The £78.5 million (US$160m) non-HRA (Housing Revenue Account) Kent housing PFI project in south east England serves as a landmark deal in refining the social housing PFI structure

There are a number of unique features that make the Better Homes Active Lives scheme [Projects Database] stand out, despite following the guiding principals of housing PFI projects that have come before.

This deal will provide specific housing for independent living for the disabled, elderly and people with learning disabilities - one of the first opportunities that such housing needs have been addressed in a single PFI transaction.

The scheme - lead by Kent County Council (KCC) - was also procured in partnership with 10 councils.

The financing structure was an interesting element with a unitary charge payment tranche combined with an asset transfer tranche at the end of the 30-year concession period.

Other distinguising aspects include the SPV's IPS charitable status and the avoidance of the tenant's 'right to buy'.

Background and Procurement

Kent County Council led the deal from the local authority side, acting on behalf the 10 district councils.

In May 2005 the councils received approval for an outline business case for £72 million in PFI credits and a tender notice was published OJEU.

By the end of 2005 KCC had shortlisted three consortia:

• Hanover & Integrated Care Solutions Consortium - Costain Engineering & Construction, Hanover Housing Association and NIB Capital Bank
• Housing 21
• BH Consortium - Bouygues, Hyde Housing Association and Ecovert FM

Registered social landlord (RSL) Housing 21 was named preferred bidder for the scheme in late 2006. The project then went from preferred bidder status to financial close - on 5 October 2007 - in 12 months.

The procurement timescale was textbook standard for this type of PFI.

The project will deliver 342 units in the following types of housing:

• extra-care sheltered housing - 282 units
• housing for clients with learning disabilities - 54 units
• housing for clients with mental health problems - 6 units

The new developments will be built on a range of sites across Kent, located in the following district council areas:

• Ashford
• Canterbury
• Dartford
• Dover
• Maidstone
• Sevenoaks
• Shepway
• Swale
• Thanet
• Tonbridge and Malling

An interesting aspect is that in non-HRA projects the 'right to buy' scheme for tenants does not apply - something that has proved a stumbling block in previous social housing PFI contracts.

In HRA social housing PFI projects, tenants could purchase housing from the council - leading to a reduction in the SPV's unitary cost in return for compensation.

Project Structure

The winning bidder - the Kent Community Partnership SPV - is wholly owned by Housing 21.

The project includes two key construction contractors - United House and Denne Construction - who will be responsible for the design and construction of the housing units, working on behalf of Housing 21.

Construction work is split in two distinct east and west areas across Kent.

Denne Construction will be responsible for responsive repairs, cyclical maintenance and renewal of the properties, and Denne Maintenance will provide hard FM services during the operation phase. Denne Construction was taken over by Dutch group Heijmans since October 2006.

Housing 21 will undertake the housing management services, that will include care services and tenant management, among other services.

The SPV is an IPS - industrial and provident society - giving it charitable status. An IPS is an organisation conducting an industry, business or trade, either as a co-operative or for the benefit of the community, and is registered under the Industrial and Provident Societies Act 1965.

Financing

The fixed unitary charge payment makes up the majority of the income stream for the project and if work is not completed on time, deductions will be made from the unitary charge - taking risk away from the public sector.

The remainder of the income stream comes from additional net rental payments.

Non-HRA means that any costs that come about throughout the scheme will impact on council tax.

KCC will pay Housing 21 a monthly unitary charge with PFI credits from the government.

A key part of the non-HRA deal is the residual value element - a feature arising out of the transfer of leases at the end of the agreement in lieu of cash flow payments.

This represents a value of the unexpired term of the leases, which underpin the residual value assets incorporated in the PFI project.

Price must be provided for these assets and through this process the council gets value for money.

Thirty per cent of the project revenue will come from the HMA (housing management agreement) payments and the remaining 70 per cent from the authority, as is typical with non-HRA projects.

This is supported by rental payments through the RSL representing the 30 per cent, with the remaining 70 per cent from the unitary charge payment.

Tranche A - £33 million (US$67m) - is paid for over the course of the project term and Trance B - £32.6 million (US$66.3m) - will be paid at the end with the asset transfer.

The authority has the choice - the expiry option - to retain the asset at the end or to sell to Housing 21.

Barclays is providing 100 per cent of the £65.6 million (US$133.4m) senior debt, which is priced at Libor plus 80 basis points during construction, and Libor plus 65 to 80 basis points during the operation stage.

The equity bridge is £7.1 million (US$14.4m) and is 100 per cent provided by Housing 21.

The debt to equity split is 92:8.

The project also includes a change in law facility of £3.2 million (US$6.5m) and a debt service facility of £2.6 million (US$6.3m).

Syndication is progressing well and is expected to close in the coming months.

Conclusion

There is a need for social housing PFI projects to be refined, and the Kent Social Housing PFI has gone some way to present a robust and bankable structure.

The Kent scheme follows the basic principals of the housing PFI structure, just as the Croydon project did, and as will the Brent scheme that is due to close soon.

Another interesting factor in the changing housing PFI market is that site selection is now a shared responsibility between the private and public sectors.

As there has been a slow down in the maturing UK PFI sector, social housing PFI has come to be viewed as one of the growth markets.

There are currently 19 non-HRA housing PFI projects in the pipeline.

The project at a glance