Article written by Property Investor Awards
Since the publication of the Housing and Planning Bill, property investors, developers, planners, and LGAs have been trying to understand the practical implications of the provisions. The Bill is currently sitting at the House of Commons stage, after going to the House of Lords and the Communities and Local Government Select Committee, for further scrutiny. The Government showed its further commitment to “turn generation rent into generation buy” by stinging smaller landlords with an extra 3% of Stamp Duty Land Tax from the 1st April 2016 on the purchase of additional properties like buy-to-lets and second homes, to help fund the building of new starter homes.
The need for clarity
The Chief Executive of the Federation of Master Builders, Brian Berry, told the Communities and Local Government Select Committee “that it would be more profitable for builders to build starter homes than other forms of affordable housing because they would receive up to 80% of their market value”.
However, some commentators believe that further clarity around the new starter home initiative is needed.
Adam Donovan, assistant director at property firm Deloitte Real Estate, said “it is not yet clear whether developers will be required to provide a quota of starter homes on top of local authorities own affordable housing requirements, or whether starter homes will be included within those affordable housing requirements. He added “that any requirement to provide starter homes in addition to affordable rented homes would have an adverse impact on the viability of housing schemes”.
However, Brandon Lewis told MPs that the Section 106 rules are to be amended to allow starter homes to count as affordable housing. “What we are saying is that on reasonably-sized sites we want to see starter homes delivered. How that is done and what mixes of tenures will continue to be a negotiation between the developer and the local authority.”
Property investors and developers are certainly keen to take advantage of the new proposal to redefine affordable housing to include starter homes.
The impact of Section 106 provisions
The underlying message that councils and planners are receiving from the Government is that they will have to accept an element of starter homes in Section 106 agreements for sites over a certain size but would be able to resist a 100% starter homes demand from developers. They may also still be able to negotiate with developers over the provision of affordable homes to rent once the starter homes regime has begun. The Bill, as drafted, also allows the Government to make regulations preventing councils from granting planning permission for residential developments unless the starter homes requirement is met.
Recent figures published state that there are around 1400 housing schemes of over 10 units with planning permission that are currently stalled, approximately 62% of those developments predate April 2010. The section 106 agreements that relate to these stalled developments might be making sites unviable due to being agreed in a different economic climate.
The Growth and Infrastructure Act (2015) introduced new provisions for Section 106 with a new application and appeal process to review planning obligations which relate to the provision of affordable housing. It allows a developer to renegotiate contributions based on lower development viability relative to the conditions that were agreed when planning permission was first granted.
The changes to Section 106 have been welcomed by developers who have sites stalled due to onerous planning obligations. The ability to make a formal application to renegotiate within one month of the new regulations coming into force means that these stalled developments can be re-started promptly.
However, the government is being asked to put in particular measures to prevent existing section 106 agreements from being reopened with a fear that developments could slow down as a result of investors and developers reappraising their schemes.
Richard Ford, a partner at law firm Pinsent Masons, the law firm behind Out-Law.com, said that “existing Section 106 agreements are already being looked at for the purposes of variation in anticipation of starter homes happening; developers are currently running financial models“.
Community Infrastructure Levy (CIL).
Liz Peace, will be leading an independent review of the Community Infrastructure Levy (CIL) to ‘assess the extent to which CIL does or can provide an effective mechanism for funding infrastructure, as well as recommending changes that would improve its operation in support of the government’s wider housing and growth objectives’. The British Property Federation has welcomed the announcement, claiming that CIL had become “overly-burdensome and inefficient” for property investors and developers.
LGAs response to new starter homes initiative
The Council at Milton Keynes has an issue where a large proportion of their Section 106 agreements will deliver over £300 million and they are anxious that developers will be able to walk away from commitments they have entered into.
Their concerns echo questions that other councils are getting to grips with:
- If the development of starter homes on housing sites does generate a ‘tipping point’ in terms of the provision of infrastructure and the development makes no contribution towards that infrastructure; in what circumstances will a local planning authority be justified in refusing the application and what evidence should be used by the Council in making that decision?
- Can a developer introduce starter homes retrospective to an existing consented housing site? The point here is what is to stop a developer with planning permission for a housing development, which is ready to start, or is currently being implemented, deciding not to proceed with their existing planning permission.
- If a developer revises their scheme to include starter homes, the developer may avoid making contributions towards infrastructure and facilities which are generated by the development.”
The Spending Review has addressed one of LGA’s concerns by announcing that councils will be able to keep 100% of the sale proceeds for land they own, and pump back into local services. This should hopefully help to address the issue of housing supply at a council level.
Savills’ recent analysis shows that, over the next five years, 70,000 new households a year will be unable to afford to rent or buy homes at a market rate unless assisted in some way. This means that 350,000 will need some form of housing priced at below market rate by 2020. According to Shelter a starter home costing 80% of market value is out of reach of those on average incomes in the UK.
Housing Associations are pleased the Government announced that a further £4 billion of funding will be provided for 135,000 shared ownership homes.
Interestingly, a report from PricewaterhouseCoopers has projected that by 2025 only around a quarter of 20-39 year olds in England would be owner occupiers, compared to around three quarters of over-55 year olds. As the Starter regime is for those who are 40 years and under it remains to be seen if this projection will be correct by 2025.
Skills shortage in Construction
The recent Royal Institution of Chartered Surveyors construction market survey says that the skills shortage in construction has reached its highest levels since the survey was launched 18 years ago and may cause delays for new builds.
To address this issue, a new clause will be added to section 106 of the Town and Country Planning Act 1990 (planning obligations) “ The Secretary of State may by regulations require planning obligations to include a requirement to offer apprenticeships to local people on sites where 50 or more dwellings are to be constructed.” This may help local employment but may not necessarily address the issue of a skills shortage.
The Chief Executive, Trudi Elliott, of The Royal Town Planning Institute, also told MPs; “with 240,000 planning permissions granted, just 133,000 had been completed or started, there is clear evidence that planning departments are struggling to fully resource pre-application and post permission discussions. She went on to say “a large number of planning permissions have already been granted and the focus should now be on getting them built.”
The Governments Spending Review on the 25th November announced that they will extend loans for small builders to regenerate more “run-down estates”. This has included an investment of over £300 million in delivering at Ebbsfleet, the first garden city in nearly a century.
200,000 new starter homes by 2020 equates to 40,000 per year for the next five years. Property Investors and developers are certainly seeing starter homes as a golden investment opportunity and house-building related stocks have seen more than £1bn added to their value.
However, as Planning expert Matthew Fox of Pinsent Masons, stated: “This debate demonstrates that behind the headlines, many problems arise out of the Housing and Planning Bill as the government, councils, and developers grapple with what delivering ‘affordable’ housing actually means from a practical, legal and policy perspective.”
It might be agreed that smaller landlords and property investors are being victimised at the moment. Having said that, it was Charles Darwin who once said “It is not the strongest or the most intelligent who will survive but those who can best manage change”.