Capital Letters: Process evaluation report

Question 1

Executive summary

Accepted Answer

Introduction and background

This report presents the findings and conclusions of a process evaluation of the Capital Letters programme by ATQ Consultants (ATQ). It was commissioned by the Ministry of Housing, Communities and Local Government (MHCLG or ‘the Department’).

Capital Letters was established and owned by ‘member’ London borough councils as a non-profit distributing company limited by guarantee. It was created as a mechanism for the boroughs to reduce homelessness and the use of Temporary Accommodation for homeless people in London, and its set up and operations were supported by grants from MHCLG, in the expectation that it would develop its own income streams and become self-sustaining once grant funding ended.

The aim of this evaluation is to support MHCLG’s understanding of the set up and performance of Capital Letters, its use of grant funding, and its efforts to achieve financial sustainability to inform how government could more effectively support a similar grant-funded company in the future.

To research and answer these questions ATQ interviewed a range of stakeholders across Capital Letters, its Board, current and former member boroughs, and MHCLG officials with policy and commercial responsibility for Capital Letters. ATQ also reviewed Capital Letters’ performance data, and a range of key documents pertaining to its feasibility, set up and subsequent development.

Successes and challenges

Capital Letters had several inter-related objectives, but its main aims can be summarised as being to:

Increase the supply of Private Rented Sector accommodation to member boroughs, by procuring additional properties from landlords and taking over existing properties leased by member boroughs (known as Private Sector Leased properties). The letting of these properties by Capital Letters was important because local authorities and other ‘registered providers’ of social housing (mainly housing associations) cannot discharge authorities’ duty to relieve homelessness (often known simply as ‘discharge of duty’) though a private rented sector tenancy – the tenancy technically remains Temporary Accommodation. Since it was not a registered provider, Capital Letters could do this, enabling member boroughs to achieve a critical objective (homelessness relief) and offering long-term security to homeless people; and
Reduce competition between boroughs for a limited pool of properties, and therefore reduce the power of landlords to play boroughs off against each other and drive up rents. It aimed to do this through transfer of existing borough staff undertaking property procurement to Capital Letters, thereby creating a single procurement entity with greater market reach and power, and through a range of other measures such as agreeing standardised financial incentives to encourage landlords to let properties to low-income tenants.

Capital Letters has had successes against both these objectives. It has procured around 6,500 properties to date, of which around 4,500 have been let to borough-nominated tenants and has introduced innovative ways of attracting landlords such as a sustainment service which helps maintain tenancies by low-income households. It has also increased collaboration between its members by agreeing standardised incentive arrangements and increasing borough membership to a peak of more than 20, although, by design, membership now stands at 10 boroughs, for reasons explained below.

All stakeholders agree, however that Capital Letters has been less successful than expected and hoped, since it aimed to procure more than 20,000 additional properties and has fallen short of becoming the transformational, large-scale procurement vehicle it was intended to be. Stakeholders attribute this to a number of challenges which have made it more difficult to achieve its core objectives, though borough members were consulted remain disappointed by its performance in increasing private rented sector stock supply. It has also faced challenges in developing income streams to replace grant funding and provide it with a sustainable future. In summary the main challenges identified by this evaluation can be summarised as follows.

Adverse market conditions

This has been an overarching and persistent challenge for both Capital Letters and its members boroughs. According to research which Capital Letters part-commissioned the supply of Private Rented Sector property in London is down more than 40% since 2018 and only 2.3% are affordable to tenants on housing benefit. The situation is unlikely to improve unless the Local Housing Allowance is increased so that the maximum housing benefit payable to Private Rented Sector tenants more closely matches rising market rents.

Over-optimistic planning assumptions

Both the Options Appraisal which led to Capital Letters and its subsequent 2019 Business Plan contained assumptions which were widely and quickly identified as over-optimistic to the point of being unrealistic. There was little acknowledgement in the Business Plan of key risks and obstacles, and how they might have been mitigated.

Reluctance/refusal to transfer staff

The early transfer of most procurement staff was one of two key assumptions that proved unrealistic. Stakeholders attribute this largely to risk aversion among the boroughs to transfer or second experienced staff to an untested entity, to staff reluctance to transfer, and to a view that Capital Letters should recruit its own staff (which boroughs would fund) and focus on additional provision rather than the more efficient delivery of existing procurement.

These issues made it much more difficult for Capital Letters to achieve increased collaboration and reduced competition. They also affected service delivery, because Capital Letters needed to recruit and train more staff than it had planned, since fewer experienced staff were transferred than expected.

Obstacles to transferring Private Sector Leased stock

A second assumption that proved unrealistic was that there would be early and substantial transfer of Private Sector Leased stock from member boroughs; to date no such transfers have been achieved despite considerable effort both by some boroughs and by Capital Letters staff.

This reflects reluctance by some boroughs to lose control of stock, the practical challenges of transferring individual leases and a view among some boroughs that the costs of Capital Letters managing their properties outweigh the benefits, or that they can achieve these benefits in other ways. This has hampered Capital Letters’ efforts to increase supply and reduce the use of Temporary Accommodation, and has impacted on its ability to generate income, which was heavily predicated on Private Sector Leased stock transfer.

Varying commitment of boroughs to Capital Letters

Lower than expected staff and Private Sector Leased stock transfer were the most visible manifestations of what some saw as a wider lack of commitment to the vision for Capital Letters among a number of member boroughs, especially when it expanded rapidly to more than 20 members. Some stakeholders attributed this to risk aversion and boroughs needing to see the benefits of Capital Letters before joining, along with insufficient stakeholder engagement before and in the early stages of Capital Letters’ mobilisation. Others thought it the result of boroughs being able to join with little consequence or financial commitment and being attracted wholly or mainly by the availability of subsidy, via MHCLG grant funding, to lettings made through Capital Letters.

Membership currently stands at 10 boroughs, largely because Capital Letters has now adopted a deliberate strategy of having fewer, more active members. This is because a larger and less committed membership caused administrative and governance issues, such as poor attendance at the Borough Representative Body, sometimes rendering it inquorate and unable to make decisions.

Lack of management involvement in early decisions

While the evidence suggests that the above issues have had a more fundamental impact on Capital Letters, there were also operational challenges in its first year caused by decisions made prior to the management team being in place which it subsequently had to unwind. Most importantly, a common IT platform was commissioned before the management team were in place and then abandoned and replaced, delaying live running until September 2020. The management team also inherited and did not have full ownership of the initial Business Plan, which was developed by consultants.

Challenges in finding other sources of income

In the absence of Private Sector Leased stock transfers, Capital Letters has pursued a number of other options for becoming a landlord and thus generating income from rents and management fees. These include both Private Sector Leased stock transfers from other bodies, and building partnerships with investors to enable Capital Letters to lease or buy its own stock. These arrangements have also proved challenging to implement largely due to overall market conditions, especially the rapid rise in interest rates which followed the 2022 ‘mini-budget’ and the gap between Local Housing Allowance rates and market rents.

In the face of all these challenges most stakeholders agree Capital Letters has shown considerable resilience, flexibility and adaptation. Stakeholders also agreed MHCLG had been supportive of Capital Letters and had been responsive and flexible in allowing Capital Letters to revise its targets, and in agreeing to extend grant funding until March 2024. There is also consensus that the grant funding provided by MHCLG was essential to the set-up up and subsequent operation of Capital Letters, though it may also have created a perverse incentive for boroughs to join Capital Letters solely or mainly to benefit from grant-funded subsidy.

At the time of this report (November 2024) Capital Letters remains financial stable and focused on concluding a partnership with investors and others that will enable it to lease or buy a significant stock of new housing for rent. While market conditions remain challenging, if it could conclude such a deal it would be transformative for Capital Letters, since it would both secure its financial future (because it would have income from rents and property management) and would enable it to respond to the boroughs’ increasing demand for more Private Rented Sector supply.

Key lessons from the Capital Letters programme

In the light of the above issues, ATQ makes the following suggestions for actions which could be implemented if a similar grant funding arrangement were made in the future.

Stress test business plan assumptions

Assumptions critical to the achievement of a business case or plan would benefit from being fully tested, with potential risks clearly identified, prioritised and mitigated.

Ensure stakeholders are fully engaged at all levels, and their interests are actively managed

Where the Department is providing grant funding to others who are expected to lead a project (in this case London boroughs) there would likely be considerable benefit in developing a clear stakeholder management plan to enable active management of different stakeholders and their respective interests.

Consider the conditional use of grant funding to encourage commitment

MHCLG grant funding to Capital Letters was linked to specific targets and to the growth of membership, but not to reciprocal action by member boroughs such as the transfer of staff. In some circumstances there might be a case for grant funding to be payable only if more clearly defined conditions and milestones are met.

Consider carefully the speed of organisation growth

If grant funding is awarded to a similar organisation whose membership is expected to grow in phases, targets for growth should be considered carefully, balancing the need to show progress with the challenges of engaging and committing stakeholders successfully.

