The Section 106 Standing Stock Scandal

I’ve worked in the housing and housebuilding industries for over thirty years. I’m well known for my technical expertise in the delivery of all forms of housing with a particular speciality in land and planning negotiations including acting as an expert witness at appeal. I’ve been delivering Section 106 (s.106) Affordable housing since 1990 when these planning obligation agreements first came in. In fact, I worked on some of the very first schemes, in England, in Worcestershire.

My background started in traditional Housing Association (HA) housing completely by accident. I was offered training and choose to study construction. 33 years later my experience is predominantly land led, residential development for Housebuilders as a Land Director but I’ve worked for HAs including as a consultant and currently work for a private affordable housing provider delivering only s.106 affordable housing elements alongside Local Authorities and Developers.

I’m absolute horrified, that today in December 2023 we have an unknown, growing number of newbuild, s.106 affordable housing units in the UK which are built and standing empty because they are unwanted by Registered Providers (RPs – who most people know as HAs). The numbers are unknown because no one is collecting the data.

This problem is not being openly recognised or addressed. Almost all affordable housing agents (they work to place s.106 elements with providers) will tell you about the barriers to placing schemes which I discuss in this article. They are being built out as many Developers are obliged by the s.106 to do so before they can sell all of their private units.

I’m acutely aware of specific sites in the Midlands where this is happening but am told by my contacts across the UK it is a national issue and getting worse. We need to assess the level of this issue urgently.

We are in the middle of an exponential housing crisis and people need homes right now. Having empty, brand-new, purpose-built homes they could be housed in is absolutely unforgiveable and unacceptable. According to Department of Levelling Up Housing and Communities (DLUHC) roughly 50% of new build, affordable homes provided each year in the UK are delivered via s.106. We can’t afford to lose any of them.

To explain what is happening we do need to look at the context.

S.106 agreements are legally binding agreements alongside a planning consent which place obligations on whoever executes the permission and the land in perpetuity. These obligations can cover a wide range of issues, including affordable housing, infrastructure, and public open space. I’m leaving the last two in as they have a relevance to some of the problems.

There are two types of s.106 affordable housing routes in the UK. One is for new build “exception sites” which are solely affordable and would never get consent otherwise and the other as a percentage element of new build, residential development schemes.

“Exception” or “Entry Level” schemes are normally led by a HA or Registered Provider (RP) whereas percentage elements led by a Housebuilder (Developer). My core focus here will be on the residential Developer led schemes with a percentage of homes. This is because these are the ones more likely to be rejected by RPs, the numbers are significantly greater and in today’s political context Developers are often portrayed as the “baddies” who don’t want to deliver affordable homes. In this article I’ll explain why they are trying to deliver but facing huge problems.

Local planning authorities (LPAs) typically require Developers to provide a certain percentage of affordable housing within their new housing developments. The specific percentage of affordable housing required will vary depending on the local housing and planning policies and the type of development. This becomes a legal obligation via a s.106 agreement which runs with the planning consent and the land and the homes built in perpetuity (for ever).

The type of affordable housing provided is normally dictated by the LPA based on their housing needs analysis (normally by their Strategic Housing Market Assessment – SHMA). The preference is generally always for priority need which tends to be social rented (normally those on very low incomes/benefits and up to 60% open market rents). Rents are normally capped at set Low Housing Allowance (LHA) levels then complemented by affordable rented homes (80% open market rents) and shared ownership. Shared ownership sales are becoming more difficult for various reasons but mostly deposit and mortgage barriers. The NPPF Annex 2 has many forms of tenure but they are often ignored in delivery. We are seeing more First Homes required which reduces normal affordable numbers and sometimes we see discounted open market for sale. Both have issues best explored another time but both also impact viability and deliverability.

