The world is changing. The development of new affordable housing, long the preserve of housing associations and (although rarely these days) local authorities, is being opened up to wider competition through new Government finance rules. And Britain's biggest housebuilders are stepping right in.

Housing associations themselves have changed radically over the past decade. Many are led with the focus and rigour of a well-run plc, while not being subjected to the short-term pressures of the stock market. Nevertheless, the new rules may present a challenge for housing associations, at least in the area of development. The pattern, where housebuilders traditionally bring in housing associations to develop the affordable aspects of a development, stands to be disrupted.

Housebuilders, too, have changed significantly. Operating in a complex world of brownfield regeneration, mixed-use schemes and 'sustainable communities', they have had to embrace or at least come to terms with a raft of Government policies, planning restrictions, green initiatives and energy-conscious consumers. Today's major housebuilder is a social and environ-mental engineer, as well as a cashflow generator.

So, the new ground rules are timely, if not plain sailing. Using powers under section 27A of the Housing Act 2004, the Housing Corporation launched a £200m New Partnerships in Affordable Housing pilot programme in 2005. This aimed to kickstart a wider market for the delivery of affordable homes. Seventeen bidders were selected for grant, four of which – First Base, Bovis, Bellway and Persimmon – were private developers.

The 2006-08 £3.9bn National Affordable Housing (NAH) programme was launched before the pilot programme had been assessed. This was amid fears from registered social landlords (RSLs) that it may signal the beginning of the end of the development of affordable housing by traditional housing associations. The NAH programme aims to provide more than 70,000 new homes across England in 2006-08.

The Corporation sought to ensure a consistent approach to the standards for design, construction and the ongoing management and maintenance of homes provided through the use of public money, but faced criticism from RSLs about the wider access to its funds. Combine this with the introduction of the Corporation's accreditation framework, which will enable private sector organisations to be accredited to manage new social housing, again using powers granted by the Housing Act 2004, and the concerns begin to be appreciated.

However, of 81 successful bidders selected by the Corporation in March this year, only seven – Barratt, Bellway, Gentect, Lovell, Persimmon, Taylor Woodrow and George Wimpey – are private sector developers. What is more, less than £67m of the almost £4bn pot available was allocated between those seven. Housing associations were praised as having "raised their game" to meet the challenge of private sector competition for the grant.

Private developer bids for about 5,500 homes were rejected apparently either because they were considered poor value for money, were for flats rather than houses or were for developments delayed by the planning system.

The prospectus for the NAH programme stated that only minor amendments, fine-tuning and clarification to the grant agreement to which private developers are required to sign up would be accepted. Perhaps unsurprisingly, all has not gone smoothly. Barratt, Persimmon, Bellway, George Wimpey and First Base have only recently signed up agreed terms; others are under-stood to be still finalising details of their contracts.

The Home Builders Federation reportedly wrote to the Corporation earlier this year outlining a series of deal breakers that the developers claimed could force them to turn their allocations down. The Corporation, however, is reported to have said that negotiations have now been concluded. Whatever the position, it is clear that the legal framework will take time to bed down.

In June, the Corporation launched a review of investment in affordable homes. The New Approaches to Investment Review group will consider the lessons learned from the 2006-08 programme and set the agenda for future investment in affordable homes. The Corporation's deputy chief executive Steve Douglas said that the review will help the Corporation "to look at how further flexibilities and freedoms may help to speed up supply and improve value for money, while maintaining the highest quality standards". The review group includes representatives from the Home Builders Federation.

This comes at the same time as English Partner-ships' (EP) invitation to private developers to put forward schemes to increase the level of affordable homes for first-time buyers. There is a target of 15,000 homes across England by 2010, with eligible first-time buyers enabled to purchase a minimum 50% share in a new home. EP will make up the full price of the property by way of a direct payment to the developer, and is currently seeking developers to be among the first to participate in the scheme, which has an initial budget of up to £100m over the next two years. The reported aim is for the terms to be "far more flexible" than the Housing Corporation's.

As if all that were not enough, Secretary of State for Communities and Local Government, Ruth Kelly, has asked officials to review the regulation and delivery of affordable housing given the private sector's involvement. The merger of EP and the Housing Corporation is an option under consideration.

None of this means an end to all cordial relations between the traditional providers of affordable housing and the new entrants. The right solution to affordable housing issues will vary from one situation to the next. Housebuilders will often need the management expertise and resource of a housing association for initial provision and long-term management. The sheer scale of many modern schemes requires a consortium-based, collaborative approach.

Like many big industry changes, the initial phase may be shallower and slower than many people now predict, but the long-term shift could be wide and deep. The Government's drive for a step change in the amount of affordable housing being delivered, combined with a push for efficiency gains, means that housebuilders, and more so housing associations, should limber up for a new reality. |

Adrian Bland is real estate group leader and Jacqueline Knox an associate specialising in housing at Wragge & Co.