Labour’s Nicky Gavron on the dark art of viability assessments.

Are developers gaming the system to avoid making their fair contribution to affordable housing?

Just as more affordable homes are needed, fewer and fewer are being provided by developers. In 2007-08, 1,560 homes were funded entirely through planning obligations. Since then the totals have significantly declined, and last year, only 300 new affordable homes were funded entirely without grant.

And this is all the more disheartening when you consider that public subsidy for affordable housing has fallen since 2010, making private sector contributions through planning obligations even more important.

Some – including the mayor of London – have expressed concerns that developers are using the “dark arts” to calculate how much money they can contribute to pay for affordable housing, calculations known as “viability assessments”.

I have spoken out against the way some developers appear to be rigging viability assessments to inflate their costs and underestimate the value of the scheme on paper, and then claim there is no money left over for affordable housing. This could be done in the full knowledge that the actual costs and the actual values will be different.

At a meeting last week of the London Assembly Planning Committee, which I chair, we gathered some real insight into the issues from our guests. They cited various factors holding back councils in negotiating for more affordable homes:

The National Planning Policy Framework

We heard time and time again at the meeting that the new system of planning, introduced in 2012, emphasised that the level of “obligations and policy burdens” placed on a development should not threaten its viability. The policy framework and the guidance, taken with other government actions such as giving developers the right to force renegotiation, indicates the policy could be weighted in favour of developers.

But as we heard from guests – the interpretation of this is confused, especially alongside other guidance. The process is saturated with uncertainty.

The Mayor’s 20 per cent profit benchmark.

The “Three Dragons” model, provided by the mayor for calculating viability, sets a default profit level of 20 per cent on new developments. However, is it appropriate for the mayor to have such a benchmark in this widely used model? And more importantly, what is an “appropriate” profit benchmark for developments anyway?

Land issues

The price of land is a key issue affecting viability. The flexibility with which affordable housing requirements are applied may have contributed to skyrocketing land values: John Wacher of the London Borough of Islington told us that “almost by definition, the developer that gains the site is the one that has assumed the lowest level of policy compliance with the development plan”. From a developers’ perspective, it is claimed that the easy sites have already been snapped up and the land currently being developed is now much more expensive to build out.

There are also issues about the methodology used to value land. Most developers opt to use “market value” – which generally means that a developer will make the most attractive offer for the land, often based on the expectation of luxury housing with little or no affordable homes. A more appropriate approach might be “existing land use value plus”, which is based on the current use of the land in addition to an increase in value, to provide an incentive to sell the land.

Developing the right skills with limited budgets.

London boroughs need highly skilled staff to be able to negotiate effectively with developers. Councils are often outnumbered and out-skilled by developers who use their deep pockets to hire experts. 

John Wacher highlighted excellent work boroughs are doing together to improve their skills, but with pressures on council budgets, the recruitment and training environment is challenging.

But how do we solve these problems? Guests and community groups who have developed real expertise in this area presented us with some ideas – from making viability agreements more transparent, lowering the profit benchmark, and providing better information sharing and training of staff.

We also heard that the mayor’s own developments on public land holdings offer a real opportunity to show leadership.

The Committee will be exploring whether these ideas will work over the next weeks – but if you have any ideas of your own, please do email us on planningcommittee@london.gov.uk. We would especially like your ideas on how to develop a more holistic approach to viability, with a wider context of wellbeing and a more equitable approach to sharing value.

 Nicky Gavron AM is chair of the London Assembly Planning Committee.