The Mayor’s long-awaited ‘Homes for Londoners, Draft Affordable Housing and Viability Supplementary Planning Guidance (SPG) 2016’ has now been published (on 29 November). His new guidance on bidding for grant funding from the £2.171bn Homes for Londoners Affordable Homes Programme 2016-21 has also been published, setting out how housing providers and developers should be considering bidding for grant funding from the Programme.
Turning first to the draft SPG, consultation will close on 28 February 2017. It is important to underline how once finalised, the SPG will supersede section 3.3. (Build to Rent) and Part 5 (Viability) of the March 2016 Housing SPG; the rest of the Housing SPG is to remain current.
The new draft SPG provides guidance on a wide array of affordable housing-related issues, which broadly fall within three main topics:
A threshold approach to viability (Part 2);
Guidance on viability assessments (Part 3); and
Build-to-Rent (Part 4).
A threshold approach to viability
After having been mooted for a few months, the proposed 35% affordable housing (to be measured in habitable rooms) threshold (‘This SPG does not and cannot set a fixed target for affordable housing in developments’) is now ‘official’. The so-called ‘threshold approach’ is meant to incentivise developers to deliver 35% or more affordable housing in their schemes, by not requiring them to submit viability assessments (‘Route B’) if that proportion can be delivered without public subsidy and respecting other requirements (such as tenure mix). The draft SPG underlines that where Boroughs adopt different approaches to delivering a higher average percentage of affordable housing (without public subsidy), their local approach should continue to apply.
When a scheme does not meet the 35% threshold (‘Route A’), viability evidence would have to be submitted, and review mechanisms should apply to ensure that ‘any future uplift in values contributes to the delivery of the maximum reasonable amount of affordable housing’. These review mechanisms would consist of early review, where an agreed level of implementation progress is not made within two years of the permission being granted, and near the end of development, once 75% of units have been sold. If a surplus profit were to be identified, ‘this should be split 60/40 between the local planning authority (LPA) and developer’. Applications which propose off-site or cash-in-lieu contributions, which involve the demolition of existing affordable housing or where the applicant claims the vacant building credit applies would all have to submit viability evidence.
The new ‘Homes for Londoners: Affordable Homes Programme 2016-21 Funding Guidance’ that has been published alongside the draft SPG specifies the incentivising circumstances in which the Mayor will make funding available to guarantee an increase in the number of affordable homes delivered. For Route A schemes (viability evidence is required), grant will apply to all affordable homes if the affordable housing delivered with grant is more than 40%; if the affordable proportion with grant is lower than 40%, the grant will only apply to the additional units ‘over and above the baseline level of affordable housing […] viable on a nil-grant basis’. For Route B schemes (viability evidence NOT required), grant will only be available if this allows the proportion of affordable housing to increase above the nil-grant position to a level of 40% or more.
Further details are provided on the London Living Rent (LLR) – expected to ‘offer tenants (whose combined income is below £60,000) the right to purchase their LLR home on a shared ownership basis’ after a rental period of 10 years – and on intermediate housing products, as well as starter homes (‘the Mayor will provide an update on how any starter homes requirement might affect the details of this SPG once the Government’s position has been made clear’).
Finally, the Mayor’s view on the national Planning Practice Guidance’s Vacant Building Credit (VBC) is that this will not be appropriate in London ‘in most circumstances’, as developments on brownfield land would come forward anyway. The draft SPG also underlines that if an applicant claims a scheme qualifies for VBC, community infrastructure levy relief cannot be claimed through the Regulation 40 vacancy test.
Guidance on viability assessments
Given the importance placed on viability assessments as the means for scrutinising schemes that fail to hit the 35% affordable housing threshold, the draft SPG provides guidance on how these assessments should be undertaken. The draft guidance offers detailed explanations on different appraisal requirements, development values and costs, including:
How abnormal costs should be considered (these ‘are assumed to have influenced the level of premium above the existing use value a land owner would expect’);
Built cost inflation, which should not be included; and
Developer’s profit, which is recognised as being ‘scheme specific’ and that it needs to be justified by applicants, taking account of ‘individual characteristics of the scheme’, the potential risks of the development and comparable schemes.