Award grant funding directly to the implementing organisations

MHCLG grant funding was initially channelled to Capital Letters through a lead member borough, which caused payment delays and blurred accountability. A more appropriate approach may be for grant funding to be tied to the achievement of specified outcomes/milestones and be paid directly to the organisation responsible for the achievement of those outcomes (as happened in this case when the grant funding agreement was changed in 2022).

In addition, the initial grant funding made to a lead member borough to support the mobilisation of Capital Letters, before the executive team was in place, caused implementation issues and delays. It may be advisable to avoid making advance payments to organisations not directly involved in achieving outcomes, unless absolutely necessary (for example to support initial recruitment). This may mean it takes longer to mobilise once the executive team is in place.

Provide consistent and active support to the grantee organisation

It was challenging for the Department to provide commercial advice and support to Capital Letters from its inception because it did not have access to the requisite expertise. With the Central Grants Hub now in place, MHCLG could encourage recipients of grant funding to accept commercial advice and support and allow it to play an active role in the organisation’s oversight via its Board. The Central Grants Hub is promoting this ‘intelligent funding partner’ model in MHCLG and this research suggests that Capital Letters, member boroughs and the Department’s policy lead would all have welcomed such support if it had been available at programme inception.

Question 2

1. Introduction and background

Accepted Answer

Purpose of this report

This report presents the findings and conclusions of a process evaluation of Capital Letters (London) Ltd (Capital Letters) by ATQ Consultants (ATQ). It was commissioned by the Ministry of Housing, Communities and Local Government (MHCLG or ‘the Department’).

Capital Letters was established in response to the increasing pressures on local authorities in London caused by both the rising costs of Private Rented Sector accommodation and the growing number of families in expensive Temporary Accommodation. It was created as a mechanism for London boroughs to work collaboratively to reduce these costs by combining resources, driving efficiency, reducing competition for homes and increasing the supply of permanent accommodation. It is a non-profit distributing company, established as a company limited by guarantee, and wholly owned by London boroughs that agree to become members.

MHCLG provided grant funding to Capital Letters to support its set up and implementation, with an expectation it would become self-sustaining once this funding ended. The aim of this evaluation is to further MHCLG’s understanding of the set up and performance of Capital Letters, its use of government grant funding, and its efforts to achieve financial sustainability to inform how government could more effectively grant manage a similar company in the future.

At various times during its development and evolution government grant funding and other support to Capital Letters was provided by the Department as MHCLG, as the Department for Communities and Local Government and as the Department for Levelling Up, Housing and Communities. For simplicity this report refers throughout to the Department as MHCLG or simply ‘the Department’.

Background and context

Capital Letters was established after an options appraisal and feasibility study commissioned by the collective body for the London boroughs, London Councils, the Greater London Authority (GLA) and the Department. After preparatory and mobilisation work in 2018-19 it was launched in September 2019 with an initial membership of 13 London boroughs and began procuring properties in April 2020.

More details of the objectives of and logic for setting up Capital Letters are provided in the Findings section of this report, but according to its initial (2019) Business Plan its main objectives were to:

increase the supply of Private Rented Sector properties to London boroughs, identified in the Business Plan as its ‘primary objective’;
reduce the use of nightly let and paid temporary accommodation, and ensure properties were allocated more locally than currently the case; and
remove unproductive competition and duplication of effort between London Councils, and by providing an organisation to represent all the London boroughs, offer a simpler and more straightforward interface for London’s landlords, managing agents and developers.

Capital Letters was supported by grant funding from MHCLG, which allocated £38 million for its set up and operations. This funding was ‘top-sliced’ from Flexible Homelessness Support Grant (forerunner to the Homelessness Prevention Grant) – meaning it was taken out of the total grant allocation before the funding was distributed to local housing authorities across England. The total amount of grant funding paid to Capital Letters, and the way it was allocated across years changed over time, as described further in the Findings section of this report.

Key research questions

The overriding objective of this evaluation is to support MHCLG in understanding how it can manage a similar grant funding arrangement in the future. The subsidiary research questions as identified by MHCLG can be summarised as follows.

1. How did Capital Letters use MHCLG’s grant funding and to what extent was the grant funding effective in supporting the mobilisation of Capital Letters?

2. How did MHCLG support, and grant manage, Capital Letters in achieving their objectives, and working towards financial sustainability?

3. What were the key successes and challenges for Capital Letters in achieving their objectives, including:

procuring and letting affordable Private Rented Sector properties to homeless households,
building collaboration and reducing competition for accommodation for homeless households between member London boroughs, and
developing sustainable funding streams beyond grant funding?

4. How did COVID-19 impact the mobilisation and successes of Capital Letters?

ATQ identified a further question in the course of the research, which was:

5. How might the design and implementation of Capital Letters have been done differently to improve its achievement of objectives?

Approach

To complete this evaluation, ATQ carried out primary research with a range of stakeholders across Capital Letters, London boroughs and the Department, and combined this with a secondary desk review of a range of documents and Capital Letters performance data.

The primary research was conducted through semi-structured interviews supported by topic guides. Interviews typically lasted one hour although interviews with some key stakeholders with more in-depth-involvement in the evolution of Capital Letters were longer. Stakeholders to be interviewed were chosen in consultation with the Department and the Capital Letters leadership team to ensure a broad representation of views across current and former London borough members, and the inclusion of borough representatives who were heavily involved in the initial set up and mobilisation of the organisation.

ATQ interviewed 16 stakeholders in total including the company’s executive team (4), independent and borough representative Board Directors (5), other representatives of both current and former member boroughs (5), and MHCLG officials with policy and commercial responsibility for Capital Letters, including the management of grant funding and review of performance (2). All those interviewed from current or previous member boroughs had knowledge of Capital Letters development and evolution over a number of years, and frequently since its inception, in addition to current involvement. In addition, some borough representatives who had moved between authorities were able to share views and experiences from more than one borough.

Secondary research comprised review of Capital Letters’ performance data, and analysis of a range of key documents pertaining to its set up and subsequent development. ATQ reviewed a total of 26 documents including various iterations of Capital Letters’ business plans and strategies and supporting financial forecasts and assumptions. The most important documents in helping ATQ address and answer the research questions were:

The initial (2017) Options Appraisal commissioned from consultants by London Councils, the Greater London Authority and the Department. This considered various options (one of which was the formation of an organisation like Capital Letters) for enhancing pan-London collaboration in the procurement of private rented accommodation for homeless households;
The draft Business Plan developed by MHCLG in 2018;
The final Business Plan approved by Capital Letters’ Board in May 2019. Both this and the draft 2018 plan drew on and were developed from the Options Appraisal, and set out initial mobilisation plans and targets for Capital Letters over its first 3 years of operation;
An independent review of Capital Letters by the London School of Economics. This was commissioned by Capital Letters in 2021 and provides an independent assessment of its successes and challenges at that point;
A review of service and income options for Capital Letters by Campbell Tickell in 2023. This was also commissioned by Capital Letters and focused on how it could achieve sustainable income streams in anticipation of the ending of grant funding in March 2024; and
An internal review by MHCLG, completed in March 2023. This was undertaken to support the reprofiling and repurposing of the Department’s grant funding contribution for 2022-23 and 2023-24 and set out how the Department expected grant funding to be used to support Capital Letters in a reset of its business strategy once grant funding ended.

All interviews were completed between 2 October and 11 November 2024. ATQ would like to thank all stakeholders who gave up their time willingly and at short notice to be interviewed, and the Capital Letters team and MHCLG officials for sharing key documents.

Limitations and exclusions

A limitation of the primary research is that ATQ was unable to interview all 10 boroughs who are currently members of Capital Letters and pay a membership fee. ATQ has however interviewed a reasonable sample comprising 6 of these 10 boroughs (including borough members who are also on the Board of Capital Letters). It also had access to the Campbell Tickell service and options review in 2023 which sought the views of all 20 members at that time.

Time and resource constraints also did not allow for research with either private landlords providing, or tenants renting accommodation procured or managed by Capital Letters.

The scope of the evaluation was limited to the period over which MHCLG was directly involved and providing grant funding, which ended in March 2024. Consequently, this report does not comment in detail on the future sustainability of Capital Letters, only on its efforts to achieve sustainability while grant funded.

Report structure

The rest of this report is structured to:

report Findings from the evaluation, structured to directly address the key research questions set out above,
draw overall Conclusions about the successes and challenges of Capital Letters, and
identify Key Lessons from the Capital Letters Programme and make suggestions on how MHCLG might grant manage and support a similar programme in future.

Question 3

2. Key findings

Accepted Answer

This section sets out key findings from the evaluation. It first addresses the successes and challenges of Capital Letters against its objectives of procuring and letting affordable Private Rented Sector properties, building collaboration and reducing competition between boroughs, and developing sustainable funding streams beyond grant funding. It then addresses questions relating to the use of MHLCG grant funding and the role of the Department in supporting Capital Letters, and finally views on how set up and implementation might have been done differently.

