The final version of Sadiq Khan’s supplementary planning guidance on affordable housing and viability was published on 16 August 2017. I had previously blogged on the November 2016 draft.
For internal purposes at Town we have prepared a tracked version, showing the differences. There are many, mostly tightening up the language, but also with some material additions and changes of emphasis.
This blog post focuses on 20 of what appear to me to be material changes from the position I summarised last year:
1. 50% affordable threshold for public land
The threshold for the ‘fast track route’, where viability information is not required, nor review mechanisms as long as an agreed level of progress is made following the grant of permission, remains at 35% for schemes on private sector owned land. However a higher threshold of 50% has been introduced for land “in public ownership or public use” where grants are not available.
“2.33 It is widely recognised that land in public ownership should make a significant contribution towards the supply of new affordable housing. Land that is surplus to public sector requirements typically has a low value in its current use, allowing higher levels of affordable housing to be delivered. For these reasons the Mayor has an expectation that residential proposals on public land should deliver at least 50 per cent affordable housing to benefit from the Fast Track Route.
2.34 Where a public landowner has an agreement in place with the Mayor to provide 50 per cent affordable homes across a portfolio of sites, individual sites which meet or exceed the 35 per cent affordable housing threshold and required tenure split may be considered under the Fast Track Route. Where such an agreement is not in place, schemes that do not provide 50 per cent affordable housing will be considered under the Viability Tested Route.
2.35 Where 50 per cent affordable housing is delivered on public land, the tenure of additional affordable homes above the 35 per cent is flexible and should take in to account the need to maximise affordable housing provision.
2.36 This will apply to land that is owned or in use by a public sector organisation, or a company or organisation in public ownership, or land that has been released from public ownership and on which housing development is proposed.”
Is the definition in paragraph 2.36 specific enough? What are companies or organisations in public ownership? What if the land was released from public ownership long ago?
2. Specific advice in relation to section 73 applications
“2.14 For schemes that were approved under the Fast Track Route, any subsequent applications to vary the consent will not be required to submit viability information, provided that the resulting development continues to meet the 35 per cent threshold and required tenure split, and does not otherwise result in a reduction in affordable housing or housing affordability.
2.15 For schemes where the original permission did not meet the 35 per cent threshold or required tenure split, or where a proposed amendment would cause it to no longer meet these criteria, viability information will be required where an application is submitted to vary the consent and this would alter the economic circumstances of the scheme (for example resulting in a higher development value or lower costs). Such schemes will be assessed under the Viability Tested Route to determine whether additional affordable housing can be provided.
2.16 Proposed amendments that result in a reduction in affordable housing, affordability or other obligations or requirements of the original permission should be rigorously assessed under the Viability Tested Route. In such instances a full viability review should be undertaken that reconsiders the value, costs, profit requirements and land value of the scheme. The Mayor should be consulted where a scheme amendment is proposed that changes the level of affordable housing from that which was secured through the original planning permission.”
There is a risk that the inevitable minor amendments that come forward after grant of planning permission, with less than a material effect on the economic circumstances of a scheme, will lead to the need for updated viability information if paragraph 2.15 is to be applied strictly. This could lead to delays, or to scheme amendments not being pursued if the borough is not prepared to accept that they are non material amendments that can be secured under section 96A.
3. Greater emphasis on viability transparency
The draft guidance already indicated that viability information “should be available for public scrutiny and comment like all other elements of a planning application“. The new guidance ratchets this up a further level:
– “boroughs should implement procedures which promote greater transparency where not already in place”.
– in submitting viability information, applicants “should also provide a summary of the financial viability assessment which outlines key findings, inputs, and conclusions to assist review by the LPA, Mayor, and members of the public.”
Applicants will still have the opportunity to “argue that limited elements should be confidential, but the onus is on the applicant to make this case“.
4. Habitable floorspace cross-check
Whilst the percentage of affordable housing should be measured in habitable rooms, there is this additional advice:
“Habitable rooms in affordable and market elements of the scheme should be of comparable size when averaged across the whole development. If this is not the case, then it may be more appropriate to measure the provision of affordable housing using habitable floorspace. Applicants should present affordable housing figures as a percentage of total residential provision by habitable rooms, by units, and by floorspace to enable comparison.”
5. Sensible flexibility regarding fast track approach
The draft guidance indicated that in order to follow the fast track approach, even if a scheme offered the threshold level of affordable housing, it was required to “meet all of the other relevant policy requirements and obligations”. The relevant passage now refers to meeting “other obligations and requirements to the satisfaction of the LPA and the Mayor where relevant”.
6. Greater emphasis on exploring the opportunity for public subsidies
“All schemes are expected to determine whether grant and other forms of subsidy are available and to make the most efficient use of this to increase the level of affordable housing delivered. All applicants are expected to work with the LPA, the Mayor, and Registered Providers (RPs) to ensure affordable housing from all sources is maximised.”
