Renewed optimism for UK residential housing developers?

Unpacking the ambitious plan to boost UK residential housing

The newly installed UK Labour Government has tabled potential reforms to the National Planning Policy Framework (NPPF), which details the government’s planning policies for England. Self-described as a “clear, ambitious local plan for high-quality house building and economic growth,” these planned reforms seek to refine the planning system and address key housing supply issues in the country, taking a growth-focused approach.

There is a lot to be positive about regarding these planned reforms, specifically as they address the growing need for affordable housing in the UK through aggressive “new town” housing targets and look to repurpose and develop “grey belt” land. In theory, these reforms would give the development industry a much-needed boost and support the UK in addressing its housing supply needs. However, as always with any ambitious plan, there are still several issues to be worked through, including some concerns from developers around the proposed reforms and how they will affect the viability of previously approved projects.

Altus Group had the privilege of interviewing Tom Hegan, Partner at Turner Morum, to leverage his expertise and tackle some of these key issues in greater depth.

Hegan specialises in viability analysis and valuation advice, mainly concerning affordable housing / Section 106 negotiations and development land valuation assessments. He is deeply involved in the expert witness / arbitration process and other development consultancy matters. As a RICS registered valuer and expert witness, he has immense insight into the “boots on the ground” aspects of ambitious development reforms like this.

Let’s explore why cautious optimism is warranted for UK developers, even though we are still early in the reform process and have a growing need to modernise systems to support it.

How would you succinctly sum up the planned NPPF reforms?

Hegan: The proposed reforms introduce universal and ambitious local plan coverage, intended to boost economic growth and bring 1.5 million new homes to the market. They would make the assessment of housing needs mandatory and introduce a lofty 50% affordable housing target for many new large strategic developments.

These reforms primarily target a broader definition of brownfield land and identify grey belt land suitable to meet development needs within the public interest. Broader changes include modifications for local planning authorities, targeting the development of affordable homes, supporting economic growth, and increasing planning fees.

Are developers optimistic that these political pledges will come to fruition?  Are there areas where the reforms may only work “on paper”? 

Hegan: Yes, the proposed reforms have many positive aspects. They’re looking to streamline the planning system and reintroduce mandatory housing targets for local authorities. Reducing red tape is always welcome, especially as most of the UK housing industry feels the planning system is broken, however there are indeed some concerns.

Fifty percent affordable housing is an aspirational target but likely not achievable on most schemes. Even in London, the UK’s highest-value area, it is rarely achieved. The risk of setting such a high target is the need to consider the viability of that development in almost every case, resulting in system delays and extra costs for assessments of viability.

Additionally, benchmark land value is important. Currently, there’s a well-established range of acceptable minimum returns for the landowner, typically in the £100,000 and £200,000 gross per acre range. The reforms suggest potential reductions to Benchmark Land Values (BLV), which would disincentivise landowners from releasing their land to the market. Contractual arrangements are generally already in place for many potential development sites and include these sorts of minimum prices. Reducing BLVs in this way would essentially sterilise these sites from coming forward, making the Government’s aspirational housing targets impossible to achieve.

The Capital Gains Tax (CGT) increases will already reduce net landowner returns, which could be problematic, as the removal of tax efficiencies will further disincentivise land release. The proposals also hint at the use of compulsory purchase powers to force this land to participate, but it’s safe to say that the industry regards this as a hollow bluff. Such widespread land “seizure” would be unpalatable and unenforceable at scale, for various reasons including timescale, costs and inevitable legal challenges.

There is also the use of review mechanisms. These are typically used when developers have agreed reductions in affordable housing with the local planning authority at the planning stage, based on site viability. These complex mechanisms rarely yield much to councils but provide a considerable additional layer of complexity to the planning system - making them more of a barrier than an incentive. Requiring review mechanisms within almost every scheme would reduce the number of dwellings being delivered, with no real tangible benefits.

Lastly, there is a prevailing attitude in the UK of supporting new homes coming forward, but that support dampens when needed development runs through one’s “own backyard.”

It is great there is an initiative to boost development and add housing supply, but the reality is that the NPPF could impact the viability of many existing schemes. Do you agree?

Hegan: Certainty is critical for housing development. Once a proposal for a set number of dwellings is fixed, the developer will turn to its Section 106 contribution requirements and what is required from the scheme, in terms of infrastructure delivery. This helps developers decide on whether the scheme is viable and / or whether changes are required.

Theoretically, that’s a straightforward process. The reality is that cumbersome and non-optimised planning systems in the UK bog this down, especially where scheme requests keep evolving, making decisions and budgeting difficult. This impacts the investment and funding open to developers.

The proposed NPPF changes, if implemented sensibly, could be the pendulum swing in planning permission reforms we need. However, they will have knock-on impacts on the broader economy around development. Should the industry see a massive ramp in demand, we need the accompanying ramp in capability, such as labour to build those additional houses and the building materials to support construction.

How could the proposed NPPF reforms and systems be improved to facilitate, rather than slow, development plans? 

Hegan: Regionally informed affordable housing targets, based on area-wide viability assessments rather than a blanket target, would be more viable. However, there is an immense need for more resources and an overhaul of the planning system.

While highly professional, trained planners working for councils may recommend a planning consent for approval, the final decision generally lies with elected members, who often do not necessarily have the skills or development background that is required, and very commonly take a “not in my backyard!” approach. Removing allocated sites from this process and allowing planning officer level approval would significantly streamline these planning decisions. With this change, only non-allocated sites should need to go through this member approval process.

Addressing the repetitive loops that introduce unnecessary delays to planning is also important. Developers shouldn’t need to use the threat of planning appeal to see movement. We need to give developers certainty to secure the investment that is required to promote these sites. Reducing unnecessary complexities, cost burdens and planning risk, alongside better support for smaller developers/ SMEs, would result in massive improvements.

Overall, there are plenty of reasons for optimism that the Labour Government is tackling the needs of the UK housing industry through its proposed NPPF reforms. However, as with any nascent proposal, there is still much work ahead to refine it into a working plan instead of a lofty dream, especially the underlying modernisation needed to better support its goals.

Leveraging a more modernised approach 

With any ambitious change like this comes the need for more modernised systems to help test project viability and keep things on track. While highly complex spreadsheets crafted over the years are the stalwart of many schemes, changes and updates can be cumbersome and vulnerable to human error. This adds to the risk of many schemes being stalled or abandoned due to a lack of accessibility and transparency to financial modelling software. Modernising these systems would help reduce the time to adapt schemes and get approvals quickly and efficiently.

As government proposals evolve into projects, it will be all hands-on deck for the UK development industry to solve some of these issues and do what they can to help meet the nation’s housing needs.

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