How the Growth and Infrastructure Act will affect affordable housing

This article was first published on 29th May 2014 by Construction News online and can be found online here.

The Growth and Infrastructure Act 2013 has introduced a new procedure to renegotiate affordable housing obligations in section 106 agreements.

These obligations require residential developers to make a prescribed number of homes available for people whose needs are not met by the market, and so naturally impact the profitability of a development. Previously there was no right to appeal such agreements until five years after they had been entered into. The rationale behind the G&I Act is that some affordable housing contributions negotiated in prosperous economic conditions now render developments economically unviable.

The government considered that an earlier right of appeal, specific to affordable housing, was needed to "unlock" developments that had stalled due to viability issues.

Despite the good intentions, however, a recent flurry of appeals under the new law has sparked concerns that developers are taking advantage of the changes and that this will undermine the provision of affordable housing.

The appeals

The Planning Inspectorate is understood to be considering 10 appeals by developers to reduce or eliminate affordable housing obligations under the new law.

Four further appeals have been determined and two of those were found in the developers' favour. In the first successful appeal, a planning obligation by Redrow Homes was modified to reduce the development's affordable housing content from 60 to 36 units. In the second, Master Pond Wharf successfully applied to remove completely a requirement for 20 affordable units in its development of 100 flats. Among the appeals pending determination are bids to remove requirements for 291 affordable homes in a Gloucestershire development and a £9.19m contribution towards affordable housing in Blackpool.

The economic viability test

Applications and appeals under the G&I Act hinge on the economic viability test. If the affordable housing requirement means the development is not economically viable, the requirement will be modified or discharged to make the development economically viable.

While there is no statutory direction as to what constitutes an unviable development, the government has published detailed guidance on the issue. Developers must submit appropriate up-to-date evidence that, wherever possible, reviews the original viability appraisal and clearly demonstrates that they will not make a competitive return under current market conditions.

A viable level of affordable housing provision should also be proposed. Variables that should be assessed where relevant include land value, building costs, capital and debt finance costs and profit levels.

Viability challenge

While recent appeals under the G&I Act have understandably triggered concerns regarding affordable housing provision, the difficulty of satisfying the economic viability test should not be underestimated.

The onus is very much on the developer, who must submit robust viability evidence in line with detailed government guidance.

A significant factor in both the Redrow Homes and Master Pond Wharf cases was that the appellants had rigorously followed the guidance to produce clear, fair viability figures and there was simply no reason for the inspector to disagree. Planning obligations negotiated in differing economic conditions can undoubtedly be a serious obstacle to house building and in genuine cases, therefore, the G&I Act will ultimately result in more affordable housing being built than would otherwise be the case, if the development had completely stalled.