Last year I wrote about Rustat Road in Cambridge where Persimmon Homes had acquired a 1.2 hectare site for £9 million with a section 106 agreement in place to build 30 percent affordable housing. They pled poverty under the government’s 2013 appeal procedures. The City Council reduced the affordable housing requirement to 6 percent and Persimmon promptly sold the site for £15 million to another developer. So far so scandalous.
The Cambridge Evening News, in a piece of excellent investigative journalism, has now revealed that the new developer Weston Homes is set to make an extra £17 million in sales income over what was set out in the viability assessment (prepared by consultants CBRE, with the connivance of the HCA, in November 2013). This is because the selling values in the CBRE report were grossly under-estimated. Taking a one-bed apartment of 52 square metres, CBRE estimated these would sell for £225,493 whereas one is now being advertised for £340,000 – a price that is likely to be achieved or exceeded given the febrile state of the Cambridge housing market. Sadly, the Council commissioned an “independent” valuation which more or less ratified the CBRE figures.
This means that the outturn sale yields from the 143 new units will be at least £53 million compared to CBRE’s estimate of £36.4 million.
In 2013 an overage clause was negotiated that would allow the Council to claw back some of this additional profit but this was capped at £1.75 million, and although Weston Homes’ costs will have increased slightly it means they are set to make a huge windfall profit on this site, providing just 6 percent affordable housing in the process.
The CLG guidance on viability assessments states that “Unrealistic Section 106 agreements negotiated in differing economic conditions can be an obstacle to house building” yet values across much of the south east are now way above 2007 values. House prices in Cambridge have increased by 47 percent over the past five years, according to ONS figures, and the average house price in Cambridge has now breached the £500,000 barrier. If anything, local authorities in London and the south east should be re-negotiating higher levels of affordable housing.
The Rustat Road site is emblematic of hundreds of sites all over the country where developers have pulled the wool over the eyes of cash-strapped and often naïve councils by inflating construction costs and deflating sale prices in order to maximize their profits and evade their social obligations. Many local communities feel ripped-off by developers who use smoke and mirrors and redacted reports, citing spurious commercial confidentiality, to obscure the true scale of their profits.
This highlights the need for a much higher level of market-level expertise to be injected into key local authorities. At the very least the LGA should have put together a rapid response team of experts who could provide a robust challenge to developer appeals (the guidance gives local authorities just 28 days to decide on an an appeal otherwise the developer can go to the Secretary of State). It would have paid for itself within a year. Alas, it is probably too late. When the dust settles I am sure that thousands of affordable homes will have been lost as a result of this unfair process, and developers will be laughing all the way to their bloated bank accounts. What with this and the governement injecting billions of pounds into starter homes is it any surprise that housebuilders are reporting record profits?
We should never forget two things in relation to this. First developers have launched these appeals in the face of a deepening housing crisis. (Take a walk around central London on any nght of the week if you disagree). They have put their moral compass to one side and put profits before people. Second, despite the government’s featherbedding of housebuilders, the historical record shows that they have never, can never and will never fix the housing crisis on their own. Only a mixed approach that includes significant public investment in social rented housing will improve affordability and cut the welfare bill.
(This blog first appeared on the Inside Housing website on 6th April 2016)