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Delivering affordable housing in the Vauxhall Nine Elms Opportunity Area

Prepared for

London Boroughs of Wandsworth, London Borough of Lambeth and Greater London Authority

September 2014

© BNP Paribas Real Estate 2014

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Contents 1 Executive Summary 3 2 Introduction 5 3 Analysis of future affordable housing levels 10 4 Appraisal models and affordable housing delivery 3130 5 Current and alternative approaches to delivering affordable

housing 3332 6 The role of review mechanisms 4847 7 Difficulties faced by developers and RPs in delivering housing in

NEV OA 5453 8 NEV schemes and potential GLA investment 6463 9 Conclusions and recommendations 7069

Appendices Appendix 1 - Planning status of NEV OA sites Appendix 2 - Development appraisal year 1 Appendix 3 - Shared ownership income analysis Appendix 4 - Guaranteed income model assumptions

Anthony Lee MRTPI MRICS Senior Director BNP Paribas Real Estate 5 Aldermanbury Square London EC2V 7BP 020 7338 4061 [email protected] realestate.bnpparibas.co.uk

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1 Executive Summary This report considers approaches to the delivery of affordable housing in the Nine Elms Vauxhall Opportunity Area (‘NEV OA’) where at least 20,000 new homes and circa 500,000 square metres of commercial space are to be provided over the next twenty years. Developments in the area are typically high density and high specification, reflective of the target markets that scheme are aimed at. The volume of additional residential units and commercial floorspace in the area requires significant investment in new transport infrastructure, which developments will help to fund. This additional call on development value limits the amount of affordable housing that can be secured.

Scheme viability is a crucial factor in determining the amounts of affordable housing that can be secured in developments in the NEV OA. It is vital that scheme viability is considered on an appropriate basis and, in particular, that benchmark land values are based on existing use values plus an appropriate and site-specific premium, not market values. Our viability testing on a sample scheme applies growth factors to sales values and inflation on costs as well as changes to other key variables. This analysis indicates that improvements in viability that have been seen provide opportunities to increase the levels and types of affordable housing delivered through the opportunities in the area. The analysis also identifies the significant opportunities and additionality that could be derived from exploring and developing options for off-site provision and gifting of land for affordable housing development. In combination higher values and development momentum and a more creative approach has the potential to assist in the delivery of affordable housing targets and indeed for the two boroughs to revisit affordable housing targets to provide greater clarity as to what can be delivered across the NEV OA.

Appraisals are essentially snapshots of development proposals at a particular point in time and the results can change considerably as a result of changes to key inputs. Review mechanisms could help to reflect the dynamic nature of scheme viability by offering the councils an opportunity to reconsider viability over the course of a development. Developer concerns regarding the impact of reviews on fundability could be mitigated through capping the amounts that might be payable under viability reviews.

Markets are inherently cyclical and counter-cyclical measures may require significant public funding in a high value area such as the NEV OA. However, affordable housing requirements can be changed during periods of recession to help address viability issues, with the quid pro quo being enhanced provision when markets recover. Measures could also include supporting developers who build out schemes for rent initially, with sale when the market recovers. This support could fund the additional costs of capital until the units are eventually sold.

Delivering affordable housing in the NEV OA is complex and difficult due to the high density nature of planning developments. When combined with the councils’ affordability criteria, the amounts payable by Registered Providers are low, which squeezes viability. There is an inevitable tension between aiming to meet local housing need and delivering target percentages of affordable housing. As a result of this tension, compromises will often be required. Options to improve the proportion of units that can be secured as affordable include reviewing the mix of housing required, direct delivery by developers of some forms of low cost housing and provision of free land by developers to RPs and the Council in the lower value portions of their sites.

As an alternative to on-site delivery, the councils could secure a significantly greater quantum of affordable housing by taking commuted sums and using

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these to procure affordable units elsewhere. The analysis identifies that it is likely to be easier to deliver affordable rent and larger family homes through off-site provision in the quanta required to meet local demand. Off-site provision could include funding estate redevelopment programmes on the councils’ own land holdings and developers/landowners purchasing and indeed developing sites preferably in the local area to demonstrate a continued commitment to place making in the NEV OA.

Flexible tenure arrangements offer a potential solution to mitigating risk which may enable RPs to offer more to developers for completed units, thus improving viability and the percentage of housing that is targeted to meet local demand. Whilst such arrangements do not have a particular national or regional policy locus flexible tenure arrangements, if accommodated, have the potential to secure a level of income and deal with risk and this report recommends that the GLA and the boroughs explore such options.

Service charges are a significant issue in the NEV OA, both in terms of the impact on occupiers but also the impact on viability, as they are taken from the gross rents that RPs collect. Other issues associated with intermediate housing affordability could be resolved through different forms of development, including smaller space standards.

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2 Introduction 2.1 Background

The London Plan identifies the Nine Elms Vauxhall area (‘NEV’) as an Opportunity Area (‘OA’) of 195 hectares. The ‘Vauxhall Nine Elms Battersea Opportunity Area Planning Framework’ (‘VNEB OAPF’) produced by the Greater London Authority (‘GLA’) with the support of Wandsworth and Lambeth Councils, indicated that the area had the capacity to deliver:

■ 16,000 new homes;

■ 300,000 square metres of employment space at Battersea Power Station (60,000 square metres of retail; 160,000 square metres of offices and 80,000 square metres of other employment uses); and

■ 200,000 square metres of mixed employment use on other sites.

The boundary of the NEV OA is shown in Figure 2.1.

The 2013 ‘Update to phasing of development and infrastructure requirements in the Nine Elms Vauxhall Area’ study indicates that the number of dwellings and non-residential floorspace will increase from the numbers anticipated in the OAPF. Developers/landowners anticipate delivering 18,276 residential units (an increase of 2,276 units) and 608,612 square metres of non-residential floorspace (an increase of 108,612 square metres). The draft ‘Further Alterations to the London Plan’ (January 2014) increases the minimum number of residential units to be provided in the NEV OA to 20,000 units.

Figure 2.1: NEV OA boundary

Sites in the NEV OA are at various stages in the planning process. A full position statement on each site is attached as Appendix 1. This appendix also shows the details of each proposal, including a summary of the contents of the

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Section 106 agreement. Table 2.1.1 below summarises the schemes that have secured planning permission.

Table 2.1.1: Schemes in NEV OA with planning permission

Scheme Date of approval Number of residential units

81 Black Prince Road Allowed on appeal 15/9/09

101

10 Albert Embankment 17/2/14 No residential

Hampton House 21/6/13 253

Prince Consort House 16/10/13 47

2 -14 Tinworth Street and 108 -110 Vauxhall Walk AKA Spring Mews

14/8/12 No residential

Lord Clyde, 90 Tyers Street 21/3/12 No residential

Island Site Vauxhall Cross 20/8/13 291

1-9 Bondway & 4-6 South Lambeth Place

18/4/11 No residential

Vauxhall Square Cap Gemini 2/7/13 520

Vauxhall Sky Gardens 239

Keybridge House 28/1/14 401

Queensborough House 21/11/13 No residential

Sainsbury’s Nine Elms 31/5/13 737

30-60 South Lambeth Road 1/9/12 No residential

Eastbury House 1/9/12 48

Battersea Power Station 23/8/11 3,444

Battersea Gas Holders 18/1/13 763

Marco Polo House 18/1/12 456

Riverlight Deed of variation 15/12/13

802

Market Towers 487

Sleaford Industrial Estate/Dairy Crest 20/1/14 301

US Embassy 12/10/10 No residential

Embassy Gardens 16/2/12 1,978

Royal Mail Depot 5/3/12 1,870

New Covent Garden Market 25/10/20121 2,491

Total 12,738

2.1.1 Delivery of affordable housing in NEV OA

While developments in the NEV OA typically attract high residential sales values, there is also pressure on development viability as a result of the need to fund new infrastructure to support the new communities that will be established 1 New planning application submitted on NCGM site on 22/5/2014 (Ref: 2014/2810) for 3,019

residential units

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in the area. This includes the construction of an extension to the Northern Line (‘NLE’) from Kennington through a new station adjacent to Sainsbury’s on Wandsworth Road and onwards to a new station at Battersea Power Station. In addition, developments will need to contribute towards non-NLE transport improvements, highways works, education, health and emergency services. Contributions from developments towards provision of this social infrastructure will reduce the amount of development value that could have potentially been used to deliver affordable housing. It is important to stress, however, that without this supporting social infrastructure, the developments would be unacceptable in planning terms and the number of new units would need to be scaled back considerably.

2.1.2 Affordable housing policy requirements in the NEV OA

The two boroughs take very different approaches to seeking affordable housing contributions from developments in the NEV OA. Lambeth apply the same policy in the NEV OA as applies to other sites throughout the Borough, i.e. 40% of habitable rooms on sites capable of providing 10 or more units if no grant is available and 50% where grant is available. In Wandsworth, developments are required to provide a minimum of 15% affordable housing which is lower than the Council’s policy for the rest of the Borough. Outside the NEV area of Wandsworth, schemes are required to provide a minimum of 33% affordable housing and up to 50%, subject to viability. However, even with this reduced quantum of affordable housing, the Development Infrastructure Funding Study (‘DIFS’), which supports the OAPF, identified that the income generated by the tariff would not meet the funding requirements identified to support the OA. The schemes which were submitted for planning prior to 2014 were generating negative residual land values, indicating that adopting the 15% minimum affordable housing target has secured delivery that might not otherwise have been provided.

The councils’ policies are supported by viability studies which were undertaken in 2013. The studies indicate that the policy targets will not be achievable on every site in the NEV OA. However, setting a target based on the least viable scenario would result in sites that could have provided more affordable housing not doing so.

Revising the viability studies will not assist the councils in securing additional affordable housing. The councils need to maintain a firm position of how they will test viability to ensure that developers do not over-pay for sites, thus maximising the amount of ‘value uplift’ generated by developments to provide affordable housing.

The rationale for the lower affordable housing target in Wandsworth is set out in the DIFS. The DIFS explains that the financial contribution towards infrastructure will limit the extent to which affordable housing can be provided.

The DIFS suggests that developer contributions will be an important source of funding to deliver the infrastructure that the NEV OA requires. Rather than basing the tariff on the costs to be funded, it determines the amounts that developments can viably support, reflecting other policy requirements (affordable housing, and Code for Sustainable Homes). The DIFS concludes that a tariff of £40,000 per unit is viable on riverside sites and £20,000 per unit in all other parts of the NEV OA, in combination with 15% affordable. The tariff would fall to £25,000 and £15,000 respectively if 40% affordable housing is provided. A higher tariff is proposed between 2016 to 2031, as shown in Table 2.1.3.1 and 2.1.3.2.

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Table 2.1.3.1: recommended tariffs in DIFS: 15% affordable housing

Land use 2010 – 2015 tariff per unit

2010 – 2015 tariff per sqm

2016 – 2031 tariff per unit


Residential (area 1) £40,000 £425 £50,000 £530


Office - £160 - £160

Mixed use retail - £150 - £150

Retail - £150 - £250

Hotel - £40 - £40

Table 4.1.2: recommended tariffs in DIFS: 40% affordable housing

Land use 2010 – 2015 tariff per unit


2016 – 2031 tariff per unit




Office - £150 - £150

Mixed use retail - £150 - £150

Retail - £150 - £250

Hotel - £40 - £40

The tariff has been subsumed into Wandsworth’s Community Infrastructure Levy (‘CIL’) which the Council adopted in November 2012. Wandsworth have a commitment to reviewing their CIL Charging Schedule in 2015, including whether an increase in the level of charges in Nine Elms can be justified, in line with the DIFS. Lambeth have adopted a similar approach and have included a CIL rate commensurate with the DIFS tariff in their CIL charging schedule, which was examined in February 2014.

2.1.3 Aims of this study

The councils and the GLA have commissioned this study to assist them in decision making on the requirement for investment to support the delivery of affordable housing in the NEV OA to maximise delivery against targets.

The report is structured as follows:

■ Section 3 analyses potential future affordable housing levels and provides a set of metrics that can be used in negotiations with developers on individual developments;

■ Section 4 examines development appraisal models; their role in negotiations on affordable housing levels; and explores their effectiveness and whether alternative approaches are required;

■ Section 5 considers current and alternative approaches to the delivery of affordable housing in the NEV OA;

■ Section 6 analyses the role that viability review mechanisms current play in maximising affordable housing in the area and how they could be used in the future;

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■ Section 7 considers the role of Registered Providers and developers in the

delivery of affordable housing and how this role might change to assist the councils and the GLA to maximise delivery of affordable housing;

■ Section 8 considers how the GLA might direct some of its resources to delivery of schemes in the NEV OA;

■ Section 9 sets out our conclusions and recommendations.

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3 Analysis of future affordable housing levels In this section, we consider current forms of development being brought forward in the NEV OA and potential new opportunities that might arise in the future. We then consider how developers and the authorities establish appraisal parameters when establishing an appropriate and viable quantum of affordable housing on individual schemes. A key element of this negotiation is the land value against which a scheme residual is benchmarked. Finally, we consider how levels of affordable might change in the future.

The two factors that the councils can seek to influence are the benchmark land value that developers use for their viability assessments and the price that Registered Providers can pay developers for completed units. With regards to the first factor, the greater the uplift from the benchmark land value to scheme value, the more scope there will be to deliver affordable housing. Or putting this another way, the less the developer pays the landowner, the greater the value available to fund affordable housing. With regards to the second factor, the price RPs can pay is directly linked to the tenure mix, affordability criteria and certainty as to future income streams.

3.1 Types of development in NEV OA

Schemes that are currently on-site in the NEV OA are being developed by large national developers, including Berkeley Homes (Riverlight, Hampton House and Ebury House), Ballymore (Embassy Gardens), Telford Homes (Parliament House), Fraser Properties (Vauxhall Sky Gardens) and Special Purpose Vehicles (Battersea Power Station Development Company, which was formed by S P Setia, Sime Darby Employees Provident Fund; and Sainsbury’s working in partnership with Barratt Development and L&Q to redevelop their store).

The larger developments contain a mix of residential and commercial floorspace, including retail and leisure. The housing element is predominantly built for sale to owner occupiers and investors. There is a small amount of private rented sector (‘PRS’) housing in the recent Christies Warehouse proposals include an element of PRS.

Developments in the area are almost without exception high density, flatted schemes which will add significant pressure to infrastructure, as noted in the previous section. Many of the proposed developments that have already secured consent, or where proposals have recently been submitted for planning, include tall towers some of which exceed 30 storeys. This form of development presents challenges to the developer and selected RP in accommodating a mix of tenures, both in terms of physically accommodating separate cores and entrances and managing the impact of service charges.

There is currently significant appetite for new development in the area, with the first phase of Battersea Power Station selling off plan within 1 week of the launch. Other sites have also sold very quickly, including Riverlight and Parliament House. Developers are prioritising sales to UK purchasers, but overseas sales are still important. Developers have not disclosed how many units have been sold to overseas buyers, but we understand that a significant proportion of units in schemes on-site have been sold overseas. How these units will be used by overseas investors remains to be determined; inevitably a majority of owners will rent out their properties while a minority will occupy them for part of the year or to an even lesser extent simply keep them empty and hold the properties as an investment and secure a return through capital growth rather than income.

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There is strong pent-up demand from the domestic market which has recently been boosted by the Government’s Help to Buy scheme, which helps many people who were previously excluded from the market by high deposit requirements. While this programme was initially intended to operate for a short period of time, the Treasury recently announced that it will be retained until at least 2020. This type of intervention is often difficult to wind back without having a significant impact on the market, so it may become a permanent feature of the housing market. However, it is not clear what impact this scheme will have in NEV. At present the maximum price of properties which can be bought through the scheme is currently £600,000 and many of the units marketed to date are priced above this figure.

Affordable housing content of the schemes on site is at around 15% in Wandsworth and typically between 20% to 40% in Lambeth2. Affordable housing is being delivered as a mix of affordable rent and shared ownership, both of which are being provided in line with the councils’ respective affordability criteria.

3.2 Potential new opportunities

The majority of larger sites in the NEV OA have already secured planning permission from their respective planning authority, including inter alia Battersea Power Station, Ballymore Gardens, Riverlight, New Covent Garden Market (although a new planning application is to be submitted), Market Towers, Sainsbury’s, Royal Mail, Vauxhall Sky Gardens, Sleaford Street, Marco Polo House, Hampton House, Parliament House, and Eastbury House. Most of the larger applications were in outline or hybrid and are likely to be re-visited which may affect the delivery of affordable housing. Given that market conditions have improved significantly since some of the larger permissions were granted, it is likely that any reconsideration of these schemes is more likely to result in an improved delivery of affordable housing than for there to be an adverse impact. The larger outline schemes also provide an opportunity for planning authorities to consider how they should most appropriately deliver affordable housing in a high value, high density areas.

Many of the smaller sites do not yet have planning permission, so there is scope for new types of provision to be brought forward, subject of course to cooperation from the landowners. With regards to physical form, it is unlikely that developers will move away from the high density, flatted model that the consented schemes have established. However, there is clearly scope for the authorities to take a strategic approach across the remaining sites and potentially some of the consented schemes, which may be amended. For example, there may be potential for securing greater amounts of affordable housing by pooling requirements from higher value sites on some of the lower value parts of the NEV OA.

3.3 Approach to affordable rent

In respect to the Affordable Rent tenure, both councils have undertaken assessments of the rent levels that would be affordable to current and future tenants, in the context of government reforms to the welfare system. The proposed rents are deemed to be the maximum that can reasonably be charged while having regard to the Local Housing Allowance and the Universal Credit (which will limit the total amount of benefits a household can claim to £26,000) and the incomes of households at whom the Affordable Rent tenure will be targeted.

2 Lower levels of affordable housing have been agreed, but normally where other benefits have been secured (e.g. the provision of a school at the Keybridge House site).

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One important characteristic of the Affordable Rent tenure is that the rent must be fully inclusive of service charges. Therefore the sum of the rent and service charge must be within the levels of rent that the boroughs consider affordable in the context of the factors in the preceding paragraph. In high specification, high value developments, service charges can be substantial (more than £50 per week in some instances). This severely limits the rent that RPs are able to charge tenants while conforming to appropriate affordability levels. This has the potential of placing substantial downward pressure on the value that RPs can pay to developers for completed Affordable Rent units in new developments.

For example, in LB Wandsworth, RPs are required to provide 50% of units at no more than 50% of market rent, with a blended percentage not exceeding 65% of market rents. The Council has set a maximum rent of £190 per week for a 2 bed Affordable Rent unit. If the service charge were disregarded, a 70 square metre (750 sq ft) flat might generate a capital value of circa £127,500 (£1,830 per square metre/£170 per sq ft). However, if a £35 per week service charge is levied, the capital value of the unit would fall to circa £97,500 (£1,399 per square metre/£130 per sq ft). For context, if the same flat were to be provided as a social rented unit at target rents its value would be in the region of £86,250 (£1,238 per square metre/£115 per sq ft). This example serves to demonstrate the difficulties that might be experienced in delivering Affordable Rent units in high value schemes where high service charges are likely.

There is a similar impact on the value of shared ownership units, where the effect of service charges upon affordability will reduce the amount of initial equity that can be sold; or will reduce the percentage rent charged on the retained equity.

Affordability criteria and service charges both have a significant impact on the amounts RPs can pay developers for new stock, with a consequential impact on the percentage of affordable housing that can be viably provided. In later sections, we consider how these issues might be resolved.

