Planning guidance on affordable housing quotas in private schemes has got developers and contractors scratching their heads and crunching their numbers. Here, Davis Langdon & Everest eases their pain …

The availability and quality of housing has a significant impact on people’s lives, affecting choices of work and transport needs, as well as the quality of life. With rates of household formation continuing to increase, housing demand stimulated by the buy-to-let market, and housing supply remaining largely static, there are significant shortages of suitable housing in areas of population pressure. This is reflected in property prices, where in London, according to building society Nationwide’s indices, prices increased 149% between 1995 and 2002.

The steep increase in house prices have hit non-homeowners hardest, and a growing proportion of the population is being priced out of the market. At the same time, along with overall output, the production of affordable housing has fallen, with fewer than 20,000 units completed in 2002, required to address a total housing need backlog of 450,000 households.

These issues are not unconnected. Since the introduction of the revised PPG3 in 1999, the development process has become much more complex, dealing with brownfield sites, higher proportions of affordable housing, mixed-use schemes and so on. Development now involves longer timescales, and greater investment of capital and resources together with the legacy of the continuing management of mixed-use communities. As illustrated in the initial findings of the Barker Review, published in October 2003, these pressures are making a major contribution to the current fall in housing output. With an annual shortfall of between 15,000 and 40,000 homes, this is a serious issue for the economy. However, with only £450m of committed public investment up to 2006, the government’s Communities Plan does not appear to have enough resources to progress quickly, and a step change in how we deliver housing to meet need is required.

Market forces

Market forces in housing are complex, driven by incomes and house prices, demographics and social change, and economic factors including employment and consumer confidence. Current factors affecting the UK housing market include:

  • A forecast increase in the number of households by 4.3 million by 2020
  • Net population growth in London and the South-east. London’s population, which fell until the 1990s, is now forecast to increase 700,000 by 2020
  • Medium-term expectations for continuing growth in real earnings and relatively low inflation and interest rates
  • Increasing numbers of single and two-person households – 80% of new households are single person
  • Increasing demand for urban living in London and in regional cities
  • Growing affordability gaps – only 37% of households can currently afford to buy property – compared with 46% in the late 1980s
  • Large numbers of households without self-contained permanent housing – more than 450,000, mostly in London and the South-east.

Despite rising prices, the supply of new housing into areas of high demand has not increased significantly. Housebuilding is a high risk enterprise and developers will take a conservative approach, in order to avoid being exposed to a falling market. However there are a wider range of factors that have combined to make house building more complex and risky and the market less responsive to high levels of demand:

  • Planning guidance. PPG3’s revised standards, designed to prevent the development of low-density suburban sprawl, also create significant tensions between the need for housing, its location, cost and development value and the speed of delivery. Not only is the system more complex, but the number of planning refusals for major developments has increased to 25% since the introduction of the new guidance.
  • Affordable homes provision. The private sector has become a major developer of social housing, with quotas rising to 50% in locations such as Oxford and some London boroughs. The resulting fall in land values is a significant hurdle to development, particularly as developer’s land banks are bought in advance of development and can be adversely affected by changes in policy or market conditions. The gap between Social Housing Grant and the actual costs of development is the housebuilder’s financial contribution. However, the impact of affordable housing on development efficiency and end values also need to be considered. Issues concerned with affordable housing are dealt with in greater detail below.
  • Development on brownfield land is the source of many difficulties. PPG3 sets a target for 60% of planning consents to be given for brownfield sites, together with a sequential test in favour of previously developed land. The benefits of redeveloping brownfield sites include the efficient use of available land and opportunities to reuse infrastructure. However these benefits do not accrue to the developer, while the problems and risks including site assembly, removal of existing uses, site preparation, decontamination and the availability and cost of infrastructure reinforcement may combine to reduce the value of the site in residential use to below an economic level.

In addition to constraints on the supply of land, housebuilders also have limited development capability in terms of finance and management resources. The dense mixed-tenure schemes promoted by planning policy and the need to optimise land value are more complex to develop, particularly in terms of planning, design and relationships with stakeholders such as local authorities and registered social landlords. Finance requirements are also greater, with significant upfront investment in construction not being recovered until relatively late in the development programme, further constraining development capacity.

