UK Property – Residential Policy Update (Quarter 1, 2008)

KNIGHT FRANK RESIDENTIAL INTELLIGENCE

Quantity, quality and affordability

Three main themes underpin the Government’s new policy proposals for housing. In short there needs to be more of it, it needs to be better designed and it needs to be more affordable. All of this is prompting a significant shift in emphasis from housing renewal to housing growth.

There is no shortage of headline grabbing statistics, including a commitment to build 3 million new homes by 2020. The issue for the industry, and the planning system, is that this fairly demanding increase in the pace of development needs to take place alongside some ambitious targets for design and build standards such as a commitment to make all new homes Zero Carbon by 2016.

This document sets out the key policies as they affect developers and house builders. Whilst some policies and targets may be further refined the pattern is clear. Developers who invest time and resources in design and place making skills, develop good links with affordable housing providers and importantly build relationships with public sector landowners, will succeed over the next decade.

A HOUSING CRISIS

Is there a problem?

If we could point to one issue which dominates all others in the UK housing market, and especially the English market, it is that we do not have enough houses to meet demand. There are many reasons we can point to: family break up, increased life expectancy, immigration and rising wealth (which increases housing consumption through, for instance, more second homes). These factors have all fuelled demand, and over the past decade house building has simply not kept pace.

The consequence of this imbalance has been that house prices are far higher than they would otherwise be. Also the differential in cost between different tenures has risen to such a level that households in social rented accommodation are effectively trapped, with little prospect of shifting into either the private rented sector (PRS) or into owner occupation.

What is the solution?

The Government’s policy solution to the housing crisis is contained in the 2007 Housing Green Paper, which set ambitious targets for the volume of future house building in England. The Green Paper proposes the delivery of three million homes by 2020. Meeting this target will be a significant challenge for both the development industry and the planning system.

The Government has stated that policy will aim to move beyond supply and demand issues, and that the objective is to loosen the housing market, thereby enabling households to move between different tenures more easily at different life stages.

What does the Government propose?

The Government’s vision is that all households will “have access to a decent home at a price they can afford, in a place where they want to live and work”. The Housing Green Paper proposes three main policy streams to help realise this ambition:

• More Homes • Better Homes • Improved Affordability

MORE HOMES

New targets

The Government believes that there is a requirement for an additional 2 million homes by 2016 and a further 1 million by 2020. Accordingly, it is looking to house builders to deliver an annual total of 240,000 homes by 2016 and then maintain supply at that level for some years.

Can the targets be met?

The targets represent a considerable increase over the present level of supply and there is a good deal of scepticism about the ability of our current planning system and house building structure to meet them. The Government is therefore looking to overhaul aspects of the planning system which are discussed below, it also commissioned a report (the Callcutt Review) which looked at barriers to delivery within the house building sector. The Callcutt Review was published in November 2007, in its initial response to the report the Government has said that it will:

  • introduce a new legal definition of what constitutes a ‘substantial start’ by a developer to avoid major sites being held up by long delays;
  • introduce new ‘fast track contracts’ to help speed up the development of new homes on public sector land;
  • agree a ‘new industry standard’ to increase transparency of developers’ land holdings held for future housing.

Where will all the houses go?

The 2016 target will be met in large part by the proposed 1.6 million homes which have been set out in the regional housing allocations. This total includes the new development proposed in the four existing growth areas (Thames Gateway, Milton Keynes/South Midlands, London-Stansted-Cambridge-Peterborough and Ashford).

A further 150,000 to 200,000 will be added through the review of existing RSS documents currently underway in some regions.

An additional 150,000 homes are to be provided within New Growth Points. Finally ten eco-towns are proposed which could see the addition of between 50,000 and 200,000 new homes by 2020.

What is a Growth Point?

Local authorities were invited in 2006 to submit strategic growth proposals to identify particular locations where additional housing could be concentrated over the period to 2016. This process resulted in 29 Growth Points being identified in the south and the midlands.

The Government wants to add more Growth Points in 2008/09. These new Growth Points will not be confined to the south or the midlands, but instead will be located across England. The extension of the project into the north could potentially conflict with the Housing Market Renewal Programme (HMRP).

Is the Housing Market Renewal Programme safe?

The HMRP has targeted ‘failing markets’, areas of private sector or social housing for which demand has declined dramatically over a short period – or in some cases where demand has effectively disappeared.

Demolition of housing has been a notable feature of the HMRP. The role of the HMRP is likely to shift subtly over time, with the emphasis placed not only on building more housing, but also on reducing vacancy rates and on recycling existing housing. There is concern that funding to pay for new build growth is being reallocated away from market renewal projects.

What is an eco-town?