3.4 Metrics for negotiations on scheme viability

Both councils’ policy requirements for affordable housing are framed as targets which are subject to site-specific circumstances, including the viability of development. When a developer is unable to meet the policy targets in full, the onus is upon them to demonstrate why the scheme cannot do so by submitting a Viability Appraisal with the planning application. Both councils procure external valuation advice to validate appraisals submitted by applicants and this process frequently results in a change in the level of affordable housing provision.

There are various appraisal models available to test the viability of developments. These models all share similar characteristics and can produce results in different ways. The main options are as follows:

■ A residual land value as an output; or

■ Land cost as an input, with profit as the output.

The various inputs to an appraisal are summarised in Figures 3.4.1 and 3.4.2. Clearly one of the additional key factors is time and flows of income and cost, which we consider later.

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Figure 3.4.1: Appraisal model (residual land value)

GROSS DEVELOPMENT VALUE (‘GDV’)

Private flat sales values

Receipt from Registered Provider

Car parking sales

Ground rents

Investment value of commercial floorspace

A

LESS

DEVELOPMENT COSTS

Base build costs

Contingencies

Professional fees

Marketing

Finance

B

DEVELOPER’S PROFIT C

RESIDUAL LAND VALUE = A – (B + C)

Figure 3.4.2: Appraisal model (profit as output)

GDV

Private flat sales values

Receipt from Registered Provider

Car parking sales

Ground rents

Investment value of commercial floorspace

A

LESS

DEVELOPMENT COSTS

Site value

Base build costs

Contingencies

Professional fees

Marketing

Finance

B

SITE VALUE C

PROFIT = A – (B + C)

3.4.1 Evidencing inputs to a development appraisal

Developments have unique characteristics that should be reflected in the inputs to a development appraisal. For example, sales values of individual units will

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be determined by aspect, location, height and internal specification, while build costs will be influenced by design, specification, ground conditions and so on.

When preparing a development appraisal, a valuer would have regard to scheme-specific characteristics so that the result (in terms of residual land value) is reflective of these characteristics.

Inputs to an appraisal reflect the current day situation and circumstances may change very quickly. For example, sales values can change in response to changes in demand (up or down) over short periods of time. Although the impact of changes to inputs can be tested through sensitivity analyses, the base position will always be rooted in today’s market conditions. Evidence provided in support of a development appraisal therefore has a short “shelf-life” and any user of an appraisal should have regard to the need to collect new and updated evidence if the viability of a scheme is to be re-visited.

When assessing the viability of a development proposal, we would expect to see the following evidence produced by the Applicant:

■ Sales values: a unit-by-unit pricing schedule, showing how aspect, height, specification and location have been considered. This pricing schedule should be supported by an analysis of comparable sales within the vicinity (if schemes have recently been sold) or other relevant developments that share similar characteristics.

■ Sales rates: the speed at which units in a development are sold is an important factor in determining viability. Off-plan sales which result in completion of a sale when a unit reaches practical completion will improve the overall cashflow profile of the development. In other words, the sooner a unit is sold, the sooner the developer receives payment and this reduces finance costs. We would expect to see a sales phasing plan that is reflective of the sales rates achieved by other comparable developments, having regard to site-specific factors that may result in a different rate of sale.

■ Receipt from affordable housing Registered Provider (‘RP’): developers will typically sell the affordable housing units to an RP which will take responsibility for selling equity stakes in shared ownership units and letting the rented units. We would expect the developer to either produce a valuation of the units, based on anticipated rental income and/or the value of equity stakes sold, or provide offers from RPs for the units available.

■ Commercial floorspace: many schemes coming forward in the NEV area include an element of commercial floorspace, typically retail, office or leisure uses. Appraising the residual value of these elements is similar, except that the method for arriving at a capital value is based on capitalising the expected rental income. Developers therefore need to evidence both the rental income and also investment yields, both of which can be demonstrated through comparable lettings and investment sales.

■ Build costs: a cost plan for the proposed development, reflecting scheme-specific characteristics, including design, ground conditions, access issues and site constraints, below ground issues (such as Underground lines, services etc). We would typically assess the overall build costs against benchmark data and recommend that the costs are reviewed by a Cost Consultant if they are significantly higher than the benchmarks.

■ Professional fees: developments typically require professional inputs from a group of specialists, ranging from design to rights of light advice. Schemes do not require an identical level of professional inputs, as they will vary in complexity. For example, the structural engineering input to a 40

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storey tower scheme will clearly be greater than would be the case for a 4 storey building. Consequently, professional fees will lie within a range of 8% to 12% (possibly more in very exceptional circumstances). Developers will therefore need to demonstrate why the level of fees used in their appraisal is appropriate to the nature of the scheme under consideration. Developers would normally need to evidence professional fees by providing a breakdown of the total between the different disciplines.

■ Marketing costs: marketing costs include the Selling Agent’s fees, but also the cost of show homes, advertising, brochures and overseas marketing activities. Marketing costs typically account for 3% of GDV, but can sometimes be higher in exceptional circumstances. For example, on schemes being sold out over very long periods, the marketing home and other material may require updating and re-branding to reflect changes in customer requirements. Developers should provide a detailed schedule of how the marketing budget is divided between different costs if the total budget exceeds the normal 3% allowance.

■ Finance costs: financing developments became more complex after 2008 due to funders tightening their criteria for lending. In particular, it is now uncommon for banks to fund the entire development cost and unless developers have access to their own equity, they will need to source the balance elsewhere (either through mezzanine finance or external equity). The cost of funds can vary in relation to the type of developer, their perceived longevity and their experience in the type of scheme they are seeking funding for. Funds may also vary in relation to the type of development, with more complex schemes with lengthy build out periods perhaps attracting higher funding costs than simpler schemes. However, the market accepts a blended 7% finance rate (inclusive of arrangement and exit fees). Where a higher rate is used, we would expect to see evidence in the form of funding agreements.

■ Development profit: profits are to an extent scheme-specific but also must have regard to the general stance adopted by banks who might fund the development. Profits have generally been at around 20% of private housing GDV since 2008, with a reduced profit on the affordable housing (6% of cost). The primary purposes of profit are to enable the developer to secure a return on capital and to mitigate against risk (i.e. that the sales values anticipated in the appraisal are not achieved). Sales risk on the affordable housing is low in the NEV area, as there is strong demand from some RPs for new stock. Where a developer seeks to include higher profit levels in an appraisal, we would expect to see a robust rationale in terms of the risks associated with the scheme relative to other comparable schemes in the area.

3.4.2 Current and future values in the NEV area

Chart 3.4.2.1 below summarises the sales values predicted in various schemes in the NEV OA that BNP Paribas Real Estate have assessed on behalf of the two authorities. It is important to stress that the values shown are scheme averages and that there is likely to be a significant variation between per square metre values for units in different parts of a building and/or with different aspects.

The councils can update sales values by applying forecasts from the leading agents, but these are of course based on sets of assumptions that may or may not pan out in practice. It is impossible to accurately forecast the future trajectory of sales values with any degree of certainty. We also note that the leading agents do not attempt to forecast values beyond a five year timeframe, underlining the point that long term forecasting is inherently unreliable.

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Table 3.4.2.1: Values estimated on NEV OA schemes at time of planning application

Scheme Borough Date of assessment

Average market values (per sq m)

Average affordable rented values (per sqm)

Average shared ownership values (per sqm)

Vauxhall Bondway

Lambeth Mar 2014 £12,099 £1,615 £2,691

1 Lambeth High St

Lambeth Feb 2014 £11,077 £2,799 £4,252

8 Albert Embankment

Lambeth Feb 2014 £7,000 to £10,721

£2,045 £3,046

Sleaford Street

Wandsworth Jan 2014 £8,650 £1,345 £2,960

Riverlight Wandsworth Sept 2013 £11,216 n/a £3,518

Prince Consort House

Lambeth Aug 2013 £11,683 n/a £3,724

Vauxhall Sky Gdns

Lambeth July 2013 £8,690 £1,049 £3,077

Hampton House

Lambeth Feb 2013 £11,345 n/a £2,831

Sainsbury’s Lambeth Dec 2012 £6,221 to £7,825

£2,378 £3,283

Vauxhall Square

Lambeth Nov 2012 £10,367 £1,615 £2,637

NGCM Wandsworth May 2012 £7,427 to £11,722

£1,432 £2,616

Market Towers

Wandsworth May 2012 £11,208 n/a £2,691

Royal Mail Wandsworth Feb 2012 £6,641 to £8,385

£915 (note 1)

£2,960

Embassy Gdns

Wandsworth Feb 2012 £7,707 n/a £3,326

Marco Pollo Wandsworth Jan 2012 £8,086 n/a £2,411

BPS Wandsworth Sep 2010 £8,988 to £13,918

£1,292 £2,691

Table 3.4.2.2 summarises the 5 year forecasts of sales values growth from each of the leading agents. This shows a degree of divergence of opinion in terms of the future housing market trajectory in London. Table 3.4.2.3 provides “pessimistic” and “best case” scenarios over the next five years based on the forecasts.

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Table 3.4.2.2: House price forecasts 2014 – 2018 (nominal annual growth)

Agent 2014 2015 2016 2017 2018

Savills3 4.5% -0.5% 7.0% 7.0% 4.5%

JLL4 8.0% 8.5% 8.0% 7.0% 5.5%

Knight Frank5 4.0% 0.0% 5.0% 5.0% 5.0%

Cluttons6 11.0% 7.0% 4.0% 3.0% 2.0%

Strutt & Parker7

6.0% 2.0% 7.0% 7.0% n/a

Table 3.4.2.3: Pessimistic and best case forecasts 2014 – 2018 (nominal annual growth)

2014 2015 2016 2017 2018

Pessimistic 4.0% -0.5% 4.0% 2.5% 2.5%

Best case 11.0% 8.5% 8.0% 7% 5.5%

Clearly some of these scenarios consider the London market as a whole, or in other cases, prime central markets, and are not specifically based on the NEV OA area. The most appropriate method for updating information on sales values is for the councils to periodically collect information on achieved sales values (unit and per square metre values) on various schemes in the NEV OA. Ideally, this information should also include factors that are likely to impact on values, including height, specific location, aspect and specification.

Forecasting affordable housing values is to an extent more difficult than attempting to forecast private sales values. There has been considerable flux in the arrangements for delivering affordable housing since 2010, which impact on rent levels; the degree of variability of rent levels; affordability criteria; operating costs; funding costs; void levels; and RPs’ attitude towards risk. Furthermore, there is continued uncertainty with regards to the levels and application of grant funding that may be applicable to certain types of development.

3.4.3 Current build costs in the NEV area

Schemes in the NEV OA tend to be unique in terms of their design and built form and this typically means that costs will vary (to some degree) between different schemes. When assessing development appraisals on behalf of the councils, we typically compare the build costs on a per square metre basis to benchmark data from the RICS ‘Building Cost Information Service’ (‘BCIS’). Where costs exceed the RICS benchmarks, we recommend that the councils procure specialist advice from a cost consultant.

In terms of updating data on build costs, it is possible to apply one of the BCIS cost indices to the base data, which currently forecast five years into the future. This would provide an indication of the likely change in costs, but the optimum way of determining up to date costs would be to require a developer to commission their cost consultant to update their cost plan. This would then need to be reviewed by the Council’s cost consultant.

3 “Prime London”. Equivalent “mainstream London” forecast is as follows: 2014: 8.5%, 2015: 6.5%, 2016: 4.0%, 2017: 2.0% and 2018: 2.0% 4 “Central London Developments” forecast. Same forecast applies to “Prime Central London” 5 Prime central London forecast 6 Greater London forecast. No forecast by year for prime London markets 7 Prime central London

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3.4.4 Target profit levels

Target profit levels and how profitability is measured will vary to some degree between different types of scheme and to a lesser extent between developers. Developers are likely to adopt a different approach for schemes which are developed over long periods of time (i.e. ten years or more) than they would for schemes developed over relatively shorter periods (i.e. the typical development period of two to three years). For the latter type of scheme, developers are likely to adopt a profit on value or cost approach, where they simply target a percentage of either scheme value or scheme cost. For long term schemes, there is also a need to reflect the time over which the return is received, so these developers will target a profit based on an Internal Rate of Return (‘IRR’). The IRR is simply the discount rate required to achieve a Net Present Value of zero. IRRs can be ‘geared’ or ‘ungeared’ meaning that the cost of funds is either included in excluded respectively.

At the current time, developers are targeting profits on private housing of 20% of value, which broadly equates to 25% of costs. For larger schemes, developers who have recently secured planning permission for schemes in and around the NEV OA have proceeded with development on the basis of IRRs of 12% to 13%. This also reflects research by Gerald Eve in its viability study for the City of London’s Community Infrastructure Levy.

Prior to 2008, developers and funders were satisfied to proceed with a development on the assumption of a developer’s profit in the region of 15% of private housing GDV, or sometimes even lower. As the recovery gathers strength, it is possible that developer’s profits could fall, but it is difficult to predict when this might happen. A lot will depend on the attitudes of banks, which are still working through significant stocks of toxic debts, many of which are associated with property development. It may take an additional five years for the banks to address all these outstanding debts, after which time they may expand their lending on new residential development.

With regards to affordable housing, most developers accept that the risk associated with a disposal to an RP is lower than the risk of selling individual private units. Given that the developer will forward sell the affordable housing in a single transaction and that the RP will make staged payments over the construction period, a profit of 6% on cost is generally accepted.

3.4.5 Development Finance

Following the last housing market peak in 2007, funders significantly reduced their exposure to residential development. As a result, they reduced the proportion of overall scheme costs that they would fund to no more than 50%. Funders are typically charging a margin of 6% to 6.5% above the base rate, with cost of funds to developers of around 6.5% to 7%. Developers need to provide their own funds for the balance of the development costs. This may be sourced from internal funding (i.e. retained profit) or through mezzanine finance or equity. These sources of funds attract varying costs, but they may exceed the 7% charged by the banks.

Banks may reduce their margins as the risks associated with residential development recede. However, that is likely to be accompanied by an improvement in general economic conditions and an increase in the Bank of England base rate. So whilst the banks’ margins might fall over time, this is likely to be off-set by an increasing base rate. The net result will be that finance rates are unlikely to fall much below the current 7%.

Funders currently require developers to achieve off-plan sales of as much as 30% of units prior to allowing developers to draw down loan funding. This

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means that developers will need to fund the initial costs through equity or mezzanine funding, or from their own internal resources. Over time, it is likely that banks will relax their criteria and remove the pre-condition for off-plan sales.

In the NEV OA, many schemes involve tall or large buildings which are very difficult to phase – once construction is commenced, it is not possible to stop building and occupy the part that has been completed. This has implications for cashflow – there is a long period during which the developer has to commit resources without receiving any income. This introduces a dimension of risk that is unique to these schemes and may impact on a developer’s ability to fund such schemes. Terms of finance may therefore differ to reflect the perceived or actual cashflow risks.

3.5 Appropriate benchmark land values and viability The residual land value of a scheme is one half of the equation when testing its viability and ability of deliver affordable housing. The other half of the equation is the benchmark or ‘threshold’ land value, i.e. the value that will be sufficient to bring the site forward for development. There has been considerable debate over the past few years on what constitutes an appropriate benchmark land value, which to an extent has not been assisted by the National Planning Policy Framework (‘NPPF’) which talks in general terms about “competitive returns” to landowners. The notion of a “competitive return” is clearly open to considerable variation in interpretation. There are broadly speaking two approaches to determining an appropriate benchmark land value for testing the viability of a development: ■ Existing Use Value plus an appropriate uplift, or an Alternative Use Value;

which are the preferred and recommended approaches in both boroughs and

■ Market Value.

3.5.1 Existing Use Value plus appropriate uplift, or Alternative Use Value

An existing use value is literally the value of the site assuming that the existing use continues and there is no change of use or redevelopment. In other words, it reflects the current situation with regards to the income that the existing building generates (or does not generate). If the building were to remain in its existing use, the landowner could continue to receive the income for as long as demand for the building remains. If the existing building is not currently let and there is doubtful future demand, clearly the landowner will be keener to release the site for development to avoid the burden of keeping the building empty (including empty rates, insurance costs, security costs etc).

If a development proposal fails to generate a residual land value that at least exceeds the existing use value, then it will not come forward, as the landowner would be better off retaining the existing building and receiving the rental income. If the proposal generates a residual land value that is the same as the existing use value, then the decision to sell will be based on the landowner’s assessment of likely future demand for the building, which will clearly include the age and facilities of the building in comparison to others, as well as demand for the particular type of space in the location. It is therefore important to consider the extent to which a ‘premium’ above existing use value is required to incentivise a sale for development. This premium is likely to range from zero to as much as 30%, but should always be based on site-specific factors and characteristics.

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Taking the existing use value plus an appropriate premium is an objective “floor” below which the residual land value of a scheme cannot fall if it is to be viable. It is readily understood and can be easily measured and tested.

A variant to existing use value is to consider an alternative use value (i.e. a scheme that the landowner might consider in place of a residential scheme). For example, rather than selling for residential development, the landowner could sell the site for a hotel. Alternative use values may be valid providing the proposed use would be acceptable in planning terms and also that the appraisal fully reflects any policy requirements that would attach to such a scheme. Adding an incentive to an alternative use value would be inappropriate, as the landowner does not currently have the benefit of the income that derives from this use; it needs to be considered alongside other competing alternatives that would also require planning consent.

3.5.2 Market Value Some members of the RICS advocate the use of ‘Market Value’ as a benchmark land value when testing viability of development proposals. The main difficulty with this measure is the extent to which individual valuers interpret the meaning of this term and how it should be applied to individual sites. The RICS has published guidance on testing viability8 which at paragraph 3.3.4 takes as its starting point the existing (or current) use value of a site:

“For a development to be financially viable, any uplift from current use value to residual land value that arises when planning permission is granted should be able to meet the cost of planning obligations while ensuring an appropriate Site Value for the landowner and a market risk adjusted return to the developer in delivering that project (the NPPF refers to this as ‘competitive returns’ respectively). The return to the landowner will be in the form of a land value in excess of current use value”.

The Guidance goes on to state that “it would be inappropriate to assume an uplift based on set percentages … given the diversity of individual development sites” and that the uplift from current use value should be determined by “market value” which would include “market/transactional evidence”. There are considerable dangers in relying upon transactional data, as follows:

■ Transactions are often based on bids that ‘take a view’ on squeezing planning policy requirements below target levels. This results in prices paid being too high to allow for policy targets to be met. If these transactions are used to set a benchmark land value, the outcome would be unreliable and potentially highly misleading.

■ Historic transactions of housing sites are often based on the receipt of grant funding, which is no longer available.

■ There would be a need to determine whether the developer who built out the comparator sites actually achieved a profit at the equivalent level to the profit adopted in the viability testing. If the developer achieved a sub-optimal level of profit, then any benchmarking using these transactions would produce unreliable and misleading results.

■ Developers often build assumptions of growth in sales values into their appraisals, which provides a higher gross development value than would actually be achieved today. Given that viability appraisals are based on

8 ‘Viability in Planning: Advice to Practitioners’ August 2012

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current values, using prices paid would result in an inconsistent comparison (i.e. current values against the developer’s assumed future values). Using these transactions would produce unreliable and misleading results.

