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Developers Are Aggravating the UK's Housing Crisis by Ducking Affordable Home Targets

A new report by the Bureau of Investigative Journalism shows how developers are dodging affordable housing quotas, as their profits explode.
Image by Andrew Stawarz

This story comes to VICE News from the Bureau of Investigative Journalism (TBIJ)

Jean Uzoma, a redoubtable 67-year-old community activist, lives in one of Europe's biggest housing development zones, close to the River Thames in south London.

From Jean's fifth floor balcony, imposing glass towers and cranes edge towards her estate from east and west.

As house prices and rents spiral, you'd imagine a huge housing project presents the perfect opportunity to address Britain's affordable housing crisis.

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But Jean sounds almost affronted when asked whether the thousands of newly built flats in her community will provide homes for her daughter's family, who were priced out of the area years ago.

"Don't be stupid!" she laughs. "Nobody's going to live there who comes from here."

Less than quarter of a mile from Jean's apartment and running parallel to the Thames is a 195 hectare muddle of arterial roads, elevated rail lines, offices, distribution businesses, data centers, and council estates.

Known as the Vauxhall Nine Elms Battersea Opportunity Area (VNEB), London Mayor Boris Johnson has defined the VNEB as the largest remaining development zone in central London.

Between the vast, looming towers of the iconic Battersea Power Station and the forbidding, fast flowing road junction of Vauxhall, thousands of new homes and public spaces will, according to the mayor, attract international investors and reinforce London's status as a world city buoyed by the input of internationally renowned architects such as Frank Gehry.

Local officials sold the mammoth project to residents on Jean's estate on the basis that over a third of the homes would be affordable. But, according to research by the Bureau of Investigative Journalism, just 17 percent of the 15,000 VNEB homes currently in the planning process across the two London boroughs hosting the development are likely to be priced at below market levels.

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At various times during the 43 years on her estate, Jean has chaired the tenant's association, run the advice center, and acted as a trustee for both a neighborhood law center and a local adult education college — not to mention helping secure notable improvements to what once was a sink estate.

No shrinking violet and not one to throw in the towel, even Jean has nevertheless given up fighting the developers and their plans for luxury homes.

"I tried in the past, along with some people in our Tenant's Association, to block some of the planning applications along here. But you waste your time because even if we convince Lambeth (Borough Council) and Lambeth refuses permission, the developers appeal and get it anyway. So what is the point?"

'Worryingly, we have seen a huge cut to the housing grant and woefully low levels of affordable homes being built.'

What is happening to Jean's community in south London is a story replayed across the UK, and goes to the heart of Britain's affordable housing crisis.

In England, there are 1.4 million households on council waiting lists — a 34 percent rise since 1997. This includes nearly 85,000 children living in temporary accommodation — equivalent to the entire population of a mid-sized UK town.

But against this swelling tide of humanity unable to secure a decent, stable home, the supply of affordable housing has gone into reverse.

Government figures projected that 42,710 affordable homes would be built in England in the 2013-14 financial year — the lowest number since 2006 and a 26 percent fall since 2010.

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Affordable supply in Britain has never recovered from former Prime Minister Margaret Thatcher's flagship "Right to Buy" policy, under which approximately 2 million council homes have been sold at a substantial discount since 1980. Local authorities were for many years banned from using the proceeds to replace council stock.

Since the Thatcher years, housing associations have been the main providers of homes for people priced out of the market. Some are colossal organizations with net assets worth several billion pounds. They earn substantial revenue from rents and many of them increasingly develop homes for sale to the mainstream market.

To build cheap homes, housing associations have for decades relied on two things: an annual government grant worth billions of pounds and access to land.

Today, however, the affordable housing sector has been winded by a double punch — one thrown by the UK Treasury, the other by the planning system.

Chancellor George Osborne, in his 2010 government spending review, announced a 60 percent cut to the affordable housing grant. In June last year, he followed this with a further 2.2 percent reduction.

In return for the grant cut, the government has allowed housing associations to increase rents on their new build homes to 80 percent of market rents. These so-called "affordable rents" have replaced significantly cheaper, social rents. It means that in many areas, particularly in England's densely populated and expensive south east, even affordable rents are out of reach of ordinary people.

