Agenda item

The Monitoring Officer submits a report informing the Overview Select Committee that the Executive Decision taken by the City Mayor on 22 November 2021 relating to the acquisition of a property portfolio for Affordable Housing has been the subject of a five-member call-in under the procedures at Rule 12 of Part 4D (City Mayor and Executive Procedure Rules) of the Council’s Constitution.

 

 

The Monitoring Officer submitted a report relating to the Call-in of an Executive decision taking by the City Mayor on 22 November 2021 on the acquisition of a property portfolio for Affordable Housing. The decision had been called in under Rule 12 of Part 4D, City Mayor and Executive Procedure Rules of the Council’s Constitution and subsequently the matter had been referred to the Overview Select Committee.

 

The Committee were recommended to either:

 

a)    Note the report without further comment or recommendation, which would have the effect of rolling the call-in forward to Full Council on 23 February 2022;

b)    Comment on the specific issues raised by the call-in, for forwarding to the next meeting of Full Council on 23^rd February 2022;

c)    Resolve that the call-in be withdrawn.

 

Before presentation of the call-in, the Chair made the following statement:

 

“Members will be aware that the owner of the properties and the precise location of the properties has not been disclosed in the report. In order to protect the financial and business affairs of the Council, this detail remains exempt and will not be referred to during our discussion this evening”.

 

The Chair invited the sponsor Councillor Kitterick to address the Committee during which he made the following points:

 

·         Once the renovation and repair costs were added, the authority was looking to spend nearly £40million in total, and given the significance of this, felt that the amount of time given to study the transaction was inadequate.

·         There was secrecy around the deal, and Members were happy to maintain the secrecy of the party. However, part of the secrecy was questioned, when the Council was in a situation where it was about to commit to a £40million deal.  He stated that members and the people of the city had not been told who the purchase was from, what properties were being sold, and the tenants currently in the properties had not been told the transaction was happening.

·         The property schedule showed property valuations but it had been agreed that individual addresses should not be published, though there had been a compulsory purchase order Executive Decision the previous day when two properties had been named.

·         A further issue was a request had been made on a confidential, privileged basis and not to be shared or divulged, for the opportunity to have look at some of the properties and details of them to satisfy Members of the deal being made. He referred to requests of a similar nature being made previously by Members throughout their time on the Council, and confidential reports had been viewed and not divulged in the past with confidences kept. He stated that in an case, the information would at some point be viewable on the Land Registry.

·         There was a value for money argument. As a comparison, Hospital Close was purchased at £60,345 per unit, whereas the purchase under question was £71,761 per unit, which was around £10,500 more per unit than the Hospital Close transactions.

·         Members had been given reassurances that the details did not need to be viewed as there were chartered surveyor reports. However, it was noted that property 24 showed a variation in the valuation of £200k, property 43 showed two variations with a difference in valuation of £436k, and finally in property 25 there was a valuation variance of £608k, and that opinion divergences into the high six figures was of particular concern.

·         It had been reported that the properties were in fair condition, yet they needed £12.5m of repairs. Concern was raised that, on a £26.5million portfolio, having to do repairs of the amount reported did not sound as if the properties were in fair condition. It was added there was a possibility that the number of habitats would reduce from 371 following repairs.

·         A further issue raised was that other options had not been examined. The transaction would represent a movement of tenants from a private landlord to the Council. Councillor Kitterick stated that the Council was the better landlord and therefore the movement of tenants to the City Council was to be broadly welcomed. However, he noted that the transaction did not add a single unit of housing to the councils housing stock, and that this was the hugely missed opportunity. 

·         A suggested alternative to use the £40m was for the Council or a contractor to build new units. Councillor Kitterick reported that a general estimate of £130 – 160k was needed to build a new unit (house), which would potentially add 245-300 brand new homes in the city adding to the Council’s housing stock and could be built on the Council’s own land.  He also questioned whether other developers had been approached. 

·         Attention was drawn to Section 6.2, Legal Implications, page 42, in the report, which read “This exercise has revealed that a number of the dwellings are currently used or works having been carried out without the benefit of planning permission. In addition, works to some dwellings have been carried out without having obtained building regulations approval.” It was noted the Council was the leading planning authority, and there was a reputational issue that a large transaction was being undertaken with a body that had shown little or no regard for planning or building regulations in the past. Also quoted was “However, as the majority of breaches occurred some years ago and therefore enforcement action is no longer possible; and although there remains a risk of action for non-compliance the risk is considered low.” It was questioned if the Council would take enforcement action against a property it had just purchased.

