Viability Assessment Is Not A Loophole, It’s A Noose

Congratulations to Shelter’s PR team. Its report, Slipping through the loophole: How viability assessments are reducing affordable housing supply in England, with a deliberately emotive reference in its accompanying 1 November 2017 press release to a ‘legal loophole exploited by developers‘ was lapped up largely uncritically by the media:
Loophole that allows developers to avoid building affordable homes leads to huge shortfall Telegraph, 31 October 2017
Majority of affordable homes lost due to legal loophole exploited by developers, show figures Independent, 1 November 2017

Revealed: The ‘Loophole’ Developers Use To Avoid Building More Affordable Homes Huffington Post, 31 October 2017
SHAMEFUL GREED Developers are using a legal loophole to build less affordable homes than required in order to protect their profit margins The Sun, 1 November 2017

Some basic truths are being conveniently forgotten. I set out some of them in my 28 May 2017 blog post, Affordable Housing Tax and won’t repeat them here, save to say that we need to pause and reflect whether public policy on affordable housing provision is in a good place at all at present. 
The aim of the Shelter report is to seek to persuade the Government to follow through with its proposed limiting of the role of viability assessment at application, as opposed to plan-making, stage. This proposal is being consulted upon in Planning for the right homes in the right places consultation paper, responses to which are due by 9 November 2017.
But the report is unbalanced. The description of the assessment process is over-simplistic. It asserts blandly that developers “can cite viability concerns to lower the amount of affordable housing they are required to provide, in order to guarantee them a 20% profit margin and inflate their bids for land”, playing down the scrutiny given by the authority’s valuers (or district valuer if the authority so chooses) and by the Planning Inspectorate on appeal (see for example my 24 June 2017 blog post that referred to the Parkhurst Road and Newcombe House decisions). The report repeatedly refers to 20% profit on a scheme as if it is a standard benchmark dreamed up by developers, when in reality a scheme by scheme approach is required. Often that figure has indeed been accepted, but on the basis that it is determined to be appropriate as a tipping point. Given the risks inherent in any major scheme (the paper wrongly states that “the developer’s profit is effectively guaranteed by the viability loophole” – not guaranteed, not a loophole) how much profit would a provider of capital require in order to invest in that project rather than in any other commercial development or investment? 20% sounds about right to me?
The report ends up laying most of the blame at paragraph 173 of the NPPF:
“…To ensure viability, the costs of any requirements likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing land owner and willing developer to enable the development to be deliverable.”
It seeks to show the effect that this supposed change in approach has had on the delivery of affordable homes by way of section 106 agreement:

It is interesting to look at this table alongside other tables in the research work from which it is drawn, Rethinking planning obligations: balancing housing numbers and affordability (Dr Sue Brownill and Dr Youngha Cho, School of the Built Environment Oxford Brookes University, March 2017):


In my view NPPF has been far less influential than other changes such as the loss of Government funding. 

By political sleight of hand, moral and legal responsibility for funding the provision of affordable, ie subsidised, housing has over the last decade moved largely onto the owners of land being brought forward for residential development and the promoters of those schemes. What level of affordable housing do these schemes have to bear? In reality, given such high policy targets, as much as can be extracted in negotiations, often with a review mechanism in the section 106 agreement allowing for further extraction at later stages in the development, preserving only as a potential return whatever benchmark land value and developer’s profit percentage has been agreed upfront in the viability assessment. 
As I explained in my Affordable Housing Tax blog post, section 106 requirements in relation to affordable housing largely started in the 1990s and became progressively entrenched in policy through the 2000s. But, prior to reductions in government funding, first in 2005 and then in 2011, the basis for developer commitments towards affordable housing was very different. Developers would commit in their section 106 agreement to affordable housing provision on the basis of securing a minimum base price for the units, usually being obliged to market the opportunity to nominated registered providers (known as registered social landlords until 2008). The quantum of the registered provider’s bid would depend upon the level of social housing grant secured from the Housing Corporation (replaced by the Homes and Communities Agency) and/or local authority. The nature of tenure of the affordable housing, and quantum, would depend upon the base price secured and in turn, in large part, upon the availability of social housing grant. “Cascade” provisions would specify the policy priorities in terms of tenure/quantum where the minimum base price could not be achieved. The minimum base price would commonly be linked to the Housing Corporation’s Total Cost Indicator (TCI), ie its estimate, area by area, of the normal cost of providing different types of housing. Social housing grant was commonly as high as 40 to 60% of TCI. But from around 2011 , with little fanfare and no public debate, social housing grant ceased to be available for section 106 affordable housing. 
As a result of that fundamental change in approach, affordable housing requirements are now pretty much a straight tax on land value (where the developer can pass the cost to the land owner through paying less for the land) and otherwise a tax on development. Often in reality the cost cannot be passed on – land owners have existing uses for their land, other potential development options or simply a minimum aspiration below which they will not go. Equally, land may have been acquired by an irrationally exuberant purchaser, unwilling now to crystallise a loss.   
Viability assessment is a necessary evil, but don’t assume that developers relish it:
– Via review mechanisms it can end up capping the maximum return that is achievable, an unattractive option when weighed against the uncapped risks that arise through any development project.  
– The toxic nature of the public debate, placing at the developer’s door a problem not of its making.

– The increasing risk that commercially sensitive information will need to be shared publicly.  

– The slow, expensive and unpredictable nature of the process, involving various consultants, all paid for by the developer – plainly, going with the policy grain will always be an easier option.