3.5.3 Impact of benchmark on affordable housing secured Ultimately, the choice of benchmark will be a key determinant in the level of affordable housing that a scheme can provide. The higher the benchmark land value, the lower the amount of value uplift arising from development that the councils can secure to secure for affordable housing provision. This is illustrated in Figure 3.5.3.1 below. The chart compares the benchmark land value (which is represented by the blue bar) to the residual land value generated by two schemes, one of which provides a policy compliant level of affordable housing (the red bar) and one providing a reduced proportion of affordable housing (the green bar). Figure 3.5.3.1: Impact of benchmark land value on affordable housing

In the chart, the existing use value plus margin is shown as the dark blue segment of the bar. If this is adopted as the benchmark land value, then a policy compliant scheme (represented by the red bar) is sufficiently high for the scheme to come forward. However, if the Market Value is adopted as the benchmark (represented by the combined total of the dark and light blue segments), then the policy compliant scheme is no longer viable. This would force the planning authority to agree a scheme with reduced levels of affordable housing (represented by the green bar). Every scheme generates a finite amount of value that must be divided between the various interests (the landowner, developer and local planning authority). In almost all cases, the Developer’s interests are secured through inclusion of a profit in the development appraisal. The planning system must therefore mediate between the public interest (in terms of affordable housing and other obligations) and private interests (in terms of land value to the developer). Under the market value approach advocated by the RICS, the bulk of any uplift in land value goes to the landowner, by necessarily squeezing the amount of affordable housing provided. Under the existing use value plus premium approach, the uplift in land value is split between the landowner and the public interest.

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Maximising levels of affordable housing in the NEV OA are therefore highly dependent on both authorities maintaining a firm line on the benchmark land value that developers may use in their viability assessments. For example, the Applicant’s assessment of a Wandsworth scheme was that the Market Value was in the region of £15 million. The appraisal submitted by the Applicant’s advisor was lower than the Market Value (at around £13 million), which in itself raised questions as to the validity of the market value provided. The argument that the Applicant’s advisors appeared to be advancing was that the site would have a higher value in the market than a scheme that could be accommodated on the site was worth. This is clearly counterintuitive and undermined that logic of the Applicant’s position. The Council commissioned BNP Paribas Real Estate to review the viability appraisal and we concluded that the existing use value of the site was in the region of £8 million (including premium). This meant that the scheme could have afforded £5 million towards additional affordable housing in comparison to the position presented by the Applicant. The councils’ negotiating position would be strengthened if its planning guidance relating to the principles which will be used to test scheme viability were reviewed, with one of the key factors being the determination of the benchmark land value. An approach to establishing a benchmark land value is set out in Figure 3.5.3.2. Wandsworth Council is currently in the process of reviewing its Planning Obligations Supplementary Planning Document which could provide the opportunity to introduce further guidance on assessing viability. However, as a number of major schemes are being built out on existing planning permissions, there may be limited opportunities to re-negotiate the levels of affordable housing. Figure 3.5.3.2: Establishing a benchmark land value

Step 1: establish current use(s) on site

Step 2: establish value of current uses ■ Establish rental income paid by existing occupiers, or if building is vacant, consider comparable evidence for similar space within the area.

■ Allow for appropriate incentives, vacancy periods and allowances for refurbishment

■ Capitalise the net rental income by applying an appropriate investment yield

Step 3: Consider an appropriate site-specific premium

■ Consider the extent to which the building is currently occupied.

■ Consider strength of covenant of current occupier.

■ Consider extent to which alternative occupiers/use exist(s).

■ Vacant buildings with little prospect of being occupied should attract a low premium.

■ Occupied buildings with healthy demand from alternative occupiers would attract a high premium.

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We have discussed the benchmark land value issue with developers in the NEV OA, who agree that there is a tension between the value that the market places on land in the NEV OA and the levels of affordable housing that can be provided. However, developers operate in a competitive market and their view is that adjustments to land values can only take place gradually. In this context, developers would be assisted in their negotiations with landowners and better placed to manage landowners’ expectations if the councils can provide a clear indication that they will expect NEV OA schemes to deliver greater amounts of affordable housing in the future. Furthermore, individual site circumstances will vary which might warrant a different approach, or a different premium above existing use value in comparison to the ‘norm’. This might include sites which were purchased before a change in policy, for example.

3.6 Future affordable housing levels

We have undertaken a series of viability appraisals to test the maximum likely levels of affordable housing that can be negotiated in schemes and how this might increase in response to changes to key appraisal inputs (a copy of the year 1 appraisal is attached as Appendix 2). This assessment uses an actual development in the NEV OA which has recently been consented.

The appraisals consider the level of affordable housing that the scheme could provide if the scheme comes forward in today’s market, but then how much is could provide in 5, 10, 15 and 20 years’ time. We have applied growth to sales values and build costs and have varied developers’ profits to reflect receding sales risk. We have also tested the impact of grant funding both in today’s market, but also if the scheme were to come forward in the future.

Benchmark land values will not necessarily remain static over a 20 year period. Commercial land is likely to increase in value over time in response to changes in the economy. We have also modelled the impact of the changes above alongside increases in benchmark land values.

The DIFS signalled that the (then) tariff should increase from 2016. Under the CIL regime, the councils will need to review their charging schedules to determine whether an increase is viable. For the purposes of our assessment, we have assumed that the CIL remains at currently adopted levels.

3.6.1 Scenario 1

In Scenario 1, we assume that sales values grow by 5% per annum and construction costs increase by 3.5% per annum. Developer’s profit and finance are assumed to remain unchanged over the 20 year period.

Table 3.6.1 summarises the results of our appraisals, which assume that the scheme is brought forward at different points in time, firstly, in year 1 which reflects current values, and then in 5, 10, 15 and 20 years’ time.

If the scheme were brought forward now, it could deliver 21.7%. The results indicate that if benchmark land values do not change, the level of affordable housing that could be achieved if the scheme comes forward in 20 years would increase to 47.27%.

The Table also shows the ‘opportunity cost’ of delivering additional affordable housing at the various points in time when the scheme could be brought forward. All other things being equal, the cost of delivering an additional square metre of affordable housing would be £7,147 per square metre for affordable rented housing and £5,802 per square metre for shared ownership housing. If

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the councils wished to secure an additional 70 square metre unit, it would cost £500,290 for affordable rent or £406,140 for a shared ownership unit. However, as the opportunity cost will grow over time, the cost of securing an additional 70 square metre unit would grow to £1,407,980 for affordable rent and £1,313,830 for shared ownership.

Table 3.6.1: Scenario 1 – maximum potential affordable housing – value growth 5% per annum, cost growth 3.5% per annum

Year in which scheme is brought forward

Year 1 Year 5 Year 10 Year 15 Year 20

Benchmark land value

£8,000,000

£8,000,000

£8,000,000

£8,000,000

£8,000,000

Sales values (growth per annum)

5.00% 5.00% 5.00% 5.00% 5.00%

Construction costs (inflation per annum)

3.50% 3.50% 3.50% 3.50% 3.50%

Profit levels (% of GDV), Affordable housing profit constant at 6%

20.00% 20.00% 20.00% 20.00% 20.00%

Finance rate 7.00% 7.00% 7.00% 7.00% 7.00%

Affordable housing outturn (assumes a 70% rented, 30% shared ownership tenure split)

21.70% 28.50% 35.37% 42.30% 47.27%

Outturn IRR 6.98% 6.98% 6.97% 6.97% 6.97%

Residual land value

£8,014,785 £8,678,333 £9,416,901 £8,009,099 £7,238,953

Opportunity cost of additional square metre of Affordable Rent

£7,147 £8,977 £11,829 £15,469 £20,114

Opportunity cost of additional square metre of Shared Ownership

£5,802 £7,632 £10,484 £14,124 £18,769

3.6.2 Scenario 2

Scenario 2 repeats the analysis in Scenario 1, but tests the impact of grant funding on the level of affordable housing that can be secured. We have assumed for testing purposes grant funding of £100,000 per affordable rented unit and £50,000 per shared ownership unit. Whilst we acknowledge that these amounts significantly exceed the allocations in the 2011-2015 funding programme, the level of grant would need to be substantially higher to make any meaningful difference to the outcome. The grant funding allocations increase the amounts that RPs could pay for affordable rented housing from

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£1,345 per square metre to £2,774 per square metre (assuming an average unit size of 70 square metres). They could increase their offers for shared ownership housing from £2,690 per square metre to £3,404 per square metre. These increases would reduce the ‘opportunity cost’ of delivering affordable housing in the NEV OA.

Table 3.6.2: Scenario 2 – maximum potential affordable housing – value growth 5% per annum, cost growth 3.5% per annum, grant funding of £100,000 per affordable rented unit and £50,000 per shared ownership unit




£8,000,000

£8,000,000

£8,000,000

£8,000,000

£8,000,000


5.00% 5.00% 5.00% 5.00% 5.00%


3.50% 3.50% 3.50% 3.50% 3.50%


20.00% 20.00% 20.00% 20.00% 20.00%

Finance rate 7.00% 7.00% 7.00% 7.00% 7.00%


30.27% 37.07% 43.80% 45.58% 50.68%

Outturn IRR 6.98% 6.98% 6.97% 6.97% 6.97%

Residual land value

£8,054,903 £8,265,725 £7,532,532 £7,436,884 £10,263,569

Opportunity cost of additional square metre of Affordable Rent £5,718 £7,578 £10,400 £14,040 £18,715

Opportunity cost of additional square metre of Shared Ownership £5,088 £6,918 £9,770 £13,410 £18,055

3.6.3 Scenario 3

In scenario 3, we have again assumed sales values will grow by 5% per annum and costs by 3.5%. However, we have also increased the existing use value from £8 million in year 1 to £16 million in year 20, representing a resurgence in demand for employment space in the area.

In year 1, the level of affordable housing is 21.7%, as the key inputs are identical to those in Scenario 1 and the existing use value remains at its base

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level. However, if the scheme came forward in year 20, it could viably provide 42.18% affordable housing, which is approximately 5% less than would have been the case had the existing use value remained unchanged.

Table 3.6.3: Scenario 3 – maximum potential affordable housing - value growth 5% per annum, cost growth 3.5% per annum, increasing benchmark land value




£8,000,000

£12,000,000

£13,000,000

£14,000,000

£16,000,000


5.00% 5.00% 5.00% 5.00% 5.00%


3.50% 3.50% 3.50% 3.50% 3.50%


20.00% 20.00% 20.00% 20.00% 20.00%

Finance rate 7.00% 7.00% 7.00% 7.00% 7.00%


21.70% 25.17% 31.97% 38.00% 42.18%

Outturn IRR 6.98% 6.98% 6.98% 6.98% 6.98%

Residual land value

£8,014,785 £11,848,410 £13,804,992 £13,951,736 £19,091,298

Opportunity cost of additional square metre of Affordable Rent

£7,147 £8,977 £11,829 £15,469 £20,114

Opportunity cost of additional square metre of Shared Ownership

£5,802 £7,632 £10,484 £14,124 £18,769

3.6.4 Scenario 4

In Scenario 4, we repeat the analysis in Scenario 2, but assume that developer’s profit falls from 20% to 17.5% in year 5 and is then assumed to remain at 17.5% through to year 20. The 2.5% reduction in profit from year 5 onwards would enable the developer to enhance their affordable housing offer by around 3%.

Table 3.6.4 summarises the results of these appraisals.

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Table 3.6.4: Scenario 4 – maximum potential affordable housing - value growth 5% per annum, cost growth 3.5% per annum, increasing benchmark land value, profit falls from 20% to 17.5%




£8,000,000

£12,000,000

£13,000,000

£14,000,000

£16,000,000

Sales values (growth per annum) 5.00% 5.00% 5.00% 5.00% 5.00%

Construction costs (inflation per annum) 3.50% 3.50% 3.50% 3.50% 3.50%

Profit levels (% of GDV), Affordable housing profit constant at 6% 20.00% 17.50% 17.50% 17.50% 17.50%

Finance rate 7.00% 7.00% 7.00% 7.00% 7.00%

Affordable housing outturn (assumes a 70% rented, 30% shared ownership tenure split) 21.77% 28.57% 35.37% 40.48% 45.58%

Outturn IRR 6.98% 6.98% 6.98% 6.95% 6.95%

Residual land value £8,014,786 £11,576,930 £12,762,305 £14,947,988 £15,748,765



3.6.5 Scenario 5

Scenario 5 repeats the analysis in Scenario 4, but assumes that the RP can secure an allocation of grant funding equating to £100,000 per affordable rented unit and £50,000 per shared ownership unit. This increases the amounts that RPs could pay for affordable rented housing from £1,345 per square metre to £2,774 per square metre (assuming an average unit size of 70 square metres). They could increase their offers for shared ownership housing from £2,690 per square metre to £3,404 per square metre.

Provision of grant funding would enable the developer to provide approximately 3% additional affordable housing in each scenario. If the scheme was brought forward in year 20, the appraisals indicate that the scheme would be able to provide close to 50% affordable housing. At the assumed levels of grant, the

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total cost would be £12.35 million to secure an additional 10 units, which equates to an average of £1.24 million per additional unit secured. This substantial investment underlines the high opportunity cost of providing affordable housing in the NEV OA.

Table 3.6.5: Scenario 5 – maximum potential affordable housing - value growth 5% per annum, cost growth 3.5% per annum, increasing benchmark land value, grant funding of £100,000 per unit for affordable rent and £50,000 per unit for shared ownership




£8,000,000

£12,000,000

£13,000,000

£14,000,000

£16,000,000

Sales values (growth per annum) 5.00% 5.00% 5.00% 5.00% 5.00%

Construction costs (inflation per annum) 3.50% 3.50% 3.50% 3.50% 3.50%

Profit levels (% of GDV), Affordable housing profit constant at 6% 20.00% 17.50% 17.50% 17.50% 17.50%

Finance rate 7.00% 7.00% 7.00% 7.00% 7.00%

Affordable housing outturn (assumes a 70% rented, 30% shared ownership tenure split) 30.27% 35.37% 42.18% 45.58% 48.98%

Outturn IRR 6.98% 6.98% 6.98% 6.98% 6.98%

Residual land value £8,014,785 £11,968,071 £12,762,305 £14,685,490 £17,233,784



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3.7 Conclusions

One of the councils’ overriding objectives in the NEV OA is to sustain regeneration and development through the inevitable market cycles over the envisaged build out period to 2030. Whilst we are currently in a ‘bull’ market with rising prices, and to an extent regeneration in the area has now achieved considerable momentum, the councils might need to accept compromises during periods of down turn to sustain activity.

The current approach of both councils to providing affordable housing on site in the NEV OA is challenging in the current market due to relatively high existing use values, high build costs and affordability requirements that depress the value RPs can pay to developers to acquire affordable housing units. There is a very high opportunity cost of securing additional affordable housing, which means that substantial amounts of grant funding would be required to secure additional units.

As noted previously, developers are building out planning permissions for some of the major schemes in the NEVOA, so the opportunities to secure more affordable housing on these sites will be limited. On some sites, such as New Covent Garden Market, developers are bringing forward new applications which will provide an opportunity to revisit the levels of affordable housing previously agreed. There will also be opportunities to include viability reviews in Section 106 agreements on schemes where new applications are submitted.

Over a fairly short period, our appraisals indicate that the percentage of affordable housing that could be secured on developments in the NEV OA will increase above current levels. Our appraisals also indicate that grant funding will have a limited impact in terms of facilitating additional supply of affordable housing and therefore the GLA is likely to be able to secure more from its funds by utilising them in lower value areas.

In order to increase opportunities for delivering affordable housing in the NEV OA, the councils will need to work with developers to ensure that increases in values do not simply inflate prices paid for sites. If this is allowed to happen, then it is unlikely that the councils will be able to negotiate additional affordable housing above current levels. The councils should therefore adopt a firm approach to negotiations which utilises the EUV plus premium approach, with the premium providing the flexibility required to take account of site-specific circumstances and market dynamics. This approach takes a different starting point from the RICS guidance, although would probably lead to broadly the same position. A strict interpretation of the RICS guidance is likely to result in a rather more onerous requirement for developers than the EUV plus premium approach, given that it requires that “Site Value should equate to the market value subject to the following assumption: that the value has regard to development plan policies and all other material planning considerations and disregards that which is contrary to the development plan”. Given that the RICS guidance can be interpreted as requiring the developer to reduce the land value through an iterative process of increasing the affordable housing level, there is a question as to how far the land value can be driven down. Given the requirement to “have regard to development plan policies” which seek to provide the maximum reasonable proportion of affordable housing, market value could, in theory at least, be £1. There is clearly a need for an objective minimum value for a site, which logically should be at least the value of the site in its current use. Ultimately, it is likely that the EUV plus premium approach and the RICS ‘market value’ approach will provide broadly the same benchmark land value.

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4 Appraisal models and affordable housing delivery The councils’ brief requests that we consider the appraisal models adopted to test viability of individual developments that are submitted by developers for independent scrutiny. In particular, the brief indicates that we should “consider the appropriateness of utilizing other economic property investment assessment techniques that are more familiar to private developers. This would include identifying and exemplifying approaches that utilise Discounted Cash Flow (DCF) and Net Present Value and Internal Rate of Return Investment Appraisal models”.

When assessing viability, developers and their advisors, as well as the Council’s appointed independent valuers will frequently use Argus Developer, which is an appraisal package in widespread use throughout the development industry.

4.1.1 Impact of affordable housing targets on developer and landowner behaviour

The implication of the differential in tariffs between two rates for 15% and 40% affordable housing is that the ‘cost’ to a scheme of providing an affordable housing unit is £15,000 per unit for residential area 1 and £5,000 per unit for residential area 2 (i.e. the difference between the tariff in each area). In practice, the cost of delivering affordable housing is much greater than these figures suggest. For example, if private sales values for 70 square metre unit are £10,000 per square metre (£929 per square foot) and the affordable housing values are £2,000 per square metre (£186 per square foot), the ‘cost’ of delivering the unit as affordable (in terms of revenue forgone) is £8,000 per square metre, or £560,000 for the unit.

It is possible to identify two fairly distinct stages in the planning process in the NEV OA. In the first stage, at around the time of the DIFS study being completed, delivering 15% affordable was challenging and the first schemes generated significant negative residual land values. When factoring growth into their appraisals, developers were able to achieve a scheme that ‘stacked up’ financially. In the second stage, which followed confirmation of funding for the Northern Line Extension, increases in sales values have improved viability. However, as a result of historical legacy, in the Wandsworth part of the NEV OA, the minimum 15% affordable housing policy could be said to have been treated by some developers as on the level of affordable housing provision required rather than a minimum that was required. In the Lambeth part of the NEV OA, the affordable housing requirement is the same as in the rest of the borough (i.e. 40% without grant and 50% with grant). Lambeth have been securing a higher quantum of affordable housing on most of their NEV sites and also securing the NEV tariff on most sites. However, to an extent the schemes in Lambeth are generally less complex and smaller, and not therefore subject to the long term vagaries of the housing and funding markets that affect schemes such as Battersea Power Station. Additionally, more recent applications have achieved significantly lower levels of affordable housing provision for a number of reasons. What is perhaps clear from the analysis undertaken here is that the current affordable housing percentage utilised in Wandsworth is no longer the firm baseline that it was. This in turn provides a level of uncertainty for applications coming forward given that financial analysis would indicate that more than 15% affordable housing could be achieved.

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4.1.2 Argus Developer and other appraisal packages

BNP Paribas Real Estate have reviewed Argus Developer and the GLA Development Control Toolkit elsewhere9 and we do not repeat that analysis here. In this report, we undertook a comparative analysis of the Argus, the Homes and Communities Agency’s Development Appraisal Tool and their Economic Appraisal Tool. We concluded that Argus provided the most accurate results of all three models and was most adept at being applied to a wide range of development scenarios. However, these positive features were off-set to some degree by its complexity and amount of training required.

The councils’ brief has asked that we consider the appropriateness of utilizing other economic property investment assessment techniques that are more familiar to private developers. However, Argus is an appraisal model which is fundamentally the same as models created by developers, albeit that developers’ models are typically run with land cost as an input, with profit as the output. As noted previously, Argus is also capable of being run land as an input cost and profit as an output.