The guidance is intended to be “integrated with the approach to funding set out in the Mayor’s guidance to his Affordable Homes Programme 2016-2021 .”
Funding is said to be available on a fixed grant-per-unit basis:
“2.24 Where developer-led schemes can provide or exceed 40 per cent affordable housing (with grant) then the fixed grant per unit will be available on all affordable housing units in the scheme.
2.25 Where developer-led schemes are delivering less than 40 per cent, grant will only be available for the additional affordable homes over and above
the baseline level of affordable housing shown as being viable on a nil-grant basis.”
“2.28 Where public subsidy is available to increase the level of affordable housing on a scheme the tenure of additional affordable homes above the 35 per cent is flexible but should take into account the need to maximise affordable housing provision through the available public subsidy.”
7. Build To Rent
The final version of the guidance retains the Mayor’s support for build to rent. Some additional elements have been spelt out in his “build to rent” definition. As well as being a development of at least 50 units, with a build to rent covenant of at least 15 years, with self-contained units, operated under unified ownership and management, the development must:
” • offer longer tenancies (three years or more) to all tenants, with break clauses that allow the tenant to end the tenancy with a month’s notice any time after the first six months;
* offer rent certainty for the period of the tenancy, the basis of which should be made clear to the tenant before a tenancy agreement is signed, including any annual increases which should always be formula-linked;
* include on-site management, which does not necessarily mean full-time dedicated on-site staff, but must offer systems for prompt resolution of issues and some daily on-site presence;
* be operated by providers who have a complaints procedure in place and are a member of a recognised ombudsman scheme; and
* not charge up-front fees of any kind to tenants or prospective tenants, other than deposits and rent-in-advance.”
There is more detailed guidance about the clawback arrangement if units in the scheme cease to be available as BTR:
“4.14 In line with the Mayor’s approach to affordable housing on Build to Rent schemes, and to ensure that there is no financial incentive to break a covenant, planning permission should only be granted where the scheme is subject to a clawback agreement. The appropriate clawback amount will be the difference between the total value of the market rent units based on the viability assessment at application stage, and those units valued on a ‘for sale’ basis at the point of sale. The LPA should be notified of the sale price of units that are sold and this should inform the market value of remaining units to determine the clawback. The clawback amount must demonstrate a sufficient difference in the value of units between rented and for sale tenures, consistent with the ‘distinct economics’ of build to rent, for the scheme to qualify for the Build to Rent pathway.
4.15 The clawback amount will be payable to the LPA for the provision of affordable housing in the event that market rented units are sold within
the covenant period, which would break the covenant. For larger phased schemes the LPA should consider whether the clawback amount should be disaggregated to the relevant block in which units are sold. The clawback amount should not reduce over time to ensure that the covenant remains effective for the full period.
4.16 In the event that a share of rented units are sold, and the remaining units are retained within the rental market, an LPA may determine that the clawback
is calculated based on the units sold. The other units will remain under covenant and the clawback will apply at the point of sale if disposed of within the covenant period.
4.17 The clawback does not relate to any affordable units provided as part of the scheme. Affordable units are not subject to a minimum covenant period and must always be secured in perpetuity. Additionally, overall ownership of the building(s) in which the units are located may change during the covenanted period without triggering ‘clawback’ if the units remain in single ownership and management as Build to Rent.”
Encouragingly, the guidance indicates that, as the sector develops, “the Mayor will keep under review whether it may be possible to set out a Fast Track Route specifically for developments following a Build to Rent pathway through the planning system.”
8. The “early review”
This is the review that the draft guidance stated was to be carried out when an agreed level of progress on implementing the scheme has not been achieved within two years of the permission being granted. The early review is also in the final version of the guidance, although with a little more flexibility: “within two years of the permission being granted or as agreed with the LPA”.
Plans in the section 106 agreement “should identify which homes would switch to affordable accommodation in the event of an improvement in viability at this early stage”.
All review mechanisms should generally set a cap on the amount of additional provision to be sought, which should be 50% affordable housing. Suggested formulae are set out in the guidance.
9. Mid-term review
For applications that do not meet the 35%/50% threshold, as well as the early stage review there is the late stage review at the point at which 75% of units are sold or let (the review generating payments in lieu rather than an additional requirement for affordable housing in the scheme, and with the surplus split 60/40 between the borough and the developer). However, the final version of the guidance introduces the possibility of mid-term reviews for some schemes:
“For longer-term phased schemes it may also be appropriate to secure mid-term reviews prior to implementation of later phases and an updated Early Stage Review in the event that a scheme stalls for a period of 12 or more months following an Early Stage Review.”