There is of course a debate to be had as to the relative extent to which land owners, developers and the state should fund affordable housing. I hope that we are indeed about to have that debate. There are some faint but encouraging signs, for instance the announcement by the prime minister in her party conference speech of £2bn towards social housing, the promised green paper and Sajid Javid’s recent urging that the Chancellor should borrow to build homes. We await the Autumn budget on 22 November with interest. In the meantime, unless local planning authorities are going to reduce massively their affordable housing requirements (unlikely, it’s needed), there is no alternative to viability appraisal. By all means, let’s make it work better but, without it, we will have even fewer homes built. 
Inevitably, we’ve been there before. See for example an ODPM report, July 2005: The Value for Money of Delivering Affordable Housing through Section 106:
“7.1  The research confirms that s.106 plays an important role in the delivery of affordable housing. However, there are other factors besides s.106 which have a significant influence on the provision of affordable housing. Some of these factors affect the availability of land, others affect the capacity to negotiate affordable housing contributions, still others affect the financial capacity of RSLs and other stakeholders. Such factors include: 
…

– Other planning obligations – the requirement for other essential planning obligations can reduce the contribution available to affordable housing. 

– Rent restructuring – this can affect the ability of the RSL to raise loans. 

– The grant regime – the abolition of LASHG has implications for affordable housing delivery if it is not replaced by other means. The short term nature of the bidding regime for funds can delay or postpone a scheme.

See also written evidence submitted to the Communities and Local Government Committee by by Professor Tony Crook, Ms Sarah Monk, Dr Steven Rowley and Professor Christine Whitehead in 2006:
”  Our research suggests that most (nearly three quarters) of Section 106 affordable housing units have an injection of public subsidy in the form of Social Housing Grant. At first sight this is odd and does not sit easily with one of our interpretations of Section 106, ie that developer contributions replace the need for subsidy. This might suggest policy “failure” but ignores the context within which Section 106 works best. Our evidence shows that planning gain delivers affordable housing in high price areas where land is expensive. What developers’ contributions appear to have done to date is to reduce the price of this expensive land to one that RSLs can afford within Housing Corporation funding guidelines. So, despite significant developers’ contributions, mounting on average to 5% of the gross development value across Section 106 sites (both the market and non-market elements), SHG is still needed to make the homes affordable and the schemes viable. In a recent calculation we have estimated that developers’ contributions on schemes agreed in 2003-04 were valued at £1,200 million. In looking at how Section 106 provides funding, we also need to recognise that Section 106 negotiations between developers and planners are not just about affordable housing contributions, but are usually about a much wider range of contributions, both in terms of physical off-site infrastructure and wider community needs, including school buildings. Affordable housing is not necessarily the highest priority and hence there may be little by way of developers’ contributions left over once other requirements have been negotiated and agreed. Thus both the expense of the land and the competing claims on planning gain explain the need for SHG, although without a clear negotiating and “accounting” framework there may well be risks that SHG inadvertently cross-subsidises these other planning “gains”.”


Eleven years on and it seems to me that we are in a much worse position. Whilst some grants are of course still available, social housing grant is long gone and in many areas a large non-negotiable slice has taken out by CIL (supposedly to be spent by authorities on infrastructure that unlocks development but that is not how it has turned out at all).

If the 2017 answer is to rely on land owners and developers to pay for affordable housing, let that be the outcome of a proper political debate and written into policy rather than the current unsatisfactory situation, which appears to me to be intellectually dishonest. If you’re going to tax market participants, do it openly, explain why you’re doing it and be sure that the mechanism is efficient in delivering the agreed objectives – more housing and more affordable housing, of all tenures. 
Simon Ricketts, 4 November 2017
Personal views, et cetera

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PSI-Apps

Nothing in this blog post is intended to suggest in any way that planning in London is a game of psychology, politics and process but here are the basic rules, as applied this month by Sadiq Khan in Wandsworth and Barnet. 
PSI applications are defined in the Mayor of London Order 2008 as applications of “potential strategic importance” that fulfil at least one of the criteria set out in the Schedule to the Order. 

PSI applications have to be referred to the Mayor before they are determined by the borough council (I include in that term for ease the Corporation of the City of London and Westminster City Council) and referred again, if he requires it, after their determination and before the permission or refusal is issued – stage 1 and stage 2 referral respectively. 
The Mayor has two special powers:
First, subject to various detailed criteria and procedural requirements he can direct refusal (see my 9 September 2017 blog post Policing The SPG: New Scotland Yard). The borough council must then issue a refusal notice and the applicant has its usual right of appeal to the Planning Inspectorate. Advanced players of the game (not a game) take the view that the Mayor’s direction is potentially revocable, so in some circumstances the borough may hold off issuing its refusal notice and further negotiations will ensure. (I note for example that the New Scotland Yard refusal notice has not yet been issued). 
Secondly, again subject to various detailed criteria and procedural requirements, he can direct that he should be the local planning authority and then determine it himself (almost inevitably by granting planning permission) following a representation hearing (before which there is a stage 3 report). Until this month he had only determined two applications by this route, Hale Wharf in Haringey and Palmerston Road in Harrow (see my 18 March 2017 blog post London Calling: Mayoral Interventions).
We now have two more examples: 
Homebase site, Swandon Way, Wandsworth 
As set out in his press release, the Mayor has resolved on 17 October 2017 to approve a scheme by National Grid UK Pension Scheme next to Wandsworth Town railway station for 348 homes. Wandsworth Council had resolved to refuse permission for the development of the site due to the height and scale of the development and its proximity to a nearby conservation area. The development included 23% affordable homes. The developer has now agreed to increase that figure to 35%, with the majority in the first phase of development, and with review mechanisms as per the Mayor’s SPG. 
He had called in the scheme on 26 June 2017, noting that Wandsworth was significantly underperforming against its borough 33% affordable housing target. 
The Stage 1, 2 and 3 documents are at this link.
National Institute for Medical Research site, Mill Hill



The Mayor resolved to approve on 6 October 2017 a scheme by Barratt London for 460 homes on the National Institute for Medical Research site, the Ridgeway, Mill Hill. Barnet Council’s planning committee had resolved to refuse planning permission against officers’ advice, with the proposed reasons for refusal referring to effect on a conservation area, on green belt and on trees. In his 2 May 2017 call in letter he stated that Barnet Council is “currently significantly under-delivering against its annualised housing completions targets and the borough’s affordable housing targets.” The Mayor secured an increased affordable housing commitment, from 20% plus off-site financial contribution, to 40%. 
The Stage 1, 2 and 3 documents are at this link.
So it may be said that the Mayor is achieving on these schemes the percentages that he has flagged in the SPG. But I do have some open questions:
1. Where is the developer’s focus now to be in preparing proposals – on meeting local and borough concerns and aspirations or on achieving, via density, a development that is sufficiently viable to deliver the affordable housing percentages that may lead to the Mayor stepping in to assist if local discussions become difficult?
2. By his pragmatic actions, is the Mayor giving more weight to the SPG (non-statutory guidance, not policy) than it deserves, particularly in insisting on fairly rigorous adoption of the review mechanisms in the SPG?

