Part 2 of a propviews deep dive into the new Draft
The new emerging framework for London is a less plan and more pitch. It requires a vast injection of public cash into London’s housing development supply chain to get things to work.
If they pull it off, this could be positive for the Capital. But what if they don’t?
The ask
It’s explicit from the start and appears in the opening pages as the curtain lifts:
Para 1.25:
“The Plan’s supporting Viability Study shows that London is in an extremely challenging viability context ……
It moves swiftly to pitch:
…..The public sector requires the capacity to take a more interventionist role in both the housing and land markets to support housing delivery and create the conditions for investment…..
It then considers a new vision for execution:
….Beyond this, delivery models such as greater land assembly, more pro-active intervention in de-risking sites and partnership approaches are required to unlock higher levels of housing”
But alas, it finishes on retaining the enforcement regime which has inadvertently decapitalized London res dev:
Comprehensive review mechanisms will be applied to schemes to ensure that affordable housing is increased if market conditions improve viability over time.
A brave new world
The draft plan moves the London development sector away from private-led delivery. It sets thresholds that by its own admission, are unachievable without a multiples of extra grant to what London has available today.
And it chimes perfectly with the new Burnham administration in two clear ways. First, the aspiration to uptick council house building materially. The second, to hand more power and resources to Mayors across the UK. You could say London is perfectly placed to benefit from a very sizeable chunk of this new public sector spending largesse.
But there’s a problem. London is not in the north. And there is another problem. Housing is not the only capital call.
There is a huge and acute short fall in defense spending. And let’s add a third issue for the experienced travelers amongst us: has London really proved itself worthy of more cash given its own delivery record? Burnham may look to his home track of Manchester where the relationship between the private and public sector appears better than the political skirmishing that pervades London.
And here’s the worry for the built environment sector if the power politics fail. For those not in the thrall of contractor + deals and public sector pump priming, what happens if the money doesn’t materialize?
What happens if the cash shoots (literally) towards NATO. What happens if the current political leadership isn’t there in two years.
The money doesn’t materialize but the ratchet remains. Not a pleasing prospect for long term investors that live beyond photo shoots and four year election cycles.
Mayoral flagship policies remain
The draft shortens the text and there are some welcome new policies. I will write about these in further parts.
However, and this is a political decision, it appears to have maintained the threshold approach. This means review testing, rigid EUV + and profit capping.
To get to even a semblance of justification, City Hall opted for an in-house assessment of viability to support the revised thresholds. Essentially a swift return to 35% for Inner London and Southwest and then a ring of 25% and 20% affordable in areas considered more marginal. So there is some easing but if you don’t hit the numbers, then you move straight to testing with both mid and late-stage reviews in play.
There are soft words from City Hall to soothe jitters. The viability testing will return to an enabling mentality. But memories of Cuba Street, Stag Brewery and Aberfeldy linger long.
Let’s call a spade a spade. The fact is an enforcement mentality got beyond the grip of Deputy Mayors. It led to deadlock and profit squashing. It led to stalled sites and impairment just when the market required pragmatism and support. It wasn’t the root cause of London’s housing collapse but the threshold approach has proven too complex in tougher times.
The balance sheets have not recovered. Investment capital needs to be won over. Does this Plan give the market the confidence to come back?
Many North American and Far Eastern investors won’t invest meaningfully in London again unless there is a more material change. No amount of developer gloss is going to make up for what has happened over the last five years and to be fair, this isn’t all on City Hall.
Same supporting cast with softer words doesn’t make up for serious impairments. Innovation is required, less detail and a less conspicuous ratchet.
And as one senior viability professional told me: no one professionally was going to put their PI cover at risk for this new Draft plan. The new thresholds are set on deep foundations of public cash. The majority of the work holding up the Draft has been done in-house.
Does in-house make the new Plan inward facing?
The real question is this: can these new thresholds really work in a post Build Safety world where costs of capital have returned to their historic average? Some would argue they didn’t work well even in the heady days of 2016.
London wasn’t doing much better than 15% affordable back then. Threshold chasing in the Murray era caused London to create a lot of unviable consents trying to satisfy something that was never possible without proper public funding.
What chance has London now when development viability has fallen through a floor? These new thresholds might be a little softer but the market has moved too far in the wrong way. More radical policy i.e less policy is needed.
The City Hall base case
Let’s look at the numbers. To support a broad retention of the Mayor’s threshold approach, City Hall has run a series of base cases across value bands. The highest is A and the lowest is F. They run crudely from central London to the outer fringe.
The base case makes some bold assumptions: 80% reduction in Borough CIL and no costings on the higher than market standards on water, acoustics and carbon.
Of the 989 different scenarios tested by the GLA team, only 23% are viable as a base. Yes that’s right, City Hall is relying on serious growth to meet the threshold ask – or a heck of a lot of new cash.
There is no change to profit allowed even though we are in a different world of risk and cost of capital.
Essentially policy led need (i.e. affordable quotas) is eating into and killing effective demand. It’s pure play regulatory capture. One eats the other.
You drive rationing which makes things more costly. Things becomes scarcer and so rationing becomes more exacting in response. The costs get greater and effective demand is harder to serve. One drives the other and we all lose.
If not even a quarter of the base works today even using out dated assumptions, what does it mean if we put some real world assumptions into the mix? Yikes
Look out for the next part where we look in detail at the sensitivity and ask whether even 23% is the right base case to justify the new threshold approach. Part 1 below:
Draft London Plan Consultation: The Greenbelt Gamble – sharing views and insights