We are not aware of other economic property investment techniques that differ fundamentally from Argus or any similar appraisal tool. The councils’ brief indicates that such models could include “Discounted Cash Flow (DCF) and Net Present Value and Internal Rate of Return Investment Appraisal models”. However, Argus Developer has at its centre a Discounted Cash Flow and is capable of generating information on returns in the form of Internal Rate of Returns rather than profit on cost or GDV. A different model is not required to generate these outputs.

We would not advocate the adoption of either an existing appraisal package such as the GLA Development Control Toolkit or the HCA DAT, or the creation of a bespoke package for the NEV area. Schemes in the NEV area are capable of being modelled in Argus, which is almost infinitely flexible in terms of development programme and phasing. It is more than capable of appraising complex and large schemes in regeneration areas. It has been used to assess the developments at Stratford City and is currently being used to assess Wood Wharf, which is a large complex regeneration project adjacent to Canary Wharf.

Bespoke packages are expensive to build and – if operating correctly – are unlikely to generate different results from Argus. The inputs to any appraisal are the critical factor, rather than the model itself. However, given that all major valuers and the main banks rely upon Argus for secured lending purposes, it is both in widespread use but also tried and tested. With any bespoke package, there would inevitably be challenges to the model itself and developers would be reluctant to use it due to unfamiliarity.

We have sought developers’ views on the various appraisal models available and they have confirmed that Argus Developer is a satisfactory model for assessing the viability of developments in the NEV OA.

9 BNP Paribas Real Estate ‘Development Control Toolkit Model – review of 2011 version’ February 2012

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5 Current and alternative approaches to delivering affordable housing In this section, we review alternative approaches to delivering affordable housing that might generate more value and meet planning requirements, housing targets and requirements, which in turn would enable developers and RPs to deliver an improved quantum and/or mix of affordable housing. The councils might need to consider weighing the importance of delivering affordable housing on-site versus maximising overall numbers of affordable units.

5.1 Current approach to affordable housing in NEV OA

In both the Wandsworth and Lambeth parts of the NEV OA, the councils generally apply their borough-wide affordable housing policies and requirements to proposed developments in the NEV AO. In the Lambeth area, the Council seeks 40% affordable housing, with a tenure mix of 70% rented and 30% intermediate housing, with the rented element confirming to the approach set out in the Council’s Tenancy Strategy. Although the Council has agreed alternative approaches, this is on a case by case basis and is not supported by a specific NEV OA policy. Similarly, Wandsworth also apply their borough-wide policies on mix and unit type in the NEV OA, albeit that the minimum requirement is lower at 15% than the borough-wide 33% minimum.

5.2 Alternative approaches to delivering affordable housing on-site

There are several key factors in improving the delivery of affordable housing levels in the NEV OA, some of which have been outlined in earlier sections of this report. The first is to ensure that developers assess the viability of sites on an appropriate basis (i.e. taking a site’s existing use value as a starting point, rather than market value). Achieving this aim will require a very firm planning policy basis for ensuring that viability assessments are undertaken using existing use value benchmarks and not market value. The second is to maximise the amount that RPs can pay for affordable housing to minimise the developer’s ‘opportunity cost’, although this raises challenges in terms of affordability. The third is to minimise the impact of the affordable housing on the development by minimising the floor area relative to the amount of private floorspace. We address the second and third points below.

5.2.1 Maximise the amounts RPs pay for affordable housing in NEV OA

As identified elsewhere in this report, the councils’ affordability criteria will limit the amount RPs can pay to developers to acquire affordable housing units in the NEV OA. This compounds the opportunity cost of delivering affordable housing units here. However, if the councils are to deliver their housing policy objectives of meeting a range of housing needs in their boroughs, they will have to accept a lower overall quantum of delivery to ensure that housing costs to occupants are at a level that households in housing need can genuinely afford. This issue might lead to a conclusion that boroughs need to work with the Mayor to consider where different segments of housing needs and requirements could best be met. Rather than seeking to meet the entire range of needs in the NEV OA, the need for family housing could be satisfied in other parts of Wandsworth and Lambeth, or indeed in other boroughs.

As an alternative, the councils could reflect higher housing costs in the area by targeting a higher affordability ‘segment’ in the NEV OA. For example, rather than seeking to target households on incomes in the region of £30,000 to

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£40,000, the councils could target a higher income range (say £65,000 to £75,000) at the top of the London Plan affordability cap10. This would enable the RPs to build in a higher rent on retained equity, thus increasing their overall offer price to developers. This is turn would improve overall scheme viability.

Table 5.2.1 summarises the potential uplift in value that could be achieved by varying the household income from £28,000 to £68,000 in £10,000 increments. The calculations are based on a one bed unit (52 square metres) with a market value of £380,000. The service charge is assumed to be £25 per square metre per annum. We have assumed that the purchasing household would be required to spend no more than 45% of their gross income on housing costs and that mortgages return to their more typical level of 6.5%, rather than the very low rates available today. The calculations are attached as Appendix 3.

Table 5.2.1: Amount payable by RP at varying household income

Household income

Value of equity stake sold to occupier

Rent paid on retained equity (%)

Total capital value (initial equity stake plus rent on retained equity)

Capital value per square metre

£28,000 £91,200 0.00% £91,200 £1,754

£38,000 £95,000 1.10% £155,819 £2,997

£48,000 £95,000 2.20% £216,638 £4,166

£58,000 £129,200 2.75% £263,002 £5,058

£68,000 £186,200 2.75% £289,592 £5,569

This analysis indicates that by focusing on a smaller segment of housing need (i.e. at the upper end of the London Plan income threshold) the councils would enable RPs to considerably increase their offer prices for shared ownership units. This would probably need to be considered as part of a pan-London strategy as to how best to meet needs of households with different incomes and unit size requirements. Focusing on a more tightly defined range of needs in the NEV OA would significantly reduce the ‘opportunity cost’ of delivering shared ownership units, thus improving viability and enabling developers to provide higher levels of affordable housing.

A further route to explore would be to address high service charges in the NEV OA. This is one of the most significant issues for RPs delivering affordable housing in the NEV OA, due to the high specification of the blocks required for private flats. These high standards are required to achieve the high market sales values that developers are targeting. We address this issue later in this section. If service charges can be reduced, RPs will be able to enhance their offer prices and to an extent this can be achieved through separate cores. This is not always possible and in these cases, providing the affordable housing off-site might be preferable in terms of delivering additional units and controlling services charges. This is of course subject to the availability of sites in suitable locations in or close to the NEV OA.

Other options to maximise the amounts RPs could pay to developers include restricting involvement in the NEV OA to one or two key RPs. If one or two RPs acquire a ‘critical mass’ of stock in the area, they might be able to drive down management costs through economies of scale. We understand that RPs

10 Lambeth’s priority is for rented housing and is generally more flexible on income thresholds for shared ownership housing than Wandsworth. Lambeth have recently allowed income thresholds to move upwards at Vauxhall Square to improve viability.

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typically allocate a housing manager to circa 500 units; if too many RPs acquire new units in the area, they may be unable to achieve this ratio of units to managers. This would require the councils and RPs signing up to a protocol that would limit involvement to a small number of key RPs. This protocol would also require buy-in from developers to ensure that they do not approach RPs outside this core group for offers. This may be difficult to enforce given that the majority of developers tend to have long standing trusted relationships with a very limited number of RPs that operate within the OA.

Establishing a core group of ‘preferred’ RPs in the NEV OA would require a procurement process run jointly by the councils and the developers. The key selection criteria might include adherence to the councils’ affordability requirements; a proven track record of delivery of affordable housing in major regeneration areas; ownership of land in the boroughs that might be included in off-site solutions; and offer prices.

5.2.2 Minimising affordable housing floor area ‘take’

At present, the councils will seek to meet a range of affordable housing needs on schemes in the NEV area. This will mean providing units which meet the needs of single person households through to households comprised of five or more people. The market housing units are largely targeted to smaller households, so the affordable housing can have a disproportionate impact on viability as the ‘average unit’ is likely to be larger than the ‘average private unit’. The councils could minimise the impact of affordable housing provision on overall scheme viability by reducing the unit sizes to smaller units only. This would require an explicit acknowledgement that affordable housing in the NEV OA is to be targeted at smaller households only and that the need for family housing would have to be satisfied on lower value sites, ideally in the immediate vicinity, but possibly in other parts of Lambeth and Wandsworth, or in other boroughs. Given that the most urgent need in the rented affordable sector is for larger family units, this approach also implies a greater proportion of units would need to be provided as intermediate, rather than rented housing. However, rented housing could be provided if the councils could secure ‘gifted sites’ (discussed later) or through linking developments to estate improvement and regeneration.

Whilst this approach would result in a lower overall affordable housing ‘take’ from the total floorspace, leaving more floor area for private sale, thus improving overall scheme value. This would, in principle, generate more value for the developer which could be used (in part at least) to fund off-site provision, including estate regeneration.

5.2.3 Delivery of shared ownership units in NEV OA by developers

Although there are routes to optimise the value of shared ownership tenure by increasing the income bands that units are targeted at, there are alternative routes that could achieve the same result without sacrificing affordability criteria.

One route would be to allow developers to directly provide shared ownership or shared equity products. This would avoid the current issue of the retained equity being valued at a substantial discount to market value (RPs will typically value the retained equity on the basis of the discounted rent they receive, disregarding future staircasing). If developers were permitted to become the shared ownership/shared equity provider, they would benefit from the full market value of each unit sold to an occupier. This would be both in the form of an immediate capital receipt from the occupier and from the retained equity which the developer would hold. Occupiers could staircase in the normal way from the developer if they choose to, although it is likely that developers would

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oblige owners to staircase to full ownership within a pre-agreed period so that they can utilise their capital on other schemes.

The advantage of this route for developers is that they could borrow against the retained equity to fund the development itself, or other developments. Alternatively, they could package up the retained equity and sell to a fund or other institution, which would secure its return from capital growth.

In order to provide the developer or any fund with an exit route, they would have to be permitted to withdraw their capital if the occupier sells the unit. At the point of sale, the proceeds would be split on the basis of the relative equity shares held by the occupier and the developer (or any purchasing fund). The councils are likely to require that capital is recycled for provision of affordable housing, which may cause issues for the developers.

This route would effectively mean that the shared ownership units could (in principle) be valued at an equivalent value to private units, so there would be no opportunity cost of provision. However, it is likely that at least some discount to market value would apply, due to the relatively restricted exit route available to the developer or any purchasing fund.

Developers have operated shared equity models elsewhere, but typically for units that are not restricted by a Section 106 agreement. Consequently, they have been relatively free from the normal restrictions. Applying the normal restrictions contained in a Section 106 agreement to developers might not be acceptable and might be an issue for further discussion and testing.

5.2.4 Free land on NEV OA sites for Council and RP delivery of units

One of the most significant issues for developers is the cost of developing affordable housing relative to the receipt from RPs. In all schemes we have assessed on behalf of the two councils, the costs of development significantly exceeds the receipt from the RPs, which indicates that the private housing has to cross subsidise the delivery of the affordable (as well as cross subsidising any loss-making employment floorspace and generating a land value).

An option that might resolve this issue is to free developers from responsibility for direct delivery of the affordable housing obligation generated by their scheme. This would be achieved by developers identifying part of their site which would be transferred at nil value to the Council and/or an RP, which would jointly or solely take responsibility for delivery.

This approach would clearly only be workable on the larger sites where it is physically possible to provide the affordable housing units on a completely separate site from the private housing and commercial development.

This would require a slightly different approach to securing the affordable housing units than is currently the case. The usual restriction on developers selling a proportion of market housing units before the affordable housing units are delivered would have to be removed from the standard Section 106 agreement. This would need to be replaced simply by an obligation to transfer (at nil cost) the land upon which affordable housing can be developed prior to occupation of a certain percentage of units. The developer could not be expected to accept any restrictions linked to delivery of the units after it has lost control of the land.

On sites of a more significant scale, there are likely to be opportunities to focus affordable housing in lower value areas within the overall development. This will help the developer to improve viability by providing more private housing in parts of the sites where the highest values can be achieved. This would then

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enable them to potentially release more (lower value) land for use by the Council and/or RPs for the delivery of affordable housing.

As an example, the Wandsworth could work with the developer of the New Covent Garden Market (‘NCGM’) redevelopment to re-engineer the scheme to re-direct affordable housing to the lower value areas within the site. In the original NCGM scheme, the developer had proposed to provide an even split of affordable and private housing in the area of the site adjacent to Thesally Road. In the 2012 viability assessment, the estimated values for the Thesally Road site were circa 55% of values expected for the northern sites. This differential in values was largely associated with the proximity to the new market and a significant volume of pre-existing Council housing.

In order to test the feasibility of this option, we have undertaken some high level modelling to test the uplift in private housing gross development value by removing affordable housing from a wider development against the loss of (lower value) private housing on the part of the site which would be transferred at nil value to the Council and/or an RP.

Our assumptions are as follows:

■ Private sales values on the ‘wider’ part of the site: £10,764 per square metre (£1,000 per square foot);

■ Private sales values on the area of the site to be transferred to the Council/an RP: £5,920 per square metre (£550 per square foot);

■ Affordable housing value (blended rate): £2,153 per square metre (£200 per square foot);

■ Total floor area of the whole development: 400,000 square feet; ■ Floor area in low value part of site: 100,000 square feet; ■ All-in development costs of the private housing: £4,844 per square metre

(£450 per square foot); ■ All-in development costs of the affordable housing: £3,767 per square metre

(£350 per square foot); and ■ The affordable housing has been agreed at 20% of total floor area.

Scenario 1: Affordable housing provided by developer across site

In Scenario 1, we have assumed that 20% affordable housing is provided in both the ‘high’ and ‘low’ value areas, with the developer taking responsibility for the delivery of both tenures. Figure 5.2.4.1 shows the division of the floor area in the ‘high’ and ‘low’ values areas between private housing and affordable housing, together with the resulting GDVs.

Scenario 1 would generate a total GDV of £300,000 million, of which £16 million would be generated by the affordable housing. Total development costs would equate to £172 million, generating a land value of £128,000 (before finance, profit, marketing costs etc).

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Figure 5.2.4.1: Scenario 1 – affordable housing distributed across the site

Scenario 2 then considers the impact of transferring the entire ‘low value’ floorspace (100,000 square feet) to the RP for provision of affordable housing. This would result in the benefit of the delivery of an additional 5% affordable housing in comparison to scenario 1. The additional 5% could be converted – if required – into private rented housing or another tenure to generate cross-subsidy to deliver the affordable housing.

Figure 5.2.4.2 summarises the results of our analysis of Scenario 2. Dividing responsibility for delivering of the private and affordable housing tenures and focusing the affordable housing on the lower value site results in a significant enhancement to the land value secured by the developer (this increases from £128 million in Scenario 1 to £165 million in Scenario 2, an increase of £37 million). However, the affordable housing generates a negative land value of -£15 million. This could be mitigated through the conversion of some of the affordable housing to private rented housing. Alternatively, the developer could fund the shortfall from part of its £37 million uplift in land value generated by splitting the private housing from the affordable.

Figure 5.2.4.2: Scenario 2 – affordable housing focused in low value area

It might be possible for the arrangements above to be applied to sites in different ownership. This would involve the developer of a higher value site acquiring a lower value site, using the uplift in their land value (which would arise through the route illustrated above) to fund the purchase.

Carving out the affordable housing as a separate development also has the advantage that it would then be considered ‘RP led’ and would qualify for grant funding under the current guidelines in the 2011 – 2015 Affordable Homes Programme. Grant funding at current rates is unlikely to mitigate the full shortfall, but could make an important contribution. Given that the trend in grant

20% affordable housing agreed, evenly split between high and low value areas

Private housing 240,000 sq ft in high value area 240,000,000£ GDV in high value area

80,000 sq ft in low value area 44,000,000£ GDV in low value area

Affordable housing 60,000 sq ft in high value area 12,000,000£ GDV in high value area


Total GDV 300,000,000£

Total development costs Private 144,000,000£

Affordable 28,000,000£

Land value (before finance, profit etc) 128,000,000£

25% affordable housing agreed, all of which is provided in low value area

Private housing 300,000 sq ft in high value area 300,000,000£ GDV in high value area

sq ft in low value area £ GDV in low value area

Affordable housing sq ft in high value area £ GDV in high value area


Private GDV 300,000,000£

Private development costs 135,000,000£

Private land value (before finance, profit etc) 165,000,000£

Affordable GDV 20,000,000£

Affordable development costs 35,000,000£

Affordable housing land value (before finance, profit etc) 15,000,000£

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funding rates is downwards, it is likely that the Developer would be required to mitigate the bulk of the shortfall.

There are of course several limitations to these arrangements which the councils would need to consider:

■ Firstly, carving out the affordable housing as completely separate developments with their own design might blunt ambitions to achieve “tenure blind” developments. The councils would need to therefore require RPs to achieve the same standard of external design as the neighbouring private developments.

■ Secondly, there may be reluctance from developers towards this approach unless the retained a degree of control over the “donated” site, as the council’s/RP’s development proposals could directly impact on the value of any adjacent part of their site, particularly if the standard of development was significantly different.

■ Thirdly, carving out affordable housing from a wider development might be presented as a form of tenure separation and working against achieving mixed and balanced communities within developments. Firstly, it is clear that in order to deliver certain unit sizes and affordable rent tenures, some consideration needs to be given to innovative solutions that deliver the quantum of housing against target. Secondly, if linked to estate improvement and regeneration there is no reason that the provision of new housing (particularly in forms that would be attractive to family households – lower density development) would not be a positive for local residents. Thirdly, on a macro-scale, delivery of affordable housing nearer to target in the Opportunity Area would result in a greater degree of social mix, as the overall level of affordable housing across the NEV OA area as a whole could increase. In reality, particularly on larger sites as are common in NEV, there is also a degree of separation even where provision is provided on-site.

5.3 Off-site delivery

Market housing in large parts of the NEV OA attracts very high sales values, in some parts over £10,764 per square metre (£1,000 per sq ft). In contrast the value of affordable housing typically ranges from £1,615 to £2,153 per square metre (£150 to £200 per sq ft). Consequently, there is a very high ‘opportunity cost’ of delivering an affordable housing unit on site. Assuming a private sales value of £10,764 per square metre (£1,000 per sq ft), the opportunity cost of delivering a unit as affordable could be as high as £9,149 per square metre (£850 per sq ft). For a 46 square metre (500 sq ft) one bedroom flat, the opportunity cost would equate to £425,000. Additional illustrations of the opportunity cost are provided in Table 5.3.1 below.

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Table 5.3.1: Illustrative opportunity cost of delivering affordable housing on site

Unit type

Unit size sq m (sq ft)

Market housing value per sqm (sq ft)

Value as market housing

Value as affordable housing

Opportunity cost (or potential payment in lieu)

1 bed 46 (500) £8,611

(£800)

£400,000 £75,000 £325,000

1 bed 46 (500) £10,764 (£1,000)

£500,000 £75,000 £425,000

2 bed 70 (750) £8,611

(£800)

£600,000 £112,500 £487,500

3 bed 79 (850) £10.764 (£1,000)

£850,000 £127,500 £722,500

The councils could secure some of the affordable housing contribution on some or all sites as a payment in lieu, rather than units on site. The payment could then be used to provide affordable housing on lower value sites, where the opportunity cost is much lower. The councils would then be able to provide more units (or different tenures and types of units, such as affordable rent and family housing) than would otherwise have been possible through an on-site solution.