3. When we see the draft London Plan at the end of next month, are we going to see various policies that cannot be said to be “strategic” but are drilling down to issues which should be left to be addressed at borough level?

4. Where deals are done to ensure an increased affordable housing percentage, will the increased pressure on viability in fact delay those schemes coming to fruition?

5. In some circumstances, will we see developers either seeking to ensure that their schemes meet the PSI application threshold, so as to come within the Mayor’s ambit, or conversely, seeking to ensure that they remain below the radar? Where will the balance lie – more big schemes, or fewer?

6. To what extent is party politics relevant? Is the Mayor more likely to intervene in Conservative boroughs such as Wandsworth and Barnet?

In the meantime, there are plenty of rumours about the Mayor’s planning policy direction, from tightening up on the criteria for student housing schemes to scrapping density matrices. All will no doubt be revealed on 29 November. 
Simon Ricketts, 21 October 2017
Personal views, et cetera

Mending The Planning System (Has Anyone Tried Switching It Off And On Again?)

When I recently blogged about the Raynsford review of the planning system, I really wasn’t expecting shadow CLG Secretary of State Roberta Blackman-Woods to announce yet another one at the Labour party conference, at a CPRE fringe event. This is CPRE’s write-up. It will be called “People and Planning”. According to Building magazine we can expect proposals to streamline the compulsory purchase system and “tougher measures to stop developers sitting on sites“, as well as a rethink on CIL and on the Government’s recently announced OAN methodology consultation. 
Labour leader Jeremy Corbyn had the following passages in his conference speech, leading on from references to the Grenfell Tower tragedy:
We have a duty as a country to learn the lessons from this calamity and ensure that a changed world flowers . I hope that the public inquiry will assist. But a decent home is a right for everyone whatever their income or background. And houses should be homes for the many not speculative investments for a few. Look at the Conservative housing record and you understand why Grenfell residents are sceptical about their Conservative council and this Conservative government.

Since 2010: homelessness has doubled, 120,000 children don’t have a home to call their own, home ownership has fallen, thousands are living in homes unfit for human habitation. This is why alongside our Shadow Housing minister John Healey we’re launching a review of social housing policy – its building, planning, regulation and management.

We will listen to tenants across the country and propose a radical programme of action to next year’s conference. But some things are already clear tenants are not being listened to.
We will insist that every home is fit for human habitation, a proposal this Tory government voted down. And we will control rents – when the younger generation’s housing costs are three times more than those of their grandparents, that is not sustainable.

Rent controls exist in many cities across the world and I want our cities to have those powers too and tenants to have those protections. We also need to tax undeveloped land held by developers and have the power to compulsorily purchase. As Ed Miliband said, “Use it or lose it”. Families need homes.

After Grenfell we must think again about what are called regeneration schemes.

Regeneration is a much abused word.

Too often what it really means is forced gentrification and social cleansing, as private developers move in and tenants and leaseholders are moved out. 

We are very clear: we will stop the cuts to social security.

But we need to go further, as conference decided yesterday.

So when councils come forward with proposals for regeneration, we will put down two markers based on one simple principle:
Regeneration under a Labour government will be for the benefit of the local people, not private developers, not property speculators. 

First, people who live on an estate that’s redeveloped must get a home on the same site and the same terms as before.

No social cleansing, no jacking up rents, no exorbitant ground rents. 

And second councils will have to win a ballot of existing tenants and leaseholders before any redevelopment scheme can take place.

Real regeneration, yes, but for the many not the few.

That’s not all that has to change.”

Liberal Democrats’ leader Vince Cable took a similar theme in his own party conference speech:
“If there is any single lesson from the Grenfell disaster, it is that people in poverty aren’t listened to. Nowhere is inequality more marked than in the housing market. Property wealth for the fortunate coexists with growing insecurity and homelessness for many others. Home ownership, which spread wealth for generations, is no longer a realistic prospect for younger people with moderate means.

To put this right, we must end the stranglehold of oligarchs and speculators in our housing market. I want to see fierce tax penalties on the acquisition of property for investment purposes, by overseas residents. And I want to see rural communities protected from the blight of absentee second home ownership, which devastates local economies and pushes young people away from the places where they grew up. 

Homes are to live in; they’re not pieces on a Monopoly board. But whatever we do with existing homes will not be enough. A doubling of annual housing supply to buy and rent is needed. 

For years politicians have waffled about house building while tinkering at the edges of the market. I want to recapture the pioneering spirit that in the mid-20th century brought about developments like Milton Keynes and the new towns…I want to see a new generation of garden cities and garden villages spring up in places where demand presently outstrips supply.

But we know that private developers alone will not make this happen.Just as social reformers in the 1950s and 60s saw government roll up its sleeves and get involved with building, government today has a responsibility to be bold…and to build more of the homes we need for the 21stcentury. It is utterly absurd that councils are allowed to borrow to speculate in commercial property…but are stopped from borrowing to build affordable council houses.”

The shadow of Grenfell of course looms over the politics of planning and social housing. Secretary of State for Communities and Local Government, Sajid Javid, had earlier in the month announced a “green paper on social housing“:
A wide-ranging, top-to-bottom review of the issues facing the sector, the green paper will be the most substantial report of its kind for a generation.

It will kick off a nationwide conversation on social housing.

What works and what doesn’t work.

