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The London Plan and achieving London’s housing targets

22 Jul 2019

The London Plan and achieving London’s housing targets

When it comes to housing the Draft London Plan, published in December 2017, has caused major concern for some of the key stakeholders. This concern was recently brought to the fore by the Home Builders Federation in their publication Greater London Economic Footprint of Homebuilding where they have urged the mayor to change the draft. In particular, they call for more detail on how the GLA will facilitate what they agree are the much-needed homes that will house London’s growing population.

London’s population is due to expand to 10.8 million by 2041 from the current 8.4 million. Therefore, just to meet housing demand an additional 66,000 homes per annum will need to be built, compared with the current level of circa 42,000.

On its own this target is challenging but when other requirements of the London Plan are factored in such as the need for 50% affordable homes it becomes obvious that both central and local government will have to pro-actively intervene in a much bigger way than ever before if this aspiration is to be achieved.

The current level of affordable housing being achieved is 24% on conventional housing supply. This means that the current viability model for affordable housing in London is supported by a combination of public grant and private sector margin cross subsidy from 76% of the housing supply (current average grant levels are £70,000/unit for social rented and £30,000/unit for intermediate). There obviously needs to be a structural change in the way in which viability is to be achieved if the 50% is to be realised. The cross-subsidy element from the private sector units will reduce and will need to be balanced by an increase in public grant plus a downward adjustment on land prices.

Also, there needs to be an understanding of the further challenges that increasing the proportion of affordable housing has on the housebuilder business model. Typically, a housebuilder will look to achieve a 15-25% margin return on their development value. Affordable housing in London generally provides no or negative return for the housebuilder (the open market cross subsidises), therefore the higher the weighting the more difficult it becomes for the housebuilder to achieve its returns, on which its funding is quite often reliant.

In addition, development appraisals have always been assessed on a current day cost, current day value basis. The sensible assumption being that the potential increases in costs over the development period are “hedged” by the potential increases in value. The value of the affordable housing is often set at the outset of a contract and therefore has no opportunity to increase in order to cover any increases in cost. When the affordable housing is down at between 20-35% of the development, housebuilders have been historically willing to take a view on this and rely on the cross-subsidy element to cover any shortfall. As the percentage of affordable increases this becomes a lot more difficult and has led to housebuilders having to change their traditional approach to appraising a development by building an element of cost inflation into the model (which can only be a forecast) or trying to negotiate an increasing time-related value to the affordable. This is being perceived as creating more risk in an appraisal, which affects viability, which in turn effects deliverability.

Assuming that the subsidy element can be made up through a reducing land value is optimistic as this will require more certainty in planning policy and time for the re-adjustment to embed.

The impact of the targets are therefore negative on the traditional housebuilding model and therefore underpins my original point that if the London Plan is to be achieved there needs to be more detail on how the GLA will underpin the structural changes required in the short, medium and long terms.

If the total number of homes are to be achieved there needs to be a more forensic analysis of the market conditions, we should be able to determine the total amount of subsidy required to deliver the required amount of affordable homes and then dependent on market conditions be a lot more intelligent in how this subsidy is provided whether via private or public subsidy.

In the longer term there needs to be more certainty around planning policy, it is only with this certainty that the potential longer-term adjustment in land value will be achieved.

The importance of housing to London is much more that just more homes: the HBF estimates that last year housing contributed more than £5bn to the local economy. On a pure pro-rata basis if the numbers were to increase to the 66,000 needed then the contribution increases to £8bn.

The London Plan needs to provide a lot more detail on the “how” than it currently does and in so doing identify where the land will be coming from, how the GLA will ensure the right and appropriate level of subsidy to ensure viability and how it will proactively intervene to ensure achievement.

Richard Jones is head of residential and regeneration at Arcadis

Article & image source: Housing Today

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