A site that achieves planning consent with a s.106 then has a Developer who these days invites bids from RPs and other Other Providers (OPs) to purchase the s.106 elements. This can be done direct by the Developer or via the many affordable housing consultants or agents who provide a service to do so. The Agents normally charge a fee to either the Developer or the RP/OP who secures the deal. Years ago an LPA would work with their preferred HA to agree who would take the units and work together on mix etc. That rarely happens now partly because of competition laws.

The more new-build housing developments we build the more Affordable housing we should be able to deliver through S.106 agreements.

We are losing to “off site payments” many affordable housing elements due to technical/construction viability issues but we also now seeing some elements built and then standing empty. This agreement to pay rather than provide is normally agreed during the planning process but sometimes post planning with a provision for a facility within the s.106. This is happening more and more because Developers are becoming more aware of problems with placing s.106 elements with housing providers.

The current economic challenges and the poor state of our existing housing stock requiring vast investment is fuelling this. The other very concerning influence is the growing of HAs into larger and larger businesses with a focus on volume due to economies of scale. We appear to be losing the local, community-based RPs as they struggle to survive and that makes management of smaller schemes in less dense areas more expensive. I started my career with a small, community-based RP and this makes me very sad and concerned. This is making rural housing need harder to address and I truly believe takes away the personal relationship with communities.

Almost all costs to deliver new homes have gone up and margins have gone down. Values have not kept up with the increased costs and uncertainty over the economy has slowed open market sales which in turn slows affordable delivery also. This reduces margins and profits.

According to the latest data from the Building Cost Information Service (BCIS), construction costs for new build housing in the UK increased by an average of 10.5% in the year to June 2023. This represents a significant increase from the previous year, when costs rose by 5.5%.

The increase in costs has been driven by a number of factors, including:

• The rising cost of materials, such as timber, steel, and concrete.
• Supply chain disruptions caused by the COVID-19 pandemic and the war in Ukraine.
• Labour shortages in the construction industry.

The increase in construction costs by type of property is relevant when looking at mix:-

• Detached houses: 12.2%
• Semi-detached houses: 11.5%
• Terraced houses: 10.4%
• Flats: 9.2%

The increase in construction costs is not expected to slow down in the near future. The BCIS forecasts that costs will continue to rise by around 8% per year until 2025. This is due to the ongoing supply chain disruptions and labour shortages in the construction industry. In summary it is more expensive to build new homes than ever before.

All of this has a huge impact on the costs Developers need to recover from the Affordable housing elements. They can’t operate at a total loss but they do model in a discount for the affordable elements. They absolutely have to cover their land, construction and financing costs but generally accept they sacrifice any profit for the affordable element and sell it at a discount of open market value.

This is not just about housebuilders making a profit it is also about institutional lenders who need to make profits from lending to both housebuilders and housing providers. Without lenders there is no development. If it doesn’t stack you can’t finance the development. There has to be an acceptable loan to value ratio and when costs have significantly risen but values have not risen in line there is a problem. We don’t want house values to rise in line as we need affordability to be achievable and we don’t want more inflation.

It is also about the revenues housing providers need to service loans. Rents have been controlled but costs of provision in all ways have gone up. The new LHA increase will help a little on social rented properties, but LHA is also directly linked to private rents (social rent 60% open market rents and Affordable at 80% market rents). There is a danger open market rents where LHA rises increase the level of housing universal credit element paid to private landlords will just cause rents to rise which has a knock effect.

RPs/HAs/OPs have to borrow money to acquire new homes. The costs of borrowing for these homes have gone up as have all borrowing costs in the UK, albeit it appears to be stabilising.

RPs/HAs/OPs are also facing their own increased overheads generally due to inflation. Estimates I’ve seen are around 14%.

Add to all this huge and critically necessary retrofit costs of upgrading existing stock to meet decent and newly required improved standards. I am quite furious about the state of social landlord-controlled housing stock overall in the UK. There is absolutely no excuse whatsoever for the level of unfit housing being held but that is for another article.