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To Jon Sparkes, chief executive of Crisis, a homeless campaign group, low-cost housing providers are in danger of forgetting their core mission.

"Worryingly, we have seen a huge cut to the housing grant and woefully low levels of affordable homes being built," he said. "Combined with 'affordable rents' of up to 80 percent of market rents, we are extremely concerned about the future of the sector as a whole."

As housing associations adapt to a new cash constrained world, the other mainstay — affordable houses built by the private sector — is also in freefall.

Developers often describe themselves as "place makers" and creators of "sustainable communities" in the beguiling language deployed by the industry.

But for the most part, the mainstream volume house building industry is a crude numbers' game. If a stock market quoted company fails to achieve a gross profit margin of at least 15 percent, its shares generally dive, making it vulnerable to a takeover from an industry rival or private equity group.

In this cut-throat industry a company's profit margin substantially improves if more units can be crammed on to a site.

First, however, there is a hurdle to overcome — the planning system. As a condition of securing planning consent, developers are required to meet a local affordable housing target.

This target is set by the individual local authority and is expressed as a fixed percentage of residential developments which should be affordable. The percentage varies from council to council reflecting the local economy and income levels.

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For the full range of TBIJ housing stories, read more here.

In the immediate aftermath of the credit crunch, when both mortgage supply and buyers dried up, many house builders were glad to sell land to housing associations to build affordable units so they could access housing grants from central government. It provided welcome cashflow in a time of economic crisis.

But to the big beasts of the house building industry, the financial crisis is now a distant memory. In fact, rarely have they had it so good.

In the past three years, TBIJ calculates the UK's top ten builders increased their pre-tax profits by 180 percent, from £566.7 million ($888m) in 2011 to £1.56 billion last year. This year, the top ten housebuilders' pre-tax profits are set to exceed the £2 billion barrier for the first time since the peak of the last boom in 2006.

A combination of Osborne's huge housing grant cut and the house price boom means there is now little incentive for developers to build affordable homes.

It has got to the point that many housebuilders see affordable housing as a cost they need to control and reduce. In this market, they'd be stupid not to.

Luckily for the industry, the planning system provides a helpful escape valve: the affordable housing target is not a legally enforceable mechanism. It serves merely as guidance. It is trumped by national planning policy. This states that if a developer can prove building affordable homes makes a residential scheme financially unviable, the local authority's target for low cost homes can be waived or reduced.

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There is very little chance Jean's daughter could live near her mum in Lambeth — houses are just too expensive.

Housebuilders use what is known as a financial viability assessment to prove that a local authority's affordable housing target makes their schemes uneconomic. The assessment lays bare to council officers the economics of a project — so long as the figures given by the housebuilder are accurate. According to independent experts who scrutinize the figures, often they are not.

The assessment works by subtracting a scheme's projected cost, including a 20 percent profit for the developer, from its potential revenue based on current property values.

The resulting figure is called the "residual land value." If there is hardly any difference between a site's residual land value and its current value, developers argue it does not make sense to build the scheme — unless affordable provision is reduced. So assumptions on costs and revenues become critically important in assessing a scheme's viability.

Yet surprisingly, many planning authorities appear to fail to check viability assessments as thoroughly as they might.

"The weakness in the viability system combined with the government's cuts to the (affordable) housing grant regime, largely explains the current affordable housing supply disaster," said Christopher Marsh, a specialist planning adviser to local councils who has scrutinized hundreds of viability schemes.

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It is almost unheard of for a financial viability assessment to be made public. Developers are extremely reluctant to disclose them — even to councilors. They only tend to come to light if leaked.

So arguments over financial viability have become the new battleground on which local councils, developers and now increasingly, campaigners fight — with victory in very many cases going to the developer.

Sky High
Jean doesn't get to see her grandchildren as often as she would like. With her failing sight, she can no longer drive the 40 miles to visit her daughter. There is very little chance Jean's daughter could live near her mum in Lambeth — houses are just too expensive.

"My daughter's been married 25 years in July and she's had to buy a house in Luton [north of the UK capital.] She couldn't buy a house in London."

