Why can’t we build affordable housing in London?

A housing protest in London

How is it possible that despite the huge construction boom in London, the city is still failing to provide the housing it needs?

Much of this failure can be attributed to the way in which professionals have appeared to abuse their privileged role in the planning system to further the profits of their clients.

In this article I explain how the planning system is supposed to work and how the failure to regulate surveyors is threatening the sustainable development of our cities.

Planning and value

In 1947 the UK Government removed the unrestricted right of landowners to develop their land. Instead of being free to build whatever they wanted, whenever they wanted within a fixed set of rules, landowners would have to apply for permission to build. Permission should only be granted if the proposed development met the development plan for the area.

Development plans are supposed to be drawn up based on need. The job of a planner is to try to discover what demand will exist for new buildings over the next 10 years and then draw up a plan to guide development.

In addition, plans are supposed to ensure a good quality built environment for the public. They include provision of open spaces, the protection of the historic environment and other requirements to ensure that cities develop in a sustainable manner.

Although this process is not explicitly about money, the distribution of wealth is central to it. The planning system is a large part of how we distribute land value in our country. A change in designation in a plan from one land use to another (for example office to residential) can have large consequences for the value of land. Through the planning system landowners and developers are no longer free to pursue the most profitable scheme. Instead (if the planning system is working as it should) they are compelled to build the development of most value to the wider community.

The provision of affordable housing is the most explicit ways of how this redistribution works. In 1990s the then Conservative government introduced a requirement for new housing developments to include a proportion of affordable housing (this requirement is currently being dismantled by the present Conservative government). Clearly developers can make more money by not providing affordable housing, and instead selling everything at the market rate, but the need is for affordable housing. It is important that affordable housing is not loss making for developers, who receive a payment for building it. It is simply that the profit achievable is lower than with market housing.

The erosion of planning control

Despite having a planning system that should guide development towards the public benefit, In London we simply aren’t seeing the building needed. Between 2007 and today the amount of affordable housing delivered on new developments has gone from 12% to 3%. Instead we get more than a hundred towers, mostly of luxury housing that does very little to meet the needs of Londoners. These towers are cannibalising the city and UNESCO is about to send a monitoring mission to London because of their concern that the lack of planning control is having on views of the Palace of Westminster.

Clearly this was not the plan, but over the last ten years we have seen the steady erosion of the planning system by successive governments which has been largely centred around one policy: development viability testing.

What development viability testing does is say that if planning policies mean that a developer can’t meet a profit target, then the planning authority must remove planning controls in order to encourage development. In other words the need for the developer to achieve a certain profit level comes before social need. The effect is that the community provides a subsidy to developers out of their share of land value in order to allow a development to go forward.

The policy was first introduced by Ken Livingstone in London. Developers were challenging his affordable housing target of 50% as being unviable, and it was thought that the introduction of development viability testing would call their bluff.

However since then it has turned around entirely. The policy has been extended to the extent that almost any planning policy can be removed if it is shown that it makes a development ‘financially unviable’. And almost every development in London does claim to be financially unviable, a very strange phenomenon at a time when profits in the development industry are booming.

It is difficult to underestimate the impact of this policy change. Research from the Bureau of Investigative Journalism in 2013 found that across the country 60% of developments failed to meet affordable housing targets, representing thousands of lost homes.

The Games Begin

Development viability is a simple enough process. A developer employs a surveyor to estimate the costs of building and any future revenue that the developer will achieve. If the profit left over is not enough for the developer to finance his project then the scheme is deemed financially unviable and therefore eligible for planning subsidy.

And this is where the games begin. The entire system relies on the estimates made by surveyors, who are paid by the developer. What if to please his or her client, the surveyor deliberately underestimates the profit of a scheme in order to capture some of that lucrative subsidy for his client?

To compound the problem, as pointed out in my last post, it has become the practice of councils to conduct the whole viability process in secret so that there are almost no public scrutiny. If a surveyor were to deliberately manipulate figures to his client’s advantage, other than a council officer and any consultant they employ to assist them, no one would know until it was too late.

Worryingly, the evidence shows that this kind of practice does happen. At the Shell Centre surveyors for the developers, Knight Frank and Savills, simply created two contemporaneous estimates for the sales value of housing in the new development. When talking to the council, they insisted that the new housing was worth no more than £1275 a square foot. This would net the developer just over £1bn. They argued that when the costs of development were taken out there was not enough left over for the building to be financially viable. Lambeth and their consultant BNP Paribas accepted the general premise that the building was financially unviable, although they thought the valuation a bit low.