One way to make up the difference in cost is for RPs to offer more grant input but it is almost unheard of to be able to secure grant funding for s.106 elements. Funding is being squeezed across the UK in a very difficult economic market and it is almost seen as a form of “tax on Developers”.

It is therefore becoming more and more unviable for RPs to pursue development and particularly s.106 schemes. This means they are looking at their business plans in detail and pulling back on development particularly s.106s. In an uncertain market it is the safest, most responsible and necessary thing to do.

In my experience there are also these particular drawbacks on s.106 schemes for RPs.

• Their business plans don’t fit the number, mix or location of the units (more detail below)
• They don’t get the design standards or specification they want as Developer led (makes long term maintenance harder and less cost effective to plan and manage)
• The restrictions on lettings and tenure impacts lending availability plus level of  voids and revenue
• Because of the in-perpetuity restrictions on the title they are more difficult to fund with Lenders
• Retrofit bills are taking priority in both funding and resources
• Private management companies in place with no control over service and estate charges which can be utterly unaffordable for tenants. This is due to open space and communal landscaping etc. no longer being taken into “council” ownership and maintenance responsibilities because they are considered a liability. Tenants have to pay these costs
• Low Housing Allowance caps on social rents do not cover the costs of the mix required by the LPA (they are based on bedroom number not the floor area built and are historically based on standard house sizes from historic Local Authority housing provision). The larger the unit the less likely it is to stack.

In particular on the mix RPs are most concerned with:

• Most larger RPs won’t now look at schemes under 40 units because of economies of scale and many smaller s.106 schemes are unviable for them
• They don’t generally want apartments, maisonettes or 1 beds due to high turnover of tenancies and management concerns
• They don’t generally want bungalows as these are more expensive to build, less Affordable on values and often a higher turnover due to a likelihood of more aged tenants
• They don’t generally want 4 bed houses as again these are more expensive to build, less Affordable on values and management concerns
• The location may be unsustainable management-wise particularly in rural areas

This all results in us being left with an unviable S.106 scheme a Developer cannot sell to a willing RP despite trying their best and providing exactly what the LPA has asked them to. Worst still many s.106s make no provision for what happens in this instance and especially if the units are built out. The Developer is trapped with units they can’t place.

Other non registered other providers (NRP) can usually offer bids on the units but can’t necessarily provide the tenure the LPA wants as a priority because they are funded based on their specific tenures (albeit they can deliver tenure still compliant under Annex 2 of the National Planning Policy Framework (NPPF). You do not need to be a RP to deliver s.106 Affordable housing elements under the NPPF. Some LPAs recognise this and their s.106s include for other providers. Where LPAs do not it becomes even more difficult to place the homes.

If the Developer has already signed the S.106 with, for example, occupation restrictions, they are tending to build out the units with a belief the units will be able to be placed with an RP. The LPA believes the Developer will also be able to deliver the units via an RP.

Many Developers over the last 4 years have had offers from RPs accepted but they have then pulled out leaving them without a provider. Until a contract is completed the risk remains.

I personally know of 100s of empty, brand new Affordable S.106 homes standing empty across the UK – some for 4 years now and of at least one small Developer who is now facing liquidation because of this. The longer they stand the more the damage both to values (no longer new build), Affordable delivery targets and worse of all an absolute tragedy to those in housing need who need these homes. If a housebuilder does go into liquidation there is a danger the homes will go to auction on the open market.

Where the House Building industry is getting wise to this they are now being able to clearly demonstrate to LPAs the S.106 Affordable elements are undeliverable and seeking commuted sum contribution in lieu. This is done by way of a viability assessment carried out by a suitably qualified professional showing how the only way to make any affordable housing provision and allow the scheme to proceed is by paying a sum of money (level normally agreed at planning stage in the s.106) to the LPA for them to use towards new homes elsewhere.

