For those used to reading planning committee reports on large housing developments, you will be familiar with the paragraphs on the provision of “affordable housing” which say something like this:
“The proposals have been subjected to a rigorous Viability Assessment and this confirms that the provision of affordable homes, whilst below that required by policy, is justified.”
In my own London Borough, we use the Greater London Authorities Viability Assessment model. (Details of which can be found here.) In the last 15 months that I have been a councillor, I do not think one single scheme has been granted consent with an affordable provision in excess of 25 per cent – and we have granted consent for more than 2,000 new homes across a number of major schemes in that time.
We even granted consent for one such scheme on land owned by the Council!
So why does this happen? In simple terms, because the Viability Assessment is driving developers to build higher-rise properties with mostly apartments because that way they can make more money and cover the inflated prices paid for the land they are building on.
The Viability Assessment allows them to make a “reasonable margin” of up to 17 per cent of Market Value.
By building high-rise blocks of flats, they can increase the end value of a scheme well beyond that which could be achieved with streets of terraced houses and low rise apartments. There will be objections, the planning battle will be long, but in the end, all those costs can have a “reasonable margin” added to them and taken as profit.
I’m not against developers making profits. Indeed, I was one and if I hadn’t, I wouldn’t have been a very good one. If businesses don’t make profits, they don’t invest.
If developers couldn’t make a decent return on their shareholders’ – often yours and my pension funds’ – money, there would be no development. So profit is a good thing. (Just to clear that up.)
But if a developer builds high-rise apartment blocks, he has higher costs. In the short term, they will secure a higher market value of the end product, simply by dint of having more end product. So it is no surprise that developers seek to build high-rise, apartment blocks.
So, if a developer pays £150,000 a plot for a site for 20, three bedroom houses with gardens which would sell for £400,000 (not unusual in many London boroughs) the build will cost around £1,500/sqM including fees and finance and the 17 per cent “profit” allowed (based on a market value of £8m) equates to £1.36m. So, with a land value of £3m, there’s £940,000 left over for “social obligations, including affordable housing.
But if they can get consent for 30, three bedroom apartments in, say two eight storey blocks, the numbers look like this. The individual value is a bit less, say £350,000 for each, but that’s raised the market value of the completed units to £10.5m. But as we’re now building higher, costs go up because we need lifts, stairs, a different structure, off-street parking etc etc. So we’re at around £2,000/sqM, making the build cost around £6.0m, again including fees and finance. Profit is higher at £1.785m, so now we can’t even make the land value of £3m and there’s nothing left for the social obligations.
To square that circle, we need to push the build up to 10 stories with 40 apartments at a value of £14m, profit of £2.38m, costs of £8m, land still at £3m and a paltry £620,000 left over for social obligations including affordable housing. Given that anywhere in London where you propose a ten-storey development, outside the very dense core areas, you will face significant objection from residents it is not surprising to find developers pushing this even further – on the basis as they might as well shoot for the stars in the hope of getting to the moon!
All along though, what gets squeezed are local residents who don’t like high-rise development and the provision of affordable housing because high-rise, high-cost development may favour landowners and developers, but it certainly does not help provide affordable homes.
So we have created this toxic mix of high land values because of the way the planning system works, unpopular development because of the way the rules on viability favour – for developers – high-rise, high-cost buildings and squeezed provision of social homes because that is the only thing left in the pot to squeeze.
In London, there is clear evidence for this in the Annual London Plan Monitoring Report, (available here). Since 2004/5 the number of schemes approved with densities higher than the London Plan guidelines has ranged from 53% to 65%. For developments with 15 or more homes, the figures range from 62% to 69%.
The official target is for 95% of all consents to be within the density figures in the London Plan.
Look around and you will see that the buildings which are being built are high-rise, high density, apartment-led schemes. They are being built because they suit planners and bureaucrats obsessed with the delivery of numbers of “units”, rather than being built as homes that people want to live in.