Manchester City Council Report for Resolution. Greater Manchester Housing Investment Fund. The Chief Executive, City Treasurer and City Solicitor

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1 Manchester City Council Report for Resolution Report to: Council 1 April 2015 Subject: Report of: Greater Manchester Housing Investment Fund The Chief Executive, City Treasurer and City Solicitor Purpose of Paper The purpose of the report is to: outline the proposals and detail the progress in establishing the 300m Greater Manchester (GM) Housing Fund; to gain agreement from Council for the City Council to manage the GM Housing Fund; identify the proposed governance arrangements for the Fund; detail and agree the guarantee arrangements for the Fund; detail the proposals for the investment strategy of the Fund; and identify Treasury Management issues that are addressed in the Treasury Management report considered elsewhere on the agenda and which sets out Treasury considerations and amendments to Prudential Indicators and MRP policy. Recommendations: Executive is requested to: I Ii Note the contents of this Report Recommend to Council that; a) the Council enter into a legal agreement with DCLG to receive the 300m GM Housing Fund and to guarantee the repayment of up to 240m of refund to DCLG b) The Capital Programme be increased by 300m for the GM Housing Fund to be funded through borrowing c) The Council obtain indemnities from all other nine GM districts to meet the shortfall of any funds to be repaid to DCGL based on the respective percentage population within GM d) Authority be delegated to the City Treasurer and the Executive Member for Finance to approve capital expenditure decisions from the GM Housing Fund on the basis of recommendations of GMCA S 31

2 iii Authorise the City Treasurer to agree the consequential increase in the government debt ceiling to accommodate increased borrowing as a result of managing the GM Housing Fund. Wards Affected: All Community Strategy Spine Summary of the contribution to the strategy Performance of the economy of the region and sub region Reaching full potential in education and employment Individual and collective self esteem mutual respect This report sets out proposals for the Housing Investment Fund Neighbourhoods of Choice Financial Consequences Revenue and Capital The report sets out the proposals for the 300m Greater Manchester Housing Investment Fund which will come into effect from 1 April The Council will each year have to account for any capital losses on the Fund (including those covered by either Central Government or the other districts) with no impact on the useable reserves. There will only be impacts on the useable reserves in the event that the guarantee is called upon and the impact will be limited to the City Council s proportion of the loss. Contact Officers: Name: Howard Bernstein Position: Chief Executive Telephone: h.bernstein@manchester.gov.uk Name: Richard Paver Position: City Treasurer Telephone: r.paver@manchester.gov.uk Name: Liz Treacy Position: City Solicitor Telephone: l.treacy@manchester.gov.uk Background documents (available for public inspection): Report to GMCA, 27 February 2015, Housing Investment Fund S 32

3 1. INTRODUCTION 1.1 The Greater Manchester Agreement announced by government in November 2014 includes provision for the devolution of housing investment in Greater Manchester, in the form of recoverable loans and equity provided to residential property development schemes, to GMCA through the creation of a 300m Housing Investment Fund ( the Fund ). 1.2 The Fund, which is intended to launch on 1 April 2015, will have a 10-year lifetime. It will be funded using the budgets of existing recoverable investment programmes administered by the Homes and Communities Agency ( HCA ), and within GM the Fund will replace those recoverable investment programmes currently delivered by the HCA. Management of existing HCA commitments and operation of its various grant funding programmes will continue to reside with the HCA. 1.3 The key aspects of the proposal, as set out in the Greater Manchester Agreement, are as follows: funds are to be provided to the private sector (including Registered Providers) in the form of recoverable loans and longer-term equity; GM is to guarantee an 80% recovery rate on principal a maximum of 240m; GM will agree an Assurance Statement with HMT/DCLG including a governance and investment strategy; funds are conditional on GM demonstrating that its balance sheet can support the agreed repayment schedule. 1.4 With an economy worth around 50 billion, a population of 2.7 million people and over 90,000 businesses, Greater Manchester already competes on a global scale. An additional 100,000 jobs are forecast to be created in Greater Manchester over the next decade. Over the last ten years the population of Manchester has grown by 19% - faster than any of the other Core Cities, and it is expected that by 2024 an additional 128,000 people will be living in Greater Manchester. 1.5 The development of a high quality, market-facing housing offer that provides neighbourhoods of choice capable of attracting and retaining the skilled and diverse workforce required by employers is critical to achieving these growth ambitions. 1.6 Key priorities for GM are to: build more homes: the initial evidence base produced to inform the development of the GM Strategic Framework indicates that an additional 10,000+ new homes p.a. will be required to meet the additional housing demand generated through economic growth. Current completion rates currently stand at 3-4,000 per annum, and market pressures increase with each year of under-supply; S 33

