Affordable Homes Guarantee Scheme 2020 (AHGS20)

The Department requires changes to be made to the Scheme Rules so as to broaden the range of delivery undertakings which may be eligible for funding (referred to as "Scheme Expansion"), to include improvements relating to energy efficiency and housing decency as well as the construction of new-build and additional affordable housing. Those improvements will be facilitated via:

• 'Tranche B' loans (while an amount equal to 'Tranche A' loans must continue to be spent on the delivery of new affordable housing); and
• secondly, to clarify or in some cases modify the current rules of the scheme, to ensure it remains accessible to a broad range of RPs whose business plans incorporate a degree of new development (referred to as "Scheme Acceleration").

As part of the Scheme Expansion and Scheme Acceleration, consequential changes will be made to the concession agreement and programme documentation (as more particularly described in section II.2.14 below). This will include an increase to the Cumulative Guarantee Amount to £6bn and to extend the application window to April 2026.

In respect of the intended increase to the Cumulative Guarantee Amount and the extension of the guarantee application period, the concession agreement contained provisions contemplating these particular modifications (clauses 3.1 and 7.2 respectively). To that end, the Department is of the view that such modifications are justified on the basis that they are compliant with the requirements of Regulation 43(1)(a) of the CCRs.

In respect of the remaining modifications referred to elsewhere within this notice, the Department is of the view that such changes are justified on the basis that they are compliant with the requirements of Regulation 43(1)(b) of the CCRs for the reasons set out below.

Firstly, the Department believes those modifications are necessary due to the fact that the required delivery undertakings under each loan as originally designed no longer meets RP, or government, requirements due to financial and non-financial issues that have had a significant impact on the affordable housing sector since it was launched. This original scheme requires all funding to be spent on new development, which has been deprioritised by many of RPs in favour of expenditure on decarbonisation and decency works to their existing stock. This reprioritisation occurred towards the end of 2022 in light of rising inflation, interest rate rises, capital expenditures, maintenance costs, potential rent caps, the urgent need to address decency standards and health and safety issues in respect of their existing social housing (e.g. discovery of mould/damp within social housing accommodation which have resulted in health issues, and ongoing fire safety concerns) and a desire to improve energy efficiency of housing (both for environmental and anti fuel-poverty reasons).

Many RPs that would otherwise have been eligible for the scheme paused development activity and diverted their available funding towards existing stock improvements, which inevitably reduced demand for the existing scheme given its development focus. By allowing AHGS20 finance to be used both for new development (with a minimum of 50% of each loan to be used for this purpose) and decarbonisation and remediation, the scheme will be better aligned to RPs' current priorities, enabling them to access funding at lower rates than are available in the market (that can in turn be reinvested in delivering their business plans) and ensuring they can continue to develop new homes while addressing issues with their existing stock. Further, the political landscape has changed since the procurement was conducted in 2019/2020, such that there is a more intensive focus today in respect of tackling environmental and quality issues. The Department believes that the AHGS20 is the optimal vehicle to address these issues and the expansion of the required delivery undertakings under each loan and the limited range of associated variations to the benefit of RPs does not materially alter the services procured under the initial concession contract (i.e the raising of finance to lend to RPs and the subsequent underwriting and administration of that lending). Indeed, not only would the adjustment to the borrowing restrictions be optimal, but in respect of the health and safety issues referenced above, the Department believes it is entirely necessary for the AHGS20 to assist with this objective. Therefore, in order for the AHGS20 to continue to deliver its primary objective (i.e. support the delivery of new-build and additional affordable housing), it is necessary to ensure that the scheme facilitates safe practices and ensures that borrowers meet their contractual obligations and wider duties to comply with latest government guidance/regulations. Changes to the security arrangements (whereby borrowers will have the option to calculate the minimum value of their security by reference to the amount allocated to new development only) are required because, unlike new development, expenditure on decarbonisation and decency works does not necessarily lead to a corresponding increase in asset values. Requiring borrowers to provide security in the absence of such an increase would create a drag on their unencumbered asset base, prejudicing their ability to access finance from commercial lenders who require a more traditional security package. These factors, coupled with the other factors discussed below, means that the Department believes it is necessary to incorporate these modifications.

The Department also believes that a change of concessionaire cannot be made for economic and technical reasons. Tranche A and Tranche B constitutes an integrated product, in that both are advanced to the same borrower at the same time and are secured by the same asset pool. If Tranche A and Tranche B were advanced by different lenders, and the Tranche B lender were unsecured, then in the event of a default o…