Integrating affordable housing into commercial schemes

The requirement to include affordable housing as an element of planning gain was first introduced in 1996. Since then, as house prices have increased dramatically, the need for a range of affordable and intermediate tenure solutions has grown. Now, as house prices stabilise in some markets, the development costs of social housing, which continue to increase in line with tender price inflation, could become a significant brake on a scheme’s viability.
Affordable housing is a diverse sector, including students, public sector workers and the frail and elderly. There is no clear definition of what affordable housing means, and no fixed percentage of provision. As a result, the developer’s local knowledge of planning and market conditions is crucial. The principal tenures are:

  • General needs housing. This social housing tenure comprises homes managed by registered social landlords (RSLs) for tenants who are nominated by local authorities. Partial funding comes from social housing grant. As housebuilders have no control over the tenant nomination process, there is considerable sensitivity with general needs housing and they will select their RSL partner with care. Tenant and property management capabilities are, for example, key criteria. A wide range of different unit types are required in this tenure. Draft London Plan proposals currently aim for a requirement for 35% general needs housing out of a total affordable housing quota of 50%.
  • Shared ownership. This is a tenure developed by Housing Associations to provide the opportunity for tenants to gradually buy an increasing share of their home. The remainder of the cost is recovered by a rental charge. Shared ownership schemes are popular with housebuilders because the residents have a financial interest in the upkeep of the property. This tenure can qualify for social housing grant.
  • Sub-market rent. This tenure is aimed at the intermediate market with rents pegged at a fixed discount below market levels. The tenure receives no social housing grant support.
  • Discounted sale. Another tenure aimed at the intermediate market. Qualifying purchasers are sold the property on a set discount to open market value. This discount is applied in perpetuity to subsequent sales. Unfortunately, due to the rate of house price inflation, much affordable housing for sale is no longer within reach of its target market. Discounted sale properties do not attract grant funding.
  • Key worker housing. This accommodation is attracting a great deal of attention as the availability of public sector workers in city centres becomes a major constraint on service provision. Key worker housing can be for rent or sale and can attract grant funding. The main distinguishing feature is that the housing is made available to reserved occupations. This helps to make the tenure attractive to developers, not only in terms of the people housed, but also in terms of the dependable income streams that they generate.

Affordable housing requirements place a dual pressure on development value. Although much affordable housing provided through section 106 agreements is part funded using Housing Corporation TCI allowances, due to the absence of RSL funding, the developer’s subsidy is substantial, often equivalent to the land costs and profit on the affordable units. These costs typically pass down to lower land values, but the housebuilder also has to generate a greater margin from a smaller number of open market units. Furthermore, lower land prices may prevent housebuilders from securing brownfield land zoned for redevelopment as housing. Proposals in the draft London Plan, which require all commercial development to provide affordable housing, are partly aimed at creating a more level playing field for development.

In addition to pressure on costs, there is concern that the presence of a high proportion of affordable housing might affect the end value of the commercial housing. Accordingly, the specific tenure of a scheme’s affordable housing, together with the size, arrangement and location of the units, is a highly sensitive issue. Among the factors that need to be considered are:

  • The degree of integration of affordable housing. Greater segregation is preferred where affordable quotas exceed 25%, or on particularly high-value developments.
  • The level at which integration occurs – within a block or at the level of the street.
  • The selection of appropriate unit sizes to ensure that there are no significant lifestyle differences between market and affordable units – for example, the placing of family homes in a predominantly one or two-bedroom apartment development. This helps to control requirements for amenities and services, as well as aiding integration.
  • The setting of management and service charge costs to affordable units at achievable levels without comprising the service provided to open market purchasers.

Once the extent and type of affordable housing has been determined, the layout and detailed design will aim to optimise end value, and to ensure that the scheme works well in the long term. Elements of design and layout that contribute to the successful incorporation of social housing into a scheme include:

  • Appearance. Using a consistent design standard on external elements to avoid drawing attention to the differences between tenures is important. Limits on RSL revenue budgets may favour the selection of low-maintenance masonry external walls and so on.
  • Location. The key factors in terms of location involve the maximisation of the value of the market units determined by considerations including: kerb appeal (the immediate visual impact of the scheme from the site entrance); orientation (ensuring that the full benefit of views, sunrises and sunsets are secured by the open-market units); height (in apartments, providing affordable housing at low level in walk up arrangements, minimising services charges associated with lifts and securing the higher value upper units for market sale).

The provision of affordable housing has become a key element of residential development, requiring considerable skills in land buying, stakeholder management and design to deliver high quality schemes.

In the current market, purchasers have little choice and generally prefer to live in homogenous schemes rather than in diverse neighbourhoods. Careful consideration of the appropriate level of integration of different tenures is essential to ensure the long-term success of developments.

