New viability rules: fair, limited, transparent?

New viability rules: fair, limited, transparent?

On Monday, Theresa May’s government announced a shake-up of planning rules, including a new version of the National Planning Policy Framework (NPPF). The aim is to get more homes built, as pretty much everyone now accepts that this is the best way to tackle the housing crisis.

Over the coming weeks, we will go through all these proposed planning changes with a fine-toothed comb to work out just what they mean for the supply of genuinely affordable homes. But for starters, the government’s draft viability guidance aims to get more affordable homes and other community benefits out of private housing developments.

This is a drum we’ve been banging since the current viability rules first came into force in 2012. These rules have allowed developers to reduce the affordable housing quotas on their schemes if they can show that their ability to make a ‘competitive’ return is at risk, using a viability assessment of the scheme.

It’s no surprise that private housebuilders are concerned to make sure their schemes are profitable. The problem is that some developers have been upping their bids for land by assuming that they won’t provide affordable homes, then using the high cost of land as evidence for why they can’t provide affordable homes – a circular logic that has ‘planned out’ affordable homes and inflated land values. Our research last year showed how thousands of affordable homes have slipped through this ‘viability loophole’: where developers submitted viability assessments, schemes in nine of England’s largest cities lost 79% of the affordable homes council policies required.

The new draft viability guidance aims to crack down on such abuses. The rules will no longer allow developers to use the price paid for land as evidence to cut affordable housing numbers, and the government is crystal clear that developers and land traders must account for local policies like affordable housing when agreeing the price of land. This should mean more affordable homes coming through the system. Combined with the package of measures contained in the draft NPPF and a further consultation on developer contributions, the viability guidance sets its sights on a fair, limited and transparent viability system – just what we have been calling for.

But will the proposals work out this way? As with any new set of rules, yesterday’s draft will need to be refined carefully to make sure reality lives up to the good intentions. Here’s how we think they stack up against our recommendations for a new system.

Will the proposed system be fairer? 

Designing a fairer viability system is principally about how the benefits of new housing are shared between landowners, developers and communities. In other words, what balance will the new system seek between profits and affordable homes?

Under the new system, viability assessments will need to work out the “Existing Use Value” of the land – what it is worth in its current state – and add a ‘premium’ onto this to make sure landowners have an incentive to sell. This could result in affordable housing getting a bigger cut – at the expense of landowners’ profits. However, the government’s proposals include some important caveats. The landowner’s ‘premium’ will be worked out using evidence from recent land transactions and how much profit landowners made from these – so the new system may replicate the inflated landowner profits of the old system, leaving less for affordable housing.

For developers, the new system specifies a 20% profit level for most schemes. This will replicate problems with the old system’s guarantee for ‘competitive returns’, which translated into a fixed return independent of market conditions, development risk or performance.

The crucial point is that the new system contains strong protections for landowner and developer profits, leaving affordable housing as ‘the residual’ – the part of the equation left over after those protected landowner and developer profits.

On the other hand, the government’s proposals introduce new evidence standards for viability assessments, which should ensure that they better reflect the actual costs and profits of a scheme.

Will the proposed system be more limited?

That’s certainly the government’s intention. The new system aims to test viability more rigorously earlier on in the process, when local plans are written and agreed, to provide more certainty about how much affordable housing new schemes are expected to deliver. As a result, there should be less need for viability to be tested again when individual sites are put forward for planning permission.

However, the guidance also suggests a bigger role for review mechanisms, through which viability could be re-tested after planning permission has been given. Elsewhere in the guidance, the government stresses the need for councils to be ‘sufficiently flexible to prevent planned development being stalled in the context of significant changes in costs and values that occur after a plan is adopted’, and suggests that review mechanisms should aim to ‘provide more certainty through economic cycles’. In other words, the new system will continue to vary the level of affordable housing to manage market risk: cutting affordable homes if developers are confronted with lower than expected profits. The crucial point to determine is just how ‘significant’ changes in developers’ expected profits have to be before cutting affordable housing from a scheme becomes acceptable.

On the other hand, review mechanisms could also be used to increase the amount of affordable housing if they look like making higher than expected profits. This could be particularly important for large schemes, where it is difficult to predict sales values accurately over the long-term.

What this means for transparency

The government has evidently heard the arguments around transparency, and its consultation document on developer contributions couldn’t be clearer on this point: ‘the expectation is that all viability assessments will be conducted on an open-book basis and published except under limited circumstances.’ Those ‘limited’ circumstances are part of the NPPF consultation, and the government intends to issue guidance to set these in stone.

This is great news. Councils and local communities asked to accept lower levels of affordable housing on new developments should at least know why changes are being made, and should have the information they need to hold developers using viability to account.

Next steps

A few ambiguous phrases in the old planning rules led to the growth of an industry around viability assessments, dedicated to pruning away affordable homes. Those who benefit from the current rules will not back down quietly. So we need to ensure the new system really does close the viability loophole, and enables local communities to get the affordable homes they desperately need. There’s a lot more work to do before the final rules are published in the summer.

 

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