·         Much had been made to how the properties would be offered to people in the city to meet the need, but the issue there was some had sitting tenants.

·         Members requested information on the student / resident balance.

·         It was noted that a number of the properties were studios which were likely to be rented to single individuals. Those single individuals with no children no longer appeared on the Housing register, so Members would not want to see those people displaced, therefore the amount of units that appeared to be available may not actually become available.

·         Without knowing the properties, it was not known what planning permissions were attached to them. Members of the Committee had been informed that some of the properties were student lets, and indeed with student properties and lets there were restrictions such as accessibility to residents parking schemes which might be problematic for longer term tenants.

·         It was not known if rents would be reduced in line with other council tenancies.

·         If the Council were to spend £40million, the transaction needed scrutiny to look at how differently it could be spent.

 

The Chair invited Councillor O’Donnell as a signatory to the call-in to speak, and he made the following additional points:

 

·         As Members, they needed to scrutinise every penny spent. Members were not against the transaction as such if the Council was getting value for money in spending the £40million.

·         He questioned whether the Council wanted 300+ single accommodation units, or 250 homes for life built to a high standard.

·         The commercial sensitivities over the transaction were understood, but councillors were being asked to support something they did not have all the relevant information on, and that this might result in making a very poor decision that did not enhance the city’s housing stock. 

·         He requested that Overview Selection Committee Members, or a small group of Members, be allowed to look at the transaction in more detail confidentially and to defer the decision.

 

The City Mayor informed the meeting that throughout the whole process he and colleagues had been aware it was a very significant decision and had been careful to take the very best professional advice before arriving at it.  He stated that he was committed to bringing into use more housing and the recommendation reached had been to take private properties and tenants into the remit of the Council to enable the properties to be properly managed in future with all of the safeguards that other council tenants had.

 

The City Mayor responded to the point made about the diversions in valuers figures and said that it would be odd if sometimes professional judgements did not sometimes differ, and what mattered was the aggregates of those figures brought the value of the purchases within the range for which Members were being asked to approve. He thought it correct that if the figures had been suspiciously close then that would have required further examination, and that the point of aggregate figures showed that the council was getting good value for money.

 

The City Mayor said it wasn’t a choice being made between purchasing or building, because the Council was doing both, and was of the only authorities that would have a larger housing stock at the end of the four years than at the beginning, and at a time when Right to Buy was eroding stock, to have that record was something to be proud of and would not be achieved by building alone.

 

 

Richard Sword, Strategic Director City Development and Neighbourhood Services, validated the point that the Legal Team, City Barrister, and Head of Law had confirmed what could legally be released and what couldn’t. The Strategic Director then introduced and outlined the contents of the presentation (attached to the minutes for information).

 

During delivery of the presentation, Chris Burgin, Director of Housing, made the following points:

 

·         There was a need for housing in the city, but what was little known publicly was the need for one-bedroom accommodation. Fewer than 900 properties became available each year, with only around a quarter of them being one-bed units, and even those with the highest needs had to wait on average four months.

·         The Council continued to face pressures linked to housing demand from families and single people facing homelessness, with almost 5,000 approaching the Homelessness service in 2021. Whilst the Council continued to provide high-quality services and prevented 80% of those facing homelessness from becoming so, there was still a growing need for housing to meet a demand to meet the need alongside other housing demands as a growing city. The need had been exacerbated by Covid and the ‘Everyone In’ initiative linked to single people, and for which Leicester sustained the offer far longer than other authorities.

·         There was an ongoing burden of Right to Buy scheme placed in the city and the Council. Since the 1980s, the Council had lost over 14,000 properties and each year continued to lose another 400 homes, with currently just under 20,000 homes remaining. It also equated to a loss of £7.1million each year in rental loss, which meant less money to invest in the Council’s housing stock and wider obligations of improving council estate areas.

·         The commitment in 2019 to meet growing demand for housing supply of 1,500 new Council social and extra-care homes for the city had driven the Council to work to find routes to achieve this. One point to note was the link to acquisitions and Right to Buy. There had been a recent change in legislation governing the scheme and the Council would from 2022 be capped at the level of acquisitions it would be able to undertake, as this could be no more than 50% of the overall new housing delivered for the city.

