Analysis

Planning levies could reduce construction of affordable homes

Time and costs of Section 106 agreements and Community Infrastructure Levy are threatening to stifle construction of affordable homes as developers seek to reduce the impact of the agreements and offset the charges by building more profitable housing.

Housing shortages and rising prices will also drive developers towards building where their margins are greatest and not necessarily where affordable houses are needed the most.

House prices rose 7.5% in 2013 according to Halifax estimates and for 2014 the Royal Institution of Chartered Surveyors is forecasting an increase of 8%. This is against the backdrop of housing shortages. Association for Engineering & Consultancy research has revealed that by 2021 the UK will have a housing gap equivalent to 886,000 households putting inevitable further pressure on prices.

"In 2007-8 Section 106 Agreements were worth £4.9bn of which approximately half was for affordable housing."

Section 106 agreements are used as part of the planning process and require developers to pay for improvements such as infrastructure on and off site and affordable housing. These legal arguments between the local authority and developer are negotiated on a case by case basis and can outline a number of obligations for the developer that must be undertaken as part of the proviso of being granted planning permission.

These agreements hold considerable weight as they are generally required to be in place before planning approval is granted and so before development can occur. The value of obligations can be significant. For example in 2007-8 they were worth £4.9bn of which approximately half was for affordable housing.

Agreements are not always easy and cheap to negotiate and the requirements of local authorities can impact considerably on the potential profitability of a scheme. This prompted the development of the Community Infrastructure Levy (CIL).

The levy is not mandatory; the relevant charging authority can choose to employ it or not. Money raised can be used by local authorities to provide, improve or pay for operation and maintenance of infrastructure. The funds may not be used for affordable housing. To put it simply, CIL is collected for investment outside of the development for non-housing infrastructure, while Section 106 remains in place to develop site specific needs.

CIL is calculated in pounds per square metre of gross floor space.

Information on who is charging what is slowly becoming available with Planning Resource’s live tables on CIL rates revealing a wide variation of residential rates from £0 to over £500.

One of the advantages of CIL was to make the process of negotiating contributions towards infrastructure simpler and cheaper to implement thus speeding up development (as opposed to Section 106 agreements). Information on who is charging what is slowly becoming available with Planning Resource’s live tables on CIL rates revealing a wide variation of residential rates from £0 to over £500.

"This would mean 10,000 fewer affordable homes being built"

In reality the interaction between these obligations is not simple, the resulting system is complex and likely to put off investors and developers who don’t have a detailed understanding of the sector.

Section 106 agreements negotiated prior to the recession but still attached to sites frozen in the slump have been seen by Government as holding up a restart of house building.  Government’s own impact assessment suggested that 75,000 homes had been stalled because the sites were deemed no longer viable.

Renegotiation can take a long time and to move things along Government has said that they need to take place within just 28 days. Reduction of affordable housing is going to be a clear target in any renegotiation.

If the percentage of affordable homes on sites was cut in half from 30% to 15% this would mean 10,000 fewer affordable homes being built, a significant number when in England in 2012-13 only 42,830 units were built, itself a drop from  the 60,480 constructed in 2010-11. And on some sites affordable homes could be abandoned altogether.

There is concern that local authorities are facing a losing battle. Reassessing viability is not a simple process as developers will seek to maximise costs and minimise sale prices to reduce their margins to minimise affordable housing provision. Developers ultimately have the power to stall putting the authority under extreme pressure to come to terms given that the market is starting to pick up and there are a wide number of sites across the UK that developers could chose to prioritise instead.

One of the advantages of CIL was to make the process of negotiating contributions towards infrastructure simpler and cheaper to implement, thus speeding up development (as opposed to the previous S106 agreements). It is becoming increasingly apparent however that the variation between local authorities in bands for both retail/commercial and residential development is adding to its complexity, alongside xemptions such as schools and hospitals.

Ove the longer term the incentives within the system for delivering housing remain too mixed and mechanisms too complex. Radical reform is therefore needed and given the scale of the challenge, needs to be bold in its approach. ACE's second housing report proposed a new Land Optimised Value Extraction (LOVE) model for planning, land acquisition and construction. This is designed to overcome the existing disincentives to build by ensuring local authorities, land owners and house builders all benefit from more effective planning, better certainty and suitable timelines as well as a share of th value generated through the process.

Graham Pontin is senior economist at the Association for Engineering & Consultancy

You can read more from Graham on this at http://www.acenet.co.uk/housing-market-analysis-s106-and-cil/1723/6/1/8