Furthermore, the Mayor underlines his preference, in terms of viability assessment approaches, for the ‘Existing Use Value plus’ (EUV+) approach, where ‘the benchmark land value is based on the current use value of a site plus an appropriate site premium’, as this is considered ‘the most appropriate approach for planning purposes’. Therefore ‘in most circumstances the Mayor will expect this approach to be used’; alternative approaches will only be considered in exceptional circumstances but a ‘market value approach’ will generally not be acceptable for the Mayor.
Finally, LPAs are invited to consider a more tailored approach to affordable housing for Opportunity Areas and Housing Zones, taking into account the characteristics of sites, while for Strategic Industrial Locations (SIL), the Mayor recommends that ‘when the release of SIL is deemed appropriate (in local plans), it fully contributes to other important planning objectives, in particular new affordable housing’.
The last section of the draft SPG focuses on Build-to-Rent (BtR); the Mayor openly expresses his support for such development and particularly recognises the ‘distinct economics of the sector’, in comparison with more mainstream ‘build for sale’. The draft SPG has therefore defined specific requirements for these schemes.
In recognising that one of the major constraints affecting BtR developments is the lack of an appropriate legislative/ planning framework, the Mayor aims to propose a ‘BtR pathway’, the key principles of which are:
A clear definition of BtR, this being: schemes of at least 50 units, with homes (all self-contained and let separately) to be held as BtR under a covenant of at least 15 years; unified ownership and management, including professional and on-site management; longer tenancies being offered (ideally three or more years); and where the property manager is a member of a recognised professional body;
Recognition of a specific affordable housing type associated with BtR, as all homes in BtR schemes should stay under single management and therefore discounted market rent (‘preferably at London Living Rent levels’) is to be preferred;
The design of schemes, in terms of space standards, should be in accordance with Policy 3.5 of the current London Plan (with the draft guidance however recognising ‘flexibility to consider innovative design where they meet identified need and are of an exceptional design and standard’);
A specific approach to viability, recognising ‘the distinct economics of the sector’ – the threshold approach (Route B) would not apply to BtR schemes and viability information would be required; and
Management standards, as BtR schemes should ‘showcase the best management practice in the rented sector’.
Looking then at the Mayor’s new guidance on bidding for grant funding from the £2.171bn Affordable Homes Programme 2016-21, it provides all the detail for providers and developers considering bidding for grant funding. In terms of timing, funding bids will have to be submitted using the GLA’s new ‘Open Project System’ (OPS) between 31 January and 13 April next year. The assessment of all bids will take into account: deliverability (including consideration of a provider’s delivery output under previous funding programmes, when a bid is for ‘Indicative proposals’ i.e. those just showing the number of homes to start in each financial year); feedback from the London Borough; and Regulator feedback (e.g. on the provider’s business plan).
Announcements of allocations will then be made in May, with the GLA’s ‘partners’ contracted by the end of June, 2017.
With the Programme being for 60,000 starts on-site by 2021, eligibility to bid for grant is limited only to organisations intending to own the completed affordable homes. If properties are to be funded as London Affordable Rent or London Living Rent, the landlord also has to be registered with the Social Housing Regulator. As explained above, BtR developers are expected to provide some units in their developments for sub-market rents. Where set at the level of London Living Rent, providers retaining a legal interest in these homes will be able to bid to secure grant from the GLA, if the landlord of the properties is registered with the Social Housing Regulator (such properties would not have a mandatory right to shared ownership).
Funding bids are also encouraged from London Boroughs.
As regards process, there are three bidding mechanisms: the ‘Approved Provider’ route (available if at least 50% of the provider’s housing starts in London between April 2015 and March 2021 are affordable homes); the ‘Developer-led’ route (for all schemes with less than 50% affordable housing, or with an ‘in lieu’ off-site provision that proposes more affordable homes than required under the s106 obligation); and a route for negotiated grant rates (for supported or specialist housing).
Schemes using the ‘Developer-led’ bidding route are incentivised to provide more affordable homes. Where the percentage of affordable housing proposed is more than 35% but less than 40%, funding is only available for the homes over and above the 35% level. If however grant would enable the level of affordable housing to be viably increased to 40% or more, it can be applied to every affordable home in the project. And if a development could viably achieve 40% or more affordable housing without GLA grant, providers can use the grant-funding to increase the level of affordable provision to an even higher level.