Mayor and Chancellor strike a positive deal for London
29 Nov 2016
In last week’s Autumn Statement the Chancellor of the Exchequer announced some very welcome increases in the affordable house building budget – as well as the great news that unfair letting agent fees would be banned. Funding programmes are always complicated things, covering several years and using multiple policy levers – such as direct grants, lending, loan guarantees, and use of public land. So it’s always important to look at the detail of how the headline numbers will actually be deployed. Sadly, in not surprisingly, it’s common to find that the positive story launched on the big day turns out to be rather less brilliant when scrutinised more closely.
All of which makes today’s announcements from the Mayor of London doubly welcome. In short, the Mayor and the Government have done a deal to roughly double affordable housing investment in the capital, and to spend this on a mix of tenures, including genuinely affordable homes on low rents. This is excellent news: both the Mayor and the Chancellor deserve respect for coming to such ground-breaking deal in a tough fiscal climate, and across political party lines too. The housing crisis is not a purely London problem, but it is undeniably most acute in the capital, and any attempt to address the chronic undersupply of affordable homes in England has to address London’s needs as a priority.
So both the Autumn Statement and the London settlement seem like very positive steps forward. But does the detail support this rosy picture? We’ll need to see the government’s White Paper, due out soon, but on the available information our initial assessment is that, overall, it really does. The Autumn Statement made it clear that the really will be new money, and that it will support rented housing too. The Mayor’s proposals published today are also very encouraging. The Mayor intends to:
- use the planning system to increase affordable housing;
- tackle the vexed problem of ‘financial viability assessments’ undermining affordable house building;
- including new, low cost rented homes in the mix of homes funded;
- clarify how Build to Rent can work and deliver affordable homes;
- using his planning and funding powers to change fundamental drivers in the land market.
Some reports have suggested that the new planning proposals constitute an abandonment of the Mayor’s campaign pledge of 50% affordable housing – up from the 13% actually achieved last year. There are in fact good technical reasons why the Mayor cannot instantly achieve such a huge increase, but that does suggest that it may not have been sensible to promise it in the first place. Overall, we think the funding and tenure policies are a decent balance of the positive and the pragmatic – but we will be holding the Mayor’s feet to the fire to ensure that the homes built really are as affordable as possible.
We also think there is something really interesting emerging in the Mayor’s planning policy about the way the role land is understood – which for my money is the most fundamental problem we need to tackle in our housing system.
There’s a lot of complex stuff going on here (see detail below) but at first reading it sounds extremely encouraging. In essence, land values ought to reflect democratically agreed plans. So if the plan requires affordable housing and good community infrastructure, the market ought to factor those things into the price of land. Too often it works the other way around: developers bid against each other for land, and the highest bidder then has to haggle down the affordable housing and infrastructure contribution on grounds of viability. Reversing this perverse interaction between the market and the planning system offers the promise of a genuine transformation in the way development is done in this country. There’s a real chance that Chancellor and Mayor have just fired the starting gun on that transformation.
Here’s our quick summary of the measures announced today:
- The Mayor published his 2016 – 2021 Spending Programme for affordable housing. This sets out how he proposes to spend the £3.15bn agreed with the new government.
- The funding is expected to support 90,000 new affordable homes in London over that period (18,000 per year).
- 58,500 of these homes will be either for Shared Ownership or Living Rent. 31,500 will be for London Affordable Rent.
Tenures being funded:
- London Affordable Rent: this is similar to traditional social rent. Rents are set at target social rent levels uprated for inflation. Allocations are general needs with 5% of homes set aside for the GLA’s Housing Moves scheme (or 10% on large schemes over 150 units).
- London Living Rent: This is a new intermediate rented product, with a time limited tenancy and a route into home ownership. In short, the new product will be a discounted rented home for up to 10 years with rents based on median local household incomes. Eligibility will be restricted to households earning less than £60,000 who don’t have sufficient savings to buy a home in the area, and the homes will mainly be 1 or 2 bedroom. Boroughs can set additional priorities. The renter will be expected to be saving towards homeownership and “a requirement to assess the ability and inclination of prospective tenants to save”. Renters will be offered a shared ownership option on the property. If the tenant has not purchased the home within 10 years then the landlord will need to sell it as a shared ownership property. Landlords will have flexibility over tenure length, but the initial tenancy must be at least 3 years
- Shared Ownership: this looks largely the same as currently, with the same eligibility criteria. The Mayor is however putting some pressure on landlords to standardise and simplify their service charges.