Table 5.3.2 provides an illustration of how affordable housing payments in lieu in the NEV OA could be used to provide a higher percentage of affordable housing on other schemes. Both councils could identify sites outside the NEV OA which might be suitable for affordable housing development, with payments from sites within the OA funding delivery. For the purposes of this illustration, we have assumed that the NEV OA site should have provided 20 two bed units of affordable housing. As shown in Table 5.2.1, these units would generate a commuted sum of £9.75 million (20 x £487,500 per unit). On a scheme where market values are £5,382 per square metre (£500 per square foot), the “cost” of providing an additional square foot of affordable rented housing would be £3,767 per square metre (£350 per square foot) (i.e. £500 less £150). The £9.75 million commuted sum could therefore be used to convert 27,857 square feet of private housing into affordable. This would equate to 37 two bed units of 70 square metres (750 square feet each). Providing the units off-site through a payment in lieu would therefore potentially generate 17 additional affordable housing units. The councils would need to consider where off-site affordable housing would be most appropriately located within the respective boroughs.

Table 5.3.2: Illustration of affordable housing provision off-site

Uplift in value arising from converting affordable housing provision to private housing

Total uplift in value (i.e. commuted sum)

Units to be provided on site 20 x two bed

£487,500 per unit £9,750,000

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Cost of market housing on alternative site

Value of affordable housing on alternative site

Cost of ‘purchasing’ each additional sq ft of affordable housing

Floorspace that can be ‘purchased’ with commuted sum of £9,750,000

Number of units that can be ‘purchased’ (based on 70 square metres/750 sq ft per unit)

£5,382 per square metre (£500 per square foot)



2,588 per square metre (27,857 sq ft)

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This approach could be adopted for one affordable tenure or both, although we would suggest that affordable rent would probably be best provided off-site as these units generate lower values than shared ownership.

The downside to the approach suggested above is that it has the potential consequence of creating an exclusively private housing enclave across a large area. In order to prevent concentrations of purely private developments, some on-site provision would be required (this could be in the form of smaller units targeted at the intermediate market, for example). It may also result in more affordable housing being provided in lower value areas within the boroughs which may reinforce existing patterns of deprivation and worklessness (although this could be addressed to some degree through local lettings plans).

To resolve these issues, the councils might decide to accept payments in lieu on only a proportion of sites coming forward to ensure on-site delivery within the NEV OA. Clearly this would be a matter for each council to consider in respect to their current and any review of their future planning policies. In this respect Lambeth have a clearly stated position which is that they will seek the provision of affordable housing on site and to target. Wandsworth has a similar position with offsite provision or payments only being considered in exceptional circumstances.

5.3.1 Location of off-site affordable housing

As indicated above, the value of private housing on the site where additional affordable housing will be provided is a critical factor in determining how much additional affordable housing can be provided using the commuted sum.

If the councils required the commuted sums to be used with a very restricted radius of application scheme sites, the additional affordable housing that could be provided will be very limited. This is because private sales values are likely to be in a similar ‘range’ within geographical areas, albeit there could be modest differences linked to differences in aspect and immediate surroundings. For example, sites with river views are likely to secure higher values than those in the same area, but without river views.

Wandsworth is likely to be able to maximise provision by investing commuted sums in the south of the borough (e.g. Tooting Bec) which is approximately 8 kilometres from the NEV OA. Similarly, Lambeth would secure maximum provision by using commuted sums in Streatham, which lies a similar distance to the south of NEV OA.

The closer the donor sites are to the NEV OA, the lower the returns will be in terms of additional affordable housing due to increasing private sales values

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moving from south to north11. The councils could therefore consider adopting an approach which sets out a zonal order or preference, requiring developers to firstly consider opportunities in the NEV OA; then close to the OA (within certain pre-determined distances; and then across the boroughs.

5.3.2 Using commuted sums on council owned land

As an alternative to using commuted sums to fund additional affordable housing on developers’ sites, the Council could use commuted sums to facilitate provision on council owned sites.

This could include estate redevelopment projects, where densities are increased to allow for the provision of an element of private housing to cross-subsidise the reprovision of the affordable housing. Raising funds through commuted sums would enable the councils to provide funding for such schemes, which would limit the extent to which private housing would be required, thus maximising the delivery of affordable housing.

There may be limited opportunities to use commuted sums in the manner outlined above within the NEV OA as very few council owned sites are located within the OA. The councils should therefore consider sites in their ownership both inside and outside the OA.

5.3.3 Provision of affordable housing by developers on Council owned land

The councils have not been directly developing substantial quantities12 of their own housing for some time and may therefore have a preference for developers to take the risk of development and directly provide units on Council owned land, rather than making payments in lieu of delivery. A recent example of such an arrangement is the deal struck between Lambeth Council and developers of the Shell Centre. The proposed development includes part of the affordable housing on-site (52 extra care units and 40 intermediate rent units), with the remainder provided off-site. The off-site units are to be provided through a redevelopment of one of the Council’s estates. Had the units been provided on the Developer’s site, the scheme would have been able to provide 17 additional units. However, by developing on Council-owned land, the number of affordable units increases to 84 at nil cost to the Council. In addition, the Developer will provide a number of private units at nil cost to the Council. This approach of course relies upon suitable sites being both identified and available.

In addition to the benefit of increasing the overall number of affordable housing units, the arrangement offers the Council a further advantage. Firstly, the Council could sell the affordable housing units to an RP, which would be able to pay a capital receipt against the net rental stream. This receipt could then be used to subsidise the redevelopment of other directly-owned housing estates or to grant fund other developer or RP-led schemes. Secondly, the Council could use the private housing units as additional affordable units; or alternatively use them as private rented housing to generate an income stream; or sell them to generate cross-subsidy to enhance affordable housing delivery on other sites. However, the councils would need to carefully consider how this approach might impact on their wider policy objective of securing mixed and balanced communities and also ensuring that developments in the NEV OA are not effectively reserved for buyers from outside the area.

11 For example, values on the New Covent Garden Market site will be lower adjacent to existing council estates on Thessaly Road and Deeley Road. 12 Wandsworth has delivered some housing directly on a small scale through its ‘Hidden Homes’ programme. The Council is currently using this approach to deliver 59 affordable rent units in the NEV OA funded from a combination of Right to Buy receipts, Section 106 funding and Housing Revenue Account capital receipts.

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5.3.4 Provision of affordable housing on community land

Another arrangement that has emerged in the NEV OA is to take affordable housing off-site and provide it on near-by community owned land, in combination with upgrading and/or replacement of the existing facilities at nil cost to the community organisation.

This approach was adopted by Berkeley Group with Lambeth’s agreement at Eastbury House and Prince Consort House. The ‘opportunity cost’ of delivering the agreed percentage of affordable housing units was calculated to determine the amount of funding available. The funding was then used to deliver new facilities for the Vauxhall City Farm in return for provision of part of the site at nil cost to Berkeley, upon which the affordable housing units were provided.

The removal of on-site affordable housing can increase the efficiency of the building by enabling the developer to remove the additional cores that would otherwise have been included to serve the affordable units. This increase in floorspace enhances the value of the overall development, making more funding available for delivery of off-site benefits. Furthermore, taking the affordable housing units off-site in this scenario enables the RP to control and reduce service charges, enabling them to reduce the impact upon capital values they can pay to the Developer.

There are, however, some potential issues with this approach, the most significant being a lack of availability of sites owned by community organisations that might benefit from developer input. The arrangement also requires the cooperation of the community organisation, which may not always be forthcoming.

Developers may also prefer to avoid adding layers of complication to their development by linking their scheme to a site outside their ownership and control. For example, they may prefer to avoid obligations in the Section 106 agreement which are associated with the delivery of the community facilities on land outside their ownership for fear that this could cause delays to the main development.

5.3.5 Using commuted sums to provide personal subsidies

An alternative to investing in the provision of new affordable housing stock is to use commuted sums to provide personal subsidises to households who meet the councils’ qualification criteria for intermediate housing.

The subsidy would need to bridge the gap between the amount an individual household could finance (comprised of a mortgage, plus any deposit they may have saved) and the market value of the unit they wish to purchase.

In light of comments earlier in the report on the ‘opportunity cost’ of delivering affordable housing, the same issue is likely to apply to the use of commuted sums as personal subsidies.

We have undertaken an assessment of the personal subsidy a household might require to purchase a unit in the NEV OA. We have assumed that the household is comprised of two working adults who have a joint income of £60,000. They require a two bedroom property of 75 square metres, which are available in their chosen development for £550,000.

Nationwide Building Society would lend up to £300,200 to this household, assuming no additional outgoings or commitments, a service charge of £500 per annum and council tax of £1,000 per annum.

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In order to enable this household to purchase a unit valued at £550,000, the Council would need to provide a subsidy of £250,000, which equates to £3,333 per square metre and 45% of the initial capital value of the property. Given that a property value of £550,000 equates to £7,333 per square metre, this is likely to be in the middle of the range in the NEV OA. A 75 square metre unit on higher value sites might attract a market value of £750,000, which would require a personal subsidy of £450,000 for our example household to purchase (this would equate to 60% of the initial equity).

A commuted sum of £1 million would therefore provide funding for four purchasers, assuming a subsidy of £0.25 million per household. This is likely to be considered poor value for money in comparison to investment in new stock, particularly if the Council does not take an equity stake in the property so the funding is repaid when the unit is sold on. The councils would also need to establish whether or not housing procured through these arrangements would count towards their London Plan affordable housing delivery targets.

5.4 Flexible tenure arrangements

There are several variants of flexible tenure arrangements which aim to enhance the amount of affordable housing that a scheme can provide. Higher capital values are achieved by de-risking an RP’s income stream such that they are able to offer a higher amount to the developer. This is reflected in lower void assumptions but also a lower discount rate due to greater certainty of income.

A flexible tenure model has been proposed by the New Economics Foundation (‘NEF’); the “Defined Income (Flex) scheme”. The scheme essentially involves an RP agreeing to take a defined number of units from a Developer, some of which will be used for affordable rented housing, while the remainder will be used as private rented.

As an example, if the RP is purchasing 100 units, 65 would be let initially as affordable rented units and the remaining 35 would be privately let. If the rents on the privately let units increased over time, there would be a ‘surplus’ rent, which could be used to convert some of the private units into affordable. Conversely, if the income stream from the affordable rented units fell, or if voids increased, then the RP could convert some of the affordable units to private. In both scenarios, the aim would be to guarantee the RP an income stream that would be higher than would otherwise have been the case.

The tenure flexibility would give the RP more confidence about its long term income stream and address future uncertainties in relation to the impact of the Universal Credit; the bedroom tax; and other associated changes.

There are clearly difficulties with such models in terms of planning and Section 106 agreements. Given that all the affordable housing units could – in theory – be converted to private rented housing (albeit that they could be converted back if market rents increased), there would be considerable uncertainty as to future levels of provision and availability.

Difficulties might also arise in relation to Community Infrastructure Levy. If units are initially granted social housing relief and the units subsequently change to market housing the owners of the properties would be become liable to pay CIL at the appropriate residential rate.

The NPPF and the planning policies of both councils also define affordable housing as housing that is provided at a discount to market value. Under the NEF Flex model, units may no longer comply with this definition.

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These problems could be resolved through a variant to the model. Under the variant, units could be let at higher rents (but still at a discount to market rents) than those that the councils would normally require for affordable rented housing. Although the uplift in rents would not be as substantial as would have been the case for market housing, this flexibility would still offer the RP some certainty of income. Consequently, they could still potentially offer a higher capital value to the Developer if all risk items are addressed through flexibility on rent levels. This would probably require a change in tenancy, with a different type of occupier who is working taking on a tenancy, as they would not be constrained by restrictions imposed by the Universal Credit. Such a scheme could also breach the criteria for qualifying for CIL social housing relief.

5.5 Public Sector Investment

Public bodies might invest in the provision of infrastructure to reduce the amounts sought from developers which would then enable them to increase the amount of affordable housing provided. This may not be the GLA/HCA, but could be the councils or other public bodies.

The HCA ‘Kickstart’ scheme approach of equity funding is as an example of how this might work. However, the key distinction to be drawn is that this programme funded infrastructure that was an integral part of a scheme, so in effect, the HCA was part funding the scheme build costs through equity or a loan. The HCA will secure a return on its investment if the values of the schemes in which it has taken an equity stake achieve higher sales values than anticipated at the outset.

It is therefore necessary to consider whether the principle of equity investment in schemes (where there is potential for uplift in value) can be used to fund public (i.e. non scheme specific) infrastructure to release developer funding to provide affordable housing. Clearly, developments could not proceed unless the public infrastructure is put in place (to succeed, the development of homes and commercial space need supporting infrastructure). The Northern Line is a key example; significant increases in residential sales values and commercial values will be unlocked by the NLE, particularly at the Battersea Power Station end of the NEV. However, if a public sector organisation were to fund non-site specific infrastructure, the question is from whom might it recoup its investment and how? In the absence of a tie to a specific scheme, securing a return could be complex. TFL and the councils have developed a Tax Increment Finance Model to address this issue. Under this arrangement, the additional business rates income arising from the new developments in the NEV OA will be used to fund the costs of delivering the NLE. By capturing value through this route, more of the NEV OA tariff can be used to deliver other essential social infrastructure which would otherwise have to be funded by developers and/or the councils. More development value may therefore be available for delivering affordable housing.

One option would be for a public sector organisation to take an equity stake in developments on the grounds that those developments would not be as successful without the wider infrastructure in place. The extent to which the equity is repaid might depend on the extent of growth in sales values resulting from the provision of the specific piece of infrastructure. Alternatively, the public sector organisation could simply recoup its investment through an additional tariff (contingent upon sales values increasing by certain percentages) agreed on a site-by-site basis.

As an alternative to taking an equity stake, public sector organisations could provide funding either to the Developer or to the RP to reduce finance costs, thus making schemes more viable. As noted earlier in the report, developers typically incur finance costs at circa 7%. Loans available through the Public

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Works Loan Board could be secured at around 3%, which would generate a significant saving in comparison to bank finance. This additional value could be used to enhance the RPs’ offer prices, which would in turn improve viability and enable developers to provide additional affordable housing.

5.6 Reviewing allowable Affordable Rent levels and minimising the impact of service charges on RP offers

Councils face a considerable challenge in setting rent levels that both ensure that rents remain affordable in light of ongoing welfare reforms, whilst ensuring they are set at a level that maximises the rental income to RPs to support affordable housing delivery. Both councils have issued guidance on affordable housing rent levels to RPs.

The level at which service charges are set has a considerable impact on capital values and the rent income available to fund the purchase both of affordable rent and shared ownership properties (a £35 per week service charge compared to a £50 per week service charge reduces capital value by circa £30,000 for a two bed unit). RPs and the councils therefore might wish to explore options for reducing service charges for tenants and leaseholders.

Both councils are committed to working closely with developers to ensure that affordable housing is delivered in separate cores, so that services can be separated as much as possible to minimise costs that tenants must pay. the councils recognise the importance of giving RPs as much control as possible in setting service charges for the affordable housing and common public realm (as far as is desirable in the context of creating mixed communities). One option that has been considered is for developers to set up a sinking fund to cross-subsidise the affordable housing service charge. This would, however, merely impact on the Developer’s development appraisal in a different way and do nothing to enhance their ability to provide additional affordable housing.

5.7 Enhancing the value of shared ownership units

The 2012 ‘Phasing and Investment Study’ considered whether more value could be realised from the equity that RPs retain when selling properties on a shared ownership basis. The amount the RP pays for the retained equity is far lower than its market value, as it is based on the discounted rent charged. If a shared ownership leaseholder later ‘staircases’ (i.e. purchases more equity in their property), the RP receives a ‘windfall’. It might be possible to enhance the value of the retained equity which would release more resources for investment in additional affordable housing on a development.

Firstly, the councils and the GLA could require or seek agreement from RPs that any balance from sale of the retained equity (over and above recouping the original investment) is ring fenced for reinvestment into the latter phases of NEV OA to support affordable housing. Such arrangements could be part of a protocol agreed with RPs in the area. RPs who are keen to maintain a strong presence in a particular borough are normally prepared to accept such a restriction on a borough-wide basis, but this may be less palatable if applied on a more geographically restricted basis, such as the NEV OA.

Secondly, the GLA could invest in and hold a proportion of the retained equity over and above any equity that the RP needs to retain to support purchase and return on investment. The GLA cash investment in turn could be used to support additional affordable housing in developments. This model also has the potential of improving affordability of the unit to the shared ownership

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leaseholder13, as they would only have to pay rent on the equity held by the RP - at least initially.

As an illustration of the potential benefits, we have tested the capital value that might be payable for the completed unit, in comparison to the current approach where the RP retains all the unsold equity. Our assumptions are as follows:

■ A 50 sq metre one bed flat is sold to a household with an income of £38,000 per annum;

■ Market value of unit - £400,000;

■ The purchaser spends no more than 40% of their income on housing costs, including service charge of £840 per annum; and

■ The purchaser buys a 25% equity stake and pays a rent of 0.63% on the retained equity (this being the maximum affordable rent, given the constraints in the previous bullet point).

In the situation above, the retained equity would have a market value of £300,000, yet if the RP’s offer was based solely on the rent it would receive, it would have a value of only £36,666. If the councils and/or the GLA were to purchase equity stakes of 10%, 20% and 30%, these would add £40,000, £80,000 or £120,000 to the capital value of the unit14. This approach would solve affordability issues and enhances capital values payable to developers, but it may not be viewed as the optimum route for utilising public funding.

To provide a greater level of certainty a possible variant to the model above might include time-limited equity investment by the GLA. The shared ownership leaseholder would have a time limit by which the equity must be purchased (e.g. ten years). The RP would need to have a strategy in place if the purchaser is unable to staircase before the time limit. An alternative might involve nil rent on the GLA equity stake until such time as the shared ownership leaseholder has purchased the RP equity. At that point, a rent could become chargeable on the HCA stake to ensure a continuing incentive to full staircasing so that the investment can be recovered and used elsewhere.

13 LB Wandsworth have set a target that at least two thirds of purchasers of shared ownership units shall be households with income of between £25,000 and £38,000. The remaining third of purchasers are required to conform with the GLA’s affordability criteria (which sets a considerably higher maximum qualifying income). This puts considerable pressure on affordability in high value schemes, particularly with respect to family sized units. Even at the GLA’s income thresholds (which would be applied within LB Lambeth), it can be challenging to deliver family sized shared ownership units where sales values exceed £5,920 per square metre (£550 per square foot), as would be the case across the majority of the NEV OA.

14 Although the proportion of equity held by the RP would reduce, it could – in principle at least – increase the percentage rent on the retained equity it holds (up to a maximum of 2.75%). The amount the RP would pay the developer could therefore remain unchanged, even though some of the equity is held by the GLA.

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6 The role of review mechanisms Viability appraisals necessarily take a snap-shot of the viability of a particular scheme at a point in time. They are not dynamic, in that they do not take account of how scheme viability will change as a result of changes in key appraisal inputs, including sales values and build costs. Clearly the outturn viability of any scheme may differ significantly in comparison to the results of a viability appraisal submitted with a planning application. There are varying views on this issue, with some authorities seeking to introduce retrospective reviews to ‘capture’ a share of any improvement in viability over time, while others simply recognise this as a feature of a cyclical market and allow developers to retain any ‘upside’.

Review mechanisms are a well-established route for reconsidering scheme viability after grant of planning permission. It is a route that Lambeth have agreed with applicants on major developments, while Wandsworth have not sought to implement such reviews. The alternative to review mechanisms is that developers take a view on future growth in values and base their affordable housing provision on the ‘with growth’ appraisal outcome. This provides the Council with more certainty (in terms of affordable housing percentage) but requires the Developer to take a risk of future value growth which they may price into their scheme through a higher profit margin.