4 support a high quality private rented offer: with the target market likely to be a young, highly mobile population who will demand a high quality, well managed product; develop a strong sense of place: high quality housing, within high quality neighbourhoods with the right mix of amenities and facilities to attract and retain a highly skilled workforce. 1.7 The Fund will provide the opportunity to invest in locally prioritised schemes and give the flexibility required to stimulate the market, accelerate growth and increase housing supply. While a careful and cautious approach to managing risk will be adopted, the devolution of funding to GM will allow the ability to tailor investment to local market conditions to be maximised. This flexibility is, however, only available if GM is willing to bear the greater part of the risk of investment recovery and give the necessary repayment guarantee to government. 2.0 RESOURCING THE HOUSING FUND 2.1 The borrowing powers of the Combined Authority are currently restricted to transport related functions only and therefore at its meeting on 27th February 2015, the GMCA approved an approach whereby Manchester City Council has been asked to act as the lead authority for the loan arrangement and manage the GM Housing Fund. 2.2 The City Council will enter into a loan agreement with government to receive, and in due course repay, the funds. Negotiations with government regarding the terms of the funding, including the profile for drawing down the 300m and the treatment of interest generated on investments made by the Fund, are ongoing. 2.3 As a result of entering into the agreement there will be a consequential increase in the City Council s borrowing by 300m. As such there will be a requirement to seek a 300m increase in the debt ceiling placed on the Council by the Government through the Debt Deal. It is recommended that the City Treasurer be authorised to seek the necessary agreements with Government to increase the City Council s borrowing limits. 2.4 In the event that the principal repayment falls below the 80% guaranteed amount it has been agreed at the GMCA meeting of 27th February 2015 that each GM District will be requested to indemnify the City Council for its share of any shortfall in funds. Each District s allocation will be calculated in line with its GM population share, on the basis of the official estimate of the Registrar General relating to the commencement date of the Fund (1 April 2015). 2.5 It will be for each GM District to account for the fair value of the guarantee based on the probability that it will be called upon and the indemnities it has obtained from the other Districts. Due to the Investment Strategy and governance structure the Fund will operate under, together with the 60m buffer before there is any shortfall in funds to be repaid to government, it is not S 34