The ten proposed eco-towns are to be exemplary ‘green developments’ of between 5,000 and 20,000 new homes. The intention is that they will be designed to meet the highest standards of sustainability, including low and zero carbon technologies and high quality public transport.

Two prototype schemes, Northstowe in Cambridgeshire and Cranbrook in East Devon are in development and will act as demonstrator projects.

A prospectus for selecting eco-town bids has been prepared and sets out the following criteria for judging the suitability of proposals:

  • zero carbon and environmental standards
  • sustainable travel provision
  • design quality
  • community involvement
  • land use.

In line with Planning Policy Statement 3 (PPS3) the Government will minimise the use of greenfield land in the delivery of eco-towns.

OTHER ROUTES TO EXTRA HOUSING DELIVERY

What other mechanisms are in place for achieving more homes?

In addition to reviews of regional and local housing targets, which will be required to incorporate new Growth Points and eco-town provision, the Government has also proposed changes to the planning system and the way that public sector land is released for development.

Public sector land

Up to 2016 a total of 200,000 new homes are to be developed on public sector land, an increase of 70,000 on previous targets. There has been a push from central government to encourage public sector agencies to make surplus land available and to release it for development. Former rail land and land from the Highways Agency, the MoD and the Department of Health has provided over 550 new sites.

English Partnerships (EP) is set to have a major role in facilitating and managing this public sector land bank. EP will either acquire sites directly or take an agency role, managing or reviewing disposals and ensuring that minimum agreed standards for development are achieved. These standards include:

  • a minimum of 50% affordable housing
  • high design and environmental standards
  • all homes to meet Level 3 of the Code for Sustainable Homes as a minimum (making them at least 25% more energy efficient than existing Building Regulations standards require)
  • defined development start and completion dates to prevent land banking
  • limits on the scale of buy to let sales on each site

The Government has proposed that the Surplus Public Sector Land Taskforce be reconvened to identify and to bring more land forward for development, and that through EP a Surplus Public Sector Land Unit is created to drive forward and report on the progress of the programme.

Recycling homes and land

The national target that 60% of new housing provision should be made on brownfield land has been retained in the Green Paper, although local authorities are expected to produce their own targets.

Local authorities will also be expected to do more to bring long-term empty homes back into use. Figures presented in the Green Paper suggest up to 150,000 homes have been empty for over two years. There is a proposal to use the Housing and Planning Delivery Grant to help bring these properties back into use.

Planning reforms

The Planning White Paper, published in May 2007, proposes to streamline the planning system, strengthen the strategic role of local authorities and ensure that the planning system can cope with the future target to deliver 240,000 new homes per annum. Many of the White Paper’s proposals have now been included in the recently published Planning Bill whilst others are being incorporated in appropriate guidance.

New draft RSS documents, being prepared by the regional assemblies, will see local authority allocations of 190,000 homes per annum, some 30,000 more than the previous RSS. These annual targets remain below the 240,000 proposed for 2016. To work up to this rate of delivery the Government will look to induce greater flexibility in responding to demand and encourage the early review of allocations. The National Housing and Planning Advice Unit (NHPAU) will lead on providing guidance in this area.

At the local authority level PPS3 and the introduction of Strategic Housing Land Availability Assessments will be the main drivers in trying to ensure that land availability does not restrict the provision of housing. Local Authorities will be offered incentives in the form of Housing and Planning Delivery Grant for the delivery of new housing and the identification of at least five years worth of sites ready for development and ten years worth of development potential.

Reforms aimed at streamlining the planning system include the introduction of Planning Performance Agreements (PPA) and an expanded role for the Advisory Team on Large Applications (ATLAS). PPAs between developers and local planning authorities are perceived by Government as a potentially effective means of providing developers of large schemes with a more predictable, efficient and timely process.

INFRASTRUCTURE PROVISION

Infrastructure delivery

If supply is to rise successfully, the new households created will need to have access to schools, healthcare, transport and other facilities. The 2007 Comprehensive Spending Review aims to set out a framework within which Central Government departments can work together on infrastructure planning. The outcomes of the policy review process will then be tested by DCLG.

How will infrastructure be funded?

For several years there have been proposals for changes to the Section 106 planning obligations system. The objective has been to widen the scope of the system and to raise more money from development to pay for local and regional infrastructure. The government has scrapped initial proposals for a Planning Gain Supplement and in its recently published Planning Bill is now proposing a new system of planning tariffs which it has dubbed the Community Infrastructure Levy (CIL). The clauses in the Bill set out the broad parameters of the CIL but the bulk of the detail will follow in regulations and guidance. Nonetheless the likely elements of the scheme can be deduced.

What is the Community Infrastructure Levy?