This section considers how review mechanisms can be negotiated to maximise the delivery of affordable housing in developments. We consider the policy basis for review mechanisms; risks associated with viability reviews; and how review mechanisms might be made more acceptable to developers and funders.

6.1 Policy basis for viability reviews

6.1.1 London Plan

The London Plan 2011 indicates that review mechanisms are an option that local planning authorities may legitimately seek on developments:

“Negotiations on sites should take account of their individual circumstances, including development viability, the availability of public subsidy, the implications of phased development including provisions for re-appraising viability of schemes prior to implementation (‘contingent obligations’) and other scheme requirements” (Policy 3.12 B)

The explanatory notes to the policy go on to explain that:

“3.75 In making arrangements for assessing planning obligations, boroughs should consider whether it is appropriate to put in place provisions for re-appraising the viability of schemes prior to implementation. To take account of economic uncertainties, and in respect of schemes presently anticipated to deliver low levels of affordable housing, these provisions may be used to ensure that maximum public benefit is secured over the period of the development”.

Although not explicitly stated, we assume that the intention of the policy is that individual phases of a scheme are reviewed prior to implementation of each particular phase, rather than implementation of the scheme as a whole. If the scheme were reviewed prior to the implementation of the first phase, the benefits of growth across the bulk of the scheme would be largely lost.

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6.1.2 Lambeth – draft Local Plan

Lambeth’s draft Local Plan makes provision for review mechanisms to be secured on developments ranging in scale and not limited to schemes with multiple phases.

The explanatory text to Policy H2 notes that:

“A review mechanism to obtain additional on-site affordable housing provision and / or financial contributions will be included in Section 106 planning obligations where the quantum or type of affordable housing provision negotiated at planning application stage does not comply with policy requirements, subject to CIL Regulation 122. This is in order to capture any uplift in value due to a delayed planning implementation and / or a phased build out of a major scheme or other changes affecting financial viability”.

The supporting text suggests a potentially more wide ranging use of review mechanisms than suggested by the Draft Further Alterations to the London Plan; “other changes affecting financial viability” could include key appraisal inputs that affect schemes of all sizes, such as sales values.

6.1.3 Wandsworth

Wandsworth do not currently have a policy basis for seeking review mechanisms from developments in their adopted plan or Planning Obligations SPD. This does not necessarily mean that the Council could not seek viability reviews on some schemes, as it could rely upon the London Plan to seek a review on a phased development. However, this will be somewhat limiting in terms of potential benefits, as the majority of schemes in the NEV OA that do not have planning consent already will not be built in multiple phases.

Review mechanisms are designed to facilitate development across the economic cycle, with phases that are developed out in a rising market providing more benefits than those phases delivered into falling markets. Given that the bulk of larger and more term long schemes are located in Wandsworth, the Council may wish to consider whether it should seek fully flexibly reviews (i.e. that allow the affordable housing to both increase and fall) or whether affordable housing levels should not be allowed to fall below an agreed percentage. The latter route recognises that developers have the option of re-negotiating a Section 106 agreement if there are adverse market movements. As an alternative to a reduction in the overall affordable housing percentage, the Council could agree to switch tenures or permit changes to rent levels to mitigate falling private sales values. We understand that a review of the Council’s Planning Obligations SPD is currently taking place.

6.2 Negotiating review mechanisms

There are various types of review mechanism that have evolved to cater for site-specific circumstances as a result of negotiations between developers and local authorities. There are three main variants of review mechanisms as follows:

■ Pre-implementation review;

■ Phase by phase review; and

■ Post-sales review.

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6.2.1 Pre-implementation review

This review would consider changes in the viability of a development between the assessment undertaken prior to grant of planning permission and implementation of the scheme. If there are improvements in viability between these two points, additional affordable housing would be provided on site, or the developer would be required to pay a commuted sum. This type of review mechanism is largely designed to encourage early implementation; if little time elapses between the two assessments, then the main inputs to the appraisal are unlikely to change significantly and no additional affordable housing would be triggered.

A variant to this model is a review that is only triggered if the scheme is not implemented within a defined period from grant of planning permission. For example, if there is not a substantial start on site within twelve months from grant of planning permission, scheme viability would be reviewed and more affordable housing and/or a commuted sum would be provided if values had increased in excess of any cost increases.

6.2.2 Phase by phase review

This type of review is designed for schemes that will be developed over a period of years, typically with outline planning permission followed by a series of reserved matters applications. A baseline viability appraisal is carried out prior to determination of the outline planning application, which will establish the minimum percentage of affordable housing that the scheme can provide.

When the developer submits a reserved matters application, they would also submit a refreshed viability appraisal with sales values and build costs reflective of any changes since grant of planning permission. If viability has improved, the percentage of affordable housing would increase, or the tenure mix could change.

At the second reserved matters application, values and costs would be informed by latest market intelligence, but also by values achieved in the previous phase.

Phase by phase reviews would continue up to and including the final phase. There might be a need to cap the level of on-site affordable housing in this phase, as improvements in viability might result in a level of affordable housing that would be unsustainably high.

6.2.3 Post implementation review mechanism

On single phase developments, it is not possible for a review mechanism to deliver additional on-site affordable housing. A review of viability prior to construction of the development is therefore of limited value in terms of capturing any uplift in sales values when units are sold. This issue has been addressed by Lambeth (and other councils, such as Southwark, Waltham Forest and Hounslow) by adopting a post-implementation review of viability.

On the recently approved Shell scheme, for example, Lambeth agreed a review that is triggered when 70% of private units have been sold. Before any additional sales can be completed, the Developer must submit a viability review. If sales values exceed a pre-agreed ‘break-even’ value (the point at which a standard developer’s profit has been achieved), then a ‘surplus’ is generated, which is split 50/50 between the Council and the Developer.

The later the review takes place (in terms of sales completions), the more reflective the viability review will be of outturn sales values. However, there is clearly a tension between the aim of deferring the review as far as possible into the sales programme and wishing to avoid introducing perverse incentives. For

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example, if the review is triggered by sale of 97.5% of units, the value of the remaining 2.5% of units would need to exceed the amount of any payment due under the mechanism to the Council. If the reverse was true, the Developer may simply retain the last 2.5% of units to avoid making any payment to the Council. Setting the threshold therefore requires careful judgement as to the balance between reflecting outturn values as much as possible, and the need to ensure that any payment due to actually paid.

6.3 Perceived risks associated with review mechanisms

There are a number of perceived and, to an extent, real risks associated with review mechanisms which we consider below.

6.3.1 Developer risk

When planning authorities propose a review mechanism, a frequent reaction from the developer is that they will increase risk. This perception is typically based on misconceptions as to how review mechanisms will operate. If structured appropriately, a review mechanism should allow a scheme to achieve a ‘normal’ level of return before additional affordable housing and/or a payment is triggered. For example, if a scheme generates a 15% developer’s profit with an agreed level of affordable housing, appraisal inputs would need to change such that a 20% developer’s profit was achieved before any additional affordable housing is provided. In this situation, the risk associated with selling the private units is mitigated through a full developer’s profit. It is only when a scheme enters ‘super-profit’ territory that additional affordable housing is provided.

6.3.2 Funding and fundability

Developers often suggest that their funders will be less likely to fund a scheme where the Section 106 contains a review mechanism in comparison to a scheme where there is no such mechanism in place. This is said to be related to resistance from funders, partly borne from misconceptions as to how reviews are intended to operate.

Clearly a route to addressing this issue would be to make review mechanisms a standard feature of section 106 agreements so that – if a matter of course, funders will not have the option of picking and choosing which scheme to fund on the basis of presence or absence of a review mechanism.

Local authorities will also typically cap any payment in lieu due under review mechanisms at a level which is equivalent to the maximum level of affordable housing indicated in local policies (when the on-site delivery and any payment are considered in aggregate). This gives the developer and funder absolute clarity on the maximum potential exposure, noting of course that profits will also have increased substantially if the full payment becomes due. For example, Wandsworth agreed a review mechanism with Ballymore on Embassy Gardens, with the maximum payment being capped at £40 million.

6.3.3 Property Mis-descriptions Act 1991/Consumer Protection from Unfair Trading Regulations 2008

Developers sometimes express concerns that changes to scheme content following sales of units off-plan to occupiers may give rise to claims under the Property Mis-descriptions Act15. This may occur if units are sold based on plans

15 This Act was repealed on 1 October 2013 and consumers of estate agency services need to rely upon the Consumer Protection from Unfair Trading Regulations from this date onwards.

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showing particular locations of affordable housing that subsequently change following a viability review.

This issue could be addressed if developers earmark certain units or areas in a development where units might be converted from private housing to affordable as a result of a viability review. Purchasers of private units would then be aware of the possibility of such changes prior to committing to a purchase.

6.3.4 Potential over-concentration of affordable housing in final phase

In the case of review mechanisms that potentially deliver additional on-site affordable units, there are also potential concerns regarding the quantum of delivery in the final phase. If the final phase in a scheme benefits from considerable growth in sales values, the result of the viability review might indicate that a very high proportion of the phase could be provided as affordable housing. This may be undesirable for both the Council and the developer in terms of creating a mixed and balanced community (although to an extent this would already have been achieved by a mix in the earlier phases).

The Council and the developer are likely to agree that a portion of the affordable housing could be delivered off-site, or through a commuted sum.

6.3.5 Uncertainty on levels of affordable housing

For the authority, a review mechanism may leave a degree of uncertainty as to the actual percentage and mix of affordable housing that the scheme will deliver, depending on how the mechanism is structured. This uncertainty has led some authorities to not pursue the review mechanism route at all, but instead negotiate a higher initial level of affordable housing and accept that any future uplift would accrue to the developer. This has been Wandsworth’s approach over the past few years. The approach adopted by the Council has been to look at appraisals on a ‘with growth’ basis to determine the percentage and/or mix of affordable housing that might be viable in the future and negotiate with the developer on this basis. This might be an option that the councils could consider as an alternative option to a review mechanism in some circumstances.

6.4 Improving acceptability of review mechanisms

As review mechanisms become more commonplace, it is likely that developer and funder understanding will improve. At the current time, much of the resistance to review mechanisms stems from misconceptions and misunderstanding. The councils may therefore wish to invest some time and resource into working with developers to address issues and develop a shared understanding.

A next step in this process would be to work with developers and landowners to establish standard models for review mechanisms that can be tailored as appropriate to the circumstances of each particular development. Whilst there cannot be a ‘one-size-fits-all’ solution, other councils have adopted models that have common principles, but that can be applied to similar development scenarios. Differences between reviews that have been agreed tend to be around trigger points and relative shares of any ‘upside’, rather than the underlying principles. In order to address perceived risks, review mechanisms should adopt common starting principles, as follows:

■ Reviews should not result in any additional on-site provision or payments in lieu until two conditions are satisfied:

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■ firstly, the outturn residual land value of the scheme is no lower than the agreed benchmark land value for the site; and

■ secondly, the scheme should generate a ‘normal’ developer’s return and be entering ‘super-profit’ territory.

■ There should be a limitation on any additional on-site provision or payment in lieu to a level equating to the provision sought by policy. If all parties are aware of the parameters of additional requirements, it should give them more comfort to proceed.

■ Reviews should not expose a developer to any open-ended liability to the local authority.

■ An equitable arrangement for dividing super-profit between the developer and the local authority, such that the developer is incentivised to achieve improved scheme value.

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7 Difficulties faced by developers and RPs in delivering housing in NEV OA This section considers the difficulties identified by RPs and developers in delivering housing and affordable housing on sites in the NEV OA, including the current and future barriers and risks to RPs purchasing and developing in the area. We consider whether there are any mechanisms that could be introduced that might help maintain their interest in purchasing units and sites in the area, whilst recognising the need to balance meeting local needs and meeting OA objectives of delivering mixed and sustainable communities.

7.1 Barriers to entry preventing RPs from purchasing sites

The councils’ brief asks whether particular opportunities could be developed which would enable RPs to purchase land, for example through site assembly, and through “mix and balance of housing for certain sites within development sites”.

It is unlikely in our view that RPs will be in a position to outbid private developers to purchase entire development sites and deliver them as both main developer and affordable housing provider. This is because both the initial land costs and the costs of delivering a scheme are likely to be higher than RPs are typically accustomed to. The scale of investment required is therefore unlikely to meet internal criteria and while boards might take a view on the relative risks and rewards, they are likely to impose restrictions and hurdles that would make any offer uncompetitive in comparison to private developers and investors.

RPs are likely to be in a worse position relative to certain developers and speculative investors who are taking an increasing interest in central London sites. As noted elsewhere in this report, developers and investors are now regularly building sales value growth into their internal appraisals when formulating their offers for sites, but not sharing this information with the local authorities. Boards of RPs are typically more cautious and will only sanction bids that are based on current values and current costs. This places them at a competitive disadvantage in comparison to other potential bidders.

Furthermore, a majority of RPs are relatively inexperienced in delivering high specification, high density private housing in high value developments. Taking on such a development is very risky in the absence of experience of having completed similar schemes elsewhere.

Some RPs might be interested in forming Joint Venture partnerships with developers for delivering schemes in the NEV OA, such as the partnership formed between L&Q and Barratts to deliver the Sainsbury’s scheme. Whilst this was a unique arrangement, it might be a route through which RP involvement could be facilitated, subject of course to developer interest in sharing profits with other bodies.

7.1.1 Difficulties RPs face in delivering mainstream affordable housing products

RPs who are working in the NEV OA and those who are not express similar views on the problems their organisations face in delivering affordable housing in the NEV OA. An RP that is working with a developer who is currently on site report that the councils’ restrictions on affordability for shared ownership homes results in a tension with maximising overall levels of supply. RPs are concerned that low rent levels leave occupiers with little or no incentive to staircase, as their housing costs would increase when taking on an additional mortgage for

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more equity. In addition, RPs believe that they are being asked to “subsidize these homes”, which takes resources away from delivering affordable and social rent homes elsewhere. With regards to the councils’ affordability criteria, the RPs consider that restricting sales on the basis of income bands does not work. Their preference would be for the Council to adopt an affordability test based on percentages of income, which would necessarily mean accepting that households on lower incomes would not be able to afford two and three bed homes. The current systems reportedly creates a “trap” for those that do buy a three bed property, as they will have very little prospect of staircasing, (or the incentive to) and the equity they own in their homes is so low that it will not enable them to purchase a home on the market elsewhere. Clearly however this issue could also be resolved by providing three bed units elsewhere in the boroughs where affordability issues can be more readily addressed.

Other RPs who are not currently actively looking to purchase stock in the NEV OA report that sites they look at might comply with affordability criteria today, but may not do so due to the anticipated rapid growth in market sales values over the medium term.

With regards to intermediate market rents, the RPs acknowledge that this is a tenure that Wandsworth in particular is keen to explore, but “there is a real concern about who will actually be living here in the future”. However, “subsidised PRS [‘Private rented sector’) provides an opportunity for local people to remain and work in the area and is something that we are keen to explore further”. Wandsworth is currently in discussion with developers at Christies Warehouse, Marco Polo and Battersea Power Station on the potential provision of structured PRS housing which first and foremost meets local housing demands. However, this housing would not normally be considered ‘affordable’ unless the rents were discounted from market rents. This would require the provider to pay a lower capital sum to the developer, or for a subsidy to be provided by the public sector.

One of the RPs has modelled the discounted and capped rents included in the 2015- 2018 funding programme prospectus and found that in Wandsworth “we will not be able to deliver discounted rents in most postcodes on any unit types, and for capped rents we will not be able to deliver four beds whilst meeting the benefit cap.” A similar picture emerges for schemes in the Lambeth part of the NEV OA.

Non-developing RPs also point to the difficulties caused by the level of service charges levied on affordable housing units which can be “astronomical as [residents] are contributing to the overall management and maintenance of the wider development”. They are concerned about the adverse impact this has on residents, but also the impact on their offer prices. They also suggest that “even where the service charges are required to be ‘affordable’ within the S106 we do not generally see these being defined or enforced”, although there is no evidence to back this claim. They note that there are potentially issues associated with potential challenges from private flat owners if residents of affordable units are seen to be using services but not paying for them, “but a better balance does need to be struck to ensure that service charges are better managed, enforced and affordable”.

The combined factors above account for the reasons why some RPs “have not been overly keen on taking S106 opportunities in the Nine Elms area to date”. This is clearly associated with the barriers to purchase and making shared ownerhip a workable product in the OA.

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Although the planning system has the ability to suppress the price RPs have to pay developers to acquire new units, this is not always sufficient to encourage more RP players into the area. Some are understood to be put off by the lack of control they have and the “general environment” of a high density, high specification area. Some RPs also prefer to develop and in that way have full control. This could be a factor in attracting a more diverse range of RPs to the area if sites were made available to facilitate RP and/or council development.

7.1.2 Use of council owned land to encourage RPs to investment in NEV OA

Both councils have considerable land holdings around the NEV OA, which are mostly comprised of existing council housing estates. As noted previously, there is a considerable amount of council housing to the south of the NCGM site. The councils could use their land holdings, alongside other measures, to encourage RPs to invest in redeveloping these estates at enhanced densities, using commuted sums from NEV OA sites to provide any gap funding required. This could form part of an investment plan or strategy to deliver the affordable housing target in the NEV OA and to deliver objectives in a more diverse and creative way.

This would address the issues identified by both developers and RPs with regards to affordability, as the RP could provide a higher proportion of rented housing than is likely to be viable on developer led sites. This is because the RP would not have to fund land costs.

A rolling programme of estate redevelopment and intensification would provide opportunities for the Council’s to utilise cross subsidy funding to improve areas and housing, and where appropriate and necessary encourage RPs to commit to a long term role in the NEV OA, but in a context where they would be well placed to manage risk. For example, if commuted sums were lower than anticipated, RPs would be able to manage viability risk by varying the proportions of affordable and private housing on redeveloped estates. In periods where commuted sums were higher than expected, RPs could reduce the percentage of private housing they provide an increase affordable housing provision.

In a similar vein, developers could purchase sites which could be used by RPs to deliver affordable housing obligations relating to other sites.

7.1.3 Flexible approaches to protect against investment risk

In high value areas such as NEV OA, RPs are likely to have concerns around the certainty of their income stream due to high rents and the impact of benefit reforms, which place constraints on the ability of potential occupiers to access higher value housing. Consequently, they will price this risk when formulating their offers to developers and the offer prices are likely to fall. However, if the RPs do not suffer any rent losses, then they will benefit from the ‘risk margin’ built into their appraisals.

There are several options the councils and the GLA could agree with RPs to mitigate risk which would avoid the need for building in risk margins, so that offer prices could be enhanced, as follows:

■ RPs could be given the opportunity to increase rent levels on affordable rent units if total income falls below anticipated levels. The rent increases would be used to offset income losses so that the RP is left no worse off than its anticipated position when it formulated its offer.

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■ Conversion of units from affordable rent to private rent for a single tenancy to offset any shortfalls in income arising from void losses or lower rents required as a result of affordability issues.

■ Sales of limited numbers of units to generate capital receipts to mitigate shortfalls in income. Clearly this would be a last resort as it would be difficult for the RP to reverse this option.

Making flexible approaches available to RPs would give them confidence to enhance their offers to developers and it should be possible to agree a minimum or indicative minimum price that all RPs in the area could sign up to. This would provide greater transparency to developers and more certainty as to the value of affordable housing when calculating their offers for sites. The minimum or indicative minimum price would need to be updated on a regular basis to ensure it is maintaining pace with rent and cost increases. However, achieving the flexibilities outlined above can be difficult within the parameters of specific funding programmes. In addition, the current programme restricts the GLA’s ability to consider site and location specific investment decisions.

