Planning Nutshells: The Mayor of London's Affordable Housing and Viability SPG

In August 2017, London Mayor Sadiq Khan, finally adopted his Affordable Housing and Viability Supplementary Planning Guidance (SPG), first published in draft form in November 2016.

The draft SPG was met with criticism from the development industry on a number of fronts, including the proposal to apply an Existing Use Value plus (EUV+) approach to determine benchmark land values in the majority of viability assessments.  Since the draft was published, the appeal decision relating to the proposed redevelopment by Parkhurst Road Limited of a Territorial Army Centre in Islington was issued (for more details, see our publication Planning Nutshells: Benchmark Land Values - Buyer Beware) which effectively endorsed the Mayor's stance, removing any lingering hope that the adopted version would shift considerably from the draft in this regard.

So how far has the adopted version moved from the draft?  Well, in short, not very.  In this Planning Nutshell, we summarise the key provisions of the SPG and identify where significant changes have been made.

The SPG follows the draft in structure, covering four distinct matters, and we look at each of these below.

Background and approach

The SPG opens with an explanation of its rationale and aim.  These are broadly consistent with the draft in that the main driver is securing an increase in the number of affordable homes delivered through the planning system.

To achieve this, the Mayor intends to ensure that the requirement for affordable housing is embedded into land values, the viability process is more consistent and transparent and where more affordable homes are being delivered, the planning system works faster and risk is reduced.

London Boroughs providing schemes of ten units or more are strongly encouraged to follow its approach.

Following in the footsteps of certain London Boroughs (including Islington, Greenwich and, most recently, Lambeth), the SPG provides that as a guiding principle, all information should be accessible, including viability assessments.  Whilst the Mayor will consider whether information should be treated as confidential, this will be judged against the backdrop of information tribunal decisions that have held that the public interest in maintaining confidentiality rarely outweighs the public interest in disclosure.  Therefore, when information is submitted to the Mayor, it will be done so in the knowledge that the Mayor may take the view that it should not be kept confidential and consequently, disclosed to the public.

The threshold approach to viability appraisals

The two-tiered approach

The two-tiered approach to viability assessments proposed in the draft remains, subject to slight finessing.  Where schemes offer 35% of habitable rooms (or more) as affordable housing without public subsidy and meet the relevant tenure split (30% low cost rent, 30% intermediate and 40% to be determined by the relevant LPA), viability assessments will not be required.  This is known as the 'Fast Track Route'.

As a concession in the adopted version, where schemes propose 75% affordable housing or more, as defined by the NPPF, they can be considered under the Fast Track Route whatever their tenure mix, provided the tenure and other relevant standards are supported by the LPA.

In all other cases, including Build to Rent schemes and where affordable housing is being provided off-site or a cash in lieu contribution is offered, viability information will need to be submitted in a standardised and accessible format.  This is referred to as the 'Viability Tested Route'.  

Review mechanisms

For both routes, the SPG advocates the inclusion of review mechanisms in section 106 agreements.  Both routes will be susceptible to an 'Early Stage Review' where an agreed level of progress has not been made within two years of the planning permission being granted or as otherwise agreed with the LPA.  The intention here being to encourage a prompt start on site.

Additionally, Viability Tested Route schemes will be subject to a second 'Late Stage Review', once 75% of the units are sold or let. 

Where a surplus is generated above an agreed level of profit for the developer, 60% of it is to be given to the LPA for the provision of additional affordable housing, up to a cap equivalent to the provision of 50% affordable housing (or the borough's own local plan strategic target).  In the case of Early Stage Reviews, it is expected that the additional affordable housing will be provided on-site, with section 106 agreements identifying the units which could be converted to affordable homes.  For near end of development reviews, it is accepted that in the majority of cases, a financial contribution will appropriate, to be ring-fenced to provide off-site affordable homes.

In the draft SPG, the Mayor was criticised for requiring an agreed benchmark land value to be included in section 106 agreements to facilitate Early Stage Reviews for Fast Track schemes.  This approach has been reconsidered and the adopted version now notes that this information should not normally be required at the application stage, but rather that values and costs will be assessed at the point of the viability review and that indices will be used to assess the change in values and build costs since permission was granted.

Also new for the adopted version are the suggestions that for longer-term phased schemes which follow the Viability Tested Route, LPAs should consider requiring additional updated Early Stage Reviews where a scheme stalls following a previous Early Stage Review and for larger developments, mid-term reviews, triggered by the implementation of phases, should take place.

