repair onus on the RSL is minimised with new properties held on the scheme for only 5 - 10 years.

• The RSL is able to offer properties for rental at minimal cost to the organisation.

• An agreed number of units is permanently retained by the RSL at cost price. These units can add to the RSL portfolio or generate a capital receipt for future leverage and investment.

• No stamp duty costs are incurred and VAT is avoided on management costs.

• The scheme promotes partnership between the public and private sectors.

A SUCCESSFUL PILOT PROJECT

Having identified the gap in the tenure market Dunedin Canmore Group were very responsive to the potential of the scheme and keen to run a pilot. A property in Joppa was identified and the investor approached. A build contractor with appropriate expertise was identified in Springfield Properties PLC, who have an excellent track record in the delivery of high quality affordable housing and who will deliver their 700th affordable home this year. The development has delivered 15 mid-market rentals two of which will be retained by DCG in perpetuity.

Springfield Properties PLC and Dunedin Canmore Group have now joined forces on a property where Springfield will play the full developer role. Brunstane Apartments were bought from an administrator by Springfield Properties in November 2010 and will be built out at their expense. Of the 35 one, two and three be room apartments 18 will be transferred to mid market rental through the Resonance® scheme.

As a result of the success of these partnerships Rettie & Co are rolling out the scheme countrywide and using these developments to demonstrate how the model can attract private sector funding to deliver housing that otherwise may not be built. A standard package of legal documentation and financial modelling has been developed to allow quick and easy site appraisal keeping deal costs to a minimum. This adds to the deliverability of projects and permits even the smallest of sites to be considered.

The strategic and rigorous approach of the partners in the delivery of these homes has led to the successful development and piloting of a scheme which will have a positive long term impact on housing and construction in Scotland.

Matthew Benson

0131 624 9031 | matthew.benson@rettie.co.uk

www.rettie.co.uk/services