Affordable Housing Supply Programme: process and procedures MHDGN 2022/02

Funding applications and appraisal procedures

Funding applications for social rent, mid-market rent and new supply shared equity projects being delivered through the grant-funded programme should be submitted by local authorities and RSLs through the HARP system, in line with the terms specified in any individual Programme Agreements.  Grant applicants should ensure that each funding application is completed in full, and that the information provided is accurate and robust as this data informs official published statistics, programme reporting, answers to parliamentary questions and Freedom of Information requests.  Grant applicants, working with their respective grant providers, should also ensure that the HARP system contains accurate project information at all times during a project’s lifecycle, including up-to-date spend profiles.

The Scottish Government has responsibility for appraising projects in non-TMDF authority areas.  TMDF authorities have responsibility for appraising projects in their areas in line with this guidance.

Where projects have already received grant funding through the Affordable Housing Supply Programme or its predecessor programmes, this will be taken into account in the assessment process and will be included as part of the project’s overall grant requirement.

Acquisition applications

Prior to tender application stage, and to enable an acquisition to proceed, there is the opportunity to submit an acquisition application to allow an acquisition offer of grant to be issued.  For all acquisitions, a grant settlement form should be submitted through the HARP system within 14 days of grant payment.

It is important however that a robust appraisal of the development opportunity is carried out by grant applicants before an acquisition takes place to ensure that the proposal is viable and represents value for money.  For example, while grant applicants should continue to undertake proper investigations as part of the normal acquisition process, grant applicants are advised that unknown abnormals can be considered as part of the missives.  Where this happens, grant applicants would need to purify the condition of purchase within an agreed timeframe in order for the acquisition to take place.  Such a course of action enables grant applicants to satisfy themselves that there are no abnormals, or to have them costed and the price adjusted accordingly, prior to the purchase concluding. 

Tender application stage – social rent and mid-market rent

Affordable housing investment benchmarks

When applying for grant assistance at tender stage to deliver homes for social rent and mid-market rent, grant applicants are required to self-certify that the amount of funding that they are requesting is the minimum required for a project to be financially viable for their organisation whilst ensuring rent affordability.  

For new build, refurbishment and conversion projects[1], the amount of grant requested is then compared with the applicable affordable housing investment benchmark (which should be agreed with the relevant grant provider before progressing to tender stage) to determine how the funding application will be assessed.

Projects that can be delivered with grant funding at or below the relevant benchmark follow a streamlined approval process, with projects which are seeking grant funding in excess of the relevant benchmark following a more detailed value for money assessment (Annex A).  The benchmark system is therefore a flexible, administrative tool which is used for grant assessment purposes only – rather than being a grant rate or grant ceiling – and should have no bearing on other matters such as rent setting processes. 

The current set of affordable housing investment benchmarks are as follows:

Baseline benchmarks

The Scottish Government Urban Rural Classification, six-fold should be used to identify and record a project’s geographic classification.  To identify the relevant classification, reference should be made to the National Records of Scotland Scottish Postcode Directory where the following steps should be taken:

• Open ‘latest’ under the Scottish Postcode Directory files subheading       
• Under the ‘Postcode Index and lookups’ section select ‘Postcode Index – Comma Separated Value (CSV)’
• Open the ‘SmallUser’ excel file

Find the relevant postcode in column A – column BA gives the classification of the project as follows:

• 1 – Large urban area
• 2 – Other urban area
• 3 – Accessible small town
• 4 – Remote small town
• 5 – Accessible rural area
• 6 – Remote rural area

To determine the relevant geographic benchmark classification, discussions should be held between the grant applicant and the grant provider to agree the relevant geographic baseline benchmark for the project ahead of the tender grant application being submitted.

When applying for grant funding at tender stage, grant applicants should highlight whether their development proposal contains any of the undernoted features.  If so, the relevant additional quality measures benchmark(s) will be taken into account when determining the overall affordable housing investment benchmark for the project.   

Additional quality measure benchmarks

Annex B provides illustrative examples showing how the affordable housing investment benchmarks system works in practice.  A tender application spreadsheet to determine the applicable appraisal route of a project proposal should be completed by grant applicants and submitted through the HARP system as part of the tender application process.

Social rent levels

As part of the tender application process, RSLs and local authorities should submit what the starting rents for the homes would be based on their current rent policy.

Mid-market rent levels

In most cases, the starting rent level for each mid-market rent home (including any service charge) will be no more than the relevant Local Housing Allowance rate for the property size in question.  The grant provider may however give agreement on an exceptional basis to starting rent levels for each mid-market rent home (including any service charge) being more than the relevant Local Housing Allowance rate if the following cumulative conditions are met:

• the grant applicant (being an RSL, a local authority, a local authority arms-length external organisation or an RSL subsidiary) can demonstrate that in a particular local market area conditions are materially different from the relevant Local Housing Allowance rate
• an RSL, or an RSL subsidiary, has secured the local authority’s support to the proposed starting rent levels, and
• the starting rent levels do not exceed the mid-point of market rent levels for the property sizes in question in the relevant Broad Rental Market Area (as assessed by the Scottish Government).

Rents must not at any time exceed (a) the mid-point of market rent levels for the property sizes in question in the relevant Broad Rental Market Area (as assessed by the Scottish Government) or (b) where agreed in writing with the Scottish Government and the local authority or – in the case of Glasgow and Edinburgh – the relevant City Council, the mid-point of market rent levels for the property sizes in question in a particular local market area – where this is demonstrated and accepted as being materially different from the relevant Broad Rental Market Area.

