Estate agents are in the second stage of grief - denial that price falls will follow. When they do, the "housing crisis" card will likely be played by developers seeking section 106 reductions. Hold steady. Why? Ask yourself, where should market risk lie? Within the 20 per cent profit margin built into the section 106 agreement on the date of signature, of course. Surely that's the whole idea?
Planning inspector Ava Wood seems to agree. On 2 November she dismissed an appeal by Barratt and Christian Candy (DCS number 200-004-286) to reduce a £15 million payment in lieu of affordable housing on a Thamesside block of 165 units close to the Tower of London. The section 106 was agreed with the Corporation of London in September 2013.
The joint venture company agreed to pay the first instalment of £7.5 million when the section 106 was implemented. Five months later, in February 2014, the joint venture said viability had deteriorated and it could now only manage £7.5 million in total.
Expensive, lengthy negotiations began. They have ended 21 months later, with big bills from lawyers and consultants on top of the initial £15 million. One thing is clear: developers must be wary of applying for a cut in section 106 payments on the basis that viability has reduced over time.
Calculating the benefit to a developer of adding more homes to a project is not so hard. The Department for Communities and Local Government produced a basis for doing the sums in February. They used estimated price per hectare for land with permission for housing per English local authority. The average is £1.96 million per hectare outside London and £18.6 million per hectare inside the M25. The prices are based upon 35 units per hectare outside the capital, containing 3,150 square metres of net sellable space: inside London, 269 units containing 19,722 square metres.
That produces an average land cost of £56,000 for a 90-square-metre house outside London: in the capital, £69,000 for a 74-square-metre flat. The prices are the "free" land bonus a developer enjoys if he or she gets to add more units to an existing permission. There will be arguments about extra servicing costs, fine. But the sums at least provide a basis for a renegotiated section 106.
Prediction - planning departments will be self-funded by 2020. Never has a consumer of local authority services been so willing to see prices go up as have the members of the British Property Federation, who are calling for what amounts to a 50 per cent rise in payments to push fee recovery from 66 per cent to 100 per cent of costs. There will of course be a cost: no dawdling.
Peter Bill is the author of Planet Property www.planet-property.net.