What has gone right and what has gone wrong,

Why things have gone wrong and – most importantly – how to fix them.”
Shelter also put out a press release, big on hyperbole, short on analysis, referring to the ‘legal loophole’ of ‘secret viability assessments’, focusing on the reduced levels of affordable housing achieved in Kensington and Chelsea compared to the borough’s 50% policy target and making the explicit link to Grenfell:
New research from Shelter reveals that a legal loophole has been used by housing developers to avoid building 706 social homes in Kensington and Chelsea – more than enough to house families made homeless from the Grenfell tower fire.”

How is the government’s position on the role of viability in planning (set out in paragraph 173 of the National Planning Policy Framework, a non-statutory, hardly obscure, planning policy document, now over five years’ old) a “legal loophole“?
Poor Raynsford review, is planning is too political for whatever emerges from it to gain traction? Its recommendations are due to be presented to next year’s party conferences. I hope that clear distinctions are drawn between changes to be made to the basic legislative hardware of the system (is it resilient, efficient, clear for users?) and to be made to the software (the NPPF, PPG structure – is it kept up to date to reflect the Government’s policy priorities and guiding users’ behaviour appropriately?), the purpose of the changes being to influence the content, scale, quality and pace of the data processing: individual plans and decisions actually coursing through the system, leading most importantly to delivery of political priorities, whatever they may be for the next Government. The review is somewhat hamstrung by not being able to set out those priorities as its starting point. 
So, what of the Government’s position? Regardless of what will be said at the forthcoming Conservative party conference, surely the current Government is not currently in a strong position to make further major changes. However, there is much unfinished legislative business, arising from:
– partly implemented enabling legislation (Housing and Planning Act 2016, Neighbourhood Planning Act 2017)

– uncompleted consultation processes (the Housing White Paper and associated documents, February 2017; Planning For The Right Homes In The Right Places, September 2017)

– other previously floated initiatives (for instance in the Conservative Party’s 2017 general election manifesto)

– other previous initiatives, partly overlapping with the above (a House of Commons library briefing paper dated 12 July 2017 lists 22 pre-June 2017 announcements that have not yet been implemented, or cancelled). 

 I have tried to take stock of where we are in terms of legislative as opposed to policy changes. This is a list of where I believe we are with the main planning law provisions of the 2016 and 2017 Acts (with relevant commencement dates indicated, although check the detail: in many cases a provision in primary legislation may have been switched on but still requires further secondary legislation for it to have any practical effect):

 Housing and Planning Act 2016 

 * Starter homes – providing a statutory framework for the delivery of starter homes – not in force, not really needed since the Housing White Paper u-turn

* Self-build and custom housebuilding – requiring local authorities to meet demand for custom‐built and self‐built homes by granting permissions for suitable sites – from 31 October 2016

* Neighbourhood planning changes – from 12 May 2016

* Permission In Principle/Brownfield Land Registers

    * Housing and Planning Act 2016 (Permission in Principle etc) (Miscellaneous Amendments)(England) Regulations 2017 – 6 March 2017

    * Town and Country Planning (Permission in Principle) Order 2017 – 15 April 2017

    * Town and Country Planning (Register of Previously Developed Land) Regulations 2017 – 16 April 2017

* Extension of Government’s ability to designate poorly performing LPAs such that non-major applications can be made direct to the Planning Inspectorate – from 12 July 2016

* Planning freedoms schemes – from 13 July 2016

* Resolution of disputes about planning obligations – not in force

* NSIPs including a housing element where functional link or close geographical link – from 6 April 2017

* Powers for piloting alternative provision of processing services – from 12 May 2016 (but no pilots yet)

* Urban Development Corporations/designation of new town areas – from 13 July 2016

* Compulsory purchase changes – mostly from 3 February 2017

Neighbourhood Planning Act 2017 
 * Neighbourhood planning changes – (partly) from 19 July 2017, subject of a previous blog post)

* Power to direct preparation of joint local development documents – not yet in force

* Restrictions on pre-commencement planning conditions – from 19 July 2017 (although Regulations not yet made)

* Restriction on PD rights re drinking establishments

    * Town and Country Planning (General Permitted Development) (England) (Amendment) (No 2) Order 2017 from 23 May 2017 (subject of a previous blog post)

* More compulsory purchase changes – partly in force, various commencement dates

 And these are the limited areas where we can expect further legislation:

* CIL reform (probably limited reform in this Parliament)

* Further PD rights? Maybe not. There has been silence in relation to upwards extensions in London and further rural PD rights, although limited light industrial to residential PD rights come into force for three years from 1 October 2017, following amendments to the General Permitted Development Order last year. 

* 20% increase in planning application fees (definitely)

* Completion notices reform (maybe, floated in Housing White Paper, subject of a previous blog post)

* Statutory three month deadlines for Secretary of State decisions (maybe, floated in Housing White Paper)

* Planning appeal fees (maybe, floated in Housing White Paper). 

* Regulations as to the “technical details” procedure for permissions in principle (definitely)

 I had to get my head round all of this in preparing to speak at Conference.*

*The RTPI’s Planning Issues For The Housing Agenda conference on 4 October.

Simon Ricketts, 30.9.17

Personal views, et cetera

Housing Needs: Assessed Or Assumed?

The new draft methodology to be used by English local planning authorities for determining their level of housing need is deceptively simple. Is it indeed too simple?
The current system (difficulty level: advanced)
The NPPF currently advises that LPAs should “use their evidence base to ensure that their Local Plan meets the full, objectively assessed needs for market and affordable housing in the housing market area”. They should:
“prepare a Strategic Housing Market Assessment to assess their full housing needs, working with neighbouring authorities where housing market areas cross administrative boundaries. The Strategic Housing Market Assessment should identify the scale and mix of housing and the range of tenures that the local population is likely to need over the plan period which: 

* meets household and population projections, taking account of migration and demographic change; 


* addresses the need for all types of housing, including affordable housing and the needs of different groups in the community (such as, but not limited to, families with children, older people, people with disabilities, service families and people wishing to build their own homes); and 


* caters for housing demand and the scale of housing supply necessary to meet this demand

The PPG provides more detailed guidance but in practice the recommended approach is complex, relying on a shifting, uncertain evidence-base with subjective judgements to be made. Disputes over the calculation of “objectively assessed needs” are far too time-consuming, technocratic, uncertain and expensive. 