Procuring and letting affordable Private Rented Sector properties

Capital Letters’ objectives and their rationale

The Capital Letters Business Plan approved by borough members in May 2019 identified the procurement and allocation of additional Private Rented Sector and leased properties as its principal activity, enabling boroughs to discharge their duty to relieve homelessness (‘discharge of duty’) and significantly reduce the use of Temporary Accommodation for homeless people. It was to be achieved by procuring more Private Rented Sector properties directly from landlords; and acquiring or transferring Private Sector Leased accommodation, including stock already leased by the boroughs as Temporary Accommodation

The former was to be enabled by improved collaboration between member boroughs, so that Capital Letters could offer a better and more joined-up service to landlords, accompanied by a sustainment service to support both landlords and tenants and improve tenancy retention. This would make it more attractive for landlords to offer properties to low-income households and encourage new landlords to enter the market.

The logic for Capital Letters taking over Private Sector Leased properties was that Capital Letters would be neither a local authority nor another ‘registered provider’ of social housing (such as a housing association). This matters because local authorities and other registered providers cannot legally relieve homelessness through a Private Rented Sector tenancy – if they are the landlord the tenants are technically still in Temporary Accommodation.

Since it was not a registered provider, Capital Letters would be able to convert transferred Private Sector Leased properties to permanent or settled accommodation, usually as Assured Shorthold Tenancies rather than Temporary Accommodation. This would both enable boroughs to achieve discharge of duty (and thereby relieve homelessness) and have significant financial benefits, because the one-off cost of procuring the settled accommodation would be cheaper than Temporary Accommodation in the short term, and considerably greater in the longer term if the alternative were ongoing provision of Temporary Accommodation, typically for 3 years, with no discharge of duty.

Member boroughs consulted for this evaluation largely confirmed that the prospect of increased Private Rented Sector supply remained their prime motivation for continued membership, since the challenges of finding affordable Private Rented Sector have worsened since Capital Letters was founded, as has the use of expensive Temporary Accommodation which does not enable discharge of duty. The Campbell Tickell review similarly noted in March 2023, following consultation with all 20 member boroughs, that “The Private Rented Sector procurement service (allied to the Tenancy Sustainment service), is seen by members as the primary rationale for Capital Letters.”

Successes and challenges

Capital Letters has had some success in increasing procurement and the number of tenancies. According to data in MHCLG’s March 2023 review of Capital Letters, in its first 3 full years of operation between April 2020 and March 2023, Capital Letters procured 6,165 properties of which exactly two-thirds (4,154) were let to tenants. It has also put in place a common incentive scheme for landlords (comprising a one off-payment for each Private Rented Sector property) that was agreed by all boroughs, thereby reducing competition. A further success was the introduction of its sustainment service, which is free to landlords and supports both tenants and landlords in the early months of tenancies, increasing retention and aimed at preventing households who have been allocated settled accommodation from re-entering the homelessness system.

Capital Letters has also faced major challenges which mean it has not achieved the planned increase in supply. While like-for-like comparison of Capital Letters’ performance against its targets for procurement is not straightforward, the procurement of 6,165 properties compares with a cumulative 3-year target in the 2019 Business Plan of 20,877 additional properties procured and 20,000 households relieved from homelessness. The breakdown by year is shown in Table 1 below, although it should be noted that the Business Plan targets for the first 3 years (as defined in the Plan) do not entirely line up with the end of financial year data.

Table 1. Capital Letters procurement by year

Year	Actual properties procured	Actual properties let	New properties target (Years 1-3)	Homelessness relief target (Years 1-3)
2020-21	2,754	1,644	1,952	2,000
2021-22	2,615	1,876	6,425	7,000
2022-23	796	634	12,500	11,000
Totals	6,165	4,154	20,877	20,000

^{Source: MHCLG 2023 review of Capital Letters, Capital Letters 2019 Business Plan.}

Among the challenges faced by Capital Letters in achieving this and other objectives, an overarching issue is that some of the key assumptions in the 2019 Business Plan, carried over from the original Options Appraisal, quickly proved ill-founded and meant Capital Letters’ targets were, in the view of multiple stakeholders, “unrealistic”.

Firstly, while Capital Letters has had some success in improving collaboration between boroughs, both the Options Appraisal and 2019 Business Plan assumed transfer of member boroughs’ existing procurement staff to Capital Letters at a much larger scale than has happened in practice. Successes and challenges in achieving collaboration are explored in more detail in the next section of this report, but the overall effect was to undermine Capital Letters’ efforts to become the primary source of Private Rented Sector supply to boroughs.

Secondly, the Plan assumed early, and relatively straightforward transfer of existing Private Sector Leased stock to Capital Letters, while in practice no transfers have occurred. This again affected supply but also had broader implications for Capital Letters’ financial sustainability, as also discussed separately below.

Thirdly, Capital Letters was unable to mobilise as quickly as planned (launching in September rather than April 2019) and faced major operational issues in its early months. According to Capital Letters stakeholders the most important issues were delays in setting up arrangements for secondment of staff, in agreeing common incentive payments and service agreements with member boroughs, and in implementing an IT platform on which properties could be listed and which could be used by procurement staff, member boroughs and landlords.

The IT issue proved particularly challenging: specification of a listing platform, along with other preparatory work, was initiated prior to the recruitment of the Capital Letters executive team and managed by the ‘London collaboration project’ a group comprising London Councils and representatives of boroughs that were interested in or committed to becoming founding members of Capital Letters. This group commissioned the IT system, and delegated its procurement to one of the boroughs, with the aim of having the system in place by June 2019.

Once the Capital Letters team was in place, it concluded that this system was not working as intended and was also proving more expensive to develop than promised. The Board therefore approved a plan to terminate the development contract in January 2020, and procure a separate bespoke system, CAPS, which is still in use today and appears to be well liked by all users across Capital Letters, member boroughs and landlords. Due to the abortive work on the original system and the work needed to develop the replacement, however, the CAPS system was not operational until September 2020, and Capital Letters faced abortive costs on the original development and procurement of around £300,000.

Finally, and potentially most importantly, there have been major fluctuations in market conditions over the 4 years (2020 to 2024) where Capital Letters has been close to fully operational. In 2002-21 Capital Letters benefitted both from resolution of some of the operational issues that delayed its launch and initial procurement activity outlined above, and from an increase in the availability of Private Rented Sector properties due to the impact of the COVID-19 pandemic and consequent restrictions.

The impact of COVID-19 is considered fully in a later section of this report, but stakeholders widely reported that both borough and Capital Letters negotiators experienced strong growth in the availability of properties landlords were prepared to let to low-income tenants, due to lower demand for full market rent properties as tenants left London and restrictions on landlords’ ability to evict tenants until September 2021. According to one borough stakeholder:

During COVID landlords would pretty much take anyone they could get.

This, and the increase in the number of boroughs who were members, meant procurement performance was strong. Subsequently, the reverse has happened. There has been a strong recovery in the market which has significantly increased market demand for properties to rent and made it less attractive for landlords to let at affordable rents.

As noted in the Campbell Tickell options review, research commissioned from Savills by Capital Letters found that over the year to October 2022, rents rose on average by 17% having fallen by around 10% on average between December 2019 and March 2021, in part driven by high levels of demand and much reduced availability, with listings down 31% compared with the peak in late 2020. More recent (July 2023) research for London Councils, Capital Letters and others found these trends continuing, with listings of 1, 2 and 3 bed properties across London down by 36% on the Q1 2017-19 average and asking rents in London 20% above their pre-COVID level.

These trends are reflected in the sharp fall in procurement of properties in 2022-23 shown in Table 1 above, which has continued into 2023-24. A Capital Letters year-end Board report shows it offered a total of 257 properties in 2023-24, of which 210 had been let, and that market conditions had worsened considerably over the previous 18 months. Several borough stakeholders whom ATQ consulted confirmed this trend, in response to a question about the key challenges currently facing Capital Letters. These respondents observed it was very challenging to procure properties affordable to those on housing benefit at current levels of Local Housing Allowance, which determines how much housing benefit can be paid to Private Rented Sector tenants. The 2023 research mentioned above also suggests challenging market conditions, reporting that only 2.3% of properties were offered at or below Local Housing Allowance level.

Finally, the ability of Capital Letters to achieve lettings to tenants, as opposed to procurement of properties available to let, has been affected by a relatively low acceptance rate of properties offered to member boroughs. This has a consequent effect on the conversion rate – the number of properties let as a percentage of those procured. As noted above, the overall conversion rate achieved by Capital Letters between 2020 and 2023 was 67%. Not all properties accepted are let because some are withdrawn by landlords, but analysis in the report by the London School of Economics in 2021 showed that in 2020-21 there was considerable variation in the rate of acceptance (as opposed to letting) from a high of 80% to a low of 27%, excluding some boroughs who were offered very few properties.

