Housing is a fundamental human right that should be available to everyone. With the UK having one of the least accomplished affordable housing markets in the developed world and having the highest rate of homelessness in Europe, it’s clear that action needs to be taken.
And if we do it right, it is a win-win for everyone, not just those looking to purchase a home.
The report on affordable housing published by University College London (UCL) in October last year, got under my skin.
It hit me differently and I felt compelled to research this topic further. UCL estimates that building an additional 72,000 affordable/social houses a year (in addition to 28,000 a year that are currently being built) could save the UK government an estimated £1.5bn a year by eliminating substantial costs related to homelessness. To my knowledge, this is the first time that someone has quantified the possible savings from addressing homelessness, and they are substantial.
The National Housing Federation and Shelter calculate that if the government built 90,000 new social homes, the upfront costs – estimated to be around £11.8bn – would be repaid within just 11 years. We would also see economic boosts, worth many times that initial outlay, in the form of greater employment through the construction work, tax revenues, and reduced pressure on the NHS.
So how can we successfully implement the recommendations of these reports, and where can this move benefit the developers and the economy?
It’s important to start by looking at how development site values are assessed. The final resale value or Gross Development Value (GDV) is the projected value of a scheme once it is completed.
If you deduct the construction cost, all fees and interest, marketing, statutory payments and the required profit margin, then you’re left with the residual site value that developers are prepared to pay for sites.
Most developers aim for a minimum of 20% profit on cost margin, but some would accept as low as 15%. Of course, the individual elements of the equation will be different for every developer, depending on economies of scale, whether they have in-house construction teams, an established relationship with suppliers and so on, so there will be a range of bids for land.
There is one uncertain element of the costs that has been slowing down commencements on sites in recent years. This is the affordable contribution or payment in lieu of the affordable contribution.
While such payment (or affordable % requirement) is clearly stated in the S106, many developers will rely on their ability to contest the affordable contribution requirement using the viability assessment.
Some are successful and indeed manage to reduce or remove affordable requirements, some are not. The process of trying to remove (or reduce) the affordable element can take months while delaying commencement on site, and delivery of much needed housing: private and affordable alike. Equally, some developers would overbid on development sites hoping to win the sites and relying on this ability to re-negotiate the affordable element.
UCL’s recommended target of 40% affordable housing built is difficult to achieve. Bearing in mind that only 150,000 new homes a year are being built in the private sector, the notion that circa 40% of all new build homes should be affordable/social will provide a significant challenge and will require a mindset change to the industry.
Having a 40% affordable ratio will squeeze profits and affect feasibility for these developers who have already purchased speculative sites and are hoping to enhance value by obtaining new planning permission. This may potentially prevent these sites from being developed, hence a careful approach is needed in this respect.
However, having the certainty around affordable requirements may introduce an element of stability and regularise the land market. Inability to challenge/remove the affordable element will mean one thing: the bidding war on sites will have one less variable to rely on and we will save significant time which would have otherwise been wasted on viability negotiation with the council.
There are multiple benefits for developers in building affordable housing schemes:
Secured exit at practical completion de-risking exit uncertainty
Bullet proofing the scheme against supply/demand volatility
Reduced finance costs due to an early repayment or “Golden Brick” arrangement
Reduced or no marketing costs
Early release of profit/capital
De-gearing to senior debt allowing further flexibility and room for restructure, if needed
It’s vital that any initiative shouldn’t punish developers as they are needed to build the homes of the future. Instead, if an element of certainty can be introduced, then a greater proportion of affordable homes can be factored in. A 40% level of affordable housing isn’t unworkable if developers know well in advance when it’s being introduced and can plan for it.
I take great inspiration from the success story of the ‘Housing First initiative’ implemented by Finland. They have achieved a marked decrease (75%) in homeless statistics in the last 30 years and are on a trajectory towards eradicating homelessness by 2027. Finland’s approach is more balanced with a general requirement of 25% of each project to consist of affordable housing, but the concept has been proven successfully.
With the UK General Election taking place this year, it will certainly be interesting to see what the parties say about affordable housing in their manifestos.
Whatever happens, developers and landowners will need time (and, ideally, some subsidy) to accommodate any statutory changes to affordable housing requirements. It must be done right.
Uliana Kuzmis is deputy managing director, development finance, Hampshire Trust Bank
