Affordable Homes Funding Guide

Deloitte-uk-real-estate

Released at the same time as the draft Affordable Housing and Viability Supplementary Planning Guidance for 2016 but with less fanfare, was the Affordable Homes Programme 2016-2021 Funding Guidance.

And like the former document, on the face of it this latest Guidance would appear to confirm that the Mayor has listened to the sector and taken on board its views, whilst maintaining a degree of control and a “stick” should it then fail to deliver.

Much of the Guidance focuses on the products that will be delivered by this new funding regime including three London-specific tenure types:

  • London Affordable Rent;
  • London Living Rent; and
  • London Shared Ownership.

The Mayor also states that he is open to other different tenure types providing they maintain similar levels of affordability to the three above.

The Mayor’s Draft Affordable Housing and Viability Supplementary Planning Guidance 2016 provides details of the expected mix of affordable housing tenures. It stipulates that:

  • at least 30% should be low cost rent (social rent or affordable rent with rents set at “genuinely affordable levels”;
  • at least 30% intermediate products (such as London Living Rent and/ or shared ownership); and
  • the remaining 40% to be determined by the relevant Local Planning Authority.

London Affordable Rent

The Mayor does not consider 80% of Market Rent to be genuinely affordable in most parts of London and therefore expects most homes to be let substantially below this level. The Guidance provides details of the London Affordable Rent benchmarks for 2017-18. The intention is for these rents to be changed each April by the annual increase in CPI for the previous September plus 1%, with the updated benchmarks published by the GLA on an annual basis.

It is worth noting the comparison between the Mayor’s proposed Affordable Rents versus the current LHA Rates (set at the 30th percentile) as on the face of it the proposed rents are substantially below these levels. I appreciate that this actual comparison has many limitations but does give an idea of the Mayor’s expectations versus current practice.

Number of Beds

2017–18 Benchmark Rents per week

LHA 30th percentile rents per week

Bedsit

£144.26

£90.15

1 bedroom

£144.26

£200.03

2 bedrooms

£152.73

£247.95

3 bedrooms

£161.22

£300.62

4 bedrooms

£169.70

£370.45

5 bedrooms

£178.18

-

6 or more bedrooms

£186.66

-

The rents are London wide and so in theory a one bedroom flat in Kensington & Chelsea will have the same assumed weekly rent as one in Barking & Dagenham. It will be interesting to see whether this has any impact on where affordable housing is developed in the future.

The Mayor does provide some flexibility and suggests that other rent levels for the London Affordable Rent will also be considered where the provider is able to demonstrate to the GLA’s satisfaction that the homes would be genuinely affordable. I imagine, at least initially, some will look to explore the flexibility that this paragraph provides.

The Guidance also makes clear that it expects that the larger properties (i.e. 3 + bedrooms) will be funded this way.

London Living Rent

The Mayor has previously introduced the London Living Rent as an intermediate affordable housing product with locally specified rents. The GLA has published Ward specific rent levels for London Living Rent homes which are based on one third of the median gross household income for the individual Boroughs. These Ward specific rents are available on the GLA’s website and it expects that most homes delivered on this basis will be one and two bedroom properties.

This product, when funded through the Mayor’s new Funding Guide, will be a Rent to Buy product with sub-market rents on time limited tenancies. It is hoped that this will help households on average income levels to save for a deposit to buy their own home.

London Shared Ownership

It is expected that purchasers of properties through the London Shared Ownership scheme will have household incomes that can support an initial purchase of between 25% and 75% of the value of the property and usually a mortgage deposit of around 10% of this share. Initial rents on the unsold equity of London Shared Ownership properties can be no more than 2.75% of the value of the unsold equity at the point of the initial sale and all sales should be undertaken subject to a lease. The main terms of these are set out in the GLA’s Capital Funding Guide.

In terms of eligibility London Shared Ownership homes are to be made available to Londoners who have a maximum household income of £90,000 as previously stipulated in the Annual Monitoring Report. The Guidance Note states that where local authorities have lower earnings thresholds these should be adopted for the first three months of any marketing period, reverting back to the cap of £90,000 thereafter.

Grant

Bidders for Grant need to be registered with the Social Housing Regulator (a nudge perhaps for the announcement 24 hours later that the HCA was about to be split in two again?) and they don’t necessarily have to be a Housing Association. In addition, anyone receiving Grant will need to ensure that at least half of their London housing starts between April 2015 and March 2021 are affordable homes. This could be challenging for the private sector and might discourage them from registering with the Social Housing Regulator, and may in turn have implications for the Build to Rent sector.

Compared with previous systems the Grant regime has been simplified. Grant per home for London Affordable Rent properties is set at £60,000 per home (inclusive of RCGF & DPF) and London Living Rent and London Shared Ownership properties set at £28,000 per home. Again it will be interesting to see how this affects the location of new developments.

Since 2003 the GLA has explicitly stated that there will be no Grant with s.106 agreements, whilst in practice it was still being used, in particular where additional units were being created (i.e.“additionality”). That is not the case with this Guidance Note which explicitly states that where the amount of affordable housing can be increased meaningfully then grant will be payable in certain circumstances and this will be done in such a way to try to encourage developers to provide more affordable housing.

Contained within this section of the Note is the Mayor’s implied threat that he might increase the level of affordable housing required on each site to 50% when producing the next London Plan if the number of affordable units delivered now do not increase.

The examples given relate to levels of affordable housing below and above 40%. Where the developer increases the provision of affordable housing from 35% to 37% then the additional 2% of homes will receive grant funding. Where 40% or above affordable housing is provided on a site then the entire amount will receive grant funding. The Mayor has been very clever in finding ways to encourage developers to try to provide more affordable housing. Hopefully it will work.

In addition, and in terms of the GLA’s approach to the payment of Grant between 2016 and 2021 the Grant is targeted towards securing early starts on site. Schemes developed in 2017/2018 will benefit from the early payment of Grant for the affordable housing with Grant being paid at the land acquisition stage and then on the date that work is started on site. Further down through the process the payments aren’t quite as advantageous but the Guidance provides certainty which will be helpful.

There is a lot contained within the Funding Guide and only so much that can be said within a short blog. I think there are many positive things to emerge. There are challenges, but the signs are that the Mayor has listened to what the industry has had to say and approached this Guidance pragmatically.

It is my intention to review the Draft Affordable Housing and Viability Supplementary Planning guidance 2016 in more detail in future Blogs.

 

Deloitte-uk-chris-baldwin

Chris Baldwin - Partner, Deloitte Real Estate

Chris has over 20 years' experience and leads the House Builder and Residential sector within Deloitte and has responsibility for managing the Residential Valuation Advisory Group. He has worked with a range of private and public sector clients across the UK and has considerable experience in dealing with House Builders, Local Authorities, Registered Providers and Student Housing Developers and Investors.

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