The Community Infrastructure Levy will be a standard charge levied on new development. It is intended to contribute to the future infrastructure needs of the area from which the development will directly or indirectly benefit. The main advantage of CIL for developers is that they will know in advance what their liability is likely to be. Another is that planning timescales should be reduced as there will be less need for negotiation between the parties.

The enabling legislation should receive Royal Assent in the second half of 2008. A range of secondary legislation and changes to planning circulars and guidance will also be needed. Implementation therefore is unlikely before 2009. Local authorities will not be required to introduce the CIL but it is very likely that the vast majority will do so.

How will the Community Infrastructure Levy work?

Infrastructure plans will be drawn up within the regional spatial strategy and the local development framework defining the infrastructure requirements over the plan period and estimating the resulting expenditure to which developers will have to make a contribution via the CIL.

The CIL will be based on a combination of different infrastructure requirements, i.e. so much for roads, so much for schools, etc. However, the authorities will arrive at a simple figure for the levy, for example £X per home and £Y per square metre of commercial floor space. The rate of the levy will almost certainly have to take into account the size of new homes (for instance, the number of habitable rooms) and the use class into which commercial property falls.

Will there be a standard charge across a local authority area?

The Government may encourage differential levels of CIL to be set for greenfield and brownfield land. Many authorities will also set different levels of CIL for different parts of their areas. For instance, Tower Hamlets may want to set very different rates for Canary Wharf and for more deprived areas of the borough. Planning guidance might even identify areas where no CIL would apply, for example in low value ‘regeneration’ areas.

How will the level of the CIL be set?

The level of the tariff would be set through the development plan making process and so would be subject to consultation. In setting the level of a CIL the local authority would have to consider the other demands on development, such as affordable housing and the need to build low / zero carbon developments.

What if the CIL makes development unviable?

It is likely that the planning authority would have the discretion to waive the full CIL in circumstances where it was demonstrated that this would render development unviable.

Does that mean that there will no longer be a need to negotiate s106 agreements?

In cases where it is necessary to ensure that specific local infrastructure is secured, to enable a particular development to proceed, developers will be allowed to offset the CIL system with locally negotiated Section 106 agreements.

Will the CIL apply to all development?

Logically, the tariff should apply only to the increase in development promoted on specific sites. Where development is redevelopment, therefore, the tariff is likely to be applied to the net increase in development.

Will there be a development threshold below which the CIL will not apply?

Yes, but the threshold is likely to be a low one. In the case of housing, for instance, CIL may well be payable if just a single new home is being developed. However, extensions to homes will almost certainly be excluded.

What about the existing obligation to provide a proportion of affordable housing?

At present house builders are required to provide a proportion of affordable housing within many developments. This is often 25% but can be as high as 50%. This requirement will continue and will not be affected by the CIL.

What happens to existing tariff schemes?

Some local authorities are already operating planning tariff schemes which have been introduced within the existing legal framework. Many other authorities are in process of introducing such schemes. It is very unlikely that the Government will want to put all this on hold whilst the new system is put in place. However, they will probably be keen to ensure that emerging schemes are in line with the new legislation.

MORE AFFORDABLE HOMES

New targets for affordable housing

The Government is set to spend £8 billion in the delivery of affordable housing. This expenditure will help increase supply to try to meet the proposed target of 70,000 additional affordable homes per annum to 2011. This initial target may be increased following the next spending review.

Of the 70,000 target 45,000 homes are to be provided as social rented housing, to help those on the lowest rung of the housing ladder, and 25,000 are to be shared ownership and shared equity homes provided via the Housing Corporation.

Affordable housing provision is also set to be aided by the new Housing and Regeneration Bill which will:

  • Make it easier for councils to build council homes. Councils will be able to keep the full rents from new council houses and use any surpluses to help pay for new social homes.
  • Allow some councils to opt out of the Housing Revenue Account subsidy system, keep future rents and reinvest them in local housing.
  • Allow the largest housing associations to concentrate on new housebuilding.

Together with new rules announced earlier this year which allow the best performing councils to apply for Housing Corporation grant via special venture vehicles, it is hoped that these changes will enable councils across the country to pull in more private sector investment and make it easier for them to build their own social housing.

The Housing and Regeneration Bill also paves the way for a new agency, the Homes and Communities Agency, with a remit to bring together the land and the money to deliver new affordable housing and regenerate existing communities. By merging a large part of the Housing Corporation, English Partnerships and other Government functions the Government is creating what has already been dubbed the largest ‘quango’ in Europe.

In addition to direct funding the Government is also planning new ways to use surplus public sector land, planning gain and the development of public-private sector partnerships to further supply. Local Housing Companies will be an example of public-private sector ventures in operation.

