Do viability rules favour developer returns over affordable housing?

Housing charity Shelter's assertion that a "legal loophole" is allowing developers to get out of building thousands of affordable homes across the country every year has received widespread media coverage, but has also split opinion within the planning sector.

Development: Shelter report says that a “legal loophole” is reducing numbers of affordable homes
Development: Shelter report says that a “legal loophole” is reducing numbers of affordable homes

In a report published last week, the housing charity Shelter accused developers of using viability assessments to "reduce numbers of affordable homes in order to offer higher bids for land up-front and guarantee high returns for themselves". The issue largely lies with paragraph 173 of the National Planning Policy Framework (NPPF), it asserts.

According to Shelter, this paragraph of the NPPF has since 2012 defined viability as "competitive returns", which the "industry and planning system interpret to mean at least a 20 per cent profit margin". "This is the viability loophole," the report says. "Developers can cite viability concerns to lower the amount of affordable housing they are required to provide, in order to guarantee them a 20 per cent profit margin and inflate their bids for land."

But does Shelter’s thesis stack up? "There’s no loophole," said Matthew Spilsbury, director at consultancy Turley. For Spilsbury, the viability assessment exercise is "an area of policy and an appropriate check and balance". He said that it is not realistic to expect local plan affordable housing requirements to be appropriate for every site in a district. "Local plan evidence can only go so far," he said. "You are taking a snapshot in time and hoping that it is going to work on every site and that it is future-proof."

Sara Parkinson, planning and development programme director at business group London First, said that the appraisal of viability assessments is done through due process. "When councils make these decisions, they are not being taken on a whim," she said. She added that the process "cuts both ways". Review mechanisms can allow councils to secure higher levels of affordable housing from developers than originally agreed if market conditions improve, she said.

For Gilian Macinnes, of consultancy Gilian Macinnes Associates, the report authors have gone after the wrong target in focusing on developers. "What has the biggest impact is what the site is bought for," she said. Planning practice guidance (PPG) is clear that all sites should be valued to include planning policy requirements, Macinnes said, adding that this does not always happen in practice.

But others take a different view. "Whether or not it’s a legal loophole, it’s certainly a loophole," said Mike Kiely, chair of the Planning Officers Society (POS), which represents local authority planning officers. Kiely described the NPPF’s wording as "inadequate". "The government should have made it clear that land values should reflect policy requirements," Kiely said. "It’s quite clear from the data that developers have been paying over the odds for land. They are willing to do that because they have a reasonable degree of confidence that [the NPPF’s competitive returns policy] will protect their profit level."

The report’s claim that developer profits of 20 per cent have been accepted as a standard, fixed input in viability calculations has also led to debate. Spilsbury said that the 20 per cent figure is generally accepted as a margin of return that developers can work with, but added that this is not to say it is the only figure that gets agreed. Parkinson said that developers’ profit margins vary according to risk and that a minimum threshold on profit can be a lending criteria for banks.

Macinnes said that larger developers will often say that they want 20 per cent profit put in as assumption in a viability assessment, but added that "that’s not necessarily what they’ll get out at the other end". The PPG stipulates that a "rigid approach" to assumed profit levels should be avoided and that the return will vary between projects to "reflect the size and risk profile", she pointed out.

The 20 per cent figure, according to Kiely, has "become a starting position for a lot of developers". But before the last recession the figure was 15 per cent or lower, he said.

Recent appeal decision letters indicate that inspectors are not always upholding this 20 per cent profit level at appeal. Dismissing an appeal (see link below) against a north-west London borough’s decision to refuse a scheme comprising 14 flats, an inspector in August held that a developer profit of 20 per cent is "not unreasonable or excessive". But in September, granting permission for a 93-home scheme in North Yorkshire, another inspector (see link below) "found little to support the argument" that a profit level of 20 per cent is necessary to ensure that the high risks associated with the proposal are compensated. "A profit level of between 18 per cent and 19 per cent … appears to me to be sustainable in this case," the decision letter said.

Nevertheless, in calling for changes to the system, Shelter is pushing at an open door. "The starting point for us is that clearly the system as it is does not work," the planning minister Alok Sharma told the communities and local government select committee last week. He said that the issue is resulting in a "loss of trust in communities". This week, consultation closed on proposals to limit the use of viability assessment at the application stage. The consultation proposed to make clear in the NPPF that, "where policy requirements have been tested for their viability, the issue should not usually need to be tested again at the planning application stage".

Macinnes said that this is how the system is intended to function at the moment, but added that it is not working this way in practice because many local plans present affordable housing quotas as targets rather than expectations and state that these requirements are "subject to viability". "Everything is being subject to a viability assessment," she said. "It’s creating a whole industry."

The 14-flat north-west London borough’s decision can be downloaded below.

The North Yorkshire decision can be downloaded below. 

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