Gordon Campbell

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Gordon Campbell Head of Social Housing Dunfermline
Building Society
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• A different king of recession
• Good response from both Governments
• Green Shoots

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I am seeing a few green shoots but its a little
bit too early to say exactly how theyll grow
- Baroness Vadera
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BUILDING SOCIETIES ACT 1986
a firm must take reasonable care to organise and
control its affairs responsibly and effectively,
with adequate risk management systems a
society must have an adequate system for managing
and containing financial risks to the net worth
of the business, and risks to its net income,
whether arising from fluctuations in interest or
exchange rates or from other factors
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a society must maintain adequate liquid
resources, including prudential liquidity,
appropriate to the scale and nature of its
business to enable it to meet its obligations as
they fall due the society is responsible for
managing the Liquid Assets to obtain the best
return for the least risk, and which is
responsible for raising non-retail funds when
required at the cheapest rates
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RISK PROFILE
Components to Pricing - Cost of Funds
- Risk - Management Costs
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RISK

• HAG Private Finance Leverage / DPU
• Rent Direct (abated for now)
• Valuation Methods
• Product Quality
• Cross Collateralisation
• Cross Subsidy
• Concentration of Risk

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Against a backdrop of

• Scarce Capital
• Liquidity Issues
• Drift from Wholesale Funding

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THE EFFECT OF SQUEEZE
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THE EFFECT OF SQUEEZE
Bank to Bank (LIBOR goes North)
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THE EFFECT OF SQUEEZE
Bank to Bank (LIBOR goes North)
Liquidity Doubt
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THE EFFECT OF SQUEEZE
Bank to Bank (LIBOR goes North)
Mortgage Drought
Liquidity Doubt
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THE EFFECT OF SQUEEZE
Bank to Bank (LIBOR goes North)
Mortgage Drought
Liquidity Doubt
Cash is King
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THE EFFECT OF SQUEEZE
Bank to Bank (LIBOR goes North)
Mortgage Drought
Liquidity Doubt
Cash is King
Profit Hit
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THE EFFECT OF SQUEEZE
Bank to Bank (LIBOR goes North)
Mortgage Drought
Liquidity Doubt
Cash is King
Profit Hit
Capital Scarce
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WHAT NOW ?

• Good early Initiatives
• Extension of OM LIFT
• Grant for MMR
• M to R / Govt. Equity Scheme
• Exit Routes for Homestake
• Unsold stock and land purchase

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NOT HOW WE WEATHER THE PERFECT STORM, BUT WHAT WE
DO DURING IT, IN PREPARTION FOR LIFE AFTER

• Lower Subsidy for affordable housing
• Mitigate affect of rising cost of funds
• Mitigate Higher Margins as a Result of Higher
  Risk
• Planning Maze
• Infrastructure

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Water
Gas
INFRASTRUCTURE
Roads

• Infrastructure Work Now
• Land Acquisition Now
• Capital Outlay on non-income generating
  activity

PROBLEM
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IDEA FOR DISCUSSION

• Reverse Planning Gain from 80/20 to 20/80
• Works especially if HAG becomes available for
  Mid-Market Rent
• Broadens RSL client profile mitigates risk
• Creates Mixed Communities

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Scot Govt
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Scot Govt
Interest Free Loan for Infrastructure 20
Acquisition of land
Local Authority (LHS)
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Scot Govt
Interest Free Loan for Infrastructure 20
Acquisition of land
Local Authority (LHS)
Passed to
RSL
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Scot Govt
Interest Free Loan for Infrastructure 20
Acquisition of land
Local Authority (LHS)
HAG (Less)
Passed to
RSL
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Scot Govt
Interest Free Loan for Infrastructure 20
Acquisition of land
Local Authority (LHS)
HAG (Less)
Passed to
RSL
Buy Land, Appoint Contractor/Developer
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Scot Govt
Interest Free Loan for Infrastructure 20
Acquisition of land
Local Authority (LHS)
HAG (Less)
Passed to
RSL
Buy Land, Appoint Contractor/Developer
C/D completes remedial works infrastructure
80 affordable units
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Scot Govt
Interest Free Loan for Infrastructure 20
Acquisition of land
Local Authority (LHS)
HAG (Less)
Passed to
RSL
20 Land Transfer _at_ nil cost
20 Plots for sale with Planning for Developer
when market recovers
Buy Land, Appoint Contractor/Developer
C/D completes remedial works infrastructure
80 affordable units
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Scot Govt
Interest Free Loan for Infrastructure 20
Acquisition of land
Local Authority (LHS)
Repays Infrastructure Acquisition Loan (via RSL)
HAG (Less)
Passed to
RSL
20 Land Transfer _at_ nil cost
20 Plots for sale with Planning for Developer
when market recovers
Buy Land, Appoint Contractor/Developer
C/D completes remedial works infrastructure
80 affordable units
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M I R A S

• Fair if No Rent Relief?
• MIRAS (also 2,000 FTB Subsidy) is inflationary

BUT

• MIRAS to RSLs
• MIRAS to Non-RSLs

is non-inflationary

• Only paid for development period of loan
• MIRAS (or DLIRAS) only payable to Non-RSLs if
  developing for an RSL

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E.G. 100 Houses Operating Profit
15,000 per house
Dev. Operating Profit
1.5m Less Interest
0.5m Net Profit
1.0m
Pre DLIRAS
HM Treasury
300k
Dev. Operating Profit 1.5m
Less Interest
0.4m Net Profit
1.1m
Post DLIRAS_at_ 20
HM Treasury
330k
HMT DIPS OUT 70k or 700 PER HOUSE
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SHARED EQUITY MODEL (70)
RSL Homestake Grant
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Homeowner (Mortgage) 70
Lender 15
RSL (Grant) 15
Borrower 70
Developer 15
Lender 15
Borrower 70
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PROBLEM
Lender Equity no cashflow
no timescale
SOFT Loan - no margin
Homeowner (Mortgage)
SOLUTION
Lender equity share
Homeowner (Mortgage) 1 p.a.

• No Grant

• Full Ownership

• Lender Confidence

• Developer Paid 100

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Shared Equity (cont)

• Lender Confusion
• Flight to Quality
• Imposition of limit if 80/20 is ok for
  construction industry why not lenders?

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Gordon Campbell Head of Social Housing Dunfermline
Building Society