However, at the same time, Knight Frank and Savills were telling investors in the City that the expected values were in the region of £1640 a square foot. With the stroke of a pen, the surveyors had increased the value of the building by £323m. Of course, none of this was disclosed to the Council or the public.

When this discrepancy was made public through a leak, the difference was simply explained away as a matter of timing. At the subsequent public inquiry and court battle into the scheme, we were told by Tim Corner QC, representing the developer, that the investor presentation was looking at future possible values of the housing.

It was impossible to determine the exact impact of these changes in valuations as the full viability assessment was never disclosed.

When the flats went on sale just a few months later that future possible value ended up looking very conservative. At the time of writing, sales values of currently available apartments at the Shell Centre development range between £1800 and £2000 per square foot. The highest value housing at the front of the development hasn’t even been put on sale yet.

Of course, predicting the future is not an accurate science, but in my opinion, it is simply impossible that the firms responsible believed that both estimates were fair and accurate. When one of those valuations is far lower than the other, and is produced for the specific purpose of gaining planning subsidy, the whole process stinks.

Apartments at the Shell Centre development as of 07/02/16

At another major scheme a short walk down the river, 8 Albert Embankment, Knight Frank played the same game, telling a planning inspector that their estimate of value was £60m less than what was being told to investors. That difference accounted for 30% of the value of that scheme. As a result the inspector accepted a large loss of both affordable housing and industrial space, although he turned down the development on other grounds.

At large schemes such as the Heygate and Earls Court, where vast amounts of affordable housing are being demolished to make way for new luxury apartments, campaigners have revealed suspiciously low valuations in the viability reports submitted with planning applications. However, until now it is only at Shell and 8 Albert Embankment where they have been caught red-handed double accounting.

Nevertheless the evidence suggests that the practice is widespread. In London it is rare to see a development that meets the affordable housing target, which suggests that most developments are telling planning authorities that their schemes are only marginally profitable. Back in the real world, developer profits are booming. It is difficult to imagine that the entire profession is wrong most of the time just by fluke.

In the public interest?

It is obvious that if a surveyor manipulates their valuations in order to allow their client to take value away from the community, then that is not in the public interest.

We may expect that someone paid by a developer to put the best gloss on their case, and when such huge amounts of money are involved there are bound to be instances of sharp practice. But in reality what is happening is clearly a corruption of the system.

One of the safeguards against this kind of behaviour is the fact that surveyors are professionals, regulated by a professional body. Like many other professions, they have a duty to both the public interest and their client.

Just as a lawyer’s duty to the court means that sometimes they must do things that appear to be against the wishes or interests of their clients, surveyors are not supposed to manipulate land valuations to the benefit of theirs. If they do they should face disciplinary action, and be banned from practising as a surveyor.

The public interest function of the profession is safeguarded by their professional body, the Royal Institute of Chartered Surveyors (RICS). RICS’s mandate comes from the Queen in the form of a royal charter. The point is that it is more than a trade body for its members, it has a wider duty the public.

The Royal Charter, which was first issued by Queen Victoria in 1881 and last updated in 2008, states that the role of RICS is:

“to maintain and promote the usefulness of the profession for the public advantage in the United Kingdom”.

The evidence suggests that the kind of manipulations seen at Shell and 8 Albert Embankment is happening on an industrial scale. It would unsurprising if firms are selling affordable housing avoidance schemes in the same way that accountants sell tax avoidance schemes. Indeed one firm, s106 management (which it must be said appears to be unregulated), is so crass as to publish a cartoon showing their clients walking off with a wheelbarrow full of cash after they had negotiated away affordable housing obligations for them.

So where has RICS been on this issue? The simple answer is nowhere. Given what we have learned about the practices of the industry, it is difficult to come to any other conclusion that until now RICS has comprehensively failed to uphold its duty to furthering the public interest.

Why? Who knows. These practices have been known about for some time in the industry. But consider this, surveying is big business, and Knight Frank and Savills are two of the biggest players in the industry. The turnover of Knight Frank was £440m in 2015 and Savills’ turnover was £1bn. When companies like this are involved in these kinds of practices then we know that the rot has reached the core and the remedy is difficult. I am not suggesting that these companies have undue influence on RICS, but as we have seen in the banking industry, regulators often find it difficult to tame the big beasts.

But the fundamental fact remains. As our system is currently set up we rely on surveyors taking their public interest obligation seriously, and for RICS to make sure they do. If they can’t do that then surely a new form of regulation, or a new way of doing planning, must be forthcoming, and soon.

Will RICS now take their cue from the increasing public anger over the housing crisis to do something to realign the profession with the public interest? A complaint about Knight Frank and Savills will be arriving at RICS on Monday, so we shall soon see how serious RICS are about their public interest mandate.

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