10. Targets for registered providers
“2.30 Generally the Mayor expects RP-led schemes to seek to deliver as much affordable housing as possible within the context of the requirements of London Plan policy 3.12. RPs with agreements with the Mayor have to deliver at least 50 per cent affordable housing across their programmes, and in the case of strategic partners 60 per cent.
2.31 The approach to grant funding for approved provider-led schemes is set out in Mayor’s Homes for Londoners: Affordable Homes Programme 2016-21.
2.32 RP-led schemes are likely to benefit from programme grant as set out in 2.30. Individual schemes which are led by RPs with an agreed programme with the Mayor can follow the Fast Track Route if they can commit to delivering a minimum of 35 per cent without grant. This should be set out in the Section 106 agreement along with the proportion of affordable housing which can be delivered with grant.”
11. Density opportunities
“2.37 Where a scheme meets the 35 per cent affordable housing threshold it may also be appropriate to explore the potential to increase densities on a case- by-case basis to enable the delivery of additional affordable homes where this meets exemplary design standards. It is for LPAs, and the Mayor where relevant, to consider the weight to be given to the benefit of additional affordable housing above the threshold, where this arises through increased densities or scale.”
12. Incentivising largely or entirely affordable housing schemes
“2.42 To incentivise schemes that are largely or entirely affordable, those that propose 75 per cent affordable housing or more as defined by the NPPF may be considered under the Fast Track Route whatever their tenure mix, as long as the tenure and other relevant standards are supported by the LPA.”
13. Affordable housing requirements for co-living and student accommodation
As did the draft, the final version of the guidance sets out that”new types of non-self contained accommodation [the final version adds: “such as purpose-built shared accommodation“] can play a role in meeting housing need where they are of high quality and well designed.” These should not be classed as affordable provision (and nor should hostels). The final version of the guidance states:
“2.51…Affordable housing contributions on these schemes will be assessed through the Viability Tested Route, and should be provided as separate or off-site self- contained provision, or cash in lieu payments.
2.52 Student accommodation developments will also be assessed under the Viability Tested Route. Affordable student accommodation should be provided onsite in line with the Mayor’s Housing SPG.”
14. More detailed guidance on off-site affordable housing and cash-in lieu contributions
The guidance stresses that “[v]iability alone is insufficient justification for off-site affordable housing provision or a cash in lieu payment” and goes on to set out in more detail than previously how off-site provision and cash-in-lieu payments are to be calculated:
“2.61 Off-site affordable housing requirements will be calculated by reference to the total housing provision on the main development site and any linked sites providing off-site affordable housing. For the purposes of the initial assessment and viability reviews the policy target would equate to 50 per cent affordable housing provided across the main site and any linked sites providing affordable housing when considered as a whole.
2.62 The starting point for determining in-lieu contributions should be the maximum reasonable amount of affordable housing that could be provided on-site as assessed through the Viability Tested Route. The value of the in- lieu contribution should be based on the difference in Gross Development Value arising when the affordable units are changed to market units within the appraisal. This is to ensure that where the on-site component of
market housing is increased as a result of the affordable contribution being provided as a cash in-lieu payment, this does not result in a higher assumed profit level for the market homes within the assessment which would have the effect of reducing the affordable housing contribution.
2.63 The maximum value of any in-lieu contribution, for the purposes of the
initial assessment and viability reviews (the policy cap), will be based on
the equivalent of 50 per cent affordable housing provision. As with off-site affordable housing provision (see above), the target will be a percentage of the on-site market housing taken together with additional affordable housing provided off-site.
2.64 Where an LPA has established a locally based approach for determining in-lieu contributions, such as a tariff based approach, this may be applied where this would result in a higher level of affordable housing provision (or higher policy cap).”
15. More detailed advice on estate regeneration schemes
Existing affordable housing that would be lost in an estate regeneration scheme should be replaced on a like-for-like basis. The guidance clarifies that this means “that, for example, homes at social rent levels should be replaced with homes at the same or similar rent levels, or that specialist types of affordable housing should be replaced with the same type of housing. The Fast Track Route does not apply in these circumstances, and all estate regeneration schemes should follow the Viability Tested Route to deliver the re-provision of the existing affordable floorspace on a like-for-like basis and maximise additional affordable housing.”
There is also this new passage
“2.67 Where a borough is redeveloping an estate as part of a wider programme then it may be possible to re-provide a different mix of affordable housing
on the estate, taking account of the wishes of people who want to return to the estate, if the affordable housing is re-provided like-for-like or increased across the programme as a whole. This must also take account of the affordable housing requirements on the linked sites (i.e. it must be in addition to what the linked site would have delivered on its own). Further information on Estate Regeneration can be found in the Mayor’s Good Practice Guide.”