Local Plans Expert Group’s recommendations (difficulty level: intermediate)
Back in September 2015, the then Secretary of State, Greg Clark, and then housing and planning minister, Brandon Lewis (I know, seems like another era), appointed an independent Local Plans Expert Group “with a remit to consider how local plan making can be made more efficient and effective“. Its impressive line-up was as follows: 
Members
John Rhodes OBE – Quod, Director – Chair 

Adrian Penfold OBE – British Land, Head of Planning 

Councillor Toby Elliott – Swindon Borough Council, Cabinet Member 

Derek Stebbing – Chelmsford City Council, Planning Policy Manager 

John Howell OBE MP FSA – Member of Parliament for Henley 

Keith Holland – retired Planning Inspector 

Liz Peace CBE 

Richard Harwood OBE QC – 39 Essex Chambers 

Advisors 

Christopher Katkowski QC – Landmark Chambers 

Ian Manktelow – Wycombe District Council, Team Leader, Planning Policy 

Matthew Spry – Nathaniel Lichfield & Partners – Senior Director 

LPEG’s report was published on 16 March 2016, together with a separate volume of appendices, within which Appendix 6 sets out a simplified, standardised approach to the assessment of housing need. The methodology is summarised in this table: 


It was a detailed, thoughtful piece of work, delivered quickly. The Government then took almost as long again to publish what can best be described as a holding response on 7 February 2017, alongside publication of the housing white paper:

“The White Paper confirms that the Government will consult on options for introducing a more standardised approach to assessing housing requirements. The outcome of this consultation will be reflected in changes to the National Planning Policy Framework. We want councils to use the standardised approach and will incentivise them to do so, as this will help to speed up and reduce the cost of the plan making process for those authorities that use it. The White Paper indicates that our decision making for the £2.3bn Housing Infrastructure Fund is likely to factor in whether authorities intend to apply the new standardised approach to assessing housing requirements. 


We expect councils that decide not to use the methodology to explain why not and to justify the methodology that they have adopted. We will consult on what constitutes a reasonable justification for deviating from the standard methodology, and make this explicit in the National Planning Policy Framework.

The Government’s proposals (difficulty level: elementary)
It is interesting that politicians (again) select a group of recognised experts and then embark on a significantly different approach. Perhaps the group wasn’t brave enough in its quest for a one size fits all formula or perhaps it recognised that, if it did, the figures would not be fit for purpose. 
However, a year after the publication of LPEG’s report, the Government has published, for consultation, its proposals: Planning for the right homes in the right places: consultation proposals (14 September 2017). The consultation period expires on 9 November 2017. 
“Subject to the outcome of this consultation, and the responses received to the housing White Paper, the Government intends to publish a draft revised National Planning Policy Framework early in 2018. We intend to allow a short period of time for further consultation on the text of the Framework to make sure the wording is clear, consistent and well-understood. Our ambition is to publish a revised, updated Framework in Spring 2018.” Planning Practice Guidance will be updated at the same time.
LPEG’s recommended approach has been further simplified, reduced indeed to a formulaic approach which will have to be followed by LPAs save in “compelling circumstances” which “will need to be properly justified, and will be subject to examination.” Amongst the elements that appear to have been stripped back from the LPEG recommendations are
– Just using ONS’ projected numbers of households as the demographic baseline for each area

– No ten year migration scenario sensitivity test

– No looking at vacancy and second home rates

– No separate consideration, as part of this methodology, of the need for affordable housing although LPAs should identify the housing need for individual groups, such as those in need of affordable housing, via a streamlined process (the Government invites suggestions as to how that might work). We also wait to see what will be in the forthcoming “green paper on social housing” announced by Sajid Javid in his speech to the National Housing Federation on 19 September 2017)

The proposed formula is as follows:

A cap is proposed on the level of any increase:

“We propose to cap the level of any increase according to the current status of the local plan in each authority as follows: 

a)  for those authorities that have adopted their local plan in the last five years, we propose that their new annual local housing need figure should be capped at 40 per cent above the annual requirement figure currently set out in their local plan; or

b)  for those authorities that do not have an up-to-date local plan (i.e. adopted over five years ago), we propose that the new annual local housing need figure should be capped at 40 per cent above whichever is higher of the projected household growth for their area over the plan period (using Office for National Statistics’ household projections), or the annual housing requirement figure currently set out in their local plan.”

DCLG has applied the new methodology to every authority in England, arriving at an overall housing need figure of 266,000 a year (including 72,000 in London) broken down authority by authority on a spreadsheet (which may not open on mobile devices). The table warns that the numbers are “indicative” and “should be treated with caution” (indeed various errors have already been found) but inevitably they have been pored over by those on all sides, whether to make the case for or against additional housing in a particular area. 

There are some curious outcomes due to the way that, for example, anticipated or planned employment growth that will lead to additional housing pressure has not been factored in, save indirectly to the extent that it may have an effect on housing affordability. The affordability ratio further skews the increases towards the south with many authorities in the north and the Midlands showing decreases as a result of these factors, regardless of their actual level of ambition. The paper stresses that LPAs can plan for more homes than the number arrived at by the methodology but to what extent will the existence of the lower number encourage objectors to push back?
The transitional provisions will certainly encourage many LPAs to make sure that their plans have been submitted for examination by 31 March 2018:

This is the briefest of overviews. The paper includes further proposals to which no doubt I’ll be coming returning. In the meantime, for a full analysis of the new approach and its likely implications, I recommend Lichfields’ paper, written by LPEG adviser Matthew Spry. 

Simon Ricketts, 20.9.17
Personal views, et cetera

Policing The SPG: New Scotland Yard

Pour encourager les autres or an early demonstration of zero tolerance? 