This issue is analysed in more depth in the next section of this report because it appears in part to reflect the degree of engagement and commitment of individual boroughs, but it should be noted that the acceptance rate appears to have increased as the availability of stock has reduced. In 2022-23 the conversion rate rose to 80% of properties procured and in 2023-24 to 82%, with Capital Letters reporting that many of the unconverted 18% were still under consideration, and only 4 properties had been rejected by member boroughs. In addition, some boroughs made clear to ATQ during interview that they had not rejected properties except where they were not of a suitable standard.

Building collaboration and reducing competition for accommodation

Capital Letters’ objectives and their rationale

The original Options Appraisal that led to the set-up of Capital Letters put strong emphasis on the need for improved collaboration and the need for “centralised procurement and (where boroughs prefer it) management of accommodation across London. This should increase efficiency, reduce competition between boroughs, increase market reach and market power, and allow many more homeless households to be accommodated in or close to their home borough.”

The 2019 Business Plan identified a number of steps needed to achieve this close collaboration, among which two were key:

the growth, in phases, of the membership of Capital Letters “to include if not all, then the majority of London boroughs” in the expectation that “Capital Letters will become the main source of private sector accommodation to prevent and relieve homelessness in London.”; and
the transfer or secondment of the bulk of existing procurement staff employed by the boroughs to Capital Letters, enabling the boroughs “genuinely to act together in procuring accommodation to tackle homelessness, rather than competing with each other for accommodation across London.”

Successes and challenges

Capital Letters was broadly successful in growing borough membership rapidly, although it is arguable this growth caused as many issues as it solved, as discussed further below. It has also been successful in reducing competition between its members in a number of ways, including agreeing a standard financial package for landlords for the procurement of family accommodation, and negotiating a pan-London financial package for studio accommodation.

Capital Letters was however less successful in achieving the transfer of procurement staff to support its core Private Rented Sector procurement function. This remains an issue and has, in the view of stakeholders, severely affected its ability to achieve its wider objectives.

On the issue of borough membership, 13 boroughs had agreed to become members when Capital Letters was launched, and it had targets in the 2019 Business Plan to increase membership to 19 boroughs by the end of year 2 and 25 boroughs by the end of year 3. The actual number of borough members fluctuated slightly but it appears that Capital Letters did successfully increase membership to 18 by early 2021, and then to 21 boroughs, before it fell back to 19 during 2022-23. Membership then fell to 10 boroughs in late 2023 and early 2024, largely because Capital Letters adopted a deliberate strategy of working only with boroughs prepared to commit fully to its objectives, as explained further below. The ending of grant funding from MHCLG and the introduction of a borough membership fee may also have been a factor, as noted below.

While overall numbers grew, however, stakeholders observed there was substantial variation in the degree of commitment by individual members to the vision and ethos of Capital Letters, reflected most directly in the willingness of boroughs to transfer staff. It was envisaged in the 2019 Business Plan that every borough would transfer at least 2 staff to Capital Letters, with a consequent target for 26 staff to transfer across the 13 founding boroughs. In practice, 3 boroughs seconded 2 or more staff, 3 committed less than 2 and 7 of the boroughs seconded none at all. While some boroughs had no staff to transfer and instead funded recruitment of staff by Capital Letters, others chose to fund staff when they were expected to second their own teams.

This pattern has been maintained throughout, with boroughs being reluctant to transfer their procurement teams (or to do so only to a limited extent) for a number of reasons including the desire of local housing managers to retain control of their teams, reluctance or unwillingness of staff to transfer from a local authority to an external start-up organisation, and a concern among both local teams and local landlords that established links between them would be weakened or lost. Some stakeholders admitted to being naturally risk averse and wanting to see further ‘proof of concept’ from Capital Letters before committing fully to it. Others were more forthright and made it clear that transfer on the scale assumed was unrealistic. As one representative of a current member borough (who has been involved with Capital Letters since its inception) commented on the proposal:

Here’s a new vehicle, we’re going to move all our procurement capacity into this vehicle in the hope that they’re going to provide as much accommodation as we’re currently providing. Would you give all your resource that had all your contacts, and business intelligence to that vehicle, at no cost?

It is not possible to comment on the validity of these concerns, but Capital Letters and some borough stakeholders believe they have caused major challenges. First and foremost, Capital Letters has continued to compete with local teams for a limited supply of affordable Private Rented Sector properties. While safeguards and protocols were put in place to avoid or reduce competition, including a pan-London agreement on the incentives that could be paid to landlords, Capital Letters has had to put in place different operating protocols with each borough, rather than operating largely common arrangements through staff they are managing directly. According to Capital Letters stakeholders this took months of time and effort.

In addition, there is a view among some stakeholders that local teams have sometimes prioritised their own targets for procurement over those of Capital Letters, and that this may account in part for the highly variable rates of acceptance of properties offered by Capital Letters, especially when supply was more plentiful in 2020-21. However, some borough stakeholders strongly refuted this and asserted they had only rejected properties where they were not of a suitable standard.

The alternative to transfer for some member boroughs was to fund additional recruitment of new negotiators by Capital Letters. Some of the boroughs consulted argued this was equally valid, since they expected Capital Letters to focus on providing additional procurement capacity and properties, rather than improving the efficiency of current provision. However, the recruitment by Capital Letters of negotiators of the right calibre, and their subsequent training, took much longer than using existing skilled and experienced staff who could ‘hit the ground running’. This slowed the growth of Capital Letters and its ability to procure properties, which directly reflects the number of negotiators it employs.

A number of stakeholders suggested that the variation in commitment by different boroughs was in part due to them being attracted only or mainly by the availability of grant funding, rather than having a deeper commitment to the vision of Capital Letters to be the prime/only source of Private Rented Sector procurement in London. According to one Capital Letters executive:

The targets we were set were to increase membership, and actually members joined to get grant, they didn’t join because they believed in Capital Letters, and that target artificially drove the wrong behaviours

Similarly a borough that has been a member since the start observed:

I think where it began to go wrong was the carrot of the subsidised incentive payment… we were paying about £3,000 per property and from memory we were getting around £1,500 back through the subsidy arrangement. So I think that brought on a lot of boroughs …and unfortunately a lot of the boroughs who joined only joined in my view because of the incentive payment

The variation in level of commitment of boroughs also had governance implications for Capital Letters. It was envisaged from the outset that the company would be directly managed by a Board of between 8-12 company executives, borough representatives and independent Directors. There would then be oversight and agreement of key decisions by a Borough Representative Body (BRB) on which all member boroughs would be represented at the political (Cabinet Member) level. The Board arrangements appear to have worked well but the BRB has caused challenges due to the irregular attendance of representatives of some less active members, with one stakeholder observing:

I used to go to BRB meetings where proposals were being made to move it forward but they weren’t quorate to make decisions because the members didn’t value Capital Letters enough to send a representative to cast a vote. So that stymied decision making on some really key issues.

There has also been frustration among Capital Letters stakeholders about the speed and complexity of local decision making within individual boroughs, which while sometimes unavoidable is made more challenging when there are as many as 20 members.

In this context it is worth noting that the recent sharp reduction in membership from 19 to 10 members was actively encouraged as part of a deliberate strategy by Capital Letters management and borough stakeholders. Both view it as better to have a smaller ‘coalition of the willing’ among committed members than a larger membership including some with low levels of commitment and engagement and attracted mainly by the MHCLG grant funding providing subsidy for lettings. As a senior Board member observed:

We had too many local authorities that were half-hearted, only in it for the grant, only in it for the subsidy they would get from day one, and not actively participating, not sharing the vision….A smaller number works better….marshalling a group of 10 to get solid decisions is much easier than a group of 20.

Developing sustainable funding streams beyond grant funding

Key routes to sustainability

It was both Capital Letters’ ambition and a key expectation of the finite grant funding that Capital Letters would develop its own sources of income and become self-sustaining once MHCLG grant funding ended. As discussed further in the next section, grant funding was originally intended to end in March 2022 and was then reprofiled to end in March 2024.

Capital Letters identified a number of potential income streams from the start, but it was critical to Capital Letters’ sustainability that it should be directly owning and managing properties as a landlord in its own right, rather than simply procuring properties, notwithstanding the primacy of the latter in its Business Plan and to member boroughs. The 2019 Business Plan forecast that 72% of income would come from rents and a further 13% from fees for services such as management or rent collection, paid either by boroughs for transferred or procured Private Sector Leased properties or by private landlords/agents. Most of the rest (12%) would be from MHCLG grant funding so the proportion of income from rents and property management would need to increase over time.

Private Sector Leased stock transfers

As outlined above in discussion of the procurement objective, it was assumed Capital Letters would quickly become a landlord and start to generate rental and management income from Private Sector Leased stock transferred by member boroughs. The 2019 Business Plan had separate targets to transfer 975 Private Sector Leased properties by the end of Year 1, rising cumulatively to 1,500 properties by the end of Year 2 and 2,500 properties by the end of Year 3.

