National Housing Federation in talks with house builders over ‘non-existent’ Section 106 market

‘A perfect storm’

 

Marie Chadwick, policy leader at the NHF, told Social Housing that not only are there fewer bids for Section 106 homes from housing associations, in some cases there are none at all, as a result of a “perfect storm” of factors.

 

First and foremost is the financial capacity of the sector, with budgets squeezed while building safety, quality and decarbonisation are given priority.

 

Several housing associations have as a result scaled back their development ambitions and prioritised their contracts with Homes England or where they are in joint ventures.

 

Ms Chadwick said that other factors include issues around build quality on Section 106 homes in some areas of the country, and the fact that purchasing homes with gas boilers is no longer attractive to housing associations as they work towards net zero.

 

What’s more, Ms Chadwick added, 106 deals have been made less appealing because associations are increasingly being asked to share more of the risk of development on these schemes.

 

Now, the NHF is working with the HBF to look at the issues in detail and to explore what short and longer-term solutions might exist to get the Section 106 market moving again.

 

The NHF has also been in talks with government about the problem and hopes to make more progress when the general election is over.

 

“We’re clear that action needs to be taken to ensure that desperately needed affordable homes are secured,” Ms Chadwick said.

 

She added: “One of the most effective things government could do is agree a long-term rent settlement which reflects the actual costs borne by housing associations. It is key to increasing investor and board confidence and maintaining housing delivery.”

 

The NHF’s message to developers would be to involve housing associations early in the process – even at the planning stage – as that would make it “far more likely” that they will want to buy the homes.

 

“Housing associations know what local need looks like, and the types of homes that meet that need,” Ms Chadwick said.

 

“A developer involving a housing association partner early in the process means they can work together to ensure that the homes provided through Section 106 meet requirements in terms of specification and tenure and in turn that reduces any risk that the homes won’t be bought on completion.”

 

‘Non-existent’ market

 

David O’Leary, executive director of the HBF, said the issues around Section 106 appeared to be nationwide.

 

“It seems to be pretty universal across the country, that the market is either non-existent or very, very, very small,” he told Social Housing.

 

The result for large schemes has “largely” been to slow down the development until buyers can be found for a tranche of affordable housing units, he said.

 

However, smaller house builders with smaller sites often rely on development finance loans with a baked-in expectation that there will be a buyer for the Section 106 units, and are therefore having to suspend starting work on sites, Mr O’Leary said.

 

He said that the HBF had been in talks with government until the general election was called, and has had “useful conversations” with partners in other sectors, including the NHF and the Local Government Association to understand what the issues and challenges are for them.

 

“That’s created the basis for constructive conversations with government, not to the point where there is a solution available, but I think we are at the point of all understanding the scale of the challenge and what it means for development and for the delivery of affordable housing,” Mr O’Leary said.

 

“So, I’m fairly confident that when this progresses, we’ll be able to agree what the proposed solutions should be and then it’s in the gift of government to control that it happens or not.

 

“I think from an HBF and NHF perspective, we’re working very well together, and it’s helpful just to have that ongoing discussion, dialogue and be able to know that we’re on the same page.”

 

Mayor of London

 

A spokesperson for mayor of London Sadiq Khan said that the mayor has “repeatedly warned of a perfect storm of higher building and borrowing costs hitting housebuilding hard”, with national housing completions predicted to fall to just 160,000 homes a year.

 

“These major challenges are reducing the ability of social landlords to build new homes and also to acquire homes in the Section 106 market,” the spokesperson said.

 

They added that City Hall officers are “continuing to actively engage with all parts of London’s housebuilding sector to better understand the current barriers to delivery and to assess what more needs to be done to support the sector”. 

 

The spokesperson said that the mayor is “taking action to support affordable homebuilding”, including through his £100m Housing Kickstart Fund, and through further support for social housing providers via the Accelerated Funding Route. This route can be accessed in some circumstances to support purchases in the Section 106 market.