7.1.4 Improving access to finance for RPs at low rates

The Mayor of London is currently consulting on a £200 million ‘London Housing Bank’ which aims to accelerate the delivery of large, multiple phase schemes which have planning consent. In return for funding, the developer would be required to let the units at a sub-market rent for a fixed period (likely to be between seven and fifteen years). At the end of the fixed period, the loan would be repaid with interest and the homes could either remain as sub market rented units; converted to market rent units; or sold for owner occupation or to investors. The original funds plus interest would then be recycled into other schemes.

RPs could use this funding to deliver schemes in the NEV OA as an alternative to purchasing developers’ Section 106 units. The reduction in finance costs in comparison to conventional finance options could enhance their competitiveness in comparison to private developers and investors.

This option could also be used by developers if absorption rates in the NEV OA slow down to such an extent that they need to reduce output. Putting units into the London Housing Bank scheme for a limited time period would enable developers to proceed with developments, unhindered by banks’ requirements that a certain proportion of units are pre-sold prior to release of funding.

Clearly the Mayor would need to weigh the option of investing some or all of this funding in the NEV OA relative to other options in London. Given that substantial amounts of funding would be required to deliver schemes in NEV OA, the GLA could opt to use their funds where schemes require lower levels of funding to deliver the same or better outputs.

7.2 Viability issues for developers

Developers have identified a number of issues they face in delivering viable developments in the NEV OA. These issues have an impact on their ability to deliver affordable housing alongside achieving land values that they perceive are required to secure sites from current landowners.

Developers report that “the main obstacle to the delivery of affordable housing is, as with most areas that we operate, one of viability. As you are well aware, the viability of delivering affordable housing is no easier in higher value areas than in low value areas. It is about the relationship between cost and value. In the NEV area we have found that build costs are necessarily very high to

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achieve the density and quality that is essential in order to achieve the values and sales rates needed for schemes to be viable”.

High density development is reported to have its own particular viability issues, in addition to issues associated with build costs. Developers suggest that tower schemes, such as those on small footprints (including the Albert Embankment schemes), are inflexible in the arrangement of cores. Small footprints in tall buildings do inevitably introduce constraints in terms of the ability to provide multiple tenures in the same building without reducing efficiency of the building to an unacceptably low level. If adding additional cores is difficult for design or other reasons, introducing multiple tenures – alongside commercial uses – into a single building is often impossible, making the delivery of mixed tenure affordable housing difficult. Lambeth has recognised these issues on several schemes and has accepted off-site provision at Eastbury House and Prince Consort House.

As noted elsewhere, developers report that the need to maintain a very high quality level of service for the private market, means that service charges are unavoidably high which impacts on affordable housing values and deliverability. An ability for the RP to control service charges is a key factor in improving affordability, but this is less likely to be achievable where the affordable housing is fully integrated into a development (with shared cores and/or shared public/private space).

Developers also report that the land value of most of the NEV OA has typically been driven by valuable commercial uses which were typically in fragmented ownership meaning that large land assembly has been difficult to achieve. This is borne out by the piecemeal approach to development that has been witnessed to date, with owners of small sites bringing forward their own schemes in isolation from their neighbours.

Developers also share RPs’ concerns regarding affordability of shared ownership units. They report that delivering the standard shared ownership model with initial equity stakes of 25% is “increasingly impossible to deliver, and in some cases even at the GLA’s maximum affordability levels”. They suggest that this is because even the minimum equity stake with no rent cannot be made affordable to households on anything but the maximum incomes permitted within the London Plan range.

To address this issue, they advocate the use of Discount Market sale (‘DMS’) and intermediate rented units, which they acknowledge are not without their own deliverability issues, the most pertinent of which being the income required to purchase and rent these units. It is therefore somewhat counter-intuitive that developers should advocate DMS housing, as this would require significant cross subsidy to make it affordable to households targeted by the councils. However, it is likely that the developers envisage a model where they are targeting households at the top of the London Plan household income range, or where they are simply discounting the market value of a unit by a given percentage (and the target income levels are not observed),

Developers advocate the provision of a greater proportion of intermediate housing than indicated by both councils’ planning policy requirements. They suggest that a single affordable housing tenure would enable them to address design issues (i.e. reduce the number of cores required) and allow a more efficient layout of buildings.

They also suggest that the councils will need to be flexible on their affordability requirements for intermediate housing products to ensure that they remain deliverable. This is an inevitable reaction from the development industry, although clearly an approach that might secure a degree of consensus if seen

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as part of an overall delivery strategy. In addition, they encourage the councils to consider a flexible approach to off-site delivery of affordable housing, especially on sites where greater numbers of units can be achieved through on-site solutions.

With regards to future prospects for sales value growth in the NEV OA, developers are concerned about the extent of competition that individual schemes will face in the light of the number of consented units in the area and starts on site. They are also concerned at uncertainty in the medium term with regards to the outcome of the general election due in May 2015 and possible changes to the tax system for high value properties that might follow. The continuing flow of foreign investment into the area is also a concern.

7.2.1 Counter-cyclical measures

Housing markets are inherently cyclical and the NEV OA is unlikely to be immune from any future downturns in demand and pricing. Developers of large schemes will have priced for this risk by building in a developer’s profit into their appraisal. If they are able to build and sell their developments before another market cycle, they will receive their full return. However, if they are selling into a recessionary market, they may not receive the values they anticipated and are unlikely to achieve their full return (or indeed any return), but this risk is part and parcel of residential and commercial development.

During the last housing market recession, the government introduced several measures to maintain as much development activity as possible. Two of the key issues that these programmes sought to address were (a) lack of demand for completed housing units, or housing units in the development pipeline and (b) lack of finance for consented developments to proceed.

In order to address the lack of demand for new housing stock, the government re-directed its grant funding programme to enable RPs to purchase completed developments from developers. In tandem, regulatory standards (including unit sizes) were relaxed to enable RPs to purchase units which did not normally comply with requirements for affordable housing. The purchasing RPs then converted some or all of the units from private to affordable. In other cases, RPs acquired whole development sites and delivered them out as mixed tenure developments.

To resolve the second issue relating to lack of finance for development, the government introduced the ‘Kick Start’ programme which offered developers funding on reasonable terms to address lack of traditional bank finance.

In the context of the NEV OA, such measures are likely to be difficult to implement and require substantial amounts of funding. As noted elsewhere in the report, the difference between market and affordable housing is significant, so converting units from private to affordable would require developers to take a significant write down in value. Levels of grant funding that are currently available would do little to mitigate this write down in value. Furthermore, given that the schemes in NEV OA are high density with high build costs, converting units from private to affordable would be unlikely to be feasible. This is because the value generated by the affordable units would be lower than the development costs and the RP would require substantial subsidy to cover the shortfall.

Other counter-cyclical measures might be able to address these issues. Developers and/or RPs could build out developments and offer the units as rented housing for a period until the market has recovered and demand for housing for sale increases. This model would be different from the normal ‘build to sell’ model, where the developer’s capital and other funding is tied up in

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the scheme during the build period with an exit when the units are sold. An alternative private renting approach would require a capital tie-up for the entire period that the units are held as rented assets. The boroughs and the GLA could assist developers to make this model work by providing limited financial support to cover the additional costs of capital incurred until the units are eventually vacated and released for sale. This could be facilitated by an escrow fund that the Developer and RP draw upon where necessary and returned if not used at the end of an agreed period.

Maintaining current levels of supply in the NEV OA in recessionary conditions is likely to be difficult. This is because developers would typically simply slow down delivery of their schemes so that supply is reduced to meet reduced demand. The only way to prevent this slowdown in delivery would be for public bodies to commit to purchase units if there is insufficient market demand.

7.3 Resolving issues associated with intermediate housing

The Draft Further Alterations to the London Plan (January 2014) states that intermediate housing should be made available to households with incomes of between £18,000 to £66,000 per annum, with the upper limit extended to £88,000 for family homes. The document goes on to state that “if boroughs wish to set eligibility criteria for intermediate housing below these levels, planning conditions or agreements should secure them at the reduced levels for no more than three months from the point of initial marketing and they should then be offered without further restrictions to those who meet the London-wide eligibility criteria as set out in the London Housing Strategy”.

As noted earlier, the councils face a considerable challenge in marrying the objective of improving affordability of intermediate housing with maximising the percentage of units provided. This is because the price for which RPs can afford to acquire the units is normally linked directly to the sales proceeds and/or rental income they can secure from their leaseholders or tenants. The more affordable the units (in terms of household income required to meet the housing costs), the lower the price the RP can pay to acquire the unit. This has a direct knock-on effect on scheme viability and the percentage of affordable housing that can be provided.

Shared ownership works best in terms of meeting policy objectives for affordability where market values are relatively low and service charges are also low. It works least well in high value areas, such as the NEV OA. In light of this, the councils may need to consider alternative approaches, including Discounted Market Sale (‘DMS’), shared equity and rent-to-buy models.

7.3.1 Discounted market sale

DMS is a simple model under which units are sold at a percentage discount to market value. The capital value received by the developer relates directly to the extent of discount applied – the greater the discount, the lower the capital value. If the councils wished to secure housing for the benefit of households on incomes of less than £66,000, the discounts shown in Table 7.3.1 would need to be applied. The table relates to a 75 square metre unit with a market value of £650,000. We assume that households would be able to raise a mortgage that equates to three times their gross income. The table also shows the corresponding capital value for each income band targeted.

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Table 7.3.1: DMS affordability and capital values

Household income

Total mortgage base on 3 x annual gross income

Discount to market value required

Capital value per square metre

£30,000 £90,000 86% £1,200

£40,000 £120,000 81% £1,600

£50,000 £150,000 77% £2,000

£60,000 £180,000 72% £2,400

£70,000 £210,000 68% £2,800

£80,000 £240,000 63% £3,200

Whilst affordability issues could be resolved through the use of DMS, this would result in a considerable reduction in value to the developer in comparison to shared ownership. This is largely because the unit would simply be sold at a discount; no equity would be retained which would ordinarily attract a rent, or be generate additional capital receipts in the future through staircasing.

Furthermore, the councils would also need to consider how this model meets requirements for affordable housing to be retained in perpetuity. This requirement is satisfied in the case of shared ownership through re-investment of staircasing receipts. DMS could be retained in perpetuity through a restriction on re-scale which requires that the owner sells with the discount in place for the benefit of another household nominated by the councils. This arrangement would require a mortgagee in possession clause to ensure the units provide suitable security for mortgage purposes.

7.3.2 Shared equity

Shared equity is essentially a variant to shared ownership, the key difference being that the purchaser is not required to pay a rent on the retained equity. This improves affordability, but would result in a lower capital value in comparison to shared ownership. It is likely that this would need to be a time limited arrangement, with the owner either selling the unit after a pre-determined period, or purchasing the remaining equity. While there are some examples of this model being used elsewhere, it would need to be fully accepted by mortgage providers.

Although the RP might receive capital receipts in the future as the occupier staircases, there would be very little incentive to do so, given that they would incur no costs on the equity they do not own. When staircasing, they would face additional mortgage costs and this may be unaffordable. Consequently, very little value can be attached to the retained equity and this would be reflected in the RP’s offer to the developer.

7.3.3 Intermediate rent

Intermediate rented products face similar affordability difficulties to shared ownership and discounted market sale. Intermediate units typically attract a 20% discount to market rents, but in the NEV OA, the rent levels would still be unaffordable to households on moderate incomes. Substantial discounts to market rents would be required to make the rents affordable to target households, which would in turn reduce capital values.

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7.3.4 Structured PRS housing

Private rented sector housing is developed on behalf of a specialist provider which holds housing for rent as its core business activity. These providers will achieve a return through income growth and capital value appreciation, rather than through speculative building for sale. If developers sell their units to a provider of rented housing, they may be prepared to sell at a discount to asking prices, but they would benefit from certainty and earlier cash receipts than would otherwise have been the case. Arguably, this would reduce the risk associated with the development, as the developer would proceed with the development with a guaranteed sale already agreed. A lower profit would be justified, which would improve scheme viability.

Whilst structured PRS housing meets a clear need for housing, rents are not normally discounted from market rents, so units do not obviously meet any affordable housing requirement by reference to the definition in the NPPF. However, RPs could use PRS housing as part of a ‘bundling’ of housing tenure types that would enable them to achieve a certain level of income and to mitigate risk. PRS housing may also assist RPs in purchasing sites that become available for purchase (e.g. which may be predominantly affordable).

7.3.5 Smaller space standards – adjusting the mix of units

Smaller space standards and adopting an affordable housing unit mix with a predominance of smaller units are likely to maximise provision of affordable housing by minimising the floor area required in a scheme (thus enabling a greater amount of private floorspace and more scope for ‘cross-subsidy’ to the affordable housing tenures). Smaller units currently form only part of the preferred affordable housing provision of the boroughs, as they also seek delivery of a range of unit sizes. However, Lambeth has accepted this approach on several of its schemes in the NEV OA area. Rather than meeting the whole range of identified housing needs, the boroughs could focus on delivering smaller (one and two bed) units, which would meet a segment of need, including enabling down-sizing from family housing.

Smaller space standards could be applied to conventional forms of affordable housing (i.e. affordable rented and intermediate units) and this would reduce the overall floor area relative to private housing. This would reduce the net cost to the developer of delivering the affordable housing, which would in turn improve scheme viability. However, we acknowledge that a move towards smaller units and/or a unit mix which prioritises one and two bed units is not consistent with the requirements expressed in the London Plan.

There are also specific alternative affordable housing models which use different ownership structures combined with small unit sizes to achieve affordable solutions. An example is the ‘Pocket Living’ model, which was has recently secured a £21.7 million allocation of GLA interest free funding to deliver 400 homes in the next three years and 4,000 by 2023.

Pocket Living developments are made affordable by a reduction of unit sizes from a typical 46 square metres (500 square feet) one bed unit to around 37 square metres (400 square feet)16. Combined with zero car parking, smaller unit sizes enable schemes to accommodate more units than would typically be the case.

Unlike some other intermediate for sale products, Pocket Living flats are affordable in perpetuity through restrictions on re-sale contained within the

16 These flats meet the London Plan space standards of 37 square metres for a 1 bed, 1 person flat.

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lease. Leaseholders may only re-sell their flats to purchasers earning up to the London Plan income cap. This effectively links the value of Pocket Living units to increases in salaries, rather than general house price inflation.

Units are generally sold for around £220,000 and made available to households on incomes of around £40,000 per annum, significantly lower than the maximum household income in the London Plan.

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8 NEV schemes and potential GLA investment As noted previously, many of the larger schemes in the NEV OA have already secured planning permission and the levels and tenure of affordable housing have been agreed. It is possible that the developers on these sites might submit applications to vary existing permissions, or might submit entirely new planning applications if this adds value. In these situations and for schemes that do not currently have consent, there is a potential for the GLA to invest in schemes to enhance the provision of affordable housing. However, such investment may not represent value for money in comparison to investment in lower value areas.

There is not a requirement for the GLA to invest to ‘unlock’ sites, as none can be regarded as ‘stalled’. There is adequate developer appetite to bring sites forward in the area as there is currently a degree of confidence about the market in the area. This section therefore identifies the sites that the GLA may wish to consider as candidates for investment in its 2015 – 2018 programme.

8.1 Schemes due to complete during 2015 – 2018

The recent NEV OA ‘Phasing and Investment Study 2013 Update’ gathers information supplied by landowners on their expectations of the timeframes for the delivery of their developments. The study identifies that the following sites will be delivering sites to the market in the 2015 to 2018 period17:

Table 8.1.1: Schemes delivering units to the market in 2015-2018 period (Lambeth)

Scheme name Units to be delivered in 2015/16

Units to be delivered in 2016/17


Sainsbury’s 150 175 174

Hampton House - 253 -

Prince Consort House

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Vauxhall Island - 192 99

Vauxhall Sky Gardens

- 239 -

10-20 Wyvil Road - - 62

38-46 Albert Embankment

- - 120

81 Black Prince Road - 101 -

8 Albert Embankment - - 205

Totals 150 960 692

17 These figures relate to ‘Scenario 2’

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Table 8.1.1: Schemes delivering units to the market in 2015-2018 period (Wandsworth)

Scheme name Units to be delivered in 2015/16



Christies Warehouse, Ponton Road

- 176 175

Market Towers - 88 105

Sleaford St 151 -

Riverlight 190 292 136

Marco Polo - 263 193

Battersea Power Station

- 349 349

Patcham Terrace - - 42

St Mary’s School - - 52

Royal Mail - 135 208

Embassy Gdns 314 178 147

Tidbury Court - 21 -

Totals 655 1,502 1,407

8.2 Funding arrangements to deliver additional affordable housing units

RPs are currently securing finance through traditional routes (conventional bank funding secured against their existing housing stocks) or through bonds (which are secured against the covenant strength of the organisation). Finance through banks is typically charged at between 6% to 7%, depending on the covenant strength of the organisation. Bond issues have recently secured funding at lower rates, with Notting Hill Housing Trust’s February 2014 issue achieving an all-in cost of funds of 4.47% and Southern Housing Group’s January 2014 issue achieving an all-in cost of funds of 4.5%.

The cost of funds can have a significant impact on the value that RPs are able to pay developers to acquire new units of affordable housing. We have tested the impact of a changing finance rate on the capital value of affordable rented units. This analysis is summarised in Table 8.2.1 and is based on a 75 square metre unit.

Table 8.2.1: Impact of finance rate on capital values of rented units

Finance rate Capital value per unit Capital value per square metre

7.5% £98,761 £1,316

6.5% £111,809 £1,491

5.5% £127,612 £1,701

4.5% £146,761 £1,957

3.5% £170,133 £2,268

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If RPs are able to reduce their cost of funds from 7.5% to 4.5%, it would enable them to increase their offer price for affordable rented housing by 49%, or by £48,000 per unit. This per unit enhancement in value exceeds the typical grant amount being provided by the HCA under the 2011 – 2015 grant funding programme.

As an alternative to traditional finance routes or bonds, the councils could supply funding procured from the Public Works Loan Board (‘PWLB’), which we understand offers finance at rates of around 3% - 3.5%. As indicated in Table 8.2.1, a reduction to 3.5% would result in a significant improvement in capital value. This additional value could be used to secure an increase in the overall quantum of units or an alternative mix (either unit or tenure).

In order to protect the PWLB funding, the councils or the GLA (depending on who is the borrower) would need to take a charge over the property in the same way that a bank would normally do when funding a development.

RPs typically secure funding over a 30 to 35 year period, so the councils would need to consider the benefits of tying up capital over this period. Clearly there are other projects that may take priority over funding for affordable housing, even though there are benefits in terms of improvements in levels of affordable housing that can be secured.

However, whilst this approach may be possible for some councils there are a range of factors and competing demands (e.g. supporting estate regeneration, school development) which are likely to mitigate against supporting affordable housing development in this way.

8.3 Terms of funding and indicative grant funding levels

In order to qualify for grant funding, developers would need to produce an appraisal to show viability of scheme with no grant funding. This would form the basis position for analysis of the ‘additionality’ that could be achieved if grant is made available. Grant funding would result in an increase in the amount the RP could pay to the developer which would enhance the scheme’s residual land value in comparison to the ‘no grant’ residual land value. The affordable housing content would be increased until the residual land value was no greater than the original residual land value.

The councils and the GLA would need to set firm ground rules to ensure that grant funding does not simply inflate land values with no demonstrable benefit in terms of additional affordable housing units, or an improved mix, or improved affordability.

