Councils across London are drawing up plans to claw back further affordable housing contributions from developers by imposing deferred contributions once buildings are close to completion.
The policy gives councils the opportunity to claw back funding when low amounts of affordable housing have been secured at application stage for viability reasons.
Camden, Lambeth and Lewisham all confirmed to EG that they were reviewing their policy. Several others were understood to be doing the same.
The review mechanism for s106 agreements has been more commonly used for multi-phased developments, where the value of a scheme is more difficult to assess. However, Camden Council’s local plan, approved by an inspector earlier this month, proposes imposing deferred contributions for a range of different-sized schemes, and for phased and non-phased development.
Developers have raised concerns about the wider use of deferred contributions, claiming the additional level of uncertainty could make development unviable. Steve Sanham, managing director of HUB, said: “Introducing a ‘possible, depending on circumstances’ viability review towards the end of a development will either stall a development outright, or it will drive investors to factor in this uncertainty into their required development margin.”
Change prompted by SPG
The policy change follows mayor of London Sadiq Khan’s draft supplementary planning guidance on affordable housing, published in November, which recommends a “near end development review” once 75% of units are sold, with surplus profit split 60/40 between the council and developer. This would only apply to schemes that do not meet the 35% affordable housing threshold.
In the same week as the publication of the mayor’s guidance, Lambeth Council published a draft supplementary planning document proposing an 80/20 split of any uplift for the council and the developer respectively. However, if the value of the scheme falls, there is no identified claw back for the developer.
‘Clearly inequitable’
Dean Clifford, co-founder of Great Marlborough Estates, said: “Whenever you have things like clawback mechanisms, and particularly if there are things that are being talked about where the clawback is only one way.That’s clearly inequitable.”
He added: “What we want and what we always strive for is clarity and certainty in the process and the last thing that we all want in a fragile market is additional surprises that are being thrown upon us at a future point in time.”
Ian Fletcher, director of policy at the British Property Federation, said that following the publication of the mayor’s SPG, members raised concerns about the policy causing prolonged uncertainty around the appraisal process and its impact on viability, particularly for build-to-rent schemes on which viability is “quite marginal”.
He said: “This is one of those areas where I think sometimes you can get very smart politics but not necessarily smart economics, in that to be seen to be extracting every half pound from the development process may play well with the electorate, it doesn’t necessarily mean that you will get more development.”
The BPF’s consultation response to the SPG calls for a 50:50 split in share of value uplift between the council and developer at a later review.
‘Nothing to fear’
However, Anthony Lee, BNP Paribas Real Estate’s lead director for financial viability advisory services, said the market should have “nothing to fear” from review mechanisms. He said: “The knee-jerk reaction to them is that these will cause problems with securing finance because banks don’t want to get involved.
“I think once the banks get their heads around what’s being asked of them and asked of developers, and getting comfortable with the structure, I think everyone will realise there’s nothing to fear because if you’re fully de-risking the scheme by securing a full profit margin, that’s the minimum that the bank will want to see anyway.”
A spokesman for the mayor said: “We are considering all responses to the mayor’s draft supplementary planning guidance, which will be published in a final version later this summer.
”City Hall is also working on planning policy for the new London Plan – a consultation draft will be available later this year.”
Key points: deferred contributions
■ Councils can seek deferred contributions from developers once they have reached the agreed level of profit for the scheme to be viable.
■ Any further profit can be split between the council and the developer.
■ They are commonly used for multi-phase developments but rarely for smaller developments.
■ The mayor’s supplementary planning guidance refers to later-stage reviews for developments with 11 units or more, with a proposed profit split of 60:40 towards the council.
■ If a developer agrees to the 35% affordable housing flat rate, it will be exempt from deferred contributions.