Section 106 appetite from the sector

 

Geeta Nanda, chief executive at Metropolitan Thames Valley Housing (MTVH), said the G15 landlord had taken Section 106 out of its business plan when it reduced its development programme to respond to financial pressures, including the need to invest in its existing stock. 

 

“We are still looking at a few in London under the [Greater London Authority’s] Accelerated Funding Route,” she said.

 

But Ms Nanda added that MTVH’s focus has been on delivering its strategic partnerships with Homes England and the GLA.

 

Richard Cook, group director of development at Clarion Housing Group, said that it still sees Section 106 homes as an “important part” of its development programme, with the delivery method making up around 25 to 30 per cent of its development.

 

However, this is a reduction from 60 to 70 per cent five years ago, as the group has since tilted the balance of its investment towards land-led projects so it can be “in control of [its] own destiny”, Mr Cook said.

 

He added: “We’re focused on land-led projects where we can deliver the right product to the right quality in the right location, and actually use grant funding when it’s applicable.”

 

Gerraint Oakley, executive director for growth and development at Platform Housing Group, said that the Midlands-based association is still in the market for Section 106s, but only for those with the right quality, timeliness of delivery and preferably Platform’s own house types.

 

He said: “That’s the key to it. We have actually had to notify some house builders that we won’t buy off them.”

 

Mr Oakley said that over the past few years Platform has moved into doing more land-led deals to have more control over the delivery of these homes.

 

“Section 106 will always form part of our programme, but we have to be able to be more strategically led than opportunity led,” he said.

 

Angie Hooper, new business director at L&Q, said that when the conditions are right for future growth, the G15 landlord will only consider new Section 106 agreements where it has “influence and a like-minded partner who shares our values”.

 

“S106 agreements are an important way of delivering much-needed affordable housing, but this can be accompanied by a loss of control for housing associations,” she said.

 

Ben Denton, chief executive of Legal & General Affordable Homes, said that the for-profit RP has been bidding for Section 106s at a slower level than previously while focusing on allocating funding alongside grant-supported schemes with Homes England.

 

However, over the next half of the year the provider is about to step up its bidding to the same levels as in previous years, he added. This is because over the next few months the RP will have spent most of its development grant funding.

 

“In very broad terms, over the long term we expect to deliver around 60 per cent of homes through Section 106 and 40 per cent through grant programmes,” he said.

 

Peter Merchant, investment director at Octopus Real Estate, said the investment giant is continuing to bid on Section 106s, but is looking to deliver the majority of its affordable homes via grant-funded developments.

 

The company owns a for-profit RP, NewArch Homes, which purchases homes with funding support from its main shareholder, the Octopus Affordable Housing Fund.

 

Mr Merchant said: “The Affordable Housing Fund’s primary objective is to deliver new homes and invest in grant-funded housing. We’re looking to do the majority as grant funding and not Section 106s, however we have space to invest in it and view it as a key part of our early growth.”

 

Developers setting up for-profits

 

Some consultancy firms in the sector have seen developers approach them about setting up for-profits in order to have somewhere to allocate their Section 106 homes.

 

Steve Partridge, director at Savills Housing Consultancy, told Social Housing that within the past few months, the firm has seen “a number of” medium to larger house builders coming to Savills about setting up a for-profit RP, in response to being unable to sell their Section 106 obligations.

 

“These are the kinds of organisations that you wouldn’t normally have expected to want to become a registered provider,” he said.

 

“Whilst there are always developers that look to set up their own RPs, we’ve seen an uptick in both the volume and the size of developers looking to do that.”

 

Similarly, Maggie Rafalowicz, a director at Campbell Tickell, said that the firm has seen large developers approach them about setting up for-profits.

 

“The large ones will have a strategy and a plan; they will consider if it’s worth their while and make a business case,” she said. “It’s not the case that they’re all rushing to do it but there are numbers looking to do it.”