Local viability policy part 2: What should councils be doing about the viability loophole?

Published: by Rose Grayston

Part one of this blog looked at the councils getting tough on viability assessments. Faced with acute shortages of affordable housing, councils like Bristol City are pulling out all the stops to strengthen their position in Section 106 negotiations with developers. But the development of local policy to limit the damage being done by viability assessments is still in its early stages. Urban councils in areas of high housing demand in the south of England have been much more likely to have the resources and expertise to get strong guidance in place so far.

But this doesn’t mean councils with areas of low housing demand have no options for limiting affordable housing losses from the viability loophole. Here are eight actions Shelter recommends all local authorities take to get as many affordable homes as possible built in their communities.

Publish viability assessments

Use a Supplementary Planning Document (SPD) to require all viability assessments to be made transparent, open to public scrutiny and completed according to standards. Some developers have argued that viability assessments cannot be published because they contain information that is ‘commercially sensitive’, but in practice councils have been able to make these documents public without issue – provided they redact genuinely confidential information.

Use Existing Use Value plus

By far the most problematic area in the current use of viability assessments is how the ‘benchmark land value’ is assessed. Some developers have successfully argued that the actual price paid for the land should be used. This produces circularity, because developers know that if they overpay for land on the assumption they can provide low amounts of affordable housing (inflating the benchmark value), they can later use a viability assessment to show that the scheme can only be rendered viable by reducing the affordable housing.

The Local Plan or SPD should set out how the benchmark value should be calculated for viability assessments, making it clear that local planning policies and any associated costs must be included. Shelter recommends Existing Use Value plus a clear premium as the best way to assess benchmark values.

Agree one clear policy

Make it crystal clear what the affordable housing policy is so that developers know what is expected of them – and have no excuse for not factoring it in when bidding for land. Councils with clashing policies (for example because local and regional policies are not aligned) are less likely to succeed in planning appeals. Councils with a broad range in their policy, for example requiring 0-50% affordable housing, tend to end up with schemes at the lower end of that range.

Tailor policies to local housing markets

A clear policy can still be a nuanced policy. Build up an evidence base on the low-and high-value areas of the local authority area and set affordable housing policies accordingly. Leeds City Council operates four separate affordable housing policies ranging from 5% in zone four (where regeneration is a priority) to 35% in zone one, recognising the diverse local development environment. Likewise, Eastbourne Borough Council distinguishes between high and low value market areas in its SPD.  This avoids a situation in which a whole council area is subject to a ‘lowest common denominator’ affordable housing policy appropriate for the lowest value areas.

Strengthen your language

Make sure that the affordable housing policy and any relevant planning documents do not contain phrases like ‘target policy’, ‘the council seeks a tenure split of X subject to viability’, ‘the level of contribution represents a starting point that can be negotiated’ or anything else which suggests that the council’s policy is flexible. Everybody knows there is flexibility in the system – national planning rules guarantee it. Councils should do everything they can to indicate that they will stand by their policies. This has made a big difference when cases have gone to appeal.

Question minimum 20% profit

With no official definition, developers have been left to define for themselves what level of return is ‘competitive’ for viability purposes. Following the housing market crash in 2008, expected returns rose from around 14% to 20% of Gross Development Value because of increased risk at the time. Viability assessments have enabled expected returns to settle at these higher levels as a new ‘market norm’ – despite lower interest rates, a less risky development environment and lower returns elsewhere in the economy. Councils should complete their own assessment of the risk profile of developments in the area. Then issue guidance on how developers must justify the level of return they are seeking to protect through the viability system, using an SPD if needed.

Use review, clawback and overage clauses

A major weakness of the current system is that it usually only assesses scheme viability at one point in time. Affordable housing can be reduced or eliminated from a scheme that goes on to make enormous profits when market conditions change, or because the assumptions in the viability assessment turn out to have been incorrect. Councils should introduce policies on review, clawback and overage in their Local Plan or SPD. That way, if viability assessments are used to reduce affordable housing and a developer then goes on to make larger than expected profits, the council can get some of the affordable homes back later.

Give plenty of notice of changes

As in the case of transparency in point one, all these measures are much more likely to be successful, legally acceptable and manageable for local developers and landowners if councils give plenty of notice of any changes. One option is to stagger the introduction of new policies, for example scaling up affordable housing policies in high-demand areas gradually over a period of several years, as proposed by the Planning Officers Society.

Although government sets the rules, proactive councils can clearly make progress against the viability loophole using clear policies backed up by a strong body of evidence. We hope these recommendations support local authorities and housing campaign groups in driving up the supply of affordable housing in their areas.

What happens next

Academics at Sheffield Hallam University and the Centre for Regional Economic and Social Research have found that the top five developers’ UK housebuilding profits increased by 388% between 2011-2016. The idea that developers need to cut affordable homes from schemes to make them profitable is simply not credible. Private developments in every area of the country should be able to provide a reliable stream of affordable housing. The exact level depends on the types of affordable homes needed, land values, the strength of local housing markets and a host of other factors. Councils have a vital role in evidencing the right level of affordable housing for their local area and enforcing it, using supplementary planning guidance as needed.

Ultimately we need changes to the national rules on viability because this is the quickest, best way of getting more affordable homes built. We can encourage 329 local planning authorities to write 329 viability policies and hire in the expertise needed to refine and enforce them – but all the while we will be losing affordable homes.

Or the government can follow through on its planned reforms to viability through the National Planning Policy Framework (NPPF) re-write this spring, instantly closing the viability loophole at the stroke of a pen.