Independent Financial Economist

A Proposal for Financing UK Housing Developments – ‘Community Real Estate Investment Trusts’ or ‘C-REITS’

The UK needs new approaches to financing housing development if it is to increase annual construction to the government’s desired levels of 250,00-300,000 units per annum. This proposal is for a new vehicle - the ‘Community Real Estate Investment Trust’ or ‘C-REIT’ - that will harness publicly owned land and private institutional debt finance to create new housing of all tenures plus SME workspaces. The key to making C-REITS work would be central government backed ‘first loss guarantees’ on the debt finance for developing the assets to be held within the C-REIT. In using first loss guarantees, central government can underpin financial flows to housing that are many times the size of the government’s financial exposure.

The objective is to create new housing and amenities on publicly owned land without selling that land in one-off transactions to private developers. This enables construction of homes and business spaces that will generate income streams for the district in which they are located. The local benefits financed from these long-term income streams will incentivise local authorities and their citizens to accept additional housing. By holding the assets within a C-REIT, private ‘landbanking’ cannot occur.

The developments will initially be funded by institutions that are keenly seeking low-to-medium risk debt to fund their long-term pension or insurance obligations. A ‘first loss guarantee’ from central government will transform high risk development debt into much lower risk debt that is attractive and appropriate for institutional investors.

‘First loss’ means a specified percentage of the total debt is guaranteed by the central government. If there are no losses, the guarantee costs central government nothing. However, if the government guarantee is for 12% and the developments within the C-REIT make an 8% loss, the government covers that 8% loss while the pension funds and other institutions that provided the debt finance make no loss.

The assets within a C-REIT can be a mixture of housing for sale (potentially leasehold to generate ground rents), leasehold land for self-builders, as well as housing for rent, rent-to-buy and small business spaces to rent for all types of enterprises as well as medical/dental surgeries. The mix will depend on the regional need for housing and the local need to foster business formation. Many builders of small and medium size can be commissioned for construction to distribute the beneficial stimulus from development. The important feature is the beneficial long term income generated by the C-REIT that can be harnessed directly in the C-REIT’s locality.

C-REITs should have the ability to assemble their footprint through compulsory purchase of land either by outright purchase or in exchange for shares in the C-REIT which could be designed to come with tax advantages. C-REITs should also have the ability to use their income for local services and amenities or even infrastructure. They would harness public assets to generate public income for the localities in which they operate. It should even be possible to sell shares to people who live in local post codes at a discount so that they can participate in the C-REIT’s decisions.

This is a proposal designed to benefit the widest possible number of people living and working in each locality so that the insider-outsider problem that manifests itself as ‘NIMBYism’ can be met head on and the profits from public land can be shared locally for the long term.

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