The Mayor of London’s direction of refusal on 4 September 2017 in relation to a section 73 application to amend a 2016 planning permission for redevelopment of the former Metropolitan Police’s headquarters, so soon after publication of the final version of his affordable housing and viability SPG (see my 20 August 2017 blog post, 20 Changes In The Final Version Of The London Mayor’s Housing & Viability SPG) has certainly focused minds. 

The sale of New Scotland Yard was reported in the Guardian in December 2014 under the headline “Daylight robbery? New Scotland Yard is bought for £370m by developer: Abu Dhabi investor buys famous police headquarters for £370m and says he will replace the block with luxury apartments”. The piece reports that the then Mayor’s Office for Policing and Crime “put New Scotland Yard on the market in September [2014] and said it would have cost over £50m to bring the building back up to standard. It bought the freehold for £123.5m in 2008. The sale forms part of a major revamp of the Met estate, which has raised £215m so far through the sale of 52 buildings (with plans to sell up to 200 buildings by 2016/17). The overhaul is estimated to save over £60m in annual running costs by 2016.” The then Metropolitan Police Commissioner was reported as saying that the sale was “absolutely vital“. The move was going to save more than £6m a year in running costs. The sale proceeds “would be used to kit out bobbies on the beat with tablets, smartphones and body cameras.”

The piece reports the sale agent as saying that the sale showed “continuing international confidence in the London market”. “What was clear was that all the bidders could appreciate just what a special opportunity it was”. 
The article goes on: “The new luxury apartments are expected to generate up to £100m in stamp duty when they are sold, as they will be priced over the £925,000 level that attracts a 10% rate.”
The police vacated the building in November 2016 once the purchaser, BL Development Limited (registered in Jersey but reported in the press as “an investment vehicle controlled by UAE-based Abu Dhabi Financial Group”) obtained planning permission from Westminster City Council in April 2016 for a redevelopment comprising 268 apartments. The section 106 agreement dated 27 April 2016 provides for ten affordable homes together with a £10m payment in lieu – and no review mechanism, so a once and for all deal. 
The previous Mayor, Boris Johnson, did not intervene in the planning process. Indeed, the timing rather suggests that the application was referred to him in the run up to the 5 May 2016 Mayoral election and conveniently planning permission was issued before Sadiq Khan’s success in that election.  
I do not know how rigorous or otherwise the viability assessment was at that stage, but it does seem that the benchmark land value used was £277m, some way below the amount that the developer had to pay in reality to secure the site. The sale of this public sector land generated £370m, a figure which would otherwise have come from the tax payer to subsidise police operations. The developer was going into the viability negotiation only able to assume a value for the site that was almost £100m below what it had paid, so it could hardly be said that the whole of the problem lies at the door of the developer for having overpaid for the site in a highly competitive disposal process. 
The Mayor could of course have required as a condition of the sale process that the purchaser provide a minimum of affordable housing and thereby depressed everyone’s bids, and ultimately the sale price, accordingly. He didn’t – a political choice. 
The same month as the police leave the building, November 2016, BL Development Limited make a section 73 application to optimise the scheme – a further 27 apartments, reduced basement space, fewer car parking spaces, other design changes. Its viability assessment seeks to justify (a position accepted by Westminster City Council’s viability consultants) that no further affordable housing can be secured without the scheme being unviable, meaning a reduction in the percentage of affordable housing that would be delivered (net of the in lieu contribution) from 4% to 3%.
Westminster City Council resolves on 16 May 2017 to approve the application, despite strong concerns expressed by the Mayor at stage 1 referral on 20 March 2017. There is then a very long delay before the final stage of the process, namely stage 2 referral to the Mayor where he has a fixed 14 days’ period within which to decide whether to wave it through, call it in or direct refusal. I have no direct knowledge but I assume that discussions were continuing with the Mayor’s viability team to seek to neutralise their position and in any event to make process with the necessary variation to the section 106 agreement – perhaps also to await sight of the final version of the Mayor’s affordable housing and viability SPG. The Mayor’s SPG is published on 16 August and the application is finally referred on 24 August. On the day before the application was referred to the Mayor the applicant increases its affordable housing offer by one unit, on a “without prejudice” basis, on the condition that no viability review mechanism would be required.  
Big stakes for the developer. Is the Mayor going to intervene on such a high profile site which has generated a massive return for his authority? But, on the other hand, how would he maintain credibility in his SPG without intervening on a scheme with, at face value and without descending in detail into the viability position, such a low level of affordable housing, both as originally granted (just before he could do anything about it) and (particularly) as amended?
The application was a natural one to choose from the Mayor’s perspective as it gives rise to a number of the issues addressed in the SPG, for instance:
– approach to section 73 applications

– current affordable housing commitment well below 35% threshold

– issues in relation to assessment of assumed land value, projected sales rates and profit

– land formerly in public ownership

The Mayor’s direction states that the “level of affordable housing provision proposed is wholly unacceptable” for two reasons:

Affordable housing provision: The proposed affordable housing contribution of 10 intermediate units (3.3% by unit, 2.9% by habitable room) and £10 million off-site payment in lieu has not been adequately justified. The methodology undertaken by the applicant to assess the viability of the scheme is not in compliance with the Mayor’s Affordable Housing and Viability SPG and leads the GLA to conclude that more affordable housing could be supported within the scheme. On the basis of the evidence presented, the applicant has not demonstrated that the scheme will deliver the maximum reasonable amount of affordable housing, and the proposals are therefore contrary to London Plan Policy 3.12 and the Mayor’s Affordable Housing and Viability SPG. 

Viability review mechanism: No provision has been made in the draft s.106 agreement for viability review mechanisms. Given the low level of affordable housing proposed and the significant length of the development programme, the use of review mechanisms is essential in order to reassess the viability of the scheme and determine whether additional affordable housing could be supported. The absence of viability review mechanisms does not therefore support the delivery of the maximum reasonable amount of affordable housing on the site, and is contrary to London Plan Policy 3.12 and the Mayor’s Affordable Housing and Viability SPG.”

