How to solve a housing crisis: commercial viability, land value and affordable housing

Author: Martyn Jarvis, Associate, Planning, Real Estate, London

The UK is facing a housing crisis, most pronounced in London, and this is set to be a key factor in the forthcoming Mayoral elections.  Meanwhile, commercial viability is the talk of the town.  How “viable” a scheme is will influence how much affordable housing can be provided.   Requiring disclosure of viability information across London, standardising land value calculations, standardising viability methodology and fixing affordable housing targets are amongst recent recommendations made to the Government and to the Mayor.

Transparent viability information is already required in Islington, and with Greenwich and Southwark following suit where schemes are not policy compliant, the London Assembly are now urging the Mayor to adopt this approach across London.  Over the past few weeks the London Assembly Planning Committee and London First have both presented papers aimed at steering a policy shift once the new Mayor takes office.

The London Assembly Planning Committee letter to the current Mayor focuses on the need for new supplementary planning guidance for viability assessments. Within those recommendations is a call for a fixed minimum affordable housing target across London and the promotion of the existing use value plus a premium approach to valuing land, rather than taking the market price. The aim is to prevent "overpriced" land payments being made to circumvent the provision of affordable housing. This is an odd accusation to make against developers and not something that we have encountered in practice.  It is not realistic to expect land to be purchased on the open market at a price which reflects the existing use value when it is being sold for the purpose of being developed into residential accommodation. It may be true that a tighter approach to assessing the inputs and outputs of viability assessments can deliver a marginal gain in terms of the provision of affordable housing and planning obligations. However, preventing the development of land due to the adoption of an unrealistic land value runs the risk of causing development to stagnate. 

London First and Turley's report 'The Off-Site Rule' considers how new policy can be introduced within a revised London Plan to provide greater clarity of how off-site affordable housing contributions are used by the boroughs. It notes that in 2014, off-site payments towards affordable housing topped £250 million and that in the past three years the value of payments has been sufficient to build 7,617 affordable homes (statistics of how many have actually been built could not be located). The concern is that off-site affordable housing payments are being used for general expenditure rather than being used to build affordable housing. Amongst the proposals to improve this situation is for boroughs to declare their income from off-site payments versus expenditure on affordable housing, and for them to have a closer relationship with the GLA, moving residential development towards a 'pan-London approach'. Developers will be expected to find and promote donor sites for off-site affordable housing, to be developed in tandem with the primary development site.

Problems with this abound however: how do I find a donor site and what is the cost in a region of inflated land prices?  What is the right way to conduct a viability assessment?  How do I process dual linked planning applications which are dependent upon one another, potentially in different boroughs with different policies? How do I finance two developments in a world of ever increasing construction costs?  How do I meet policy requirements while retaining a viable development?  

Both of the leading candidates in the London Mayoral election, Zac Goldsmith and Sadiq Khan, are promising to deliver more affordable housing within the capital, with Khan even promising to deliver 50% of all new homes as affordable.  It is not yet clear how this will be achieved, nor whether any of the candidates have the ability and will to solve the housing crisis.

Herbert Smith Freehills will be running seminars on the issues of disclosure of information, viability and affordable housing requirements. Please contact us for more information.

See also our separate bulletins on the Housing and Planning Bill and office to residential permitted development rights for more information on measures proposed by the Government to increase the housing supply. We will be reporting on the Government's recent consultations on the implementation of planning changes and on upwards extensions to buildings in blog posts coming soon.