·         In essence it meant that the existing funding from the Right to Buy scheme where the Council was able to utilise up to 40% against the purchase price would not be able to be used to complete such a purchase next financial year.

·         Delivery to date was outlined on council, social and extra care homes, and good progress had been made in 2021/22. Subject to the acquisition of the new portfolio it was anticipated that the Council would achieve delivery of 1,263 homes by the end of 2021 and were on track to deliver 1,500 more by 2023. Efforts to date to meet this aim focused upon 575 new homes being delivered, meeting the family accommodation needs of two-three bedroom properties.

·         The proposed acquisition as previously referenced was mainly made up of one-bed accommodation with a small number of two and three-bedroom units. The proposal was for all units to become Council housing with any existing tenants signed up to be Council tenants and let at social rent levels, and subsequently let to people on the housing register.

·         The Council was aware the portfolio had sitting tenants, with roughly 15 units unoccupied. The additional rental per year would be circa £1,545million and it was anticipated to generate an additional supply of up to 30 vacant units of accommodation each year for those on the housing register.

·         The presentation set out the call-in questions submitted which were responded to in subsequent slides.

·         The first response was to the question of how the transaction was initiated. Chris reported that the decision dated back to June 2019 when the owner produced a prospectus for its sale which became visible to senior staff in the Council, following which contact was made with the owner, and an exercise of sample site inspections randomly chosen by the Council. It then led to a request for more information from the owner and then technical, legal and finance pre-acquisition due diligence undertaken. Findings suggested the portfolio might be an opportunity to increase the supply of much needed affordable accommodation to meet housing need.

·         When looking to see if it would be a good opportunity for the Council, alternative ways were looked at to utilise the funding to deliver new council and affordable homes in the city. The Council had also been working hard to establish a new homes building programme and was moving forward as quickly as possible, though there were clear limitations on land supply.

·         There was a single unit acquisition process in place, but was resource intensive for housing and legal teams, often on purchases that did not complete.

·         It was difficult to attract registered suppliers currently to the city due to limited land sites.

·         The Council had made known its desire to purchase larger portfolios and had successfully completed the purchase some time ago of Pinewood Close in August 2019, and a number of UHL properties earlier in 2021.

·         The Council continued to advertise to any landlords to consider the sale of their portfolios, including adverts in trade magazines for East Midlands property owners, but not all opportunities meet the needs of the city and of the Council. 

·         The Council also considered where relevant the purchase of Section 106 properties that had been built by private developers.

·         Over the last three years, the Council had not limited any of the above options to generate affordable housing in the city and looked at the merits of every opportunity and was on its way to delivering 1,264 additional Council properties for the past year.

 

Matt Wallace, Director, Estates and Building Services, continued with the presentation, with the following points made:

 

·         The Council’s own Members of the Royal Institution of Chartered Surveyors (MRICS) qualified officers undertook the valuation of the portfolio.

·         In addition, three independent condition surveys were undertaken to ascertain the likely cost and expenditure in terms of future maintenance of the portfolio. Valuations were undertaken by senior directors and partners of the organisations. 

·         Following the vendors asking price of £28.3million and the independent valuation of £27.85million, the purchase price was negotiated down to £26.6million.

·         The Council’s accountants had looked at the proposed purchase in terms of it’s financial model and affordability, and indicated the purchase would be paid back in 15 years, which was a short period when compared to 30 to 35 years for a new build scheme.

·         Housing Finance had also looked at the scheme and determined it as value for money and affordable, given the Council’s rental income and based the charges of social rent.

·         It was agreed that the cost of units represented £70,000 to £75,000 compared to the cost of new build circa £130,000 to £160,000 per unit, and overall, it was quicker and cheaper to acquire existing buildings rather than build new units on a diminishing supply of available land.

·         The Royal Institute of Chartered Surveyors (RICS) Red Book industry standards were explained. It was noted the 151 years professional institution was chartered by Royal Privy Council, and members acted with integrity and objectivity, in accordance with the RICS Code.

·         Matt described how a Red Book valuation was undertaken and referred to the RICS industry standards. Redacted information was shown to provide confidence and show the level of due diligence that was followed, and how a surveyor used comparable figures such as capital yield, sold data and searches from a range of information and benchmarks to justify how they would reach a valuation.

·         He explained that it was always better to use the valuations of three valuers on big transaction.

·         The overall condition of assets was noted to be in good condition, with some new, some Edwardian, some Victorian. Some were vacant and, unlike Hospital Close, could be occupied immediately.