Creating value in housing

Value in housing is derived from location, rising prices, the size and flexibility of the units and the lifestyle that they connote. Location is the key differentiator, so in the mid-market, there is only a limited incentive to invest in design. For the housebuilder–developer, value is also generated through speed of development, reduced risk and demands on capital, and the long-term value of the development – particularly where the developer retains a management role.
The main areas where value can be enhanced include:

  • Design quality. Research by CABE into the financial benefits of investment in design for PPG3-driven schemes found that higher quality housing secures greater overall development values – and quality becomes more critical as densities increase.
  • Orientation. Living spaces and balconies should be put on an east-west axis. This is particularly important for apartment schemes aimed at the affluent urban lifestyles market.
  • Premium specifications. Value adding features of the basic shell can include increased ceiling heights, second or third bathrooms and high quality facades.
  • Secure car parking
  • Development efficiency. There are three key elements: the precise matching of unit sizes and specification to demand, the maximisation of net-to-gross-floor-area ratios and the minimisation of wall-to-floor ratios. The main driver behind an optimal ratio is circulation and means of escape. Options with multiple cores are preferred, as these minimise corridors and give greater security and intimacy. The size of cores on taller blocks can be further optimised through a fire engineering approach.
  • Floor-by-floor net to gross efficiencies of 80 to 85% are common.
  • Privacy. As planning guidance directs development into more dense, urban locations, issues of privacy are becoming more acute. The key areas where privacy is a source of concern and which can be addressed through design and construction include: noise insulation (this can be dealt with by careful layout, detailing, and specification of walls, partitions and floors); personal space (generous space standards are important to providing privacy inside dwellings – this can be a problem in small open-plan apartments; storage space is also a major issue); access (to private outdoor space such as a terrace or balcony); control over being overlooked (this usually affects balconies and terraces, but also modern schemes with floor to ceiling glazing) ; security and safety (both in the home and in public areas)
  • Design features. The wow factor, which generates sales, can often be related to detailing and fit-out. Options include: upgraded or integrated kitchen appliances, including the latest must-haves, such as ranges and American style fridge-freezers, granite worktops upmarket wall tiling and mosaic work, lighting and lighting control packages, integrated wiring for data and entertainment and enhanced storage.
  • Resident services, such as healthclubs and a concierge, attract buyers and generate employment as part of a planning agreement.

Some developers are also giving sustainability a higher profile. In addition to the environmental considerations, residential developments can have a significant impact on regeneration and the establishment of sustainable communities, through job creation and investment using section 106 agreements.

Procurement and construction

The urban residential market is complex and can involve significant risk. Developing brownfield sites, negotiating affordable housing quotas and section 106 contributions and achieving an optimum mix of uses for a sustainable development requires a high level of development skill.

Once construction starts, cost and time certainty is critical, particularly in uncertain markets such as the South-east. In particular, affordable elements need to be closely managed, to retain overall margins as all cost risk is held by the developer. For the open-market elements, profit levels are particularly susceptible to variations in construction cost.
Construction of apartment buildings and mixed use schemes is either undertaken by general contractors or by direct contracts managed by internal resources. The employment of a contractor will provide a single point of responsibility for cost and time certainty, resourcing of site management and effective provision of site set-up. Two-stage tenders, possibly involving the conversion into a design-and-build contract, are widely adopted for the appointment of contractors.

Once on site, key areas that require particular attention include:

  • Concrete frame tolerances – particularly if a curtain walling or cladding system is adopted for the envelope
  • Cladding – early procurement to ensure installation keeps pace with the completion of the frame, together with careful detailing to enable an early watertight date and minimal on-site rework
  • Plasterboard work – which affects the finish, fire separation and acoustic performance within apartments.
  • Sequencing the timing of trades working through the building to minimise disruption, abortive work and damage to completed work, together with allowing time for testing, commissioning and snagging.

Cost model

The cost model is based on a mixed-tenure apartment building featuring 65 open-market apartments and 35 flats for the affordable sector, in a mix of one and two-bedroom configurations. The seven-storey development has a gross internal floor area of 7000 m2, with a total net internal area of 5590 m2, Open market and affordable flats are located on different floors, accessible via separate cores.

The scheme also features a 50-place semi-basement car park, providing secure spaces for the open-market element of the scheme only. Separate costs are given for this.

The overall cost of the scheme, excluding car parking, is £11,429,500, equivalent to £1633/m2 gross internal floor area, and £2045/m2 net internal floor area, based on the overall area of the development.

Rates in the model are at first quarter 2004 price levels, based outturn costs for a project let on a two-stage, lump-sum contract, located in outer London. Demolition and site preparation, external works, professional fees and VAT are excluded.

Rates in the model may need to be adjusted to account for specification, site conditions, procurement route and programme.