S.106s are now starting to fail to deliver the homes we so badly need. Things have to change, and they have to change fast. The worst thing is we are letting the very people we are supposed to help down. We don’t have time to prevaricate about this, we need to act and act now. No one sector is to blame entirely, it’s all interrelated and impacted by the many challenges in our economy we now face. However, the national Retrofit bill for unfit or substandard existing social housing stock should never be as high as it is. Adequate planning and sinking fund management should have ensured upgrading works required to existing stock were already largely provided for.  I also have a personal belief that holding on to stock in perpetuity is wrong commercially when looking at the best interests of all of us. This is because at some point, housing stock almost always requires regeneration and the economic and carbon costs of retrofit can eventually be too high compared to replacement. The Retrofit bills drawing resources and funding away from new build is a clear demonstration of why we must plan to replace stock in the future.

There are answers to this challenging and frustrating situation which I am very happy to discuss further. As part of the Centre for the New Midlands we are looking at this situation amongst many of the issues facing housing in the West Midlands and beyond. We will be working hard on providing some of our suggested answers in due course. However, in this pre election environment where housing is a key issue I would urge everyone to dedicate time to how we address this as a nation and in collaboration.

We can do things immediately and one of things which is most important is to include more flexibility in s.106s in line with the provisions encouraged by the NPPF. We can also include provision for agreed mechanisms when it is simply not possible to provide what is most desired to address need by the LPA as fall backs.

If you’re involved in housing in your area perhaps ask your Local Authority how many unplaced S.106 Homes there are and why? We need to start discussing this openly instead of it being a hushed embarrassment. We need to work together to solve it without blame which achieves nothing. Look forward not back.  I would urge our Housing Minister to do the same across the country and establish the true picture of how many people are not being housed because of this.

The views reflected within this article of those of the author and do not represent RentPlus or any other organisation.

ABOUT OUR AUTHOR:

Liz Williams is an expert on land acquisition, planning and development having specialized in all forms of housing for over thirty years.

Currently the Midlands and Wales Area Director for Affordable Housing Provider Rentplus UK, Liz leads on business development and acquisition of Section 106 affordable housing elements delivering a unique form of Rent To Buy tenure across the Midlands. Liz is also a member of the Chartered Institute of Housing.

Liz is a passionate advocate of the development of truly sustainable and diverse, new build and regenerated communities where every single person is afforded the best opportunities in life. Liz believes in safe, adequate and quality housing being a catalyst for socioeconomic growth.

In 1990 Liz joined Worcestershire Housing Association working in Development and has since then worked for Bromford, Orbit and Citizen Housing Associations in delivering hundreds of new homes across the Midlands. Liz has developed many social and affordable rented homes, fully accessible and supported housing, shared ownership and almshouse accommodation. A specialist in housing construction project management, rural housing, contaminated land, regeneration and historic buildings her technical knowledge is highly respected within the industry. Liz also has many years’ experience and skills dealing with complex legal acquisitions, planning and partnership working in housebuilding.

Community consultation matters to Liz and she prides herself on always trying to engage with those impacted by changes to their neighbourhoods and indeed homes as she believes empowerment through voice creates better outcomes all round.

Liz has also worked as a Land Manager and Director in the Private Residential Sector including major housebuilders. This has included bespoke private residential homes, large scale regeneration and retirement housing,

A strong advocate for Women’s Rights Liz supports local women’s groups including Women Acting in Today’s Society WAITS and has been involved in the design and development of purpose built women’s refuges for Women’s Aid.

Liz was also a non-commissioned officer in the British Army and is a strong supporter of Veterans and their housing needs. Having been a military wife and mother during the Gulf Wars as well as a veteran herself Liz has a deep understanding of the needs of families impacted by service.

An environmentalist at heart Liz believes all development should seek to achieve the best outcomes for the environment possible with sustainability being the key. Liz has an in depth knowledge of working with alternative technologies, biodiversity and protected species.

Liz is a member of Worcestershire Ambassadors and has close links to the business communities within Worcester and the wider West Midlands with her home being in rural Worcestershire.