We appreciate that is its difficult for the GLA to provide any indication of the amounts of grant that could be made available for schemes in the NEV OA. However, as illustrated in Section 3 of this report, grant funding per unit would need to be relatively high to achieve a meaningful enhancement to the level of affordable housing that can be secured. In our appraisals in Section 3, grant funding of £100,000 per rented unit and £50,000 per intermediate unit would increase the percentage of affordable housing by circa 8.5% of units at current values, but this would decline to 3.4% of units by year 20 (based on the growth assumptions set out in Section 3). This is because the ‘opportunity cost’ of delivering affordable housing would increase year on year over that period. If grant levels were linked to increases in house prices, then the enhanced level of affordable housing would be maintained. However, given that these grant levels are significantly higher than current allocations, it is unrealistic to expect them to be provided in the NEV OA area.

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8.4 Guaranteed income model using grant

In a previous section, we outlined the key features of the NEF ‘Flex’ model, which uses tenure switching (from affordable rented housing to private rented housing) to ensure RPs a degree of certainty on their income stream. This would then enable them to pay more to developers for affordable housing as their risks would be reduced. The obvious disadvantage of this model is the risk to affordable housing supply in future years; in theory, a scheme could flip entirely to private housing if conditions in the affordable housing sector changed significantly, or if market rents fell.

A variant to this model which we do not yet think has been piloted would use grant funding, held in escrow, to cover shortfalls in income when they arise. The RP would provide a mix of affordable rented and private rented housing with an agreed split. If total income received is lower than anticipated income in a particular year, the RP would be entitled to draw down on the grant held in escrow to cover the shortfall. In years when total rents received exceed anticipated income, the RP would pay the surplus into the escrow account. If the entire grant funding is drawn down, any shortfall in income after this has happened would be an RP risk.

We would envisage that the programme would run for a time-limited period (perhaps ten to fifteen years), after which time the escrow account is wound up. If over the period more money is paid into the escrow account than is deducted, the whole amount of grant would be repaid to the GLA (or other body providing grant). Any surplus funding above the initial investment could be paid to the GLA, or split with the RP to encourage them to use reasonable endeavours to maximise income.

We have undertaken some high level modelling to show how the programme might work in practice. The main assumptions are as follows:

■ 100 properties in total, 70 of which are provided as affordable rent and 30 as private rented;

■ Market rents are £250 per unit per week and affordable rents are £125 per unit per week;

■ Total anticipated per annum £847,925; ■ Grant funding held in escrow £1,000,000; and ■ Programme assumed to be wound up at the end of year 15.

The body providing the grant funding would need to consider the set up and governance of the scheme, including how the escrow account would operate. For the scheme to be workable, the boroughs and the GLA would need to consider whether RPs have sufficient appetite for risk beyond the period during which they would be supported by the escrow funds. It is clearly possible that if rents do not match anticipated levels, then the escrow funds would not provide cover to the RP for much more than a limited period of time, after which they would be fully at risk.

8.4.1 Illustrative scenario 1 In Scenario 1, only 90% of anticipated income for the affordable rented units is achieved in years one to six, with income increasing to 93% of anticipated income in years seven to eleven and then 95% of anticipated income in the final year fours. However, market rents increase from year two onwards, which helps to offset some of the shortfall. However, there is still an overall shortfall between years one to six so the RP draws down from the escrow account over this period. From year seven onwards, the combined effect of increasing market rents and improving affordable rent income (albeit still lower than anticipated) generates a surplus. By year 15, the accrued surplus above the

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initial amount of grant invested in the escrow is £93,272, which would be split on a pre-agreed basis between the RP and the GLA. Figure 8.4.1 plots the actual income received against the anticipated income and the balance of the escrow account over the fifteen year period (the underlying assumptions for this and the other illustrative assumptions are provided at Appendix 4). Figure 8.4.1: Illustrative scenario 1

8.4.2 Illustrative scenario 2

In Scenario 2, only 90% of anticipated income for the affordable rented units is achieved in years one to four, with further declines in subsequent years (by year 15, the affordable rent actual income equates to 80% of anticipated income). Market rents received are at the level anticipated, so there is no surplus to help offset the shortfall in affordable rent income. As a result, there are overall shortfalls in each of the fifteen year period and the RP needs to draw down grant every year. At the end of the fifteen year period, the grant fund will have fallen to £59,000.

Figure 8.4.2: Illustrative scenario 2

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8.4.3 Illustrative scenario 3

In Scenario 3, 100% of anticipated affordable rent income is received in years one and two, but then falls to 90% of anticipated income for every year thereafter. Market rents are at anticipated levels up to year nine, so no surpluses are generated to offset the shortfall in affordable rent income. Consequently, the RP needs to draw down on the grant fund to offset the shortfall. From year ten, private rented income increases, but not by a sufficient amount to offset the shortfall in affordable rent income. The RP needs to draw down on the grant fund in each year, so by the end of the fifteen year period, the fund is reduced to £582,560.

Figure 8.4.3: Illustrative scenario 3

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9 Conclusions and recommendations Planning policies in the NEV OA seek to maximise the delivery of affordable housing against a target level of 3,000 homes (subject to review in light of increased overall minimum provision in FALP) but also to provide affordable housing that meets local demand and to encourage communities with a broad social economic profile. In terms of delivering these objectives, there are challenges and tensions which are highlighted in this report, the most significant of which being the impact of improving affordability on levels of supply. Considering provision of a range of housing to households on varying incomes will inevitably impact on overall supply through limitations on the amounts RPs can pay to developers to acquire new units. Achieving the objectives for the area will therefore require compromises between the competing objectives.

9.1 Historical context

In terms of drawing conclusions on the future delivery of affordable housing in the area, it is important to draw upon the historical context to understand the boroughs’ policy positions and developers’ approaches to negotiations.

When the DIFS was first published in 2010, the councils were able to provide a degree of clarity in terms of the quantum of affordable housing they would seek on individual scheme negotiations supported by more generous grant rates and a target in the case of Wandsworth Council which was the minimum provision required even where a negative residual value was identified. This arguably added to confidence and certainty for developers in an area where regeneration attempts had previously been unsuccessful. Regeneration in the area has now started and has gained a momentum that is self-sustaining and supported by improving values, not least due to the Treasury’s significant commitment to underwrite investment in the Northern Line Extension.

It is possible to identify two distinct phases in planning negotiations and the viability of schemes in the area. Prior to 2014, the majority of schemes coming forward through the planning system were technically unviable at the level of affordable housing offered. On the basis of the DIFS report, Wandsworth established a 15% minimum affordable housing target in Nine Elms as a compromise figure, given that the study identified that there was a tension between delivering funding for infrastructure and provision of affordable housing. It is therefore commendable that the councils have been able to secure as much affordable housing as has been agreed with developers. However, with wider market confidence improving and regeneration gathering pace in the NEV OA, more recent schemes are showing significant improvements in viability and can potentially provide an improved offer in comparison to the earlier schemes, despite the likelihood that these schemes will not secure any grant funding allocations.

9.2 Delivery of affordable housing in the future

The planning system must mediate between the public interest (in terms of affordable housing and other obligations), private interests (in terms of land value to the developer) and the overall objective of delivering what is a private sector led and complex regeneration. To an extent, the councils have been working through a ‘historical legacy’ where developers have arguably over-paid for sites (although these factors typically sit outside financial appraisal parameters). The councils have addressed these issues in their negotiations by considering future prospects for growth which has been found to be a reasonable approach given the significant improvements in values that has and will support the delivery of the affordable housing agreed. However, if growth or other key factors cannot be agreed, then the councils might need to consider

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other methods of maximising affordable housing delivery, including review mechanisms which consider outturn values and costs, rather than predictions.

9.2.1 A consistent approach to viability appraisals

In section 3, we discussed different approaches to assessing viability and the key issue of appropriate benchmark land values. Under the market value approach advocated by the RICS, the bulk of any uplift in land value goes to the landowner, by necessarily squeezing the amount of affordable housing provided. Under the existing use value plus premium approach, the uplift in land value is shared more equitably between the landowner and the public interest. We therefore recommend that the councils adopt an EUV plus premium benchmark land value when testing viability of developments in the NEV OA. We would also recommend that this approach is supported by the GLA.

RECOMMENDATION 1: Benchmark land values should normally be based on the recognised Existing Use Value plus premium approach or an Alternative Use Value. It is important to consider the extent to which a ‘premium’ above existing use value is required to incentivise a sale for development. This premium is likely to range from zero to as much as 30%, but should always be based on site-specific factors and characteristics. There is no single premium that can be applied to all sites and all circumstances and site-specific circumstances should be taken into account.

The use of market value as a benchmark which is based on site sales typically building in growth and which ‘take a view’ on compliance with planning policy requirements will result in an inherently unreliable basis for testing the viability of a development proposal.

RECOMMENDATION 2: The councils’ negotiating position would be strengthened if its planning guidance were to set out some guidelines for the principles which will be used to test scheme viability, with one of the key factors being the benchmark land value. Given the change in market values, grant assumptions and development impetus it may also be appropriate for the Boroughs to consider revising affordable housing targets. RECOMENDATION 3: Build costs: developers should be required to submit a scheme-specific cost plan for their proposed development, reflecting scheme-specific characteristics, including design, ground conditions, access issues and site constraints, below ground issues (such as Underground lines, services etc). Cost plans should initially be assessed against benchmark data and reviewed by a cost consultant if costs are found to be significantly higher than benchmarks. Where schemes are to be re-considered, developers should be required to commission their cost consultants to update their scheme cost plans. The updated cost plan may then need to be reviewed by a cost consultant acting for the councils.

This assessment has shown that there is currently an imbalance in the information available to the councils in comparison to data held by developers which to some extent is a result of the “standard” financial assessment models used. Equally, the councils are in receipt of a significant amount of scheme-specific data that could be of assistance in terms of monitoring trends in costs and values.

RECOMMENDATION 4: The councils should consider collecting data on sales values and other key appraisal inputs to help them to understand trends but more importantly to assist in negotiations with developers. It should be noted

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that end of development appraisals are now a requirement of Wandsworth planning policies.

Although there is arguably a lower sales risk in the NEV area, with many schemes selling off plan, it is important to recognise that many schemes involve tall or large buildings which are very difficult to phase – once construction is commenced, it is not possible to stop building and occupy the part that has been completed. There is a long period during which the developer has to commit resources without receiving any income but also the potential for having to sell into a falling market. This introduces a dimension of risk that is unique to large scale and high density schemes such as those in NEV OA.

With regards to future prospects for sales value growth in the NEV OA, developers identify a number of risk factors. Construction costs inflating as development has accelerated over the last two years. Market absorption and the extent of competition that individual schemes will face in the light of the number of consented units in the area and starts on site. Securing sales, particularly off plan, is also inevitably dependent at least in part on investment purchases and that flow of investment continuing. .They are also concerned at uncertainty in the medium term with regards to the outcome of the general election due in May 2015 and possible changes to the tax system for high value properties that might follow.

RECOMMENDATION 5: Modelling assumptions on key appraisal inputs (including developer profit) should not currently change, but with residential units selling very well in the area (with a high proportion of off-plan sales) the councils should keep this under review on the basis of adjustments being made to these assumptions dependent on market conditions.

There are numerous appraisal models available to the councils and to developers to appraise scheme viability. There is an alternative option of producing a bespoke model for use in negotiating NEV OA schemes, if it were considered that pre-existing models are unsuitable.

RECOMMENDATION 6: The GLA’s Development Control Toolkit is not in our opinion a suitable model to appraise the larger and more complex schemes in the NEV OA. The use of the toolkit is not mandatory and we recognise that as it is available for assessing all schemes from the smallest up, there are other models that are more appropriate for complex schemes. A bespoke package is also undesirable as there would inevitably be challenges to the model itself and developers would be reluctant to use it due to unfamiliarity. Argus Developer is widely used and accepted as a satisfactory model for assessing the viability of developments in the NEV OA and we recommend that it is a suitable model for continued use. The GLA should also endorse the use of this model in the NEV OA.

9.2.2 Grant funding to support affordable housing delivery

In section 3, we considered the impact that grant funding might have on the delivery of affordable housing in the NEV OA. One of the most significant issues for delivery is the ‘opportunity cost’ of affordable housing (i.e. the gap between private values and affordable values). As a result of this significant opportunity cost, substantial amounts of grant will be required to deliver additional affordable units.

RECOMMENDATION 7: Provision of grant funding in the NEV OA will yield minimal benefits in terms of additional affordable housing particularly relative to other investment and grant giving opportunities in London. From a pan-London delivery perspective, the GLA is likely to be able to deliver more in lower value

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areas than in the NEV OA. This has particular implications for affordable housing delivery in the NEV OA which are explored below.

9.3 Towards an investment plan for NEV OA

An investment plan for the NEV OA needs to address a number of objectives. Firstly, it needs to support the objectives of delivering against target levels of affordable housing and in effect delivering the maximum reasonable level of affordable housing in the area. Secondly, and balanced against meeting affordable housing targets it needs to help to address the challenges of affordability of the housing provided. Thirdly, it needs to help provide certainty to assist in sustaining the momentum of regeneration activity in the NEV OA, mitigating risk, but also helping the councils share in the benefits of growth.

There are also wider objectives at play that the two Councils and the GLA need to consider and balance. Firstly, both Councils have borough level affordable housing targets which could potentially be supported by the “value potential” available from the NEV OA. Secondly, the GLA have London wide affordable housing targets which could be supported in the NEV OA by even a greater degree of flexibility in relation to some planning requirements (e.g. on affordability, size and unit mix). If this approach were taken the GLA would need to be clear as to how such an approach to affordable housing development assisted in meeting London’s housing needs and in turn how the demands of those on lower incomes would be met elsewhere (by other housing sub markets). Thirdly, both boroughs, developers and the GLA need to consider the benefits of “in” Opportunity Area affordable housing development to assist with place making. However, to achieve what might be identified the “right” mix of affordable housing potentially requires a creative approach which is identified in the following recommendations.

9.3.1 Targeting appropriate needs in NEV OA

The councils face a considerable challenge in marrying the objectives of improving affordability of intermediate housing with maximising the percentage of units provided. This is because the price RPs can afford to acquire the units is normally linked directly to the sales proceeds and/or rental income they can secure from their leaseholders or tenants. The more affordable the units (in terms of household income required to meet the housing costs), the lower the price the RP can pay to acquire the unit. This has a direct knock-on effect on scheme viability and the percentage of affordable housing that can be provided.

Planning policy at both local and London-wide levels seeks to meet the range of housing needs on each site and/or within each location and borough. It is evident that this approach may need to change to help deliver the quantum of affordable housing that the councils and the GLA are seeking across London. Affordability issues in the NEV OA have an acute impact on supply which could be addressed by focusing on a narrower range of needs, with other needs catered for elsewhere within the boroughs, or indeed elsewhere in London. In the NEV OA, this leads to the inevitable conclusion that supply in the area should focus on smaller households, especially given the high density nature of developments in the area which makes the provision of larger unit types difficult.

RECOMMENDATION 8: the boroughs and the GLA should consider whether it is appropriate to seek to meet a range of affordable housing requirements in NEV OA on some sites, or whether requirements for larger family housing would be more appropriately met elsewhere.

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9.3.2 Gifted land, council owned land and commuted sums

One of the most significant issues for developers is the cost of developing affordable housing relative to the receipt from RPs. In all schemes we have assessed on behalf of the two councils, the costs of development significantly exceeds the receipt from the RPs, which indicates that the private housing has to cross subsidise the delivery of the affordable (as well as cross subsidising any loss-making employment floorspace and generating a land value).

An option that might resolve this issue is to free developers from responsibility for direct delivery of the affordable housing obligation generated by their scheme. This would be achieved by developers identifying part of their site and/or purchasing sites (preferably in the local area) which would be transferred at nil value to the Council and/or an RP, which would jointly or solely take responsibility for delivery.

This would also help RPs to address the issue of high service charges which impact on the price they are able to pay for units on developer-led schemes particularly for affordable rent housing.

Both councils have considerable land holdings around the NEV OA, which are mostly comprised of existing council housing estates. As noted previously, there is a considerable amount of council housing to the south of the NCGM site. The councils could use their land holdings, alongside other measures, to invest in redeveloping these estates at enhanced densities, using commuted sums from NEV OA sites to provide any gap funding required. This could not only form part of an investment plan or strategy to deliver the affordable housing target in the NEV OA but have a transformative and positive impact on those neighbourhoods by knitting in those estates more clearly into the overall regeneration of the Area. Such an approach would be dependent on resident consultation and clearly identifying the benefits of improvement and providing new housing in the area.

RECOMMENDATION 9: the boroughs and the GLA could consider approaches that give them and RPs greater control over delivery of affordable housing, allows for a better mix and balance of affordable housing to be delivered and allows the developer to deliver their affordable housing obligation in a way that provides a degree of freedom and flexibility. These approaches might include the use of funding from NEV OA sites to deliver types of affordable housing on land purchased by developers and landowners and/or on council owned land which could not be delivered in the volumes required inside the NEV OA such as family low cost rented and intermediate housing.

9.3.3 Maintaining and supporting regeneration

The councils may wish to consider tenure flexibility as an option to give developers a degree of certainty over market cycles to ensure that regeneration of the NEV OA can continue at its current pace. In return for this flexibility, the councils should reasonably expect to achieve additional levels of affordable housing (and/or payments in lieu) when markets are rising and viability is improving. Review mechanisms are one approach to providing flexibility and assisting developers in maintaining overall output. They also provide a solution to the lack of long term forecasting of sales values, upon which the councils would need to form a judgement if negotiating with a ‘growth model’ approach in order to maximise the delivery of affordable housing.

Tenure flexibility could include exploration of models that provide RPs with portfolios of stock of varying tenures that can be flexed to maintain a pre-agreed level of income. There will inevitably be planning issues that will need to be overcome for such arrangements to be workable in practice.

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RECOMMENDATION 10: the councils with the support of the GLA should consider using review mechanisms as a long term option to secure additional benefits from development during times of improving viability, while offering flexibility when viability is deteriorating (e.g. ability to convert affordable rent to private rent to maintain income). Flexible tenures will require the GLA and the boroughs how to present and accommodate such models in planning policy and CIL terms.

9.3.4 Balancing supply and affordability

The analysis undertaken in this report identifies that, delivering a minimum of 3,000 affordable homes and potentially more as residential targets are reviewed, in the NEV OA will be achieved through a combination of flexibility in requirements (in terms of a package of measures, including on and off-site delivery) and compromises on which segment of need the boroughs target in the area with the support of the GLA.

Maximising the quantum of housing and affordability are objectives that cannot be both delivered in equal measure. It is likely that quantum can only be delivered by focusing affordable housing supply on smaller households. This inevitably leads to wider considerations around the most appropriate ways of meeting different types of need in the two boroughs, but also across London.

If the councils are to deliver their housing policy objectives of meeting a range of housing needs in their boroughs and particularly in the NEV OA, they will have to accept a lower overall quantum of delivery to ensure that housing costs to occupants are at a level that households in housing need can genuinely afford and which delivers the housing mix planning policies require. This issue might lead to a conclusion that boroughs need to work with the GLA to further consider the form and type of housing developed in respect to the conditions that prevail in this case in the NEV OA (a high value and high density build area) relative to what can be achieved elsewhere in London to deliver the quanta and diverse types of housing that the capital urgently needs to deliver to meet London Housing Strategy targets.

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Appendix 1 - Planning status of NEV OA sites

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Appendix 2 - Development appraisal year 1

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Appendix 3 - Shared ownership income analysis

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Appendix 4 - Guaranteed income model assumptions

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