Last month’s revised planning framework shows the government is bent on speeding up build-out rates – in part by increasing the range of housing types. The approach chimes with Sir Oliver Letwin’s interim report, but will his forthcoming recommendations, combined with the new framework, fully address the housing crisis and what will be the overall impact on housebuilders?
The much-trumpeted revisions to England’s central planning rulebook published last month confirmed – among other things – the government’s continued focus on improving the rate of build-out of housing sites. By doing so it picked up where former cabinet minister Sir Oliver Letwin left off in June, when he published an initial analysis of the reasons behind the slow build-out of many big housing schemes.
Letwin’s report contained a very clear finding. Developers, he said, must produce a much bigger range and diversity of housing types on large sites. Doing this, they will deliver faster build-out because more homes will be absorbed by any given local housing market without affecting prices. So rather than, say, just building homes designed for sale to young families, Letwin’s analysis envisaged large projects including homes for young renters, older people, established families, and others – vastly increasing the number of people in any area that might be interested.
If Letwin’s analysis is straightforward, it is the policy changes designed to address the problem that developers, housebuilders and local authorities are really waiting for. But chancellor Philip Hammond commissioned Letwin to pull together recommendations in time for the autumn Budget, meaning the industry is likely to have to wait at least another three months. So, how does the new National Planning Policy Framework (NPPF) help solve this problem, what might Letwin come up with, and what might it all mean for housebuilders?
‘Letwin’s analysis is spot on. The problem is, the policy prescription stemming from that is
Chris Brown, Igloo
The government’s focus on the rate of build-out is unsurprising, and dates back to Gavin Barwell’s stint as housing minister when he was drawing up the 2017 housing white paper. While housebuilders love to complain about the planning system, the data shows that the planning system is now delivering permissions at record levels. Indeed, the latest planning pipeline report by the Home Builders Federation shows that 391,000 homes were granted permission last year, more than double the 183,570 new homes built, and not far off double the 202,145 permissions produced the year before publication of the first NPPF in 2012.
But actual new-build output, despite being supported by Help to Buy, has not grown by anything like as much, up just 56% from its recession low point. So, if planning permissions are not constraining output, and neither – courtesy of Help to Buy – is overall demand, then it is natural to wonder if the speed of build-out might be increased. “Letwin’s analysis is spot on,” says Chris Brown, executive chair and founder of regeneration developer Igloo. “The problem is, the policy prescription stemming from that is really difficult.”
Certainly, the evidence of one housebuilder, Countryside Properties, is that building a range of housing types and tenures can tackle slow build rates. Through its partnerships division, Countryside typically builds out large, formerly publicly owned sites with 40% of homes for private sale, 30% for affordable housing and 30% for market rent.
Countryside chief executive Ian Sutcliffe says this split can result in construction of up to 150-200 homes per year on large sites, compared with the typical 50 homes per year on a standard private sale site. “It’s about mixed tenure. It’s why we think our delivery rates and growth are stronger than anyone else’s at the moment. We’re delivering what people want, with the variety meaning we can also beat the local absorption rate. You couldn’t do this with just private sale,” he says.
Doubling build rates
This tallies with the view of newbie housing firm L&G Homes, whose chief executive last month told Building it thought it could double normal rates of build by putting many different housing types on large sites.
Last month’s NPPF has laid the groundwork for a system where housebuilders commonly deliver a much wider variety of home types. In paragraph 68, for example, the new NPPF tells local authorities to encourage the subdivision of large sites into smaller plots to “speed up the delivery of homes”. In paragraph 72, it says large-scale developments should produce “a variety of homes to meet the needs of different groups in the community”, while calling for a realistic assessment of rates of delivery and the identification of “opportunities for supporting rapid implementation”.
Perhaps most significantly, the NPPF redefines affordable housing in a way that will potentially make it much easier for mainstream developers to deliver different tenures of housing themselves without having to bring in regulated housing associations. James Finn, planning associate at consultant Barton Willmore, says: “The NPPF contains a range of ways to develop more quickly by increasing the diversity of housing – a lot of it seeks to achieve what Letwin is setting out to do. But they are long-term measures. Letwin may opt to sit and wait and see if they’re delivering before going further.”
However, others think it likely the chancellor will demand Letwin delivers more than just “wait and see” as his Budget policy prescription. In his analysis, Letwin said his final report “shall seek to find policy levers that will tend to increase the variety and differentiation of what is offered on these sites”.
Sir Oliver Letwin MP was asked by chancellor Philip Hammond at the time of last year’s autumn Budget to undertake a review to “explain the significant gap between housing completions and the amount of land allocated or permissioned in areas of high housing demand, and make recommendations for closing it”.
His draft analysis, published in June, provided his explanation of the reasons behind the problem, but not his recommendations for dealing with it. He found large sites typically took 15 years to build out and pointed to several causes, including the lack of trained bricklayers, and the behaviour of some landowners “who seek to speculate […] by obtaining outline permission many years before allowing the land to have any real development upon it”.
However, overwhelmingly, he said the main reason for slow build-out was the constraint provided by the rate at which houses can be sold into any given market without affecting their price – the so-called absorption rate. In other words, if too many houses come onto a local market at any given time, this glut causes prices to drop, which housebuilders cannot afford to happen, hence they slow down construction to exactly the fastest rate at which sale prices are protected.
