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Section 106 squeeze
Local Government Chronicle – 12 June 2008

Affordable housing relies on s106 deals. Now, as the credit crunch bites, local government is feeling the pain, says Mark Smulian.

The sight of estate agents and house builders passing round begging bowls might inspire unworthy glee among those who think these trades rip off the public during times of rising home prices.

But the howls of anguish from both sectors as the credit crunch bites signal a double bind for councils. An economic downturn will increase demand for affordable housing, but will also hamper councils' ability to secure this accommodation from developers. This issue of undersupply will be hotly debated at the Chartered Institute of Housing's annual conference next week.

Affordable housing

For the past decade, government policy has dictated that an increasing proportion of affordable housing must be secured as planning gain - commonly known as s106 - by which builders agree as part of planning permission to provide a proportion of these homes on their sites, or pay for them elsewhere.

This ties together the provision of market and affordable homes, and a fall in the former will drag down the latter.

Public money or borrowing could bridge the gap, but neither look a promising source in the present climate.

To make matters worse, the wider downturn in the property industry will hit the kind of large regeneration projects in town centres and former industrial sites that also sometimes provide affordable homes. The chance of the government meeting its target for building three million new homes by 2020 looks questionable.

Property transactions down

The Council of Mortgage Lenders gave a stark illustration of how bad things have become when it reported that mortgage lending in March and April this year was 16% down on 2007. It predicted this year property transactions would be down by 35% on 2007, at 770,000, and lending by its members 21% lower at 285bn.

Ian Thorn, a former Liberal Democrat councillor and now a public relations adviser to developers, says: "I think no one should underestimate the severity of the state of the housing industry.

"The knock-on effect on local authorities will be that they now cannot get their s106 packages, or where there is an opportunity to develop you will see developers being very, very aggressive over s106."

Research from the Local Government Association has found the housing downturn could hit councils in several ways - some not immediately obvious. These include more people being unable to pay council tax because of personal financial problems, increased demand for benefits should unemployment rise, higher demand for social housing, and fewer elderly people able to finance their social care from surplus equity in their homes.

LGA environment programme director Martin Wheatley says: "Half the affordable housing supply comes through planning gain and certainly the downturn is going to make meeting targets for provision very difficult."

It's clear that some house-building projects will stop, even Persimmon Homes, one of the largest house-builders, has suspended new sites until the market improves. But there will be a conundrum for councils even where projects continue.

When developers are fighting for planning permission it is relatively easy for councils to extract pledges of substantial contributions to affordable housing or local infrastructure.

Bad times mean builders will claim they can barely afford to build, never mind provide homes for sale at below-market prices or supply other goodies sought by councils.

Should councils decide to wait for better times, and tell builders who refuse adequate s106 deals to get lost? Or should they be glad that any development is going on and take what they can? Suddenly, the balance of power has shifted in these negotiations.

The Home Builders Federation believes, unsurprisingly, that councils must be modest in their expectations of planning gain.

"If there is a high proportion of affordable homes then a site is less viable than it might be, and if affordable housing quotas are not cut lots of sites will be unviable," a spokesman says.

There is a similar tale of woe from the property industry, where Michael Chambers, director of regeneration and planning at the British Property Federation, says: "Quite a lot of regeneration schemes are of marginal viability by their nature and so there is an issue that some might not go ahead. In hard times it's safety first.

"I think the crunch is likely to drive down planning gain. Councils could change s106 requirements to save schemes that face difficulty."

The British Urban Regeneration Association's chief executive, Michael Ward, thinks that prospects for councils are "rather gloomy" because a policy designed to take advantage of planning gain in times of plenty will be very much reduced.

He says: "The whole approach of getting affordable housing on the back of commercial development will become very hard to sustain in the current climate."

He does not though advocate panicky concessions to builders, and thinks that councils have several opportunities to find ways through.

Mr Ward says: "There is a risk that local authorities will rush to tear up agreements and give in to developers just to get projects built. Councils should get the best possible advice rather than bargain away their gains, because they might do better to take a long view that the market will come back and developers will once again be interested in projects."

Regeneration could be kept going by the public sector contributing land, so it becomes a project partner and gets a slice of future returns.

Mr Ward also suggests councils might have to switch the emphasis of regeneration. "It is about more than physical things," he says. "It is social and employment and environmental measures too.

"Councils may need to look at those rather than regeneration that depends on big commercial developments. There are a lot of good things a local authority can do that do not relate to the commercial market."

A similar 'don't back down' message comes from the Chartered Institute of Housing. Policy head Abigail Davies admits things are difficult for councils, particularly in the south, where up to 80% of affordable homes have been provided through planning gain.

She advises: "This is a real problem, but it may not be a long-term one, and councils should not take their eyes off the long game. It's very important that local authorities do not drop affordable housing targets as it will not help them long-term if builders think they are a soft touch."

She suggests they seek out those builders happy to supply affordable homes. "It is guaranteed money that they get from affordable housing - they know they will get paid even if they get less than in a private sale," she adds.

There could be a solution of sorts for councils in working pragmatically with builders, landowners and housing associations to keep development going, but still securing some benefits.

They may not have that long to wait. Mr Chambers thinks money may soon be available again as investors with cash, such as sovereign wealth funds controlled by foreign governments, seek to exploit falling land values.

"There is quite a lot of money still out there that will be looking to invest in something," he says.

"If values are falling they may start to see a certain amount of opportunities around, and it could be a lot of money comes back fairly rapidly if things improve a bit."

It's going to be tough, but perhaps not so tough that councils need shelve all their hopes for planning gain. As Dad's Army's Corporal Jones would have said: "Don't panic."

West berkshire's dilemma

West Berkshire Council has found itself over a barrel in planning gain negotiations on Newbury town centre's regeneration.

Developer Standard Life had agreed that its Parkway retail project would include 37 affordable homes among the 184 total. But it told the council in March that this provision would now "contribute to making the scheme unviable" because land and construction costs had risen and the market was unstable.

The developer proposed an alternative of no affordable homes on the site but a 100,000 contribution towards their provision elsewhere in the locality. Such 'off site' affordable housing contributions are not unusual, but West Berkshire's housing service estimated it would pay for just two homes, which it deemed "completely unacceptable". The council could either drop the original affordable homes component, or insist on it and perhaps see the project abandoned.

Newbury is prosperous, but has lost retail custom to neighbouring centres and Parkway was judged important to its long-term economy. The council accepted Standard Life's new terms but decided to pay for the missing affordable housing itself from funds accumulated from other developers' payments towards 'off site' homes.

Leader Graham Jones (Con) says: "The committee had to take a judgment on whether the scheme would go ahead if we did not vary the s106 requirement, and the evidence was that it would not so we would have got nothing."

West Berkshire will not be the last council to wrestle with this dilemma.