UK: Homes For Londoners: Affordable Housing And Viability SPG - August 2017

The Headlines

Sadiq Khan has published the final version of his affordable housing and viability supplementary planning guidance (SPG). This was consulted on earlier in the year. The final document has remained very similar to the draft but with a number of subtle differences. It sets out the Mayor's approach to strategic applications that are referred to him, noting that Local Planning Authorities (LPAs) are encouraged to follow the same approach for all schemes providing 10 or more homes.

Overall, the Mayor has responded positively to the consultation process, which is reflected in changes and clarifications to the guidance that should reduce the time taken in the planning process.

The SPG is crafted to incentivise the delivery of higher proportions of affordable housing through both carrot and stick mechanisms. Although there is no change to the policy (an SPG cannot introduce new policy), there is now a clear approach to assessing planning applications and their affordable housing content. This clarity will help landowners, developers and advisers to formulate their approach to buying/selling land and the planning application strategies thereafter. However, the proof will be in the pudding as we all start to use the SPG, as to the actual impact on affordable housing delivery in London.

It is a lengthy and detailed document. Here are the headlines:

The threshold approach to viability is established

As in the draft document the Mayor has set a threshold level for the provision of affordable housing with consequences in terms of the planning process for schemes that cannot offer this level of provision. There are now two routes for planning application schemes:

The Fast Track Route - this route is for applications that meet or exceed 35% affordable housing on site, without public subsidy, achieving the prescribed tenure split and meeting other planning requirements and obligations to the satisfaction of the LPA and Mayor where relevant. The figure rises to 50% without grant on public land. These schemes will not require viability information to be submitted;

The Viability Tested Route - for applications that do not provide 35% without a public subsidy?. These schemes will require viability information to be submitted and this will be scrutinised by the LPA and or the Mayor. Where it is determined that a greater level of affordable housing could viably be supported, a higher level of affordable housing will be required which may exceed the 35% threshold. The Mayor will treat viability information transparently making it available for public scrutiny unless there is a public interest reason for not doing this.

In addition, the following types of scheme will automatically go down the viability tested route:

  • Applications that propose affordable housing off-site or through a cash in lieu contribution;
  • Applications which involve demolition of existing affordable housing (in particular estate regeneration schemes);
  • Applications where the applicant claims the vacant building credit applies.

The definition of the two routes is intended to incentivise developers to achieve the 35% on-site threshold and thus have a more straight forward route to planning permission.

It should be noted that qualifying for the Fast Track Route is not entirely black and white as there is a subjective element in terms of meeting other planning requirements and obligations "to the satisfaction of the LPA, and where relevant the Mayor, taking in to account the priority given to affordable housing and public transport improvements in Policy 8.2 of the London Plan."

While this wording introduces flexibility for the LPA/Mayor to take a view on full compliance with every policy requirement, it could lead to difficulties where there are financial sums involved in S106 negotiations or where an element of a proposed mixed use scheme is not policy compliant and the LPA would like it excluded from the scheme. In these cases, a scheme offering 35% affordable housing could still have to take the Viability Tested Route.

Review mechanisms

For schemes using the Fast Track Route, there will be just an "early viability review" triggered if an agreed level of progress in delivering homes is not made within two years of the planning permission being granted (or a timeframe agreed by the LPA and set out in the S106). This will result in additional onsite affordable housing being required in the event that the viability has improved since the application stage.

For schemes using the Viability Tested Route there will be both an early and a late viability review?. The late review occurs at the point when 75% of the units are sold or let. This will result in a financial contribution for additional affordable housing provision in the event that viability has improved since the application stage.

The SPG explains that "mid-term reviews" may be appropriate for longer term phased schemes and an "updated early stage review" may be appropriate for a scheme that stalls for a period of 12 months or more following an early stage review.

The cap on affordable housing provision in review mechanisms will generally be "at least" 50%.

Public land

The Mayor has consistently made clear of his intention that public land should provide at least 50% affordable housing.  This is now made clear in the SPG by introducing a higher threshold for schemes on public land to qualify for the Fast Track Route.  The Mayor will expect higher proportions of affordable housing on schemes developed by Registered Providers or those on publically owned land. He will expect that residential schemes on land in public ownership or public use to deliver at least 50% affordable housing without grant to benefit from the Fast Track Route.

