Here’s why it’s not always easy to include affordable homes in new schemes

Posted On 28 Jan 2022 at 8:38 pm

The last three developments we built were all in areas where local government policy requires 40 per cent affordable housing. We delivered just over 11 per cent. Here’s why.

Affordable housing and how much developers provide is a matter of much discussion and disappointment among locals.

With property prices continuing to rise, with the amount of new property seen as being priced outside the reach of those on anything approaching a typical income increasing and with the modest number of houses being built by councils themselves, the issue is only going to become more fiercely debated.

I’ll explain how the process works and then why it works – and it’s primarily to do with “existing use value”.

Spacewords Brighton

For context, all of the developments we built were within the boundaries of a town or city, nothing on greenfield or farming land of any kind. We as developers consider this important as we want to make use of the areas that need regeneration before we start building on more of the countryside.

When any major planning application is submitted, it is accompanied by a viability document – a submission from the developer as to how much affordable housing can be provided – and at the heart of it is a valuation with some simple figures.

I know a lot of people think that developers pay a third for the land, a third for the build and make a third profit, but that hasn’t been the case this century and not for some time before either.

The report starts with an assessment of what the end value of the scheme will be with the full 40 per cent affordable housing. We sell that at around 35 per cent discount so it makes a big impact on the final figure.

The valuation then works backwards, deducting profit (around 18 per cent – banks funding projects won’t accept less), build cost (varies, but around 50 per cent), surveyors’ fees, agents, legal fees and so on.

It also deducts the amount we pay the council in community infrastructure levy (CIL) or what are known as “section 106” payments. This money is used by the council to pay for the services that it believes are required as a result of the development, such as school places, parks, public artwork and so on. We also pay section 278 money for transport upgrades.

Once you deduct all that, you’re left with a number. That number is what the land is worth.

We then need to compare that land value to what that “existing use value” is. If you’re looking to develop a block of 50 flats, you might be buying three or four houses to do it.

Their value as houses is the existing use value – and if that is higher than the land price with all the affordable housing factored in, then the homeowners aren’t going to be selling them to developers.

No one’s going to get two offers for their home and take the one that’s several hundred thousand pounds lower than the other, especially not just so they can have the pleasure of selling to a developer.

Work on the Aurum block of flats on the site of the old Sackville Hotel, in Kingsway, on Hove seafront, is nearing completion

In our viability report, the valuer will then work the other way, taking into account the existing use value and seeing what level of affordable housing can be provided, while still making it worth the home or land owners selling.

Sometimes the answer isn’t much and sometimes councils will decide to take a financial contribution from each scheme instead – known as a “commuted sum” – and use that money for purpose-built affordable housing somewhere else.

Build costs in towns and cities are substantially more than building in the countryside and this, compounded by the existing use factor, can reduce affordable housing delivered in even expensive blocks of flats to near zero.

Finally, the viability report is then checked by the district valuer who may accept the figures or in some cases negotiate for more.

Ultimately, it’s worth reducing the amount of affordable housing so that schemes can still be built if that’s what is required.

People need homes but the government falls short of its target every year.

Old buildings, frequently full of asbestos, need clearing safely. Dilapidated areas need regeneration. And councils need money for public services – cash that comes from developers and the council tax-paying home owners they sell to.

A visualisation of the Argentum scheme, the central block, planned for Hove seafront which the council has earmarked for taller properties to enable more homes to be built

The profits from projects like ours don’t just go to us developers either. Our investors include local businesses, funds and even the government through the Housing Growth Partnership which delivers excellent returns for the taxpayer.

The end result of all this is that while the affordable housing in these developments might amount to less than 40 per cent, it is still more than if the site wasn’t developed at all – because then it would always be 0 per cent and that’s not much good to anyone.

Ed Deedman is a director of Cayuga Homes.

  1. Lewis Searle Reply

    The poor downtrodden property developers, however do they cope.

  2. Rico Reply

    They don’t Lewis, they go out of business. I know of two who left the sector in the last 3 months.

    Great piece and if people understood how long planning takes, the cost of it and that overheads aren’t part of the viability assessments, they might start challenging councils who restrict supply and take an age to permit development. Blaming developers and builders will get fewer homes and affordables built, which is counter intuitive.

  3. Trace S Reply

    all housing shud be affordable for people on uni credit, single parents and parents with special needs kids on benfits

  4. Harry B Reply

    I agree Trace, having to work hard for nice things is completely old fashioned! Sorry to hear about your kids

  5. Beccy Reply

    Gosh, it must be a nightmare having an 18% profit margin policed from above. How on earth to the developers cope?? (Berkeley Homes pre tax profit for 20/21 was recently announced as £290+million.)
    This model isn’t working to create homes that are for people rather than housing as assets for investors.

    • Ed Deedman Reply

      Hi Beccy,

      We’re not Berkeley Homes and we don’t make even remotely that level of profit!
      Building housing for investors as assets would only really apply to those buying to rent out privately. Is that what you meant?

      Ed Deedman

      • Beccy Reply

        Hi Ed,

        I do realise you’re not Berkeley. But the fact that big players in the sector are able to make these kind of huge profits indicates the system is working fine for some home builders (who may still argue they can’t afford to build affordable homes, as they are trying to do over here in East Brighton). Business in general is harder for smaller companies (I’m guessing you are smaller than Berkeley, correct me if I’m wrong) so wouldn’t want to see your arguments being applied to make universal points about how the sector works for all.