Further information on the provision of homes for mid-market rent is available at Annex C.

Tender application stage – new supply shared equity

As no affordable housing investment benchmarks are in place for new supply shared equity units, grant applicants should discuss their project proposals with their grant provider at the earliest opportunity in order that the financial viability and appraisal route of the project proposal can be determined.  To aid this discussion, it is vital that property valuations are obtained – if the total value of the properties does not exceed the total project costs then the project is unlikely to be supported by the grant provider.

It should be noted that if the tranche sales predicted at tender stage are assumed too high and those levels are not realised at sale then the grant recipient will have to cover that cost difference until project reconciliation at completion stage.  Conversely, if the tranche sales are higher than predicted those funds remain with the grant recipient until completion stage.

The following example provides a breakdown of how the grant provider’s funding contribution for new supply shared equity properties would normally be calculated at tender stage[7].  (This methodology can be used in advance of inputting the information into HARP to determine whether the project is viable.)

Further information on the provision of homes for new supply shared equity is available at Annex D. 

Cost monitoring

Housing tender returns

Grant applicants must upload a housing tender return for each new build social rent, mid-market rent and/ or new supply shared equity project through the HARP system as part of the tender application process – housing tender returns must therefore be provided for ‘off the shelf’ purchases of new build stock from developers, as well as for new build homes delivered directly by grant applicants.  No offers of grant will be issued at tender stage until these returns are submitted, particularly as the Scottish Social Housing Tender Price Index[8] will be the measure used to adjust affordable housing investment benchmarks on an annual basis.

Documents relating to the Scottish Social Housing Tender Price Index report, the methodology and housing tender return are available on the Scottish Government website.  Further, HIGN 2008/06 provides an explanation of the New Indicative Cost System (which is embedded within the housing tender return).  Grant applicants should note that the terms of HIGN 2008/06 still apply with the following exceptions:

• the ‘HAG Tender Return’ referenced therein is now known as the ‘housing tender return’, reflecting the fact that both RSLs and local authorities are now required to submit this information (formerly it was only required by housing associations), and
• the allowable excesses for ad hoc levels and overall design excess levels have been increased to 25% and 15% respectively.

Automatic fire suppression systems and zero direct emissions heating

Where projects include the installation of automatic fire suppression systems and/ or heating systems which produce zero direct emissions at the point of use, grant applicants must enter the following information in the tender application spreadsheet and submit this through HARP as part of the tender application process for cost monitoring purposes:

• Automatic fire suppression systems:
  • The number of units within the project which will have automatic fire suppression systems installed, by tenure and type
  • The type and design standard of the suppression system(s) being installed, for example, sprinkler system (BS 9251) or watermist system (BS 8458)
  • Whether a water supply tank and pump is required, or whether the system is fed directly off the mains
  • The total actual tendered cost of:
    • purchasing the equipment, including all pipework, sprinkler heads and, where applicable, the tank and pump
    • installing the system, including all building work in connection with the installation, and
    • associated preliminaries.
• Heating systems which produce zero direct emissions at the point of use:
  • The number of units within the project which will have heating systems which produce zero direct emissions at the point of use installed, by tenure and type
  • The type of heating system which produces zero direct emissions at the point of use being installed, for example, heat pumps, heat networks, or electric boilers
  • The actual tendered cost of:
    • purchasing the equipment, such as pipework, radiators, control systems and all other necessary equipment
    • installing the systems, including all building work in connection with the installations
    • the energy infrastructure, such as the electricity grid connection (over and above the cost of connecting for other services), and
    • associated preliminaries.

As with the housing tender return for new build projects, no offers of grant will be issued at tender stage until this information is submitted for projects containing one or both of these measures.

Private and other public finance

At tender application stage, grant applicants must detail all of the sources of finance that are in place/ expected for the project.

Fair Work First

Fair Work is key to Scotland’s economic recovery and renewal, as set out in the Scottish Government’s Covid Recovery Strategy, and National Strategy for Economic Transformation. Through Fair Work First, criteria are being applied to grants awarded by and across the public sector, including to grants awarded to the affordable housing sector.  As a result, as part of the tender application process through HARP, all grant applicants must now:

• provide a statement demonstrating their commitment to each of the following Fair Work First criteria in a way that is relevant and proportionate for their organisation:
• • appropriate channels for effective voice, such as trade union recognition
  • investment in workforce development
  • no inappropriate use of zero hours contracts
  • action to tackle the gender pay gap and create a more diverse and inclusive workplace
  • payment of the real Living Wage
  • offer flexible and family friendly working practices for all workers from day one of their employment, and
  • oppose the use of fire and rehire practice
• confirm that a short statement is contained on their website highlighting their commitment to advancing these Fair Work First criteria – this is to be signed off by the relevant trade union where one is present, or by a workers’ representative(s) where there is no union present, and
• identify measures that their organisation will take to embed fair working practices in their organisation (which in turn will be reflected in grant offer letter).

The above information should be submitted by completing the relevant tab in the tender application spreadsheet.

Further information and support can be found in the Scottish Government’s Fair Work First Guidance – no offers of grant will be issued at tender stage until the above information is submitted.