Category: Viability

Affordable Housing & Viability: London Leads

Full credit to Sadiq Khan for pressing ahead with his heavily trailed draft Affordable Housing and Viability SPG  despite the Government’s inexplicable delay in publishing the Housing White Paper (whatever its contents prove to be). The deadline for consultation responses to the draft SPG is 28 February 2017. As the draft warns, when the Government’s detailed proposals in relation to starter homes are published, presumably as part of the white paper, there will be knock-on implications for the SPG – after how can the percentages in the draft SPG possibly survive the imposition of a mandatory starter homes top slice?
The SPG will be guidance rather than policy (although I suspect that the distinction may over time prove largely semantic when non compliant schemes come before the Mayor for sign off) and LPAs are “strongly encouraged” to follow it for schemes of ten or more dwellings. The SPG will supersede section 3.3 (Build to Rent) and Part 5 (Viability) of the March 2016 housing SPG. The rest of that SPG remains current. It will inform the drafting of the new London Plan, a consultation draft of which is expected in Autumn 2017. 
What follows will become very familiar I’m sure to all of us negotiating London section 106 agreements. The level of prescription may prove helpful in narrowing the scope for re-inventing the wheel, subject to the attitude that LPAs take to what after all is only draft non-statutory guidance. 
The ‘threshold’ approach
The draft SPG introduces a ‘threshold approach’, whereby schemes meeting or exceeding 35% (by habitable room) affordable housing without public subsidy will not be required to submit viability information. 
Schemes are divided into “route A” and “route B”. 

Route A schemes are:
. applications which do not meet the 35% threshold and required tenure split;

• applications which propose affordable housing off-site or as cash in lieu contribution; 

• applications which involve demolition of existing affordable housing (in particular estate regeneration schemes); 

• applications where the applicant claims the vacant building credit applies. 

Route B schemes are schemes which meet the 35% threshold and required tenure split (and which do not otherwise fall within the route A scheme definition above). Viability appraisal is not required, although there will be an “early review mechanism … triggered if an agreed level of progress is not made within two years of permission being granted” (the agreed level of progress being defined at the outset in the section 106 agreement).
The required tenure split
The required tenure split is:
– “at least 30% low cost rent (social rent or affordable rent) with rent set at levels that the LPA considers ‘genuinely affordable’ (this will generally be significantly less than 80% market rent). As part of [the] consultation, LPAs are being invited
to give guidance on what rent levels they consider to be genuinely affordable if above the benchmarks for London Affordable Rent”.
– “at least 30% as intermediate products, with London Living Rent … and/ or shared ownership being the default tenures assumed in this category. For viability purposes, London Living Rent homes in mixed-tenure schemes can be treated similarly to shared ownership, as it can be assumed that they will be sold on a shared ownership basis after a period of 10 years”.

– the remaining 40% is to be determined by the relevant LPA but must be “genuinely affordable”.

“London Living Rent is a new type of intermediate affordable housing that will help, through low rents on time-limited tenancies, households with around average earnings save for a deposit to buy their own home”. It has “ward-level caps … based on one-third of median gross household income for the local borough. The cap varies from the Borough median by up to 20 per cent in line with house prices within the ward”. The Mayor intends to limit eligibility for London Living Rent and other intermediate rent products to households on incomes of £60,000 a year or less, down from £90,000. 

“[F]or intermediate dwellings to be considered affordable, annual housing costs, including mortgage (assuming reasonable interest rates and deposit requirements), rent and service charges should be no greater than 40% of net household income. 
For shared ownership properties, to ensure mortgage costs assumptions are reasonable, boroughs, developers and registered provides are advised to assume buyers will access RPs, with a term of 25 years and a 90% loan to value ratio. The prevailing average interest rate being offered to lenders based on the terms above should be used to calculate the monthly payments. Generally shared ownership is not appropriate where unrestricted market values of a unit exceed £600,000”. 
Viability appraisal
Viability appraisal will be required to following a prescriptive approach, set out in part 3 of the draft. In relation to some familiar areas for dispute:
– “The price the RP has agreed to pay for each unit should be used in the viability appraisal and should be enshrined in the Section 106 agreement (for phased schemes the price in the Section 106 should be inflation linked)”.