The stage 2 report sets out GLA officers’ “significant concerns with the applicant’s approach to the assessment of the viability of the scheme…These include the applicant’s approach to land value, sales rates and profit”. 

So what were the problems identified?
1. The applicant’s viability consultants argued that the 2016 permission had been implemented and that it should should form the basis of comparison with the amended scheme to determine whether it is viable. The 2016 permission viability assessment had previously concluded that the 2016 permission scheme was not viable even with no affordable housing. The applicant had since reviewed its assessment of that scheme and asserted that it was now in fact viable due to assumptions as to lower build costs, lower finance costs and a lower profit target, leading to a higher benchmark land value (£159.34m). When the extant scheme is being used as the baseline for the section 73 scheme, obviously improvements in the viability of the extant scheme raise the bar in terms of how profitable the section 73 scheme would need to be. The report found that this approach was inappropriate “and leads GLA officers to conclude that more affordable housing could have been achieved within the extant scheme, or otherwise that the extant scheme does not provide a reasonable basis for determining the viability of this s. 73 scheme”.
2. The Council’s viability consultants do not escape criticism. They had adopted a market value approach to arrive at a benchmark land value of £200m but, in the view of GLA officers, the consultants had “not demonstrated that their approach to site value properly reflects planning requirements for affordable housing or has been adjusted to ensure that it is compatible with the current day basis of the applicant’s assessment, as required by the Mayor’s SPG”. 

3. The applicant’s appraisal apparently did not factor in a £19.5m reduction in build costs due to a reduction in the size of the basement. 

4. An IRR (internal rate of return) approach was taken to determining a target profit. The SPG states that an IRR approach “is sensitive to the timings of costs and income, and in such cases these value inputs must be robustly justified“. The report finds that the development programme assumed for the project of 8.4 years was long for a scheme of this size and inconsistent with the construction plan submitted with the ES. Slower assumed delivery would depress the profitability of the scheme. A cross-check of profit as a factor of gross development value and of gross development costs (now required by the SPG where IRR is used) showed higher than typical rates of profit. An additional contingency on construction costs was included which was not agreed. 

5. The absence of early and late stage review mechanisms was deprecated. The developer unsuccessfully argued that to include them would be a disincentive to proceed with the section 73 scheme, as opposed to the extant scheme, which does not have them.

6. There is then this political point which I feel uneasy about given the extent to which the previous Mayor had extracted value from the site via the disposal process: “This is a site that has recently been transferred from public ownership, and is in one of the highest value areas in the country. The applicant’s affordable housing offer of 3-4% must be considered in this context.”

So what next? BL Development will need to decide whether to (1) appeal against the directed refusal (which would be a fascinating test of the status to be given to the SPG and indeed the robustness or otherwise of the various viability approaches) (2) sharpen its pencil with a view to a further application or (3) simply build out the extant scheme, fewer units, the agreed affordable housing provision, no review mechanism. 
More widely there are some public policy issues arising as to public land disposals. Maximum value can be extracted at the disposal stage or the disposal opportunity can be used to require, as a bid condition, higher levels of affordable housing than would be possible if the site were sold on an unconstrained basis. But (pace Boris Johnson) you shouldn’t be able to have your cake and eat it. 
Simon Ricketts, 9.9.17
Personal views, et cetera

20 Changes In The Final Version Of The London Mayor’s Affordable Housing & Viability SPG

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: 


- EUV; 

– 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].

Viability & Affordable Housing: Update

This is a supplement to my 28 May 2017 Affordable Housing Tax blog post, since when:
Politics, people
The avoidable tragedy on 14 June of Grenfell and its aftermath – with its residents needing to be rehoused and concerns as to the fire safety of many other council housing blocks – has surely focused attention on the challenge of providing adequate housing.
Except that by cruel irony this has come precisely when the Government is of course having to face other challenges as a result of the 8 June election. Despite the Conservatives’ manifesto promises in relation to “social housing” (later confirmed to be in fact not social housing) and changes to compulsory purchase processes, the background notes to the Queen’s Speech on 21 June simply said this on housing:

HOUSING


“Proposals will be brought forward to […] help ensure more homes are built.” 

We have not built enough homes in this country for generations. In order to fix the dysfunctional housing market, we need to build more of the right homes, in the right places, and ensure the housing market works for all parts of our community. 


This will help to tackle the increasing lack of affordability by bringing more properties onto the market. It will slow the rise in housing costs relative to the rise in wages, and help ordinary working people gain better access to this most basic of necessities. It will help more ordinary working families buy an affordable home and will bring the cost of renting down. 


In February we published a Housing White Paper, which proposes end-to-end action across the whole housing system, with measures to: 

    * release more land for homes where people want to live; 


    * build the homes we need faster; 


    * get more people building homes; 


    * support people who need help now.

We will deliver the reforms proposed in the White Paper to increase transparency around the control of land, to “free up more land for new homes in the right places, speed up build-out by encouraging modern methods of construction and diversify who builds homes in the country” (p.70). 
We will consult and look to take action to promote transparency and fairness for leaseholders. We will look at the sale of leasehold houses and onerous ground rents, working with property developers, the Competition and Markets
 Authority and others as outlined in the Housing White Paper. 


Key facts 


Getting more homes built 

    * In 2016, the median house price in England was nearly eight times the median earnings – an all time record high. 


    * Home ownership among 25-34 year-olds in England has fallen from 56% in 2005/06 to 38% in 2015/16, whereas the percentage of 25-34 year-olds living in the private rented sector increased from 24% to 46% over the same time period. 


    * 189,650 net additional homes were delivered in 2015/16 in England, up 11% on 2014/15 and the highest level since 2007/08. We need to sustain that momentum to meet the affordability challenge. All credible sources agree we need between 225,000 and 275,000 new homes per year to tackle this problem. “

Are we moving into a period when local rather than national government will have to make the running, regardless of political complexion? Plus ça change, perhaps. Nickie Aiken, leader of Conservative-run Westminster City Council, gave a no-holds-barred speech to the London Real Estate Forum on 13 June 2017:
“There’s no time for on-going pleasant and cosy chats that might improve things for the better at some undefined point in the future.”