Most of the new housing projects springing up in VNEB are not aimed at the local community. Not when developers focus on maximizing profits. They do this by building as many high-end properties as they can, while often at the same time, completely legally, reducing affordable housing numbers.

TBIJ has investigated a large number of housing schemes over the past year, trawling planning documents and legal agreements to work out how the system results in affordable housing being cut from major schemes.

In one case of a 2007 project, Frasers Property, part of a Singaporean-listed conglomerate, paid £6.47 million for a disused data center in the VNEB — less than two miles from Jean's estate.

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A year later, Lambeth approved Frasers' plans for Vauxhall Sky Gardens, a residential and office development in two new buildings — one a 36-story tower. The scheme included a 35 percent affordable housing quota — close to Lambeth's 40 percent target.

But in 2010, the financial crisis prompted Frasers to ditch the office element of the scheme and increase the number of residential units from 178 units to 239. It proved a wise move given the way the London housing market was defying the downturn.

What happened next typifies how Britain loses vital affordable homes.

But despite strong demand from overseas buyers for housing, Frasers argued to Lambeth Council that the effects of the economic downturn were so severe, it needed to cut its affordable housing quota from 35 percent to 25 percent. The council agreed.

But that was not the end of the matter. In February last year, as the London market was in overdrive, Frasers argued that the withdrawal of a £5.6m government housing grant meant not a single affordable home was economically viable. It said all 59 units had to be scrapped.

What happened next typifies how Britain loses vital affordable homes.

TBIJ has been passed details of the Vauxhall Sky Gardens affordable housing viability submission. These reports, on which vital decisions about affordable housing are made, are invariably kept out of the public domain.

The Vauxhall Sky Garden' viability report states that the development had an average residential sale value of £612 per sq ft.

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Lambeth's viability adviser, BNP Paribas Real Estate, challenged this, arguing that the sale value should be 10 percent higher.

Additionally, Lambeth planning documents indicate that the viability report had placed too low a value on car parking revenue, off-plan sales, and retail rents in its viability submission to the council.

So with a higher overall projected revenue, council planning officers argued the scheme could afford a 17 percent affordable housing quota.

Despite protests from two planning committee members who found it hard to believe 25 percent affordable housing on the site made the scheme unviable, the 17 percent compromise proposal was voted through by Lambeth in September 2013.

But Land Registry documents show that as council officials were negotiating with Frasers, the company was selling options on dozens of Vauxhall Sky Gardens' flats.

And in November 2013, just two months after planning permission was granted, it was reported that the entire development was sold off-plan.

Three senior property industry sources have confirmed to TBIJ that the entire luxury 239-unit residential scheme was indeed sold — at what is thought to be more than £800 per sq ft.

In the end, Frasers reduced its affordable housing obligation by 18 units.

It means Frasers, according to bureau calculations, is set to receive an estimated residential sales income of at least £126m. This is over £20m more than the figure it indicated to Lambeth only 10 months earlier when it was attempting to scrap all the affordable homes in its development. And, in the end, Frasers reduced its affordable housing obligation by 18 units.

Frasers Property declined to comment on the gap between what it sold its flats for and what it told the council it would receive.

In a statement, the company said: "This site was bought in early 2007 and had stalled due to the global financial crisis, which led to severe funding restrictions required for the delivery of the project. The site had remained dormant since then, but with the improving residential market in 2012 an independent report from a highly respected third party was appointed to assess the financial viability at that time, with subsequent consultations with Lambeth Council's appointed consultants, BNP Paribas, to assess the affordable housing and employment provisions for this site.

"This resulted in an agreement to provide 35 rented affordable homes as well as six shared ownership homes. In addition, there is the provision of 3,250 sq meters (34,983 sq ft) of new commercial space and 210 sq m of ground floor retail space generating employment for the local community. We believe this satisfactory outcome will provide the necessary homes, both for the community and the private sector, in an area that has seen substantial urban regeneration. Works have now commenced on site to deliver this project by 2016."

In Lambeth today, there are over 15,000 households waiting for a home.

To read TBIJ's extended Great British Housing Crisis report, click here.

Image via Flickr.