– It should be assumed that all developers will incur generic average finance costs based on standard market rates.

– The IRR approach will not generally be appropriate for schemes of fewer than 1,000 units. 

– The benchmark value will be based on an existing Use Value plus premium (EUV+) approach, rather than the circularity of a market value approach. The Mayor will generally only accept an Alternative Use Value (AUV) approach where there is an existing implementable permission for that use.

The Mayor expects “all information to be made public, including council and third party assessments. Applicants will have the opportunity to argue that limited elements should be kept undisclosed, but the onus is on the applicant to make this case”. 

Review mechanisms
Section 106 agreements for route A schemes will need to require a two stage review mechanism:
– An “early review” where an agreed level of progress with the scheme is not made within two years of the permission being granted. Any surplus to be split 60/40 between the LPA and the developer and any surplus identified to translate into additional onsite affordable housing. “Thus plans should identify which units would switch to affordable accommodation in the event of an increase in viability at this early stage. If the agreed level of progress has been made, this review will not be triggered. All signatories to the Section 106 need to commit to making their best endeavours to fulfil their relevant requirements (setting out key milestones and requirements) to deliver the scheme and account may be had of the market situation at time of review”. 

– A “near end of development review which will be applied once 75% of units are sold. Where a surplus profit is identified this should be split 60/40 between the LPA and developer. The outcome of this review will typically be a financial contribution towards off-site affordable housing provision”. 

– The surplus is applied up to a total of 50% affordable housing.

The review should consider changes in gross development value and build costs using formulae set out in Appendix A to the draft SPG and which should be set out in the section 106 agreement. 
Build To Rent
Specific favourable provisions apply to Build To Rent, defined as complying with the following criteria:
“• a development, or block/ phase within a development, of at least 50 units; 

• the homes to be held as Build to Rent under a covenant for at least 15 years; 

• all units to be self-contained and let separately; 

• unified ownership and unified management of the development; 

• professional and on-site management; 

• longer tenancies offered (ideally three years or more) with defined in-tenancy rent reviews; and 

• property manager to be part of an accredited Ombudsman Scheme and a member of a recognised professional body”.

The Build To Rent restriction should usually be by way of section 106 agreement and should include a clawback mechanism if the units cease to be used for Build To Rent purposes. Two potential, alternative , clawback mechanisms are being consulted upon:
– to seek to recoup the initial loss of affordable housing if the homes are sold out of the Build to Rent sector, based on an appraisal submitted at application stage showing the reduced number of affordable homes possible due to the Build To Rent model. 

– a clawback to secure a total of 35% affordable housing. 

Affordable housing within Build To Rent schemes can be by way of discounted market rent (DMR), managed by the private sector landlord. The Mayor is seeking that the DMR be at London Living Rent. 
Some relaxation of space standards may be acceptable for Build To Rent products, particularly where they are subject to a longterm covenant that they will remain as Build To Rent. 
Differences are recognised in the approach to viability for Build To Rent schemes. Particularly:
“a different approach to profit (often lower than a build for sale scheme); 
• different approaches to sales and marketing; 

• rate of sale/disposal – this will generally be faster for a Build to Rent scheme (generally a build to rent appraisal will assume a development period and then a sale to an investor or operator); and 

• potentially lower risk compared to for sale schemes”. 

Finally, the Mayor is keen to secure the following five management standards:

“- Longer tenancies (three years or more) should be available to all tenants. These should have break clauses for renters, which allow the tenant to end the tenancy with a month’s notice any time after the first six months. 

– Within these tenancies there should be formula-linked rent increases. The LPA should not stipulate the level of rent increases on market rate tenancies, but these should be made clear to the tenant when the property is let and LPAs should ensure they are not set to discourage tenants from taking longer tenancies. Rents should normally be reset on each new tenancy.