London Living Rent

In addition to more traditional intermediate products, London Living Rent is encouraged; this being a form of intermediate housing where households with a maximum income of £60,000 are encouraged to save for their own home through low rents (based on one-third of median gross household incomes for the relevant borough) on time–limited tenancies.  RPs are expected to actively encourage London Living Rent tenants into home ownership, including by offering tenants the right to purchase their London Living Rent home on a shared-ownership basis.

Estate renewal

Where schemes include the loss of affordable housing (including estate renewal schemes) the Mayor expects that existing affordable housing is replaced with better quality accommodation, on a like-for-like basis, so there is no net loss of existing affordable housing tenures.  This will have obvious implications for the various local authority estate renewal schemes, including Southwark's Aylesbury Estate, which has received wide-spread criticism for its failure to maintain levels of social rented housing.

This requirement is carried though in the Mayor's draft Good Practice Guide to Estate Regeneration.

Vacant Building Credit (VBC)

Guidance is also provided in respect of the Mayor's approach to applying the highly controversial VBC to London housing schemes.  The SPG notes that as the majority of London's housing is provided on brownfield land already, affordable housing policies are not preventing sites from coming forward.  Therefore in the majority of cases, it will not be appropriate to apply VBC.  

VBC will only be considered on sites where the buildings have been vacant for at least five years and for at least two of those, the buildings have been actively marketed at realistic prices.  Should VBC apply, CIL relief through the vacancy test could not be claimed.

Guidance on viability assessments

Detailed guidance is also provided on the Mayor's approach to viability assessments.  In particular it is noted that:

• Applicants should demonstrate that their proposal is deliverable and that their approach to viability is realistic, so if an appraisal shows a deficit, the applicant should demonstrate how the scheme is deliverable.
• In terms of development values, all assumptions should be justified with reference to up-to-date transactions and market evidence relating to comparable new build properties within a reasonable distance from the site.
• Affordable housing values should be evidenced through calculations of rental and capital receipts.  More information will be sought where the price assumed is significantly higher than typical values.
• In terms of build costs, applicants should submit elemental cost plans that are consistent with the level of detail provided in the drawings in support of the planning application and where possible, these should be benchmarked against other similar projects.
• LPAs are encouraged to use cost consultants to assess scheme proposals and it is suggested that consideration should be given to the scheme design and whether any development costs could be reduced as part of a cost/value assessment.
• Any abnormal costs should be reflected in the land value and it should not be assumed that abnormal costs will be offset at the expense of compliance with the development plan.
• Planning obligations and CIL charges should be included as a development cost.
• A rigid approach to assumed profit levels should be avoided and applicants should not rely on typically quoted levels.  Instead, factors relevant to the scheme specifics should be examined, such as the development programme, whether the scheme is speculative or pre-sold/pre-let and market forecasts.  The application of a review mechanism should not be used as justification for a higher initial profit level.
• The residual land value methodology will be used to determine the underlying land value, whilst the benchmark land value should follow the 'Existing Use Value plus (EUV+)' approach.  Developers will be required to robustly justify an approach based on market value or alternative use value, with the latter typically requiring an existing implementable planning permission for the alternative use.
• However, in the adopted version, additional guidance is provided on when alternative use or market value approaches will be acceptable and this, together with the removal of the commentary which featured in the draft version and provided that where land has been purchased after the adoption of SPG, it is unlikely that any approach other than EUV+ will be justified, demonstrates that the Mayor may be prepared to be a little less rigid in his approach than was first thought

Build to Rent

The Mayor acknowledges that the private rented sector can make a significant contribution to increasing housing supply and that it has distinct economies of scale when compared to the 'main stream' housing market.  Accordingly, to put this distinct sector on an equal footing with the speculative build for sale market, a 'Build to Rent pathway' through the planning system is proposed.  This will comprise five key elements as follows:

• For the first time, a definition of Build to Rent is provided, and to qualify for designation:
• Schemes (or a block or phase within a development) will have to comprise at least 50 units or such lower threshold as the LPA may permit to reflect local housing market circumstances and affordable housing need, this being a new concession in the adopted SPG.
• The homes must be held under a Build to Rent covenant for at least 15 years.
• The units must all be self-contained and let separately.
• Schemes must operate under unified ownership and management and must include on-site management operated by providers who offer systems for prompt resolution of issues and some daily on-site presence and who are a member of a recognised ombudsman scheme.
• Longer tenancies (three years or more) must be offered which include tenant break clauses, operable after giving one month's notice at any point after the first six months' and rent certainty must be provided for the period of the tenancy, with rent increases being formula-linked.
• No up-front fees of any kind must be charged to tenants and prospective tenants, other than deposits and rent-in-advance.
• Any affordable housing within a scheme which meets the above definition can comprise entirely discounted market rent, to allow the Build to Rent developer to own and manage the entirety of the scheme itself.  Schemes which do not meet the definition and that do not provide a clawback agreement in line with the SPG will not qualify for the Build to Rent pathway and will be treated as build for sale development for the purposes of determining affordable housing.  Rent levels equivalent to the London Living Rent are preferred and the provision of affordable housing would be secured in perpetuity via a section 106 agreement.

• The mix and design will comprise the third element, with an acknowledgement that Build to Rent can be suited to higher density development within or on the edge of town centres or near to transport nodes and that demand is likely to be focussed on one and two bed units.  Additionally, the SPG notes that whilst all schemes are expected to meet the minimum space standards (this being a new addition to the adopted version) some flexibility on some design standards may be appropriate, such as the number of homes per core per floor and the number of single-aspect homes.

• Viability forms the fourth element and in this regard, each scheme is expected to be assessed on its own viability with the intention of maximising the supply of affordable homes, preferably at London Living Rent levels.  However, the adopted version notes that as the sector develops, the Mayor will keep under review whether it may be possible to set out a Fast Track Route specifically for developments following the Build to Rent pathway through the planning system.

In terms of viability assessments themselves, the SPG provides that they should recognise the differences between main-stream market housing and Build to Rent, namely the different approaches to profit and sales and marketing, the rate of sale or disposal and the potentially lower development risk involved.

The adopted version also clarifies the approach to be taken to viability reviews, confirming that Early Stage Reviews will be required where an agreed level of progress on implementing the permission is not reached within two years of the date of grant and Late Stage Reviews being required following the occupation of at least 75% of the market units within the development (or such other date agreed by the LPA at a point when market rents have stabilised).The Mayor's preference is for any surplus to contribute towards additional affordable homes in the development. Where this is not achieved, it should be used to provide deeper discounts on the secured affordable housing. Cash in lieu will only be acceptable in exceptional circumstances.

• The final element is management standards, with a requirement for longer tenancies (three years minimum), formula-linked rent increases which are made clear to the tenant before the tenancy agreement is entered into, on-site management (which offers systems for prompt resolution of issues and some daily on-site presence) and a complaints procedure.  The requirement that properties are advertised on the GLA's London-wide portal has been dropped in the adopted version.

Concluding comments

Since the SPG was published in draft form, the Mayor has demonstrated that he means business when it comes to tackling the capital's acute affordable housing shortage.  He has openly criticised the London Borough of Wandsworth's decision to allow the dramatic reduction in the number of affordable homes to be provided at Battersea Power Station, increased the affordable housing offer on a scheme called-in from the London Borough of Barnet relating to the redevelopment of the National Institute for Medical Research's site in Mill Hill from 20% to 40% and routinely applied the draft SPG to other called-in schemes, securing 41% affordable housing at Palmerston Road in Wealdstone and 35% at Hale Wharf in Tottenham Hale.

In his latest call-in decision, relating to a former Homebase store next to Wandsworth Town railway station, the Mayor not only bolstered the affordable housing offer (from 23% to 35%) but also increased the total number of units delivered (from 348 to 385) along with securing an Early Stage Review in the section 106 agreement.

Additionally, there are indications that other London Boroughs are going to implement the same approach.  In early October, the London Borough of Lambeth adopted their own Development Viability Supplementary Planning Document, which notes that viability appraisals will be required where proposed affordable housing provision is below borough targets - 50% where public subsidy is available or 40% where it is not.  It also confirms that such appraisals will be made public without redaction and provides guidance on the information they should contain.

And what of central government?  In its latest consultation ('Planning for the right homes in the right places: consultation proposals'), it stated that it intends to update planning guidance to help make viability assessments simpler, quicker and more transparent and is seeking views as to how best this could be achieved.

Examples given include setting out clearly defined terms to be used, a preferred approach to calculating costs and values (including land values), the format and accessibility of viability assessment reports and detailed processes and methodology.

Whilst this latest consultation does give the development industry a second bite at the cherry in making their case for a less rigid approach, it also suggests that this significantly increased interventionist approach will only spread in scale when it comes to viability as the powers that be throw their full weight at stemming rapidly rising land values and delivering more affordable homes.