“My view is that too many times we have not always pushed back enough in requiring affordable homes onsite, have buckled on viability or surrendered to the idea that brutal market economics simply denies housing opportunities for most people and that is just a harsh fact of life.”

“If you are a developer who wants to invest in and be invested in the future of our city for the long haul you are very welcome.

However, if you are just a speculator who wants to make a fast buck by building properties that only oligarchs and absent overseas investors can afford, you are in the wrong borough.
It’s good for a politician to make statements such as this but it’s not so popular (although equally true) to say that viability is still a challenge on many schemes. Many sites do attract a high market value regardless of any developer’s proposal (even when circular arguments are avoided) and why would the owner relinquish the site at a loss? Sales prices and costs budgets cannot be guaranteed. Development values are maximised by targeting the most profitable segments of the market and in the approach taken to density, yes to maximise return, but also to make the affordable housing numbers work on top of CIL and other non-negotiable requirements. Criticise from the side lines but would you speculate or lend your own money on any different or more altruistic basis, given the commercial and political uncertainties to which any significant longterm project will be exposed to? For a decision maker to make the right judgment call that maximises both the amount of housing that will actually be delivered and, within that, the amount and range of affordable housing (rather than ending up with nothing more than homes on paper, an unimplemented permission), is never going to be easy. What would make it easier would be:
– closer prescription as to the appropriate methodology to be followed – and for that methodology to follow economic reality as closely as possible so that, on the one hand, developers cannot avoid their proper obligations but, on the other, equally importantly, so that they still have every incentive to develop.  

– alongside that greater prescription, real penalties for those who game the system and bring it into disrepute. 

– due recognition for genuine altruism – how can we encourage good behaviour?

It is crucial to crack this because what the public perhaps doesn’t appreciate is the degree to which affordable housing subsidies are being left to be provided by the private sector – see for example the government’s latest statistics (April 2009 to March 2017) as to HCA/GLA funded affordable housing starts/completions by tenure type.
High Court
The current realities of viability negotiations have been exposed to the light in Minerva (Wandsworth) Limited v Greenland Ram (London) Limited (Rose J, 23 June 2017), a contractual dispute over an overage payment that Minerva, seller of the Ram Brewery site, successfully claimed from its purchaser, Chinese developer Greenland for securing a section 73 permission enabling a tower within the redevelopment scheme to be two storeys higher than initially approved. The factual account by Mrs Justice Rose is relentless in its detail.  
Appeal decisions
One theme of the Minerva case was the way in which the different parties’ viability consultants arrived at vastly differing figures, given the uncertainties as to the approach to be taken to, for instance the hypothetical land cost (benchmark land value) to be taken into account. Whilst the Mayor has set out his preferred approach in his draft affordable housing and viability SPG, the debate has continued and there have been two decision letters this month where inspectors have had to arbitrate between differing approaches taken by appellant and LPA. 
I referred in my 18 June 2017 blog post to a decision letter dated 12 June 2017 concerning a site at the junction of Notting Hill Gate and Kensington Church Street in which Inspector David Nicolson considered that the site value of £33m within the appellant’s viability appraisal (and indeed agreed by RBKC) was too high and he consequently did not accept the appellant’s position that affordable housing “could not be provided on site or, more importantly, that there needs to be a loss of all the existing 20 social housing bed spaces on the site or a net loss in the borough“. The inspector gave little weight to an alternative use value approach and was sceptical as to any figure that might be arrived at using an EUV approach. In his view, in the absence of any planning permission, there was “little sound evidence to show that the site is more of an asset than a liability”. 

The 19 June 2017 decision letter issued a week later in relation to the proposed redevelopment of the former Territorial Army Centre, Parkhurst Road, Islington was highly unusual as the central issue for the inspector, Michael Boniface, to determine was “whether the development would provide the maximum reasonable level of affordable housing in accordance with the development plan”. The proposal, by Parkhurst Road Limited, was for 96 homes and related works. The appellant had purchased the site for £13.25m in May 2013 from the Ministry of Defence. 
At the inquiry the appellant offered to provide 10% affordable housing (up from an initial position that 0% was justified given the viability position). Islington Council’s final position at the inquiry was that it would accept 34% (down from an initial requirement of 50%). The main issue between the parties was as to the appropriate land cost to be allowed for. The benchmark land value argued for by the appellant was £13.26m, a figure established at a previous inquiry, and sought to support the figure by reference to various comparables. The council argued for the EUV+ (existing use value plus premium) approach advocated for by the Mayor in his draft SPG and put forward a figure of £6.75m, which approach and figure was favoured by the inspector. The inspector was also not satisfied with the review mechanism that was proposed. 
Of note for other schemes in Islington, the inspector did not support the council’s proposed obligation, pursuant to its “Wasted Housing Supply” SPD, that would have required that none of the dwellings be left unoccupied or unused for a period of three months or more. The inspector did not consider on the evidence that the obligation was justified or that it could be properly and fairly enforced.
What next?
Obviously all eyes are on Alok Sharma, new housing and planning minister, for some hint of the approach that he will take. 
In the meantime, in London, the adoption of the Mayor’s affordable housing and viability SPG in July will provide more certainty, together with first sight of his draft Replacement London Plan later in the year. 
But ahead of that, an announcement is due on 26 June as to the Mayor’s proposed changes to his CIL charging schedule (to come into effect in 2019). Just remember that almost every penny of any extra charges levied on housing schemes will simply feed through into viability assessments and will reduce any surplus available for affordable housing. 
Time finally for a quick plug: LD Events’ annual Viability & Planning conference is taking place on 28 September 2017. 
Simon Ricketts 24.6.17
Personal views, et cetera

(Town Legal acted for the appellant in relation to the Parkhurst Road inquiry)