– There must be on-site management. This does not necessarily have to mean
full time dedicated on-site staff in every case, as this could be unviable and unnecessary on small schemes. However all schemes need to have prompt issue resolution systems and some daily onsite presence.

– Providers must have a complaints procedure in place and be a member of
a recognised ombudsman scheme. They must also have membership of a designated professional body, such as the British Property Federation or Royal Institute of Chartered Surveyors.

– Finally, properties must be advertised on the GLA’s London-wide portal, in due course, which can be in addition to any advertising the provider may already be undertaking”.

Registered providers/grant funding

Applicants are encouraged to have registered providers on board at pre-application stage. 
The Mayor’s grant funding will only be available for route B applications if it increases the proportion of affordable housing above the nil-grant position to a level of 40% or more.
“The Mayor’s Homes for Londoners: Affordable Homes Programme 2016-2021, sets out how grant is going to be used to increase the amount of affordable housing delivered on developer-led sites above 35%, and to support approved providers deliver programmes with at least 50% affordable housing”. 

Concluding thoughts

In 2015 private sector schemes only delivered on average 13% affordable housing. Will this approach nudge the percentage upwards? This largely depends on whether developers believe that to button down 35%, with no review as long as development is not delayed, and with no need for viability appraisal, is sufficiently achievable or attractive. If it isn’t then it will be business as usual, with viability appraisals submitted to seek to secure a significantly lower percentage. 

How will LPAs react, particularly those inclined to hold out for the 50% target? And how will the imposition of a mandatory proportion of starter homes impact on this nuanced, London-specific approach?

Is the Mayor’s target of 50% now unachievable by flagging 35% as in practice acceptable or can the use of public land and grant funding make any appreciable difference?

Pass. But at least the likely structure of section 106 agreements for route A, route B and Build To Rent schemes (or rather the Mayor’s starting position) is increasingly clear. Which means, if the approaches are commercially palatable, faster permissions and less delay to development (particularly with the spectre of reviews triggered by delayed implementation). And:

Mayor of London: 1

Secretary of State: nil.
Simon Ricketts 1.12.16
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The Latest on Viability Disclosure

Each September LD Events’ annual Viability and Planning conference comes around. My regular slot at the event covers ”transparency in the viability process – access to information” and it’s always interesting how the climate has changed over the previous 12 months. This blog post provides links to some of the key decisions and policy developments, supplementing my 27 September 2016 presentation. 

Information Tribunal

In the same way that previous years have been dominated by the Information Tribunal’s decisions in London Borough of Southwark v Information Commissioner, Lend Lease and Glasspool  (9 May 2014, Heygate Estate) and Royal Borough of Greenwich v Information Commissioner and Brownie  (30 January 2015, Greenwich Peninsula), this year there has been another big Information Tribunal decision: Clyne v Information Commissioner and London Borough of Lambeth  (14 June 2016, Streatham Megabowl).


Clyne is important because the Tribunal go in detail through all of the following elements of the viability appraisal, justifying item by item, their decision to order disclosure:

 • Private residential values broken down by individual unit size/location within the development?

• Affordable housing average values per square foot?

• Gross development value?

• Marketing budget?

• Construction costs?

• Professional fees?

• Projected costs : contingency percentage?

• Projected costs : letting/sale agent and legal fees?

• Benchmark land value?

• Surplus/deficit figure?

• Other : performance measures?

 This was a case where the figure allowed for developer’s profit had already been disclosed.

 Information Commissioner

 There has also this year been a plethora of decisions by the Information Commissioner. Each very much turns on its facts. However, the following basic principles are commonly set out:

 – The four necessary criteria set out in Bristol City Council v Information Commissioner and Portland and Brunswick Squares Association  (24 May 2010) to get to first base ie establishing that the information is commercially confidential for the purposes of Regulation 12(5)(e) of the Environmental Information Regulations 2004:

(i) Is the information commercial or industrial in nature?