Building a greater diversity of homes was the answer to this conundrum, he found. “I conclude that if either the major housebuilders themselves, or others, were to offer much more housing of varying types, designs and tenures (and, indeed, more distinct settings, landscapes and street-scapes) on the large sites […] then the overall absorption rates – and hence the overall build-out rates – could be substantially accelerated.”
Igloo’s Brown says the obvious implication is that Letwin will recommend extending the current system of planning obligations to require developers to deliver a greater range of housing types. Where housebuilders are today typically required to deliver a proportion of any scheme as affordable housing as a condition of getting planning, Letwin could allow local authorities to require build-to-rent, custom build, or older people’s housing, too. Brown says: “The question is whether going forward he can change planning policy to help achieve a diversification away from market sale.”
This, however, would not be without knock-on effects. In his analysis, Letwin made clear he would only consider policies that “should not jam up the housing market or impair the capacity of the major housebuilders to continue large-scale construction”. But that is exactly what many fear a requirement for a greater variety of house types and tenures could do, because of the impact on scheme viability.
The concern stems from the fact that returns for other housing types and tenures, including homes for rent, are often much lower. Countryside’s Sutcliffe makes clear that building a certain variety of tenures significantly reduces the potential return that can be made from a development site, pointing out that social rent homes are typically sold at cost, while profit for market rent is about half what can be expected for private sale. This difference means Countryside only does it when it can get hold of the land at enough of a discount that it renders the build-out commercially viable. In fact, he says, typically sites must be passed over at no up-front cost to Countryside to allow this approach, though profit-sharing mechanisms mean local authorities often make money back at a later date.
Richard Jones, group head of regeneration at consultant Arcadis, says Letwin’s idea is fine in principle, but would hit housebuilders’ profit margin if made compulsory. “Their model is built around a return of approximately 20% against open market risk,” he says. “Significant changes to the product for the housebuilder will inevitably lead to a lower margin, although against a lower risk profile.
“Therefore if the housebuilder were to be the major delivery agent, they would need to change their basic business plan, something that they have struggled to do.”
Concerns about this impact on viability have been heightened because of changes in the new NPPF that will in many cases stop developers from using evidence of a site’s economic viability to wriggle out of planning obligations. Countryside’s Sutcliffe says: “There does have to be a viability assessment process as part of private sites. If the residual value in sites is not there, then landowners won’t sell and development will stall. The net result could be a reduction in development.” Brown agrees. “The natural reaction of the housebuilders might be to stop building houses,” he says.
This dynamic currently rules out diversification for sites sold on the private market because traditional housebuilders can outbid those proposing this more diverse approach. Making it compulsory, therefore, would hit land value, which in turn might make it harder for developers to tempt landowners to sell up. Tony Mulhall, associate director at the RICS, says: “There’s an issue about to what extent the government will involve itself in commercial decisions about what market demand is, and what the market will bear. You have to ensure there’s still sufficient return so land is brought forward.”
Given these big impacts, whatever mix was required would have to be clearly justified. Matthew Spry, senior director at planning consultant Lichfields, says that if councils wanted a mix of tenures, they would have to provide proof that these are necessary for the area and be prepared that government or a related agency such as Homes England might have to contribute money if land values were impacted.
“The idea would be to somehow specify what the expectations are such that it can be priced into the land value of large sites. There would be question marks over how local authorities will evidence the mix they call for, or whether government will put in money or a delivery mechanism to support that,” he says.
This conundrum means Letwin may struggle to get his vision of mixed tenure development off the ground without identifying further funding. Many are conscious of the government’s failed attempt in 2015 to introduce a new class of housing – starter homes – via rules stating that an arbitrary 20% of every site must be given over to them. Spry says: “It would be really unfortunate if a default mix is rolled out across the country – it’ll be a real challenge getting it right.”
Igloo’s Brown says, like Spry, that public money may be needed to support this approach. Nevertheless, he is optimistic that Letwin will avoid the mistakes of predecessors. “Letwin’s quite good at this stuff. He’s not going to just say we need 50% market rent everywhere. It’ll be nuanced and will vary on a site by site basis,” he says. It remains to be seen if this optimism is well-founded.
The new NPPF: what does it say?
The National Planning Policy Framework (NPPF) sets out the objectives of the planning system and the rules that guide plan-making and planning decisions, containing the all-important “presumption in favour of sustainable development” that applications should be judged against in places that have out-of-date plans. The revision to the NPPF – the first significant one since it was introduced in 2012 – makes a number of important changes to policy. These include:
- The introduction of a housing delivery test under which local authorities’ plans are considered out of date if the homes they plan for consistently fail to be built out – leaving them open to speculative development.
- The introduction (from January next year) of a standard method for assessing housing need in any local authority area. The exact formula itself will be revised from what has been consulted upon in order to adjust for forthcoming lower household projections.
- A new approach to testing viability of development. Rather than using viability assessments as standard to justify when local authorities’ policies – such as on affordable housing – can’t be met, local authorities and developers will be expected to factor in viability when plans are made. Sites for individual applications will be assumed to be viable unless the developer can show what has changed since the plan was made.
- Local plans must include 10% of housing allocations on small sites.
- Ensuring good design is made “fundamental” to the planning process, and councils will be expected to “ensure that the quality of approved development is not materially diminished between permission and completion”.