It rapidly became apparent this assumption (carried over from the original Options Appraisal) was unrealistic, and to date no transfers of Private Sector Leased accommodation from member boroughs have taken place. It was assumed that boroughs would be strongly attracted to transfer because of the financial benefits, with transferred stock attracting a higher Local Housing Allowance rate and also capable of being converted to secure tenancies, thus enabling boroughs to discharge their homelessness duty. In practice however:

some boroughs were reluctant to transfer stock for similar reasons to their reluctance to transfer staff, risk aversion, concern about loss of control, and the need to maintain relationships with local landlords;
some borough stakeholders (especially Finance or section 151 officers) were unconvinced about the financial benefits claimed, or thought they would more than offset by the extra costs of management by Capital Letters; and
where boroughs were interested in transfer, it proved impossible to achieve in practice.

The practical difficulties of transfer arose mainly because of the differences between individual leases, each of which required separate legal review and transfer to the new landlord, and/or the different circumstances of individual tenants. In addition, it was known at the inception of Capital Letters (and mentioned in the original Options Appraisal) that the financial benefits of a higher Local Housing Allowance rate on transfer could not always be realised, notably due to the effect of the overall benefit cap on Universal Credit.

Some borough stakeholders consulted for this evaluation observed that the challenges of Private Sector Leased transfer were known prior to the launch of Capital Letters, with some commenting that “it was never going to happen” and that they had made the difficulties clear during inter-borough discussions. This tends to support a view that the assumptions in the original Options Appraisal of rapid and relatively easy transfer were unrealistic, and arguably naïve. Equally, however, the 2019 Business Plan assumptions and specific targets were clearly articulated and approved by all of the founding boroughs in May 2019, which suggests borough representatives who signed off on the plan did believe the transfer targets were achievable. This report comments later on what the research suggests as to the reasons for this apparent discrepancy (see What Could Have Been Done Differently).

Despite these persistent challenges, the 2023 review by Campbell Tickell – commissioned specifically to identify options to generate income and achieve financial sustainability – concluded that “The transfer of Private Sector Leased portfolios from Boroughs to Capital Letters is the most significant opportunity to support its financial sustainability and could also realise significant financial benefit for Boroughs.” Subsequent to the review, Capital Letters put considerable effort into negotiations about Private Sector Leased transfer with 3 boroughs but none of these transfers has, at the time of writing, materialised. One reason for this, according to stakeholders, is because boroughs are finding alternative ways of achieving the financial benefits of higher applicable Local Housing Allowance rates through Private Sector Leased transfer to a body which is neither a local authority nor an RP – for example through transfer to an internal housing company. This is perceived as both less risky than transfer to Capital Letters and cheaper in terms of management costs.

Other options

Alongside Private Sector Leased transfers from boroughs, Capital Letters has pursued other routes to becoming a landlord and generating significant income, including Private Sector Leased transfers from other landlords and two major initiatives to acquire housing stock with support from socially-motivated investors. These efforts started in 2019 and intensified in 2021 (when Capital Letters developed its first long term financial sustainability and viability plan) and again in late 2023 (when it became apparent renewed efforts to achieve Private Sector Leased transfers were not going to enable sustainability).

Among non-borough Private Sector Leased transfers pursued by Capital Letters was an initiative in 2019 to transfer a Private Sector Leased portfolio of around 850 properties from a social housing provider that wished to exit Temporary Accommodation provision, including the TUPE transfer of the staff and provision of a dowry to cover outstanding works to the properties. According to an internal Capital Letters briefing paper, this failed, after extensive due diligence work, when the size of the portfolio reduced by around 50% (with the risk of further reductions), which in the view of Capital Letters made it unviable.

In 2021, Capital Letters commenced discussions with a view to partnering a social investor in the transfer of leases of properties being managed by a leading homelessness charity, with the aim creating a longer-term strategic partnership based on the alignment of values and intent between both organisations. This failed due to the inability/unwillingness of member boroughs to provide financial guarantees, although twelve properties were leased to Capital Letters in June 2023 as the proportion of the portfolio that could be managed without guarantees.

In addition, Capital Letters has made substantial efforts to enter into larger and more strategic partnerships to acquire properties and increase supply. In 2022 it was at an advanced stage of negotiations with real estate asset manager QSix and investor TriplePoint to acquire up to 4,000 properties through a mix of leases and debt-funded property acquisitions. The arrangements were predicated on a number (nominally 5) member boroughs providing guarantees, the use of 40-year leases and the establishment of a subsidiary company to ring fence the properties for the use of guaranteeing boroughs. Unfortunately, this deal fell through in the aftermath of the September 2022 ‘mini-budget’ and the subsequent sharp and rapid rise in interest rates.

More recently, Capital Letters has been exploring similar options for acquiring a substantial number of properties with support from investors including a deal with Home Safe Housing on which legal terms were agreed in March 2024, leading to a public announcement of a deal to acquire up to 2,500 homes for £750m. This and other deals are still under consideration by Capital Letters and member boroughs, and stakeholders acknowledge they are difficult to make work in the current market and economic climate.

A key issue is that Capital Letters does not have the financial strength and balance sheet/collateral of either a local authority or a registered provider of social housing. It is therefore challenging to acquire property with external investment without financial guarantees from member boroughs, and/or higher rental income. Financial guarantees are not attractive to boroughs (though some have considered agreeing to them) because there is risk involved and the liabilities underwritten would sit on the local authority’s balance sheet. Higher rental income can only be achieved by either an increase in the Local Housing Allowance (last uprated in 2024, but not automatically uprated annually) or by acquiring and letting some properties at market rents (which reduces the attractiveness of the arrangements to member boroughs focused on relieving homelessness among low-income tenants).

Overall, therefore, Capital Letters has put substantial time and effort into a range of strategies for generating income and in particular into generating rental and management income by becoming a landlord. These arrangements have proved challenging to make work due to the practical and other difficulties of transferring existing Private Sector Leased stock from boroughs and other providers, and economic and market conditions which make it challenging for Capital Letters to acquire property.

How Capital Letters used MHCLG grant payments

How grant funding was provided

The set up and subsequent operation of Capital Letters was supported by grant funding from MHCLG ‘top-sliced’ from the Department’s allocation of Flexible Homelessness Support Grant (since combined with Homelessness Reduction Grant to form Homelessness Prevention Grant). The Department initially allocated £37.8 million to support Capital Letters between 2018 and March 2022. Following a revised business case in 2022 that reflected the challenges of meeting the original targets agreed with the Department, grant funding was extended until March 2024. However, the total amount paid was reduced to £28.1 million, reflecting the lower than originally expected procurement rates and that grant funding was in part linked to variable incentive payments to landlords.

According to MHCLG documents, the Department paid £1m in 2018-19 to cover initial mobilisation costs. Capital Letters had no management at this time, with the CEO not yet appointed or in post, and this funding was channelled through the London collaborative project, set up to manage the mobilisation process, to consultants, who supported various activities including the recruitment of the management team, writing the initial business plan, design of HR processes, and specification of the original IT system. The grant funding also paid for the procurement by a London borough and development by the chosen supplier of the IT system, which went live in June 2019 but was subsequently replaced with the current CAPs system, as already outlined earlier in this report. In 2019-20 grant funding of £5.8m was paid, which funded the setting up of the company, including staff, offices and legal costs, and a level of cash reserves.

The Department made subsequent grant funding payments of £3.4m in 2020-21, £7.6m in 2021-22, £5.7m in 2022-23 and a final payment of £4.6m covering 2023-24. These payments broadly comprised:

a fixed payment to cover a proportion of Capital Letters’ overheads, and
a variable payment to cover part of the incentive payments made to landlords to encourage them to let properties to low-income tenants at below market rents

Incentive payments were in the form of a one-off, up-front payment for Private Rented Sector properties and a fixed amount per week for Private Sector Leased properties.

Stakeholder views on the use of grant funding

Since the way the grant funding was used and managed by MHCLG are important questions for this evaluation, ATQ asked all stakeholders for their views on this issue. Overall, both Capital Letters and borough stakeholders thought that all elements of grant funding support had been essential to the set up and sustainment of Capital Letters, and it would not have been possible to establish the company without it. Specifically:

there would have been no way to set up and mobilise the company without grant funding, since it did not exist except as a legal entity and could not have raised start-up funding from another source with no track record or collateral;
the grant funding contribution to Capital Letters central overheads had been essential to ensure adequate cash flow and the ability to pay staff and suppliers; and
the contribution to incentive payments had been critical to the procurement of Private Rented Sector properties at affordable rents and had made membership of Capital Letters attractive to some boroughs, because they would otherwise have had to fund all the costs of incentive payments if doing their own procurement.