(ii) Is confidentiality provided by law? This will include confidentiality imposed on any person by the common law of confidence, contractual obligation, or statute.

(iii) Does the confidentiality protect a legitimate economic interest? Where the arguments refer to the economic interests of a third party, it will not be sufficient for a public authority to speculate on the potential harm attached to disclosure. Instead, the public authority must have evidence that demonstrates the arguments genuinely reflect the concerns of the third party.

(iv) The confidentiality would be adversely affected by disclosure. Although this is a necessary condition, the Information Tribunal in the Bristol City Council case considered that the disclosure of truly confidential information into the public domain would invariably harm the confidential nature of that information. As such, if the preceding three stages of the test are fulfilled, it will follow that the exception is engaged. Where this is found to be the case, a public authority must next go on to assess whether the balance of the public interest required disclosure

– It is not sufficient that harm “might” be caused by disclosure. It is necessary to show that on the balance of probabilities it would be caused.

– Those resisting disclosure on the basis of the harm that would be caused need to show a specific link between precise categories of withheld information and the stated harm.

– Detailed consideration as to whether the public interest in maintaining the exemption is outweighed by the public interest in disclosure.

 These are some of the decisions from the last 12 months:

Sweets Way Estate  (Barnet, 9 August 2016) – disclosure.

Doone  (East Hampshire, 16 June 2016) – disclosure.

Aylesbury Estate  (Southwark, 25 April 2016) – disclosure. 

Bishopsgate Goodsyard  (Tower Hamlets, 22 March 2016) – disclosure.

Heygate Estate  (Southwark, 15 February 2016) – redactions of DVS reports upheld equivalent to what was withheld in Glasspool, ie proposed commercial values, financial gearing rates, base inflation percentages for the delivery period set against assumed regeneration inflation figures, cost analysis summaries and construction costs. 

Tuke School, Peckham  (Southwark, 13 January 2016) – overage provisions in sale contract withheld.

 Chase Farm Hospital site  (Enfield: 9 December 2015) – withheld: forecasted residential land sale receipts and assumed value of land associated with a new school. Sensitive negotiation position of NHS Trust.

Brentford FC new stadium  (Hounslow: 22 October 2015) – all disclosed except specific appraisal information relevant to subsequent negotiations.

 Silver Hill  (Winchester, 17 September 2015) – withheld: development value of individual elements of the scheme, breakdown of individual costs and resultant net development value and profit, estimated rental value of commercial property, percentage of estimated rental values which the proposed ground rents would represent, budget for acquiring third party land, estimated construction costs for individual blocks, letting and marketing costs, interest rate on financing.

 London boroughs turning up the heat

Ahead of any updated London-wide guidance from Sadiq Khan (and his promised team of viability specialists), different boroughs are taking different approaches. For example the Hounslow local validation list  October 2015 and Greenwich local validation list  January 2016 both now require unredacted viability appraisals, which will be publically available. Other boroughs have been adopting development viability SPDs, for example Islington’s January 2016 SPD  and Southwark’s March 2016 SPD  , both of which require justification for exempting any elements of an appraisal from disclosure. Other boroughs take a more traditional approach to treatment of commercially sensitive material – who knows, perhaps even heeding the advice at paragraph 4.3 of the RICS guidance on financial viability in planning  :

 “Pre-application discussions usually proceed on the basis of treating commercial information provided by a developer (applicant) or their consultant as confidential. In order to encourage openness and transparency in the viability process both at pre- and post- application, it is also often the case that the viability reports submitted to a local planning authority are required to be classified as confidential in part or as a whole. This is to encourage the applicant to disclose the maximum amount of information, which can then be reviewed and reported upon. LPAs should therefore be asked to treat and hold this information on a similarly reciprocal basis and respect that disclosure of confidential information could be prejudicial to the developer (applicant) if it were to enter the public domain. Information will usually be disclosed to the LPA adviser but not to the general public as it may be commercially sensitive.”

 Simon Ricketts 26.9.16

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