Sadiq Khan entered City Hall in May 2016 on the back of his election promise that half of all new homes built in London will be ‘genuinely affordable’. This 50% target was seen by many as ambitious, particularly when only 13% of all new homes approved in the capital in 2014-2015 were affordable.

The release of the Draft Affordable Housing and Viability SPG entitled ‘Homes for Londoners’ on 29 November 2016 signalled the Mayor’s first sign of a strategy to boost affordable housing delivery. Once adopted, the SPG will sit alongside the Mayors Housing SPG providing additional planning guidance to support the London Plan.

All the headlines about the draft SPG has been the step away from the 50% promise of Khan to a target of 35%, which is considered to be “ambitious and practical”. We are told by City Hall that this reduction is a short-term measure designed to boost recent lagging affordable housing delivery, with the target of 50% still the long-term aspiration of the Mayor.

The 35% Threshold

At the heart of the draft SPG is viability. The Mayor is proposing an affordable housing threshold of 35%, which dictates the amount of viability evidence that needs to be provided with a planning application. This threshold determines whether an application will go down Route A or Route B.

Essentially, schemes that meet or exceed the 35% threshold without public subsidy, meet the specific tenure mix (being 30% low cost rent, 30% intermediate and 40% to be determined by the LPA) and meet other requirements and obligations, will no longer be required to submit any viability information. This is called Route B.

This trade-off is intended to work as an incentive for developers, encouraging them to deliver genuine affordable housing, avoiding the need for protracted and costly viability negotiations.

If Route B could be considered the carrot, then Route A is very much the stick.

Route A is for schemes that are unable to meet the 35% target. These schemes will be required to submit very detailed viability evidence and calculations where, in some circumstances, this evidence will be “scrutinised and treated transparently”.

The draft SPG sets out the specific approach the Mayor will expect from this viability information. This includes addressing build costs, providing a robust justification of profit and emphasises the Mayor’s preference for an Existing Use Value approach to determining benchmark land value.

Get on with it

Comprehensive review mechanisms are also proposed, including an “early review mechanism” to ensure developers get moving as soon as possible.

This acts as an incentive to get on with building the scheme. If schemes have been implemented to a mutually agreed point (via a Section 106 agreement) within two years of the grant of planning permission, they will be immune to any review mechanisms.

If this level of progress has not been reached, the early review mechanism will be triggered. If this review identifies any additional surplus above the agreed level of profit, then the surplus will be split 60/40 between the LPA and the developer. It will be expected that this uplift should be applied to identify additional market homes that can be converted to affordable on site.

This applies to both Route A and Route B schemes. In other words, get on with it.

A second review mechanism is also proposed, with this applicable only to Route A schemes (i.e. those that do not meet the 35% target). This mechanism is a “near end of development review” which will occur when 75% of the homes are sold (or, if they are not sold, when the scheme is three months away from practical completion). Again, if there is any increase in profit this will result in the surplus being split 60/40 between the LPA and developer. This surplus will normally be provided as a payment in lieu towards off site affordable housing provision. Think of this as a clawback provision, acting as an extra incentive to meet the 35% target from the outset.

Affordable Tenure Mix

Tenure mix also comes under the microscope, with the draft SPG providing the Mayors preference for the preferred tenure split of affordable housing in schemes. This includes:

• At least 30% low cost rent (i.e. social rent or affordable rent) with rent set at a level that the LPA considers to be ‘genuinely affordable’, which the Mayor considers to be significantly less than 80% of market rent.
• At least 30% as intermediate products, with London Living Rent (a rental level set at one-third of the local median household income) and / or shared ownership being the default tenures in this category; and
• The remaining 40% to be determined by the relevant LPA.

As part of the consultation exercise currently underway, LPAs are being asked by the Mayor to provide specific guidance on their tenure preference for the remaining 40%.

The final tenure mix information will be published as part of the final SPG document.

What will it mean?

The proposed 35% threshold has been designed to provide a clear and consistent approach to the provision of affordable housing. For developers, the upshot is that if they can meet the 35% target, they can avoid lengthy viability negotiations. However, schemes will still be required to provide the appropriate tenure mix, meet other requirements and be on track within two years of permission being granted to avoid any review mechanisms.

Schemes that are unable to achieve the 35% target will be in for a bumpy ride through planning; requiring strict detailed viability information to be provided, facing the threat of being scrutinised in public and being forced to agree to more onerous review mechanisms. When looking back at the 13% affordable housing delivery of 2014-2015, it is anticipated that many schemes will be subjected to this new regime.

It is important to note, however, that this will not be Development Plan policy immediately. Its teeth may not start to be really bared until the new London Plan is released. Although, there are likely to be a number of London borough authorities keen to put the new approach into action.

City Hall is currently welcoming feedback on the draft SPG, with the consultation period open until 28 February 2017. You can read the document here.