CHANGE AFOOT FOR AFFORDABLE HOUSING AND VIABILITY IN LONDON

The Greater London Authority’s (GLA’s) draft guidance notes on Development Viability and Affordable Housing were released last week. Consultation runs until 24th July, with the final documents due to be issued later in 2023. The two documents will replace the GLA’s 2017 Affordable Housing and Viability Supplementary Planning Guidance (SPG).

Together, the two documents run to 98 pages. We have summarised some of the key changes and potential implications below.

DRAFT DEVELOPMENT VIABILITY GUIDANCE

The draft Development Viability guidance sets out a much more detailed and prescriptive approach to financial viability assessments (FVAs) than has been required under the 2017 SPG.

Benchmark Land Value (BLV)

• Assessments of Existing Use Value (EUV) should include, over at least a 30-year period, “a year-by-year projection of the major repairs/refurbishment costs required by block, informed by a detailed planned preventive maintenance report prepared by an appropriately qualified surveyor”. This is a huge ask.
• Where the EUV is residential, and the existing homes do not meet housing needs in terms of unit sizes, there is a suggestion that a EUV approach may not be appropriate. Instead, an AUV based on a reconfiguration of those units may be more appropriate. This would mainly impact estate regeneration schemes, where EUVs are generally low regardless. However, it would have significant implications where a EUV is based on existing private homes that do not meet modern space standards.
• Where relying on an Alternative Use Value (AUV) BLV, the AUV should be supported by full architectural plans and an elemental cost estimate. Moreover, the applicant should demonstrate that the AUV “would be delivered if the proposed scheme was not granted planning consent”. This is a significant departure from the requirement under the National Planning Practice Guidance (NPPG) for Viability that AUVs merely be shown to be a realistic fallback option (i.e. could be delivered). We query if this is a typo or if it genuinely reflects the GLA’s view.
• For phased schemes, the BLV should be assumed to be drawn down at the start of each phase unless evidence is presented to the contrary. Currently, it is generally accepted that the BLV is drawn down in a single tranche at the start of development, so this would have significant impacts on finance costs in FVAs.

Development Revenues

• Extensive sensitivity testing is expected throughout FVAs covering, for example, revenue and cost growth and a comparison – where relevant – between Built to Rent (BtR) and Build to Sell (BtS) capital values. This is sensible best practice.

Development Costs

• Elemental construction cost plans are to be required for all FVAs. Previously, in accordance with the NPPG, estimated costings from databases such as BCIS have been acceptable. This will have significant implications on the cost and duration of viability negotiations. In particular, this might be difficult for outline applications.
• For BtR, student, and co-living FVAs, a detailed breakdown of operational expenditure (OPEX) should be provided, with reference to comparable schemes. OPEX budgets for operational schemes are rarely available in the public domain, and this requirement may therefore be difficult to satisfy.
• Detailed marketing budgets are expected for larger schemes.
• Costs relating to Rights of Light or asbestos removal cannot generally be included in FVAs; instead, they are assumed to be allowed for within the construction contingency or developer’s return. Such costs can run into many millions of pounds and will therefore need to be fully justified as standalone items.

Residual Land Value (RLV)

• Land comparables should be used to sense-check the RLV. This aligns with the 2020 RICS Professional Standard on the Valuation of Development Property. In practice, it is often difficult to unpick land transactions from one scheme and apply these to another, especially where affordable housing provisions vary between the two.

Review Mechanisms

• Instances where mid-term viability reviews will be required have been made explicit. These will be required for schemes that provide 500 or more units and for every 500 units thereafter (e.g. a 1,000-unit scheme would require at least two mid-term reviews). Mid-term reviews may also be required for estate regenerations or where a scheme’s construction period is over 5 years. As per the 2017 SPG, 100% of the surplus profit identified at mid-term reviews is to be used to deliver additional affordable housing. This, therefore, has significant implications for larger schemes in the capital.
• There is an indication that ‘Force Majeure’ clauses, which we saw introduced regularly as the COVID-19 pandemic unfolded as a means of delaying the trigger date for an Early Stage Review Date, will no longer be acceptable.
• On a case-by-case basis, the GLA may require that review mechanisms be expanded to cover all costs at the time of the review (i.e. not just build costs as per the 2017 SPG). This has the potential to elongate both the drafting and eventual discharge of S106 obligations.
• There is a new requirement that the outcome of all reviews is reported to the Planning London Datahub. This is a sensible means of tracking changes in affordable housing and financial contributions over the course of a scheme’s lifespan.
• The GLA have hardened their position on viability deficits being carried through to review mechanisms. In future, these should only be allowed in exceptional circumstances where agreed by the LPA and GLA. Such deficits are currently commonplace in S106 Agreements to recognise an over-provision of affordable housing at the application stage, often made in response to perceived political pressure. Under the new guidance, applicants will have to work harder to ensure that they don’t pay for any over-provision twice: once at the application stage and again when the review is triggered.
• There are a number of tweaks and additional explanatory notes related to the formulae to be used at the review stage, notably:
  • Formula 3 – additional guidance on its use in instances where a BtS scheme has been delivered as BtR. This is sensible in a marketplace where this switch is commonly occurring.
  • Formulae 5 and 6 from the 2017 SPG are deleted to be replaced by:
    • A new Formula 5 for mid-term reviews; and
    • A new Formula 6 for when a surplus is used to alter affordable tenures. Both are welcome.

Draft Affordable Housing Guidance

The changes here are subtle and serve to modernise rather than overhaul existing guidance.

• A more explicit move away from London’s Affordable Rent in favour of Social Rent (with only the latter now eligible for grant funding).
• A consultation on whether the maximum income cap for intermediate housing should be raised from £60,000 to £67,000.
• A requirement that shared ownership homes aligns with the Government’s 2021 model (e.g. initial income share can be as low as 10%).
• More detailed requirements for S106 clauses governing affordable housing, which provide additional clarity around occupational restrictions and service charges.

CLOSING THOUGHTS

Whilst the final form of the two guidance notes will not be known until after the consultation period ends in July, these drafts clearly show the GLA’s direction of travel. The Affordable Housing guidance is relatively light touch and unlikely to be controversial.

However, the Development and Viability guidance sets out a new framework under which viability is to be assessed. There are several welcome and sensible additions which would better meet current market dynamics, for example, switches from BtS to BtR. However, overall, we suggest that this guidance has the potential to inject significant additional complication, cost, and time into viability negotiations across the capital.

The GLA is alert to this, with its carrot being the Fast Track Route, under which no viability testing is required as long as the relevant, affordable housing threshold (35% or 50%) is met.

Overall, the new guidance will have significant impacts on residential planning applications in London. If you’re interested in discussing the likely impacts of the guidance on your planning application and how they may affect your development plans, please check out our viability brochure and get in touch with one of our team.