·         Independent condition surveys identified improvement works of £12.5million over the next 10 years that would be needed, 50% of which would go into improving thermal efficiency, including windows, doors and heating systems.

·         The Housing finance team reported capacity in the capital programme to undertake property improvement, which equated to around £3k per property on average. The acquisition would join the main LCC Housing capital programme, and condition data would form part of ongoing future maintenance programmes along with existing stock. All contracts were in place to enable preassembled supply chains to deliver the elements of the work.

·         A property had been removed from the overall transaction, as there were some issues with planning permissions.

·         Legal due diligence was undertaken at all stages of the development of the transaction.

 

The Chair said he was very impressed by the professionalism of the staff who worked in the Council.

 

Members of the Committee discussed the call-in further which included the following comments. Questions were responded to by officers present.:

 

·         A Member stated it had previously been recognised that there was a shortage of larger family homes. It was pointed out the Council owned a considerable amount of land at Ashton Green and had an allocation of 3,500 homes, with only 500 provided so far. The £30-£40million could be used productively to build family homes, and the transaction was a bad deal for the people of Leicester and those on the housing register.

·         Normally students were in short-term tenancies and the idea of them being them being removed at the end of their tenancy agreement, whilst other people that lived there remained was discriminatory, and should be afforded the same opportunity to extend their tenancies. Members were informed that no tenants would be asked to leave the properties.

·         The yields in the report read 7.4% or 7.8%. If the Council took ownership of the properties, the amount that would be charged in rent would be equivalent to what other council tenants paid. When looking at the actual costs of £26.62million, there was no stamp duty or land tax added, which took the figure to £27.4million. The 7.8% yield would give £2.1million, which meant that each property on average was producing £5,764 per annum in rental income. It was stated a house could be rented for 30% less than the current rental income predicted from the one bed flats.

·         A Member thanked officers for the detailed report, who had been reassured by the presentation and provision of information. He added there was a housing crisis and a range of houses was needed and the only way to deal with the overcrowding position in the city was to purchase the type of properties in the portfolio on offer. He further stated that as a result of Right to Buy, the housing stock was being depleted. There was a corporate commitment to build 1,500 houses which the Council was committed to delivering. It was noted the tenants would be given the assurance and same protection as current council tenants.

·         Members were informed that Companies House searches were a standard process of all properties the authority purchased to establish if there were any businesses operating form the premises.

·         The Right to Buy (RtB) receipts and spending of them had changed and the authority had less to spend so the percentage of properties that could be bought was a lot less. Also, there was pressure to spend the money otherwise the money would have to be returned legally to the Government and the Council would lose it.

·         Out of the £26.6million, almost £10.5million (40%) came from RtB receipts. From April 2022, the first in relation to the new regulations for RtB meant the authority would only be allowed to acquire the equivalent number of properties as new builds, which meant for the following year less than 200 properties. In turn the Council would not be able to buy a portfolio of 371 units from April 2022 utilising the RtB receipts, and the whole of the funding would have to come from borrowing with the affordability aspect being reconsidered. Using the £10.5million RtB receipts meant there would only be interest chargeable to the proportion of the monies borrowed.

·         With reference to student properties, when undertaking due diligence on the tenancy agreement with those tenants, they had within their clauses particular items that had to be serviced which the Council did not have, so referenced in the presentation was a special arrangement to cover that item, because it was a legal requirement that tenant had. The numbers of student tenants in the portfolio would be provided to Members of the Committee.

 

Councillor Kitterick was invited to make a final statement.  He made a number of further observations including that there were not many students in the properties, there were only 15 vacant units, and there would only be a tenancy switch over of about 30 units per year for the people on the waiting list, yet the Members were promised 371 units.

 

Councillor Kitterick referenced points made by the Director of Housing that in 2022/23 by building new builds, 168 units would come online, and that in 2023/24, 188 units would be available.  All of the units that may or may not become available over 10 years would be available in two years, which in his view indicated why the Council should go with new build.

 

Councillor Kitterick referred to a differential between valuations of property 25 of £608k. He had asked whether any recording of all the Land Registry purchase prices had been kept, which might also have provided extra reassurance. He spoke of the anticipated income of £1.54million which would pay back the principle sum over 16 years, and when including the renovation costs, a further eight years. He also asked for confirmation on who would undertake the renovations and was informed the payback period would be 15 years, with renovations undertaken by a mix of contractors and in-house staff.