Stakeholders were also generally positive about the way MHCLG had managed the grant funding and had shown flexibility in responding to the difficult operating and market conditions that Capital Letters had encountered. MHCLG officials had shown willingness to reset targets, to extend and reprofile grant funding for 2 years longer than originally planned, and to amend the arrangements by which grant funding was paid to minimise delays and unnecessary bureaucracy (see below). As one Capital Letters stakeholder commented:

We had an excellent relationship [with MHCLG] and we told them warts and all what was going on, so they were with us on the journey and did a lot of the work behind the scenes.

In addition, and as covered in more detail in the next section of this report, officials had supported Capital Letters in a complete reset of its business strategy in 2023.

Stakeholders also observed that the way grant funding was paid and used had had some adverse and unintended effects. Firstly, the channelling of the initial grant funding for mobilisation through the London collaborative project (via a lead borough) to consultants and to a London borough leading on the IT procurement, caused later challenges. It meant various parties made decisions and undertook activities over which Capital Letters had no control, and as already explained they later chose to extricate themselves from the initial IT contract and procure a new system, causing both delay and additional costs. In addition, Capital Letters chose not to retain the consultants appointed by London Councils for a proposed second phase of work and chose to redo some of the consultants’ work e.g. rewriting HR policies.

Secondly, the way grant payments were made to Capital Letters until 2022 caused administrative difficulties. Over this period, grant funding was initially paid to a lead borough who in turn paid Capital Letters under the terms of a tripartite Memorandum of Understanding (MOU) between the Department, the lead borough and Capital Letters using powers in the Local Government Act 2003. This caused challenges for both Capital Letters (which experienced frustrating delays in the approval and receipt of payment) and to a lesser extent for the Department (which did not have direct visibility of the purposes for which grant funding was used). The Department rectified this when it extended and reprofiled grant funding in 2022, putting in place a direct Grant Funding Agreement, under different legislation, between the Department and Capital Letters.

Finally, and as already explored earlier in this report, a number of stakeholders, across Capital Letters member boroughs and MHCLG, suggested that the availability of grant funding to subsidise incentive payments to landlords had encouraged boroughs to become members without fully committing to the Capital Letters vision and model, and crucially to the transfer of staff. As an MHCLG stakeholder observed of Capital Letters:

You could see the potential for it to be an effective tool for councils, and the big issue was about the lack of support, the lack of visible support coming from the councils who were their members. They were seeing it almost as free cash, without putting any commitment in to either making it work or fully exploiting the opportunities it provided.

How MHCLG supported Capital Letters

ATQ also explored how MHCLG supported Capital Letters in other ways than by grant funding, notably by providing advice and support. There is little about the Department’s role in documentation, and therefore this evaluation has relied largely on the qualitative views of stakeholders. The exception is that the initial and subsequent Business Plans state “MHCLG will have a non-voting observer member of the Board of Directors.”

Overall, stakeholders from both Capital Letters and member boroughs were supportive of the role the Department had played in providing oversight of Capital Letters. As already noted, they thought that the Department and officials were understanding of the issues Capital Letter had faced and had accepted many of them were beyond the company’s control. Stakeholders also valued the consistency of support they had received: it is noteworthy, and in ATQ’s experience unusual, that the same policy advisor has had lead responsibility for Capital Letters throughout (since 2018).

Beyond this, the views of stakeholders suggest a distinction between the first 3 years of Capital Letters (2019-2022) and the Department’s more recent involvement. In the first 3 years several stakeholders noted the Department had been relatively “hands-off”, managing grant payments and monitoring year-end performance but not actively involved in advising the company. MHCLG officials broadly agreed that, since the logic of Capital Letters from the start was that it should be directed and governed by the London boroughs who own it, it would have been inappropriate to intervene more directly. A further issue was that the Department could advise on policy issues, but officials did not have the skills to support the company in addressing commercial issues.

In later years and after 2021-22, the Department has become more involved, following the establishment in 2021 of the Central Grants Hub within the Department’s Commercial Directorate comprising staff with relevant commercial experience to support and advise on grants made by government. The role of the Central Grants Hub is broadly to ensure grants are spent well and achieve value for money, and are in compliance with the Government Functional Standard for Grants.

The Commercial Lead in the Central Grants Hub supported the MHCLG policy lead in a major reset of Capital Letters business strategy in 2023-24, taking account of the ending of grant funding and ensuring that the business plan was both more robust and accompanied by a clear plan for the orderly wind down of Capital Letters if its ultimately unable to find sources of sustainable revenue.

There was thus a shift in recent years to MHCLG becoming more involved and directly acting as an advisor and ‘critical friend’ of Capital Letters, to an extent that would not have been possible before the Central Grants Hub was formed and became involved. This is in line with a wider shift within the Department for it to become an ‘intelligent funding partner’ when providing grant funding, encouraging recipients to allow it to take a more active advisory and enabling role.

Impact of COVID-19

Capital Letters was affected by the COVID-19 pandemic, and the restrictions introduced by the UK government as a result, in two main ways:

it had to change the way it operated under various ‘lockdowns’ and other restrictions; and
there was a major impact on Private Rented Sector market conditions in London.

Capital Letters stakeholders reported that COVID-19 restrictions had some effect on its operations, especially in the initial months, but it was largely able to operate successfully. Like most organisations, the first lockdown imposed in March 2020 caused an initial shock as Capital Letters, its member boroughs and landlords adapted to different working methods, and especially the restrictions on travel and face to face contact.

The timing of the restrictions caused some initial challenges for Capital Letters. The current Operations Director was appointed a week before the first lockdown was imposed, and at a time when Capital Letters was aiming to recruit at scale, and to a greater extent than originally planned due to lower than expected staff transfers from member boroughs. From mid-2020, Capital Letters was however able to adapt successfully, for example by using video inspections of properties to replace site visits. Capital Letters 2021-25 business plan has little reference to COVID-19, and states the company has gone “from strength to strength” since April 2020.

By contrast, the impact of COVID-19 restrictions on the wider Private Rented Sector market was substantial. Demand for privately rented property fell sharply in all major cities and especially in inner London. At the same time, the Coronavirus Act 2020 introduced restrictions that affected the Private Rented Sector market, for example on landlords’ ability to serve notice to quit on tenants, and research by LSE shows many landlords voluntarily took less than full rent from tenants who were furloughed or otherwise finding it difficult to pay rent. Rents fell by an estimated 10% and the net effect was that landlords were much more ready to let property to low-income tenants and, in the words of one stakeholder interviewed, “would take anyone they could get”.

Partly and arguably largely as a result of these factors, Capital Letters was able to procure Private Rented Sector properties at a high level in 2020-21 and in 2021-22, as already reported above. Subsequently and as also already reported, there has been a major rebound in the market, with the current demand for properties at full market rent extremely high and rising, meaning there is little incentive for landlords to offer properties at below market rents.

What could have been done differently

This section considers what might have been done differently or better to improve the prospects of Capital Letters achieving its objectives and/or mitigate or avoid the challenges it has faced. Many stakeholders had views on these issues which emerged naturally from the interviews with them, though ATQ also prompted stakeholders to consider this question. ATQ also drew on the findings and statements in various documents, including independent reviews and Capital Letters internal strategies and plans – especially later revisions to the original Business Plan.

The views received are grouped under the headings below; in some areas, as noted, there were different and sometimes contradictory views between stakeholders.

Optimistic and unrealistic assumptions

A theme to emerge from multiple sources was that the assumptions made about the speed and ease with which Capital Letters would achieve key implementation milestones were optimistic and unrealistic. This applies to a varying degree to the original Options Appraisal and later Business Plan (both the draft version developed in 2018 and the final version signed off in May 2019). As already explored in previous sections, two critical assumptions which proved unachievable were that member boroughs would easily and quickly transfer their existing procurement teams to Capital Letters, and there would be early transfer of Private Sector Leased properties. The former happened to a much lower extent than planned; the latter has never occurred, despite much work by both Capital Letters and member boroughs.

Multiple stakeholders reflected that there should have been greater acknowledgement of the obstacles to these and other changes, and a clearer articulation of risks and how they might be mitigated. There is some acknowledgement of these in the original Options Appraisal, but no full risk register; and the draft and final Business Plans barely acknowledge obstacles and risks. Key activities and milestones are assumed to happen almost mechanistically.

Optimism bias in options appraisals is a well-recognised phenomenon. The Treasury has issued specific guidance on its avoidance in options appraisal and business cases for government programmes and projects, to which the Cabinet Office cross-refers in the Government Functional Standards for Grants. By 2020, Capital Letters had already openly recognised that its Business Plan contained “extremely challenging delivery targets based on assumptions which have proven to be unrealistic” and sought (successfully) to reset targets in discussion with the Department and other stakeholders.

