England’s affordable housing regime: Essential guide for overseas investors
Affordable housing (housing for those who cannot afford to buy or rent in the private housing market) has to be provided on most new residential developments in England. If it can’t be provided onsite, there’s usually a requirement to make a financial contribution towards units offsite. Providing affordable housing can affect the viability of a residential development and is a cost to be considered.
Targets for providing affordable housing are set out in the government-issued National Planning Policy Framework (NPPF). The affordable housing is secured through the planning regime by the developer entering into a planning agreement with the relevant local planning authority to control the tenure of houses.
What is affordable housing?
Affordable housing is defined in the NPPF as: “housing for sale or rent, for those whose needs are not met by the market (including housing that provides a subsidized route to home ownership and/or is for essential local workers).” The NPPF then says that it must comply with one or more of the definitions provided of different types of affordable housing (explained below).
How much affordable housing has to be provided?
The NPPF says:
- Affordable housing should be provided where there’s a major development. A major development is one that provides ten or more homes (in designated rural areas, a local planning authority’s policies may set a threshold of five units or fewer) or a site with an area of 0.5 hectares or more.
- Local planning authorities’ policies and decisions should expect at least 10% of the housing provided to be available as affordable home ownership. But there are some exemptions to this 10% target – for example, exclusive Build to Rent schemes.
While the NPPF sets out national policy, local planning authorities are responsible for producing a development plan for their administrative area. Among other things, these local plans should set out the levels and types of affordable housing provision required to meet the need they’ve identified in their area. When considering an application for planning permission and the requirements for providing affordable housing, a local planning authority will need to think about their own development plan policies as well as the NPPF.
The strategic target in London (as per The London Plan 2021) is for 50% of all new homes delivered across London to be genuinely affordable. Elsewhere, the target is generally in the region of 30-35%.
What are the different types of affordable housing?
- Social rented housing: the rent is set referring to a government formula, historically at very low rates – around 50% of private rents in the area. Housing is owned and managed by a registered provider;1 the landlord. There’s some flexibility to charge 5% above the formula rent, although social rents are capped according to property size. The amount of affordable housing available in this tenure type is declining in favor of other products. But it’s arguably the product for which there’s the greatest need.
- Affordable rented housing: this is also owned and managed by a registered provider. The rent is generally higher than that of social rented housing, but it must be at least 20% below local market rents.
- For Build to Rent schemes, affordable housing for rent is expected to be the normal form of affordable housing provision (known as Affordable Private Rent). In this case the affordable housing would not need to be operated by a registered provider.
- Discounted market sales housing: this is housing that’s offered for sale at a discount of at least 20% below market value. Eligibility of purchasers is determined with regard to local incomes and local house prices. Provision is to be made to ensure that the housing remains at a discount for future purchasers.
- First Homes is the latest government initiative for discounted market sales housing that requires a minimum of 25% of all affordable housing to be delivered as First Homes. These are newly built properties that are sold to first-time buyers of any age and must be offered at a minimum discount of 30% against market value in perpetuity. Price and income caps and other eligibility criteria apply.
- Shared ownership: this is where buyers who meet eligibility criteria can buy a share of a property and pay rent on the remaining share to a registered provider, who owns the balance of the property. Over time the buyer can increase their share through a mechanism known as staircasing until they own the property outright.
The mix of which tenures are secured is influenced by what a local authority will agree to accept in their area, based on local needs. Different tenures also have different cost implications for developers, which may influence where affordable housing is delivered.
Does all affordable housing have to be delivered onsite?
Affordable housing usually has to be provided onsite unless:
- offsite provision or an appropriate financial contribution in lieu can be robustly justified; and
- the agreed approach contributes to the objective of creating mixed and balanced communities.
Considering the viability of the development
A Viability Assessment can be undertaken to consider the costs of providing affordable housing on a development and the impact on the developer’s profit. It can be used to support an argument that a lower level of affordable housing should be provided on a particular development than that expressed in policy.
However, a developer’s assessment of viability can be challenged by the local planning authority, with the authority arguing that a greater profit is available and can be made available for affordable housing. The government provides guidance contained in the Planning Practice Statement as to the approach for a viability assessment. This approach uses the value of the land in its existing use and allows for a premium to the landowner on top of that. When making planning policy, local planning authorities are advised to make an assumption of 15-20% of gross development value as a suitable return to developers, to establish the viability of plan policies.
The methods for making an affordable housing viability assessment can vary, particularly over larger phased developments, where often there would be a viability review mechanism. Most often, a mechanism would enable a local planning authority to secure greater compliance with policy and contribution over time if the development becomes more profitable than first forecast. These mechanisms often have a similar effect to an overage provision, potentially securing higher levels of affordable housing for a local planning authority than if the allocation had been set out at the outset and not revisited.
The sheer lack of new housing in England has driven the (unacceptable) position that any housing (regardless of tenure) is more important than affordable housing. It’s not the state or health of the housing market but the level of profits a developer can show that they are likely to make, that determines how many affordable housing units can be built on a particular site, rather than the actual need for affordable housing in the local area.
Pepper-potting and other details
Pepper-potting is where affordable housing is “sprinkled” through a housing estate rather than being built in a separate development, to ensure that affordable housing is indistinguishable from market housing, contributing to the concept of place making. The NPPF objective is to achieve social integration. In addition to pepper potting, a mix of sizes and types of housing in each tenure is likely to be required.
Standards are also specified for the construction of affordable housing units.
Affordable housing is a cost to residential developers. It can reduce profits to both them and landowners and needs to be considered at the outset. While viability appraisals can be used to justify a reduction in the proportion of housing to be provided as affordable, with an allowance being made for the value to a landowner and profit to a developer, often open book accounting is required.
If you’d like any further help or advice, please contact DLA Piper’s planning team.
1 A Registered Provider is a private provider of affordable housing which is designated in the register maintained by the Homes and Communities Agency. It is usually a housing association but can also be a council or charitable body.