        What I was thinking of in terms of assets for investors is those who buy property and keep it empty for most of all of the year as the UK pretty market currently offered guaranteed growth (unlike bank accounts). Our local MP estimates 25% of the new build in the Marina are empty year round for this purpose. Of course people who buy flat just to rent them out to Airbnb etc are also not really contributing tot he asocial fabric of the area forced to accommodate them.

        A way of reducing this os to build homes that meet Housing Need in an area rather than expensive 1 and 2 bed flats. In Brighton I gather than biggest demand currently has been analysed as 3 bed family homes.

        As a laypersons, I still think there are important ways this all needs to work better.

        • fed-up with brighton politics Reply

          You are right, Beccy, and we are not really talking about smaller developers like Ed, who seems to be doing his best. However, disregarding Ed’s struggles, sorry, Ed, but there is a rather more fundamental problem here and I bear you no ill-will whatsoever, I saw in the last few days that the council has put in a couple of planning apps just for a total of merely 4 flats up Swanborough Drive way in Whitehawk, utilising redundant bin stores and reducing car parking spaces. One of these proposed flats seems to have a headroom problem (it seems that the tenant may have to be fairly short) and investigations are needed to see what might be below the floors. Desperation stuff for just 4 flats. Council is the freeholder and I think these are social-housing type flats. That is how bad the situation is around here in the East Brighton area.

          You might therefore understand that, in East Brighton anyway, given the dire situation just described, a cynical and flawed proposal (nothing to do with you) by a greedy FTSE 100 mega-developer for over 550 luxury flats, many of them pokey, dark and nasty, said to be market housing with no affordable/social housing has not gone down at all well with locals.

          • Ed Deedman

            Hi – no sympathy for any struggles required!
            That doesn’t sound like a good situation. I’ll have a look at those applications this week and see what’s going on. If I can add anything insightful I’ll come back with another reply.

        • Ed Deedman Reply

          Hi Beccy,

          Well no, we are definitely not as big as Berkeley. One thing about big companies though is that whilst the profit may sound like a lot, Carrillion made £300m profit the year before they went bust owing several billion. I suspect Berkeley are in a lot better shape than that of course, but it’s more about percentages than capital sums.
          The problem with delivering affordable is more about where they go than it is about who delivers them. Buying land and building in urban areas simply costs more than building on agricultural land. That’s why those developments tend to deliver 40% and urban ones don’t. Worthing’s target for urban areas is only 20% before viability. To compensate money from developers tends to get collected instead and then the Housing Associations build blocks with local and national subsidy money, as opposed to housing in each block.
          Empty flats held by investors for capital growth is very rare. Second homes empty for a large portion of the year though – that may well be a problem for the social reasons you outline but it wouldn’t impact on delivering Affordable Homes.
          Could it and should it work better? Absolutely.. I’d start with the planning system simply not delivering enough new homes. If the supply in popular areas matched demand then that would go a very long way to making properties more affordable for everyone. But that’s just the beginning.
          Thanks for taking an interest in the article.

  6. Martin Burt Reply

    Ed Deedman.

    You tell us : People need homes but the government falls short of its target every year:

    The government have failed to deliver.

    Earlier in your article you tell us : The last three developments we built were all in areas where local government policy requires 40 per cent affordable housing. We delivered just over 11 per cent.

    So you’re required to deliver 40% yet only deliver 11%.

    Sounds like to me you should take a look in the mirror and see who’s actually FAILED to DELIVER.

    • Ed Deedman Reply

      HI Martin,

      You’re right – we do fail to deliver the target, explaining why was the purpose of the article.
      There are multiple reasons why the Government fails to deliver its targets, but critically if the rules suggested it was 40% or nothing, then the target would be missed by even more and all the other benefits I listed would also be missed.

  7. Robin Hislop Reply

    It’s interesting to hear a developer’s side of this for a change.

    The whole concept of “affordable homes” is ridiculous from an economic perspective. Selling a property at an enforced 35% discount is effectively a subsidy to one lucky homeowner. And after a certain period, they can sell their property and turn that subsidy into cash. Why should that buyer benefit and not others? The maths is exactly the same for council tenants who take advantage of the right to buy scheme.

    It doesn’t really matter if there are zero “affordable” homes in a development, or even if each property costs multiple millions. Increasing the supply of properties will fulfil some demand, and prevent the price of property from being bid up further by people that want them. Even if lots of luxury developments are built, that will end up reducing demand on cheaper properties because there will be less competition for them.

    It seems to me that the solution to the housing crisis will involve:
    – restricting the supply of cheap money in the economy (i.e. raising interest rates), as this is by far the biggest reason prices are spiralling.
    – building more homes in areas where they are wanted i.e. the south. This will require honest leadership from politicians – we will have to make difficult choices about where to build.
    – ending the right to buy scheme so that councils can provide housing for the most vulnerable without this being constantly taken away from them.

  8. Daniel Harris Reply

    Personally I think the best way to get truly affordable homes would be to dramatically increase our local authority owned housing stuck, bring emergency and temporary accommodation in house. Thats a nice income generator. Reinvest in the new homes, still historic low interest rates, should borrow to build ourselves out of this crisis. This will mean affluent areas taking higher density homes and better class equality. Building them to last with low maintenance is more effective. Build cheap you end up with issues.

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