Management involvement in mobilisation and planning

A related issue is that critical mobilisation and planning activities were undertaken before the management team was in place. Capital Letters stakeholders observed (and have extensively documented) that this was unsatisfactory and caused major issues for the organisation in its early stages. Some preparatory work was unavoidable (the management itself had to be appointed) and it was reasonable to expect London boroughs who had already agreed to become members (and thereby also become owners of Capital Letters) to drive initial work and enable Capital Letters to be ready to implement its plan once it was launched.

However, this proved to be largely self-defeating since Capital Letters chose (or was left with no other choice than) to unwind and redo the development of the IT system and HR processes, and the initial Business plan was developed by consultants, building on an initial Options Appraisal developed by different consultants. Stakeholders argued for a different sequencing of mobilisation activities, with more involvement from the CEO and possibly other staff in everything except their own appointment.

Engagement with and commitment from member boroughs

A further view held by several stakeholders was that more work should have been done to engage member boroughs in the vision and objectives of Capital Letters prior to launch and as further boroughs joined. As noted earlier in this report, there has been concern throughout that boroughs were able to join Capital Letters without fully committing to its business model (especially by continuing to run their own parallel procurement services) and still gain access to the benefits of membership (such as the subsidy of incentive payments via MHCLG grant funding and access to the free sustainment service).

Some stakeholders argued this was because there had been insufficient leadership (mainly by the boroughs themselves, through London Councils) and effort to ‘sell’ the vision to the boroughs. However, the borough stakeholders who were instrumental in driving forward Capital Letters from the earliest stages challenged this view and argued that the need for full commitment had been made clear from the start. They asserted that considerable pressure was put on prospective member boroughs to either commit 100% to the Capital Letters concept or not be involved at all.

Borough stakeholders also conceded that large-scale collaboration between the London boroughs is not easy to achieve, and they can tend to be unwilling to work with their neighbours, even when it appears to be in their interests. As one borough stakeholder with long experience of inter-borough collaboration observed:

[Capital Letters executives] must be so frustrated with London local government but it is what it is, it’s been no different than any other project. It’s just the way we are and all you can do is try and take that into account.” [Current borough member]

While another commented:

Local authorities are not like one. All local authorities are different. We’re the same but we’re actually not. Most of the time we are competing with each other anyway and that’s assuming that we all like each other…” [Current borough member]

Two related arguments were made by stakeholders. First, some observed (though others disagreed) there had been insufficient leadership and communication within boroughs: these stakeholders observed there was commitment from the relevant borough leaders within Housing Directorates, but this was not clearly communicated to managers and staff with front-line responsibility for procurement and liaison with Capital Letters. Similarly, upward communication to Cabinet Members had been incomplete, contributing to occasionally poor attendance at BRB meetings, with consequences for decisions on reserved matters.

Others had a view that Capital Letters had engaged heavily with relevant Housing leaders and staff, but had neglected other key stakeholders within boroughs, notably officers with statutory responsibility for financial management (normally the Finance Director or Director of Corporate Services) who needed to be convinced of the financial benefits and overall value for money of Capital Letters. There was also a view from some stakeholders that Capital Letters lacked understanding of the complexities of local authorities and why and how to engage with multiple decision makers.

Capital Letters stakeholders challenge this, arguing that borough representatives discouraged engagement with Finance Directors and that at least some of the team had long experience within local government. It has also worked hard to engage lead Finance officers and other stakeholders outside Housing in its current strategy after the 2023 reset, though it was argued “that should have been done at the outset”.

Borough stakeholders who have both long experience of local government and have been very supportive of Capital Letters did however share this view that it could have had stronger experience, especially of local government finance, observing Capital Letters has had limited executive level experience outside the Housing sector (where its experience is indisputable).

Attaching more conditions to membership

A related view among some stakeholders was that there could have been more conditionality of membership. The initial Options Appraisal did suggest conditionality in some areas (for example that boroughs might be given 6 months to transfer staff or leave) but in the evolution to the Business Plan nearly all conditionality appears to have been lost, with the assumption being that the financial benefits of membership would be clear and sufficient enough to encourage full member commitment.

However, this has not always been the case and was unlikely to be given the many understandable reasons boroughs had for being cautious and ‘hedging their bets’, and the low involvement of s.151 officers in decision-making. It is possible positive engagement and leadership would always have been preferable to compulsion, but some stakeholders thought more could have been done to make the benefits of membership contingent on individual borough action. A typical comment was “maybe we should have thought better about incentivising better behaviour” while another observation was:

They weren’t being asked to pay a subscription, they weren’t mandated to do it, there was no legally binding agreement or heads of terms, saying that you will transfer staff in these timescales – so what’s in it for the council?” [MHCLG stakeholder]

More active support from MHCLG

As already noted above, there was a view MHCLG could have been more hands-on during the initial development and mobilisation of Capital Letters, and perhaps done more to encourage member borough ‘buy-in’. MHCLG stakeholders have highlighted, however, that Capital Letters was conceived as a vehicle and organisation owned entirely by its London borough members, and it would have been challenging for MHCLG to intervene more directly.

In addition, it could not support Capital Letters commercially in its early stages because the Department lacked relevant experience and capacity. Since the formation of the Commercial Grants Hub, the Department has become more actively involved in ways recognised and praised by nearly all stakeholders. In particular, this team has supported Capital Letters in the resetting of its business strategy which has addressed and learned lessons from a number of the issues outlined above. It now has in place a 30 Year Financial Plan and a detailed ‘Assumptions Bible’ setting out the rationale for the assumptions underpinning the Financial Plan.

Slower build up to full membership

A number of stakeholders reflected that many of the challenges faced by Capital Letters might have been mitigated or more easily managed if it had been set up with a smaller initial membership and grown more gradually, rather than aiming to grow aggressively to more than 20 boroughs within 2 years. The initial Options Appraisal suggested a first phase of 5-10 boroughs, but it started with 13 boroughs and grew rapidly to more than 20, before falling back. The emphasis on rapid growth is understandable since without a high level of borough membership the company’s objectives to be the sole/main source of Private Rented Sector procurement, and have enough critical mass to change the dynamics of the market, would have been hard to achieve.

In the view of some stakeholders, however, Capital Letters could have retained majority London borough membership as a longer-term objective but started with a more committed core of approximately 5 boroughs (at the lower end of the starting membership envisaged in the Options Appraisal). It would then have been a more explicit ‘proof of concept’ in its first year (which it became by default, because of mobilisation delays) and could have recruited more members from a position where it had a strong base of staff and processes in place, and had more explicitly proved its effectiveness.

As noted above, Capital Letters has belatedly recognised this and adapted what one stakeholder described as a strategy of ‘contract to grow’, also described in several sources as reducing the membership to a ‘coalition of the willing’.

Misalignment of objectives

It emerged from discussion with current and past members of Capital Letters that they sometimes had different expectations of the organisation and what they wanted it to achieve, leading to some misalignment between their objectives and those of Capital Letters itself. In simple terms, the primary objective of Capital Letters was to increase Private Rented Sector supply, which is about additionality and increased effectiveness, while its second objective was to increase collaboration to achieve economies of scale and increased buying power, which is primarily an efficiency play. These two objectives are therefore not entirely aligned, as indicated by comments from stakeholders such as:

For me Capital Letters is about additionality [it] should be going for the big developers who are trying to offload 200 properties in 3 blocks, not single properties being let while inheritance tax is sorted out.” [Current borough member]

We wanted them to bring in new business, new contacts, new landlords et cetera not basically just utilise what we already had via our staff.” [Current borough member]

This difference of emphasis is also evident in the development of Capital Letters, with the initial Options Appraisal putting greater emphasis on collaboration and reduced competition, and the later business plan prioritising additional supply.

This misalignment is important because it appears to have driven wider attitudes to issues such as the priority given to staff transfer as opposed to funding additional capacity through recruitment. It is less easy to suggest how the issue could have been resolved since in the view of many stakeholders, including Capital Letters, the twin objectives of increasing supply and improving collaboration are mutually reinforcing, rather than incompatible.

Overarching market conditions

Finally, it should be noted that nearly all stakeholders reported that any view of what might have been or could be done differently, needs to be set in the context of increasingly difficult market conditions as already described earlier in this report. As one Board member of Capital Letters expressed it:

The main challenge is the environment we are working in – it’s a pretty hostile environment for housing. Originally it was quite a good deal for landlords, or a reasonable deal, or certainly one we could talk landlords into….very quickly it became an economic environment where it wasn’t….landlords couldn’t afford to be renting out to us at a loss…and we were not able to make the basic concept work.

This also explains why a number of boroughs remain committed to Capital Letters despite its challenges, with one explaining that

We decided to stick it out to see if they could weather the storm because I don’t think it’s a Capital Letters issue, it’s a market issue…. I would like them to get us some more properties but I guess everyone is saying that.” [Current borough member]

Capital Letters continues to adapt its strategy to respond to these pressures. For example, whilst one of the initial objectives of Capital Letters was to increase the proportion of households provided with settled accommodation inside London and their current borough, it has now pivoted to an explicit objective to procure properties outside London, responding to an extremely challenging market in London and pressure from its members. As one member borough commented:

We were really pushing Capital Letters to move outside of London …you need to have a household income of £80,000 to rent in this borough, but …it is still number two when you look across London in terms of deprivation, …and when you’ve got a policy intent across homelessness that relies on a PRS to deliver a settled home solution for you, you need to look at places that are affordable, and there aren’t any in London for our populace.