- There’s £50m capital funding for move-on accommodation for homeless households in hostels/ refuges who are not being prioritised through the allocations process. This is intended to support local councils and HAs to “purchase and repair existing market properties, to develop new build and in exceptional cases to lease private properties”.
There will be several different routes for applying this grant pot:
- Grant rates for “Approved Providers” who deliver at least 50% affordable housing across their portfolio will be £60,000 per home for London Affordable Rent, and £28,000 per home for London Living Rents and Shared Ownership.
- For developer-led projects (i.e. what we usually call S106), there is a different approach. Where the developer meets the local authority’s minimum viable level of affordable housing in planning, the GLA will then offer £28,000 grant per home for additional units delivered as affordable. Where the developer goes over 40% affordable units, the grant will be available on every affordable home on the site. This incentivises developers to increase the proportion of affordable homes – though this will still depend on their assessment of the market price they could secure instead.
- Negotiated grant rates. This final route is for exceptional cases such as with supported housing, where a bespoke arrangement may need to be made.
There’s also a small section about ‘strategic investment partners’. This is where the Mayor is willing to work with major developers who want to achieve 60% affordable housing (i.e. big housing associations, maybe TfL). They are willing to do bespoke deals on grant funding in these cases too.
- The Mayor also published a Special Planning Guidance (SPG) document on viability. This sets out a 35% threshold approach to viability. Schemes which do not meet the 35% affordable housing level (or require public subsidy to do so) will be subject to reporting on detailed viability information and scrutinised by the Local Planning Authority or where necessary City Hall. City Hall reserves the right to make this information public and strongly hints that it will do so. Those that meet the 35% threshold will not be subject to viability scrutiny. Where a Borough has a higher level of affordable housing as their target (without subsidy), that continues to apply.
- It’s made clear that the 35% is not a target for affordable housing for London, but the level at which the approach to viability and transparency changes. As described above in the grant document, the Mayor is trying to incentivise developers to go above 35%.
- Sites could still be granted permission by their LPA if they fall below the 35% threshold, but the planning permission will need to set out a “clawback” mechanism to increase the affordable % if the land value rises later on. This will only happen after all the viability information has been transparently scrutinised.
- On the tenure split delivered through S106 the Mayor wants to see 30% as general needs social rent or affordable rent (with rents “significantly lower than 80% of market”). Another 30% should be for intermediate products (London Living Rent or shared ownership), with the final 40% up to the Borough.
- On estate regeneration the Mayor says: “existing affordable housing to be replaced on a like-for-like basis, meaning there should be no net loss of existing affordable housing tenures (including social rented accommodation).”
- The Mayor says that in most cases it will not appropriate to use the Vacant Building Credit in London.
Build to Rent
- The Mayor sets out expectations for Build to Rent and how it will be treated through the planning system.
- In particular a different approach to affordable housing will be taken because of the need to retain all the units under single management. The affordable homes will be discounted market rent at London Living Rent levels, but kept affordable in perpetuity.
- There’s a welcome recognition that land is being traded at values which do not reflect planning policies – and trying to rectify this through the viability and planning system.
- The document says: “the Mayor does not consider it appropriate within a development appraisal to apply a fixed land value as an input which is based on price paid for land or a purely aspirational sum sought by a landowner…Reliance on land transactions for sites that are not genuinely comparable or that are based on assumptions of low affordable housing delivery, excess densities or predicted value growth, may lead to inflated site values. This undermines the implementation of Development Plan policies and the ability of planning authorities to deliver sustainable development.”
- What he is doing in detail:
- To determine whether a site is “viable” for a landowner you need to consider whether it provides “competitive returns to a willing land owner”. What this means in practice is whether the residual land value (development profit minus costs) is greater than or equal to a ‘Benchmark Land Value’. The benchmark land value is basically a measure of a value below which a rational land owner would not sell their land.
- The benchmark land value used is often the last price at which the land was transacted or a fixed value based on other land transactions.
- The Mayor however is saying that planning policy (in the NPPG) better supports an ‘Existing Use Value plus a premium approach’ to benchmark land value.
- “The premium could be 20% to 30%, but this must reflect site specific circumstances and may be considerably lower.”
- The Mayor makes clear that the overarching aim of achieving policy goals should determine the level of premium.