5 anticipated to have any financial liability. This will need to be kept under review during the life of the programme. 2.6 The City Council will be able to retain up to 2.5m per annum of interest received above state aid interest rate levels. This will cover resource costs for the Fund, provide additional lending capacity and may provide an additional buffer to cover any anticipated losses should these materialise. 3.0 HOUSING FUND GOVERNANCE 3.1 The GM Investment Board, which has been established to provide strategic leadership in the development, delivery and monitoring of the Greater Manchester Investment Strategy and the investment funding delivered through the GMCA, will have the responsibility for oversight of the Fund, including the development and implementation of its credit risk management framework and investment performance. 3.2 All recommendations for investment being made by the Credit Committee will be endorsed by the GMCA, with final approval being required by Manchester City Council. 3.3 All loans made by the Fund will require the approval of the City Treasurer and the Executive Member for Finance, acting on the recommendations made by the GMCA through the Leaders of the ten Districts or their nominated deputies. The Council will therefore have appropriate oversight of the investments made by the Fund. 3.4 The Fund will be managed within the GMCA s Core Investment Team, which is already managing a 100m portfolio of loans funded from Regional Growth Funds and Growing Places monies, and oversees the 50m North West Evergreen Fund (an ERDF-funded JESSICA). 3.5 Detailed proposals to augment the skills and capacity currently available within the GMCA s Core Investment Team are currently being drawn up. In addition to ensuring that appropriate housing and property development expertise is available, a number of new posts with responsibilities for credit risk analysis and management have been identified to ensure that appropriate capacity is available, funded from the agreed Core Investment Team budget. 4.0 INVESTMENT STRATEGY 4.1 A detailed Investment Strategy is being developed to underpin the selection, structuring and management of investments made by the Fund, including guidance on acceptable levels of risk and the mitigation measures that will normally be expected to be included in agreements. The Investment Strategy is subject to GMCA approval following further discussion with DCLG. 4.2 The core principles of the Investment Strategy are to structure investments in such a way that maximum security for the loans is achieved and credit risk S 35

6 minimised as far as is practicable. These principles are further established in a suite of standard loan terms as follows: Maximum loan: 50% of project value or 60% of cost; Minimum Interest Rate: State Aid compliant; Term: Maximum 3 year term; Security: Fund has first ranking or pari passu arrangements with senior lender providing total secured funding does not exceed 50% of project value or 60% of project cost; Guarantees: Parent Company Guarantee sought where available and cost overrun provisions; Repayment: Fund repaid prior to equity; Equity recycle: Allowed provided maximum funding limits are never exceeded; and Monitoring Surveyor: Funded by borrower. 4.3 The Council is asked to approve the guarantee to government on the basis that the draft Investment Strategy is approved by the GMCA in due course based on the core principles above. Any subsequent material changes to the Investment Strategy would require approval from the GMCA. 5. ARRANGEMENTS FOR THE GUARANTEE 5.1 The guarantee to repay 80% of the monies received from government for investment through the Fund needs to be put in place in the legal agreement entered into by Manchester City Council and DCLG at the outset of the Fund. There will, therefore, be a requirement for MCC to account for the whole Housing Fund. 5.2 The Council will need to enter into back-to-back arrangements with each of the other nine Districts under which the Council is indemnified for the relevant share of any shortfall on the 240m that it will be required to repay at the end of the Fund s lifetime. The Council will also have its own share of any shortfall as calculated with its population as a proportion of total GM population as at 1 April 2015 when the Fund will launch. 5.3 The approach endorsed by GMCA involves each District guaranteeing a share of the 240m based on its population as a percentage of total GM population. This approach is comparable to that adopted for the funds the Council has provided for investment through the GM Loan Fund, which provides loans to businesses across Greater Manchester and is administered by Maven LLP on behalf of the GMCA. 5.4 The population figures used to calculate any funds payable under the indemnity will be based on the official estimate of the Registrar General as at 1 April For illustrative purposes, the table below sets out the maximum value of the indemnity based on the Registrar General s most recent published official estimate. S 36