16. Scheme delivery
There are these new passages:
“3.10 Applicants should demonstrate that their proposal is deliverable and that their approach to viability is realistic. As such appraisals would normally be expected to indicate that the scheme does not generate a deficit, and that the target profit and benchmark land value can be achieved with the level of planning obligations provided. If an appraisal shows a deficit position the applicant should demonstrate how the scheme is deliverable.
3.11 Where an applicant is seeking to rely on assumptions of growth in values these should be provided. For shorter-term non-phased schemes which are based on current day values and costs, growth assumptions should be included as a scenario test.
3.12 For phased or longer-term schemes, it may be appropriate to include growth assumptions within the appraisal to ensure that this is realistic and that affordable housing is maximised. These should be informed by recognised market sources for the relevant area. Where this is the case viability review mechanisms will be required as set out in this guidance given the uncertainty in determining viability at the application stage. Higher profit targets should not be assumed which offset the benefits of this approach.”
17. Greater examination of costs information
Appraisals should set out the gross to net floorspace ratio of the proposed development.
There are these additional passages as well:
“3.23… Applicants should submit elemental cost plans that are consistent with the level of detail provided in the drawings in support of planning applications (i.e. RIBA Plan of Works Stage C). Wherever possible such assessments should be benchmarked against other similar projects. Where an appraisal is based on current day values, costs should not include build cost inflation.
3.24 LPAs are strongly encouraged to use cost consultants to rigorously assess scheme proposals and verify whether costs are appropriate taking into account pricing, quantities, specification, and assumed development values. Consideration should also be given to scheme design and whether development costs could be reduced as part of a cost/ value assessment.”
“3.26 Professional and marketing fees should be justified taking account of the complexity of the development and development values. Costs applied on a percentage basis should be realistic when considering the monetary value of the assumed cost.”
17. Additional passages in relation to developer profit
“3.32 In line with PPG a rigid approach to assumed profit levels should be avoided and applicants cannot rely on typically quoted levels.
3.33 Factors that may be relevant when assessing scheme-specific target profit levels include the scheme’s development programme, and whether it is speculative or provides pre-sold/ pre-let accommodation. Market forecasts and stock market trends may also provide an indication of perceived market-wide risk”.
18. Greater flexibility as to the use of internal rate of return
The draft guidance set out an expectation that the IRR measure of return would not be used for schemes providing fewer than 1,000 units. This is gone, although where IRR is used, profit must also now be considered as a factor of gross development costs or gross development value.
19. Defining EUV and any premium
The guidance clarifies that where “a proposed EUV is based on a refurbishment scenario, or a redevelopment of the current use, this is an alternative development scenario and the guidance relating to Alternative Use Value (AUV) will apply.”
There is this additional passage in relation to the quantification of any premium:
“The level of premium can be informed by benchmark land values that have been accepted for planning purposes on other comparable sites where determined on a basis that is consistent with this guidance.”
20. Advice on the use of market value
In the limited circumstances where a non EUV+ approach is acceptable, there is more detailed guidance on the use of transactional evidence to establish market value:
“3.49 In the very limited circumstances where this approach may be justified,
an applicant must demonstrate that the site value fully reflects policy requirements, planning obligations, and CIL charges, and takes account of site-specific circumstances. Market land transactions used must be fully evidenced and justified as being genuinely comparable and consistent with the methodology applied in the viability assessment. These should also be used to determine whether the residual value of the scheme and cost and value inputs are realistic. The applicant should also consider the:
– the Residual Land Value assuming a policy compliant affordable housing offer;
– the Residual Land Value based on an assumption of no affordable housing; and
– the Residual Land Value based on evidence from recent comparable market transactions.
3.50 Land is valued on a current day basis; changes in circumstances since a site has been purchased are a factor of development risk. Land transactions may also be based on unrealistic assumptions regarding development density, changes of use, or planning obligations. Where site value does not take full account of the Development Plan or CIL charges, where market land transactions are not fully evidenced and genuinely comparable, or where transactions are based on a different methodology and have not been appropriately adjusted, reliance on market transactions will not be supported.
3.51 If an applicant seeks to use an ‘alternative use value’ (AUV) approach it must fully reflect policy requirements. Generally the Mayor will only accept the use of AUV where there is an existing implementable permission for that use. Where there is no existing implementable permission, the approach should only be used if the alternative use would fully comply with development
plan polices, and if it can be demonstrated that the alternative use could be implemented on the site in question and there is market demand for that use.
3.52 In order to demonstrate the value of a policy compliant alternative that does not benefit from an implementable permission but does have a realistic prospect of achieving planning permission, the applicant should provide a detailed alternative proposal, incorporating current day costs and values. The applicant should also explain why the alternative use has not been pursued.”
In short, there’s a lot for us all to get our heads around. If I have missed anything, no doubt you will let me know…
Simon Ricketts, 20 August 2017
Personal views, et cetera
[Thank you, Rebecca Craig at Town Legal for rising to my initial “spot the difference” challenge].