Housing numbers are plummeting across London. Little more than a year into the Starmer government and the ambition of 1.5 million new homes has been wiped out.
It’s clear from data released over the summer that the housing emergency in London has extended into a full-blown brownfield development crisis. Be of little doubt, the sharp falls – from over 60,000 starts when the current London Mayor began in office to fewer than 10,000 this year – is a part consequence of poorly conceived policy interventions.
These have exacerbated an already challenging macroeconomic trading environment and wiped-out brownfield viability.
You cannot easily correct macro economic trading conditions but you can make right policies which are not working. The new Housing Secretary, has vowed to ‘build, baby, build’ and that means removing the barriers to growth. It means being realistic, not ideological about site viabilities.
It’s time the industry spoke out about Late Stage Reviews (LSRs). They are acting as a blockade to fresh investment entering London residential development.
Championed by James Murray, Sadiq’s former housing chief, LSRs fail every principle of a good tax. They are neither fair, efficient nor simple. But as the default position across London for all applications, large and small, they are frightening off fresh real estate investment capital.
Let’s be clear about what an LSR is: it’s a profit tax on the future. But unlike corporation tax or dividends tax, it is only partially based on true costs and revenues. Many of the assumptions are made up by the public sector.
That’s unfair and weighs heavily against the capital’s international reputation as a reasonable place to do business.
Back to the beginning
If you as a developer come along with a site of over 10 homes and you cannot deliver 35% affordable, then you are liable for an LSR.
The profit allowed varies. It can be up to 17.5% of GDV, though as low as 12.5% for a build-to-rent scheme. One officer in a northeast London borough suggested a scheme I worked on should accept as low as 10%, because it was popular with the local ward.
Over whatever threshold you are able to agree, 60% of any additional profit goes to the borough.
Supporters of LSRs argue this is fine. It’s fair because the affordable thresholds are clear and they would say they are allowing you to get away with not providing the requisite level of affordable housing.
I would counter that in London, now, a 35% affordable housing hurdle sends you into negative land value. That has become a significant reason to not invest in London: you are automatically in LSR murkiness.
It gets less fair and less simple the more you look at the mechanics. The rules are gamed.
The developer is not permitted to include true costs of finance and management. It is also assumed to work for free throughout the project and cannot put salary costs in. These rules are not consistent – contractors are allowed to enter overheads – it’s just the developers that have to work off fumes.
You are also not allowed to enter the land cost – rather you must go with an EUV+ model – because the public sector does not want developers to overpay. But the execution of this approach is murky as authorities decide the premium once planning is submitted. It can range from 0-30%, but normally the council’s position is 0 and the developer must beg and cajole to get to 20%.
Explaining these viability quirks to grown-up international investors is proving challenging to those of us who wish to keep the lights on.
The result: the London residential land market has effectively shut down because developers can no longer price land.
If you’re unfortunate enough to already be in the system, the developer has to secure the land before planning and then advance the planning application – at great cost, without clarity on many of these inputs.
The bigger picture
In 1970s UK, marginal rates on earnings peaked at over 80%. This was a time of bail outs and economic chaos. When you aggregate LSRs with pre-existing taxes on profits you’re back at those kinds of levels.
The first 60% is taken by the Borough. Then there’s 25% corporation tax on the remainder and dividends tax thereafter. When you add it all together, you’re over 80%.
Effectively your profit is near capped at whatever the Mayor or the borough’s viability consultant believes is acceptable. When you marry the limited reward to the huge risks inherent in high density development, the numbers just don’t make sense.
It’s difficult for residential developers to attract investment capital with such a tilted rule book. Don’t take my word for it, look at the complete disappearance of BTR schemes in London.
It is deterring building and reducing the tax-take into the treasury’s coffers, while robbing London of its housing supply.
LSRs are toxic to growth. Treasury should be worried because they rob Peter to pay Paul. Only Paul – in this case London boroughs – isn’t getting anything either.
It’s extraordinary that we have gone from over 60,000 development starts in London in 2016 to likely lower than 10,000 in 2025. A policy made disaster. The legacy of LSRs, if this situation persists, will rob many thousands of Londoners out of their dreams to rent or own good quality new homes.
If the Government is serious about growth and building then Steve Reed should strike this unfair tax from the register.
