Housing Stock needs to be increased - but how?
24th April 2012
One of the biggest problems is the road to hell being paved with good intentions. At this time of economic austerity, developers are struggling to finance new schemes and face uncertainty over the fortunes of a precarious, unpredictable housing market. As a result, finance is becoming expensive and if schemes are not sold quickly, banks are reluctant to renew facilities and in the event they will, charge punitive arrangement fees.
Often the 'make or break' factor is what is known as a Section 106 agreement. Section 106 (S106) of the Town and Country Planning Act 1990 allows a local planning authority (LPA) to enter into a legally-binding agreement or planning obligation with a landowner in association with the granting of planning permission. These agreements are a way of delivering or addressing matters that are necessary to make a development acceptable in planning terms. They are increasingly used to support the provision of services and infrastructure, such as highways, recreational facilities, education, health and especially in London, affordable housing.
There is no doubt that these agreements are essential for the good of the local area and are socially responsible, however, many LPA's have become inflexible and as such have made many schemes uneconomic or too high risk. In the case of a requirement for social housing, this can result in nothing being built at all.
We acted in the acquisition of a development in leafy area of SE London. It comprised 23 units with a gross development value (final sale price or GDV) of £6.2m. The developer calculated that the scheme would generate a profit 28% GDV allowing for costs and funding assuming sales were generated within 6 months and sought confirmation of what the LPA required for their s106 agreement.
The answer - a payment of £800,000 in lieu of social housing. This reduces the developers profit from £1.74m to £940,000. This is clearly still a lot of money, however it assumes swift sales in market which is nothing but unpredictable. It also results in the scheme being very unattractive to lenders. Interest eats away at the residual profit where sales were slow.
In this case, the developer decided to add to the asking prices of the units in order to secure funding - great in theory, but the effect was to slow sales and reduce interest. Consequently, they needed to rearrange funding 6 months after completion, which the bank reluctantly agreed for a modest fee of £50,000!! The scheme was offered in its entirety to a number of Housing associations, however the offers received left to developer with no more that a break even point.
In another case, we had a scheme in East London which could have been a great development of 40 units and a number of retail outlets. The sums added up until the LPA placed a s106 requiring 20% of the units to be reserved for social housing. The prospective buyer number crunched and suggested that at a level of 10%, the scheme would work. This was declined and to date, the plot remains undeveloped resulting in no social housing whatsoever. Surely, something is better than nothing.
The additional effect of such a high percentage of social housing within a scheme is to reduce the value of the other units. It shouldn't be so, but nevertheless, its an unfortunate fact of 'NIMBY' culture.
We sincerely believe that if the LPA's revisited the s106 requirements more developments would be built and more affordable and social housing would result on the basis 10% of something is better than 100% of nothing. This is particularly relevant at a time when the economy needs stimulus. Developments create jobs and raise revenue for HM Treasury. Larger schemes provide improved infrastructure, commercial and retail units and builds communities as well as creating longer term employment.
We absolutely believe that local authorities and industry need to work together if the housing shortage is to be addressed. For this to happen there needs to be dialogue and flexibility. There is requirement in terms of social responsibility to provide low cost housing however much of this could be created through the Private Rented Sector with incentives for landlords to rent properties to Local Authority tenants and tenants on housing benefit.
Many incorrectly believe there is simple social prejudice, however this prejudice is born from risk rather than discrimination. Where a tenant is found to have claimed housing benefit incorrectly, the onus is on the landlord to repay the rent received where such rent is paid directly, yet that landlord has no means of checking the validity of claim. Further, few tenants can afford to pay a security deposit and LA's are, at best, very slow to make good any dilapidations.
Another issue is the lack of trust between some landlords and Local authorities. Only last week we finally gained possession of a property where a tenant fell into arrears. The tenant was in the early days of an assured shorthold tenancy and sadly lost their job. The local Housing Office advised that they could not be rehoused until they had been evicted. The landlord could only issue proceedings once the tenant was 2 months in arrears, so the rent simply stopped.
Notice was served and a Court date was obtained. At the time of the hearing, the tenant was 5 months in arrears and even when possession was granted, still the LA refused to act until an eviction date was set, some 7 weeks later. This caused the landlord severe financial hardship and costs of £1500 in addition to mortgage arrears. The result of this was the landlord deciding to sell the property resulting in another loss to the number of available rental properties. Why, in such circumstances, could the Council not have simply met the rental payments and reduced the waiting list by one family?
We now hear of Newham's plans to license landlords and Mr Livingstone's intentions to set a 'Living rent' or rent cap as it is cynically known using a subsidised, GLA Lettings Agency. This will inevitably result in yields falling and investments looking less attractive where many landlords will simply decide to sell up. This increase in sales stock may create a reduction in property values forcing many into negative equity. We need balance.
We favour a reduction in the s106 requirement and perhaps introduction of schemes with properties which investors can ONLY rent to local authorities on guaranteed rental schemes and which can be sold on as an investment maintaining stock levels. Cynics claim developers are greedy, it may seem that way. In reality, they have to factor in margins to reduce risk in an uncertain market and allow for finance costs. Irrespective of the motives, if they wont build for whatever reason, a way needs to be found to encourage them to do so. Remember, if the figures dont stack up, you wont get funding - so greed is less of a factor, rather feasibility. Try telling a bank you are happy with a 10% profit.
Drive through Newham, look at the area known as the Royal Docks and you will be amazed at the amount of land lying empty. With flexibility and attention to commercial viability, 1000's of properties could be built making a serious dent in the shortfall of that which is needed. Factor in the myriad of empty unused properties and we can really start to address the issue. This increased supply will also have an impact on rents in a far better way than the rent capping proposed by one of the Mayoral candidates.
If agents, Landlords and Councils work together we are certain the shortage of homes can be reduced for the good of all.