Local Housing Companies

Local Housing Companies will enable local authorities to play a more active role in development. Existing methods for the disposal of surplus public sector land include auction or straight disposal in the open market. This has resulted in local authorities exiting the development process at point of sale, thus leaving developers to secure planning consent and to carry development risk and opportunity.

Local Housing Companies will open up new opportunities for local authorities to establish joint ventures with private sector partners. Financial and technical assistance will be provided by English Partnerships, who have been commissioned to develop a new national package of support for local authorities to enable them to unlock land for new housing and affordable homes, and establish the quality and mix of development in their areas. The Government has indicated that there is potential for 18,000 additional shared ownership homes through Local Housing Companies.

Rural housing delivery

Recommendations formulated by the Affordable Rural Housing Commission have been used to inform the treatment of rural housing issues within PPS3 and the Green Paper. The main recommendation is to devolve power to local planning authorities with regard to rural housing provision through such means as the rural exceptions site policy.

A Rural Housing Advisory Group has been formed within the Housing Corporation to promote greater innovation and efficiency in rural delivery. Key developments include the creation of Community Land Trusts which will act as mechanisms for the ownership of land at the community level. Land is taken out of the market and separated from its productive use so that the impact of land appreciation is removed, thereby enabling the long-term planning for affordable and sustainable housing development. There are currently seven pilot schemes.

BETTER HOMES

Is quantity more important than quality?

The hope is, and it has been stated many times by Government, that we see not only more homes being built, but that those homes and the environment created around them will also be of high quality. The Green Paper sets out the Government’s intention to achieve this through:

  • facilitating the provision of good amenities and development of a sense of ‘place’;
  • high standards of design;
  • the provision of more environmentally sustainable homes.

The Government is currently examining proposals for an annual independent customer satisfaction survey on new housing that might be conducted through the Office of Fair Trading. Presently, a customer survey is carried out by the House Builders Federation but the Government wants to look at whether more is needed to support work on raising the quality of new housing.

Design

There has long been policy encouragement for new homes and neighbourhoods to be strongly designed, both to improve quality of life and the broader environment. The reality, as is often presented by the Commission for Architecture and the Built Environment (CABE) amongst others, is that this policy is underperforming.

PPS3 is the main policy platform encouraging good design and emphasises the role that design can play in facilitating community cohesion and reducing crime. There is also a suggestion that higher quality design can help speed up delivery as local people tend to be more welcoming of well-designed schemes. The Government is also currently examining proposals in the Callcutt Report that call for a new design review process for housebuilding with a presumption that any development which has passed the design review should not be subject to further planning requirements in relation to quality. The report also called on the Government to review CABE’s role in the suggested new process.

It may be that design will become more important as we move into a weaker sales environment after a decade of a relatively strong and consistent market. Developers and house builders may be pushed into placing design considerations higher in terms of their list of priorities as they try to stand out in the marketplace.

Mix

PPS3 gives local authorities greater direction in promoting the creation of what are called ‘sustainable, inclusive, mixed communities’. These require developments which cater for the needs of different occupier groups. A key ingredient is the inclusion of an element of family housing and housing which can be adapted to reflect the needs of an ageing population.

There is a fine line between the vision presented within PPS3 (and indeed the Green Paper) and the reality experienced by developers in the restrictions faced on agreeing an appropriate housing mix.

It is thought that Strategic Housing Market Assessments will help provide an understanding of a community’s needs. They will also need to reflect the environment for development and the degree to which needs can be met within the market.

Greener homes

Through the introduction of the Code for Sustainable Homes and the proposals contained in the Housing Green Paper, the Government proposes to make all new homes zero carbon from 2016. The requirements of the Code are intended to be made mandatory for developers, in stages up to 2020. Fiscal incentives are also proposed with the intention of providing a time limited stamp duty land tax relief for new homes adhering to the zero carbon policy. In its response to the Callcut Review the Government has pledged to set up a new body to monitor and co-ordinate work on delivering the 2016 target.

The recently published Housing and Regeneration Bill will also require developers to indicate whether a sustainability assessment has been made, and if it has, provide that information to prospective purchasers. An assessment provides an in-depth green rating for new homes showing how near zero carbon they are, and how they rate for wider green issues such as water usage and waste.

Courtesy: Knight Frank Residential Research

Contact information

If you have any queries regarding the topics discussed please contact:

Liam Bailey, Head of Residential Research +44 (0) 20 7861 5133
Elaine Tooke, Head of Residential Development Consulting +44 (0) 20 7173 4930
Stephan Miles-Brown, Head of Residential Development +44 (0) 20 7173 4903

© Knight Frank LLP 2007

This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Residential Research or Knight Frank LLP for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank Residential Research.

Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Registered office: 20 Hanover Square, London W1S 1HZ

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