Importantly, the Mayor provides some flexibility where he has agreed a portfolio approach with the public landowner. The SPG explains that where a public landowner has an agreement in place with the Mayor to provide 50% affordable homes across a portfolio of sites, individual sites which meet or exceed the 35% 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% affordable housing will be considered under the Viability Rested Route.

This will be an incentive for early engagement with the GLA, as many public sector sites have major cost constraints, such that a rigorously applied 50% affordable housing requirement could render schemes unviable or provide limited financial scope for the provision of other services.

The SPG makes it clear that this approach will be applied 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. Private developers will need to recognise that the 50% threshold will apply to land that has been released from public ownership.

Measuring Affordable Housing

The percentage of affordable housing in a scheme should be measured by habitable rooms. Habitable rooms in affordable and market elements of the scheme should be of comparable size when averaged across the development. If this is not the case it may be 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.

Tenure

The preferred tenure split is for schemes to deliver:

  • At least 30% low cost rent (social rent or affordable rent). London Affordable Rent should be the default level of rent.
  • At least 30% as intermediate products with London Living Rent and/or shared ownership being the default tenures assumed in this category.
  • The remaining 40% to be determined by the LPA.

Viability testing for scheme amendments (S73 applications)

The Mayor has confirmed that viability testing may apply to Section 73 applications to amend a planning permission.

The guidance is explicit that schemes that were originally approved under the Fast Track Route will not have to be viability tested unless the development does not continue to meet the 35% threshold and prescribed tenure split, or otherwise results in a reduction in affordable housing or housing affordability.

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.

In relation to the re-testing of schemes that did not meet the threshold and tenure split, the guidance does not explicitly state that this requirement only applies to those applications approved since the publication of the SPG.  We expect that clarification will be needed, as there will be much resistance to using the SPG to test scheme amendments for developments approved a long time ago.

Non self-contained and student housing

The SPG states that non-self-contained accommodation (including co-living) and hostels should not be classed as an affordable provision. 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.

Student accommodation developments will also be assessed under the Viability Tested Route. Affordable student accommodation should be provided on site in line with the Mayor's Housing SPG.

Guidance for viability assessmentsThe SPG contains detailed guidance on the approach that should be taken to viability assessments. It confirms the Mayor's preference for viability assessments to use the "Existing Use Value plus" approach to determining the benchmark land value for which a reasonable landowner is likely to release a site for development.  There is lengthy guidance about how to assess the EUV+ and the limited circumstances for using other values, including that the premium above existing use value could be 10% to 30%, but must reflect site specific circumstances. 

It is likely that landowners will continue to have higher expectations of land value, which may result in sites not being released or developers having to pay higher premiums and taking increased risks in viability negotiations and achieving viable projects. Ultimately the aim is to achieve a market adjustment in underlying land values. Monitoring the impact of the SPG will be important to ensure that this is the actual result rather than a reduction in the overall delivery of housing.

Build to Rent

The Mayor considers that Build to Rent (BTR) developments can make a particular contribution to increasing housing supply. He has set out a separate BTR pathway for these schemes which will recognise their distinct economics.

In the absence of a planning use class for BTR, the SPG sets out a definition of BTR. Schemes meeting these criteria will be assessed under the BTR Pathway that is set out in the SPG.

The definition is that the scheme should:

  • be a development, or block/phase within a development, of at least 50 units;
  • hold its constituent homes as Build to Rent under a covenant for at least 15 years;
  • provide units that are all self-contained and let separately;
  • operate under unified ownership and management;
  • 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.

BTR schemes meeting this definition will be assessed on their own viability with the intention of maximising the supply of affordable homes preferably provided at London Living Rent levels.  A viability assessment will be required and early and late stage reviews are proposed. As the sector develops the Mayor will keep under review whether it may be possible to set out a fast track route for the BTR sector.

Build to Rent (BTR) providers may be frustrated by the costs implications and uncertainty of having to put their schemes through viability testing, plus both early and late stage review.  They are likely to press the Mayor to quickly introduce a fast track route for BTR.For BTR, the affordable housing offer can be entirely discounted market rent managed by the BTR provider and delivered without grant. As it is not necessary to be a Local Authority or a Registered Provider to deliver or manage intermediate rented homes that are delivered without grant, these units can be owned and/ or managed by BTR landlords themselves.

For BTR, the affordable housing offer can be entirely discounted market rent managed by the BTR provider and delivered without a grant. As it is not necessary to be a Local Authority or a Registered Provider to deliver or manage intermediate rented homes that are delivered without a grant, these units can be owned and/ or managed by BTR landlords themselves.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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