Councillor Kitterick went on to confirm contractors would charge 20% VAT, but with a new build deal the VAT would be fully reclaimable.

 

Councillor Kitterick ended that it was positive that the tenants would be brought under the Council umbrella with the Council being the best landlord in the city, but the strategy on the scale proposed was the wrong way to go, and the Council should examine new build as part of the kickstart to regeneration, and it was an opportunity to take the report to Full Council when looking at the Capital Budget, to give Members those few weeks for reassurance.

 

In response to a Member’s question the Director of Housing reported the £10.5milion RtB receipts going into the £26.6million deal could only be utilised for an acquisition until 1 April 2022. The RtB rules changed which put a cap on the fact only 50% acquisitions would be purchased based on new housing. The Council continued to utilise as much RtB receipts as it could for new builds.  However, it was the last year the Council could undertake any significant acquisition deal and it would be more reliant on new builds from next year onwards.

 

It was further asked what type of units were vacant. It was reported the 15 units were vacant at a point in time and were mainly one-bedroom units, but as the vendor continued to operate the properties, it was not known what vacancies would be available on completion.

 

Councillor Cutkelvin, Assistant Mayor for Education and Housing, said that given the delivery of the project she would want updates to be reported to  Housing Scrutiny Commission on a regular basis to ensure the Council was delivering on what had been set out before Members. She felt that that due diligence had been demonstrated throughout the process, and an immediate benefit was the rental income as the majority of the units currently had tenants. She added that with increasing Right to Buy, every time a property was lost it undermined the HRA budget and its capacity to deliver real change and improvement, not only within properties, but within neighbourhoods as well, so there was real benefit with using the RtB receipts. A further benefit added was the ability to upscale or retrofit the houses to make sure they met energy efficient standards, thus protecting residents against fuel poverty. There was a benefit to the broader neighbourhood in terms of having potentially sensitive letting policies should the Council want to in the local area.

 

Councillor Cutkelvin acknowledged the importance of new build but noted the construction industry was under huge challenge and the fact registered providers weren’t attracted to Leicester currently and weren’t yielding affordable homes was a reflection of the pressures faced by the construction industry, Also mentioned was the way the planning system was set up benefitted those who wanted to make a profit and did not benefit those who wanted to build affordable or social housing.

 

Members thanked officers for the thorough explanations given during the meeting. Noted was the use of the RtB receipts of £10.4million, with the balance of £16.2million of Council money to provide one and two-bedroom property of which there was a shortage of for constituents, and loss of the receipts if the transaction was not made. Reference too was made to homelessness in the city and people being made homeless by landlords who wanted to charge more rent, and the current tenants in the portfolio who would have their rents reduced at a time when people income was being crushed during the pandemic.

 

The Chair thanked Members who he said had given real consideration to the issues raised under the call-in which had been responded to very thoroughly by officers. He continued there were a lot of positives about the acquisition and not least that a number of people in the city would become tenants of the City Council and the properties would be restored or improved on in all sorts of ways, for example, in terms of energy efficiency.

 

The Chair said it was important that the Housing Scrutiny Commission monitor closely how the properties are restored and improved and supported those that needed housing in the city.

 

The Chair MOVED that:

 

“The call-in be withdrawn, with there being no further action or need for consideration at Council on 23 February 2022, and the original decision to take immediate affect without amendment”.

 

The Motion was SECONDED by Councillor Westley.

 

On being put to the vote the Motion was carried.

 

Councillors Kitterick and Porter asked that their votes against the withdrawal of the call-in be noted.

 

The Chair asked that all votes, therefore, be recorded for and against, and the results were as follows:

 

Councillors Cassidy, Gee, Halford, Joel, Joshi and Thalukdar voted IN FAVOUR of the withdrawal of the call-in.

 

Councillors Kitterick and Porter voted AGAINST the withdrawal of the call-in.

 

AGREED:

That the call-in be withdrawn, with there being no further action, or need for consideration at Council on 23 February 2022, and the original decision to take immediate affect without amendment.

 

That further information on numbers of student tenants in the portfolio be provided to Members of the Committee.

 

That regular progress on the portfolio purchase be reported to the Housing Scrutiny Commission. 

 

Councillor Porter left the meeting at 8.23pm.

 

There was a short adjournment, and the meeting reconvened at 8.35pm.