News

Councils Demand Cash Contributions Prior to Planning

S106 - IS THE SCHEME STILL VIABLE?

The total value of cash accepted in lieu of affordable homes being built on site has nearly trebled from £23.4m in 2009/10 to £67m last financial year according to a survey1 of 161 English councils. This total will more than double shortly with a single payment by developer Qatari Diar to Westminster Council of £78m in return for reducing the affordable housing on the Chelsea Barracks site.

In London, the GLA London Plan allows planning authorities to seek the "maximum" amount of affordable housing on developments. Planners and developers negotiate and then sign up to S106 Agreements to gain affordable housing on site or a payment in lieu.

Previous guidance restricted affordable housing requirements to sites of fifty units and that has come down progressively to 35, 25 and until very recently 10 or 15 units. The smaller the site, especially if flats the more difficult it becomes to provide affordable units. That, coupled with the erosion of grants to RSL's to provide affordable housing has resulted in developers being more willing to make cash payments.

The economic crisis and mortgage shortage plus this lack of grant has made many previously viable schemes untenable.

Now more and more councils are actively seeking cash contributions for affordable housing on sites of less than ten units. Enfield, for example, adopted their new policy in October 2011 requiring payments to be made in accordance to a set formula laid out in their Supplementary Planning Document (SPD). This is based on assumed property prices and there is a general presumption that the developer will pay. These sums can vary from £15,000 in Edmonton to £75,000 a unit in Grange Park.

Islington has recently been out to consultation for a flat £50,000 charge per unit. Croydon has adopted a Review Mechanism whereby developers pay the Council an agreed share of any uplift from viability GDV to actual sales price achieved. Redbridge have a ready reckoner that shows how much an applicant will pay based on the m2, so a typical three bed house could attract a charge of around £135,000+.

More and more planning authorities now insist that applicants have to submit a viability assessment with the application. This should show the residual value calculated simply as sales revenue less build costs, fees, finance, sales costs and a reasonable profit. The Mayor's CIL also needs to be added in as a cost. Most boroughs and the GLA prefer the viability assessment to be the GLA Toolkit, more commonly known as the Three Dragons. This is then compared with the acquisition cost, existing use value or alternative use value, to show whether the development can financially afford to make any contribution. Paying too much for the land is not a material consideration.

These viability assessments need to be supported by robust evidence and as such will require independent valuations of the existing site or use, assumptions on sales prices or gross development value and an independent analysis of the build cost and any abnormal costs, such as reaching Code Level 4 or 5.

The Toolkit will show whether the development can make any contribution or none at all. The council will appoint its own consultant to analyse and check the report and its figures, usually at the developer's expense. And then the dialogue begins!

Developers and their consultants need to be aware that an application submitted without the Toolkit will either not be registered or there will be an assumption that the applicant will enter into a Unilateral Undertaking to make the payment that has been calculated by the planning authority.

This has come as a bit of a shock to applicants for developments of less than ten units, often because they or their consultants were not aware of the policy change. Often developers have not accounted for this payment when negotiating to acquire the land. Planning authorities are not generally sympathetic to developers paying "too much" for the land. They assume that developers should have taken this cost into account when acquiring a site. Valuers acting for lenders or private clients are also often not fully aware of the exact policy.

Prepared By
Michael Yianni BSc (Hons) Mrics
Managing Director | Belleveue Mortlakes Chartered Surveyors
myianni@bmortlakes.com