7 District Population June 2013 % of total GM population Maximum Indemnity ( 000s) Bury 186, % 16,489 Bolton 280, % 24,757 Manchester 514, % 45,474 Oldham 227, % 20,094 Rochdale 212, % 18,751 Salford 239, % 21,129 Stockport 285, % 25,197 Tameside 220, % 19,501 Trafford 230, % 20,348 Wigan 319, % 28,260 TOTAL 2,714, , The Council will need to account for any anticipated losses in relation to the fund based on the probability that losses will materialise. This will need to be accounted for in that financial year, impacting on MCC s general fund. 5.6 Each of the 9 Districts will provide an indemnity to the City Council that will offset their proportion of the anticipated losses. Based on the approach set out in the Investment Strategy, the anticipated losses on the Fund can justifiably be assessed as nil. The anticipated losses will need to be evaluated on an annual basis as part of the annual accounts. 5.7 Any losses will not fall due for payment until 31 March 2025, i.e. the end of the Fund s 10-year lifetime and, therefore, a loss may never actually crystallise. 6. IMPLICATIONS OF THE CITY COUNCIL MANAGING THE HOUSING FUND 6.1 The GMCA does not have the necessary borrowing powers required to receive the funds in relation to the GM Housing Fund. MCC is considered the most appropriate district within GM to manage the Fund given its current operations and close working relationship with the GMCA. 6.2 There is no greater financial risk to MCC managing the Fund, but it will bear a share of any liability arising as a result of the guarantee as detailed below. There is clearly an administrative burden of managing the funds. These costs will be recharged to the Fund and will, therefore, not represent a revenue burden on the Council. 6.3 MCC will need to undertake the following: Enter into an agreement with DCLG to accept the capital in relation to the Housing Fund Manage the funding on deposit in accordance with its Treasury Management Strategy Take account of required increases in the capital programme Undertake the Treasury Management function of the Housing Fund which will include: o Provide capital to approved projects S 37

8 o Monitor the receipt of capital and interest payments from each of the projects o Report to the Core Investment Team on unpaid principal and interest Account for the Housing Fund within its Financial Accounts. 6.4 The agreement between DCLG and GM is being negotiated by the GMCA. The arrangements being agreed will be reviewed by the City Council to ensure there are no conditions that create a liability for the City Council beyond those set out in this paper. It is recommended that the Council approve delegated authority to the Treasurer and City Solicitor to agree the arrangements with DCLG in conjunction with the GMCA. 6.5 The Housing Fund will be treated as borrowing by the City Council. It is recommended that the City Council s capital programme be increased by 300m. The drawdown of funds from DCLG is anticipated as 40m in year 1, 120m in year 2 and 140m in year 3. The Treasury Management Strategy will need to be updated annually to accommodate this additional borrowing expected in the year and updated to accommodate amendments to prudential indicators and MRP policy. An updated Treasury Management Strategy will be discussed elsewhere on the agenda. 6.6 The process for approving loans from the Fund will be governed by the Combined Authority as indicated earlier in the report and will be subject to appropriate scrutiny and due diligence prior to GMCA approval. MCC is entering into the loan agreement for the Fund. It is expected that loans will be approved based on the GMCA recommendations and it is not expected that MCC will undertake further analysis of a project or reject an investment decision made by the CA. MCC does, however, retain the ability to reject the recommendations. 6.7 Loans to projects will form part of the capital programme and, as such, it is recommended that any GMCA recommendations will flow through the City Council s Capital Gateway process and be subject to existing delegations including sign off by the City Treasurer and Executive Member for Finance, HR and ICT. It will be for the City Council to implement those recommendations and satisfy itself that due process has been undertaken. 6.8 It is proposed that Council is updated each financial year on the status of the Housing Fund and any potential calls on the City Council's guarantee. 6.9 Ultimately the intention is that the GMCA obtains the necessary borrowing powers for housing purposes, this will pave the way for novating the loan agreement to the Combined Authority. When this occurs, potentially in two to three years, the Fund and the loans will novate across to the GMCA. 7. Conclusions and Recommendations 7.1 It is concluded that, as a result of managing the GM Housing Fund, there will be a liability relating to the drawn Fund balance appearing on the City S 38

9 Council s balance sheet. This will be offset by the loans being provided to projects. 7.2 In the event that anticipated losses fall below the guarantee level, the City Council will need to make provisions to cover its proportion of the loss. The GM Housing Fund will be managed in a way to try and ensure the liability is zero and losses do not crystallise. 7.3 Recommendations are set out at the start of this report. S 39