Despite continued efforts by central government to increase housing supply, government policies are not tackling the root cause of the housing shortage- an obstructive planning system and the funding of affordable housing.
Unlike the public sector, the private sector has a more expensive cost of capital and a mandate to deliver risk adjusted investment returns to its banks and shareholders, usually within tight time constraints. Its requirement for a development to be financially viable is therefore often at loggerheads with the public sector’s need to enforce the private sector to build more affordable homes. Yet the current system pits the two opposing parties against one another and then wonders why not enough housing is being built. In general, the inevitable outcome is conflict, procrastination, delay, more delay, increased costs and uncertainty, which together mean less house building, a constrained housing supply and less affordable homes.
Political pressures to avoid building on the greenbelt and focus on higher density development on brownfield sites is deliverable but it is exacerbating this viability gap. Higher density schemes on brownfield land take longer and cost more to build with more development risk. As a result, they require additional compensation to make them viable for the private sector to fund.
Let’s consider some of the facts:
Many brown field sites outside London, either for sale or rental, struggle with viability even without providing any affordable housing. Most parts of the country outside the South East still command property values on apartment blocks of less than £300 psf which doesn’t leave much head room in a development appraisal.
The planning officers, who are not commercially trained, assess viability with their consultants and make recommendations which are too often ignored by councillors who go against their officers’ recommendations. The viability tests are often treated with suspicion and council members are afraid of being seen to neglect their responsibility to provide more social housing in their community.
Viability is a complex commercial equation and no two sites are the same. How can we expect planning officers and elected, but unqualified council members to successfully weigh up the commercial risks and returns of a complex, high rise brownfield development for the purposes of assessing viability?
Structural changes in local demographics and the way that people live, work and play are causing local plans and long held opinions of members and their officers to be out of date and irrelevant. Two recurring obstacles are retail floorspace and parking requirements. The centres of most of our towns and cities need less retail space and the residents of apartment blocks use fewer cars – this is not a passing phase or market cycle, it is structural. Rarely are these issues fully understood and reflected in planning decisions and detrimentally they affect viability.
The solution is to remove the viability test from the planning process.
The public sector has a lower cost of capital, more patient investment horizons and other motivation to building affordable housing, so it should take more responsibility for the supply of new homes. Until this happens the perennial shortage of housing and the problems of affordability will persist.
Matthew Allen is a Principal of Investment and Asset Management property specialist Addington.
This article appeared in Property Week on December 13th 2017.