Question 4

3. Conclusions

Accepted Answer

Capital Letters was established to achieve objectives critical to the improvement of Private Rented Sector supply in London and a consequent reduction in homelessness. It has procured more than 6,000 new properties resulting in more than 4,000 lettings to low-income tenants, in line with its primary objective of increasing Private Rented Sector supply and has introduced important innovations such as the sustainment service.

It has also been successful in improving collaboration between member boroughs, including through implementing an agreed package of incentive arrangements, successfully integrating some borough staff into its operations, commissioning research on Private Rented Sector market conditions and acting as a voice for member boroughs in policy discussions with government and others.

That it has not been as successful as expected in either increasing Private Rented Sector supply, or achieving collaboration at scale, appears to be due to a number of factors, most of which stakeholders agree to have been wholly or largely outside its control. There was over-optimism about the willingness and ability of boroughs to transfer staff to Capital Letters, and thus build the critical mass needed to eliminate interborough competition and avoid conflicting objectives, and the lack of any transfers of Private Sector Leased stock has hampered its ability to reduce the use of Temporary Accommodation by boroughs and enable them to discharge duty. This and the challenges of finding alternative routes to becoming a landlord in its own right have also made it challenging for Capital Letters to build a significant income stream to replace MHCLG grant funding.

The reluctance of boroughs to transfer experienced staff also made it more challenging for Capital Letters to mobilise and quickly build procurement capacity. This was compounded by other issues, notably the implementation of an IT system which had to be replaced, delaying the implementation of a common platform until September 2020.

In the face of these challenges, it is evident Capital Letters has shown both resilience and flexibility, revising its targets and strategy to reflect more realistically what it could achieve. It has been supported in this by the Department, which has been responsive and flexible in allowing Capital Letters to revise its targets, and in agreeing to extend grant funding until March 2024.

In addition, Capital Letters and the Department worked together during 2023 to put in place a robust plan for its future, which learned lessons from some of the missteps during its mobilisation, notably around the robustness of assumptions, assessment of risk and sources of future income.

At the same time, the number of members has fallen sharply to a more committed core of 10 boroughs. This was a strategic decision pursued assertively by Capital Letters with the Department’s support. It has been welcomed by all current member borough stakeholders consulted for this evaluation, who take the view that a larger membership was causing more problems than it solved. This was because it included boroughs reluctant to commit fully to the organisation, and potentially attracted disproportionately by the availability of grant funding to subsidise Private Rented Sector lettings, rather than the long-term benefits of close inter-borough working.

Fundamentally, however, the underlying challenge for Capital Letters and its members remains unchanged and may even be increasing. The supply of Private Rented Sector housing is falling, and a combination of sharply rising market rents and LHAs which do not reflect rental levels is making it very challenging to find Private Rented Sector properties that are affordable by low-income households in receipt of benefits. In the view of some stakeholders, it will become even harder to procure Private Rented Sector properties as economic conditions and new legislation further discourage lettings, especially by smaller and so-called ‘accidental’ landlords who let very few properties.

There is therefore still strong support for Capital Letters among its members, but for some it is conditional on them being able to increase supply – which in practice means finding a substantial source of additional properties through lease or acquisition, via the sort of substantial partnership with investors that it is currently pursuing.

Question 5

4. Key lessons from the Capital Letters programme

Accepted Answer

This section suggests lessons from the Department’s management of its grant funding to Capital Letters and associated support and makes suggestions for actions that could be implemented if a similar grant funding arrangement were made in the future. Some of these suggestions reflect lessons already learned and applied to Capital Letters in more recent times – where this is the case, it is noted as such below.

Stress testing business plan assumptions

Assumptions critical to the achievement of a business case or plan would benefit from being fully tested, with potential risks clearly identified, prioritised and mitigated. This does not appear to have been done when the original business plan for Capital Letters was in development but has been rectified in the development of the 2023 strategy and 30-year financial plan.

Ensure stakeholders are fully engaged at all levels, and their interests are actively managed

This may be challenging to achieve and should be considered in the context of speed of implementation, as outlined separately below. The overriding issue is that any project (in this case the set-up of a new company) involving multiple stakeholders requires a clear analysis of all the stakeholders involved, the importance of specific stakeholders to the implementation of project objectives, their relative interests and how they might conflict as well as align, and clear and flexible strategies for continuous management of stakeholders and these interests.

Where the Department is providing grant funding to others who are expected to lead a project (in this case London boroughs), there would likely be considerable benefit in developing a clear stakeholder management plan to meet these criteria. However, it should be acknowledged that such a plan does not guarantee success in a complex implementation such as Capital Letters, as stakeholder interests may evolve and personalities are almost certain to change over time, bringing different attitudes and preconceptions. Consequently, a proactive approach to stakeholder management will likely make it easier to track and measure success and to make improvements if engagement or commitment falls short of expectations.

Consider the conditional use of grant funding to encourage commitment

MHCLG grant funding to Capital Letters was linked to specific targets and to the growth of membership, but not to reciprocal action by member boroughs such as the transfer of staff, despite this being essential to the success of the project. In some circumstances there might be a case for grant funding to be payable only if more clearly defined conditions and milestones are met.

Consider carefully the speed of organisation growth

If grant funding is awarded to a similar organisation whose membership is expected to grow in phases, targets for growth should be considered carefully, balancing the need to show progress with the challenges of engaging and committing stakeholders successfully. Where prospective members are known to be risk averse and/or stakeholder engagement is likely to be challenging and complex, there is a strong case for starting with a smaller membership and building collaboration more gradually.

Awarding grant funding directly to the implementing organisations

A substantial initial grant was made to a lead borough, on behalf of a project group of future member boroughs, to support the mobilisation of Capital Letters. This grant funding was made before the executive team was in place, which caused implementation issues and delays. In addition, the channelling of subsequent grant funding via a lead borough caused administrative challenges and led to grant payment delays.

A more appropriate approach may be for grant funding to be tied to the achievement of specified outcomes/milestones and be paid directly to the organisation accountable for the achievement of those outcomes (as happened in this case when the grant funding agreement was changed in 2022). Also, it may be advisable to avoid making advance payments to organisations not directly involved in achieving outcomes unless absolutely necessary (for example to support initial recruitment).

Provide consistent and active support to the grantee organisation

With access to the Commercial Grants Hub, MHCLG could encourage all grant funding recipients to accept commercial advice and support and play an active role in the organisation’s oversight via its Board. Our research suggests that Capital Letters, member boroughs and the Department’s policy lead would all have welcomed such support if it had been available at its inception (when the Commercial Grants Hub was not in place).

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Executive summary

Introduction and background

Successes and challenges

Adverse market conditions

Over-optimistic planning assumptions

Reluctance/refusal to transfer staff

Obstacles to transferring Private Sector Leased stock

Varying commitment of boroughs to Capital Letters

Lack of management involvement in early decisions

Challenges in finding other sources of income

Key lessons from the Capital Letters programme

Stress test business plan assumptions

Ensure stakeholders are fully engaged at all levels, and their interests are actively managed

Consider the conditional use of grant funding to encourage commitment

Consider carefully the speed of organisation growth

Award grant funding directly to the implementing organisations

Provide consistent and active support to the grantee organisation

1. Introduction and background

Purpose of this report

Background and context

Key research questions

Approach

Limitations and exclusions

Report structure

2. Key findings

Procuring and letting affordable Private Rented Sector properties

Capital Letters’ objectives and their rationale

Successes and challenges

Table 1. Capital Letters procurement by year

Building collaboration and reducing competition for accommodation

Capital Letters’ objectives and their rationale

Successes and challenges

Developing sustainable funding streams beyond grant funding

Key routes to sustainability

Private Sector Leased stock transfers

Other options

How Capital Letters used MHCLG grant payments

How grant funding was provided

Stakeholder views on the use of grant funding

How MHCLG supported Capital Letters

Impact of COVID-19

What could have been done differently

Optimistic and unrealistic assumptions

Management involvement in mobilisation and planning

Engagement with and commitment from member boroughs

Attaching more conditions to membership

More active support from MHCLG

Slower build up to full membership

Misalignment of objectives

Overarching market conditions

3. Conclusions

4. Key lessons from the Capital Letters programme

Stress testing business plan assumptions

Ensure stakeholders are fully engaged at all levels, and their interests are actively managed

Consider the conditional use of grant funding to encourage commitment

Consider carefully the speed of organisation growth

Awarding grant funding directly to the implementing organisations

Provide consistent and active support to the grantee organisation

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