The Low Carbon Kid: Why PPP cannot solve the affordable housing problem

Tuesday, October 20, 2015

Why PPP cannot solve the affordable housing problem

It is now well established that, in an age where increasingly more people live in cities than in rural areas, squeezing in a higher population per square mile is preferable to urban sprawl for a number of reasons. This principle is highlighted by the second of a series of new reports from the Urban Land Institute (ULI) and TH Real Estate that was launched last week in London and San Francisco.

The Density Dividend: Solutions for Growing and Shrinking Cities takes a look at six European cities (Birmingham, Dresden, Istanbul, London, Stockholm and Warsaw) that are at various stages of population change – growth and decline – and concludes that they have little choice but to densify or face being increasingly inflexible, unattractive to live in, unsustainable, and ultimately uncompetitive.

It tries to establish what does and doesn’t work in making densification successful and popular.

But are the solutions the report offers sufficient to ensure success?

Cities vary in their attitudes. Some are new to urban redevelopment or lack the tools to deliver density in an integrated way, relying instead on ad-hoc initiatives and innovation.

The report identifies three distinct elements that need to be in place to ensure synchronised, sustained progress towards better, higher density:

A strong story and vision for future evolution that can galvanise attention and support from residents, workers and investors alike together with a robust growth plan that provides a guiding framework within which development can proceed.
A prioritised tactical plan about where and how to densify, targeting areas for a critical mass of redevelopment matched to durable systems of investment and improved legal, land-use, and asset management tools.
Foster a demand for new urban space and focus on the positive psychology of vibrant urban lifestyles and locations.

The report comes from the Urban Land Institute (ULI), whose 34,000 members represent all aspects of land use and development disciplines, and TH Real Estate, an investment management company specialising in real estate equity and debt investing worldwide, owned by TIAA-CREF, a US financial services company. Once you realise that it has assets of around £557bn you begin to realise where this report is coming from.

The report advocates public private partnerships (PPP) as a way of solving investment problems. These kind of partnerships are favoured by both sides (developers / investors, and local authorities) because they appear to be a way of sharing the investment burden of creating new housing, particularly affordable housing, the need for which is desperate in most cities.

But is this true?

The experience of London

The picture that the report paints of London, however, is at variance with the reality. It is not a London which I recognise. Since I know this city better than the others, a comparison of the painted picture with what I know serves as a way of evaluating the authoritativeness of this report as a whole.

Of London, the report commends The London Plan which it says:

"has allowed London to be strategic about its re-urbanisation over the past 15 years. It supports compact city development and rules out sprawl as a means of accommodating the extra 300-400,000 homes and 500,000+ jobs forecast as needed by 2030. The plan is distinctive for identifying over 40 ‘opportunity areas’ for mixed-use intensification, mainly brownfield sites around transport interchanges. It also provides an overarching vision which allows large-scale projects such as Crossrail and the Olympics to be organised and delivered with confidence."

Some of this is true. Research from around the world about livability and sustainability in cities stresses the importance of development around public transport hubs and of making maximum use of existing brownfield sites. Wherever public transport hubs are sited, whether they are bus rapid transit, Metro or rail, real estate values go up, an increase in density occurs, and so does the level of economic activity and satisfaction of inhabitants.

Crossrail is an incredible achievement, one of the most impressive contemporary engineering projects in the world, and it will be vital to target density can improvements around the new stations. Istanbul is an example of a city that has increased population density without planning and without improvements in transport infrastructure with disastrous results.

But improvements do need to be made with regard to the needs of local people. They must be brought on side and listened to, which did not happen in the case of the Olympics site in London 2012. As the focus was on the timescale and the need to create a world-class sporting destination, local needs were bulldozed out of the way.

Everything depends for its success in urban development on the provision of housing that satisfies real needs. This is true no matter where you are in the world.

Part of the London Plan is The London Housing Strategy, which has an aim of delivering over 42,000 new homes a year in the city by creating a ‘Housing Bank'. This is supposed to help subsidise rent for households looking to buy their home, give bespoke financial support to speed up house-building on public land, and offer low-cost loans for developers and housing associations.

This is cited in the report as an example of a successful approach.

But is it?

First of all, the Bank doesn't even attempt to meet the actual needs for London's additional housebuilding, estimates of which fall within a range of 50,000-80,000 per year. New homes are in fact well below this level; in 2012-13 there were 21,900. Reports in January suggested that the Bank is likely to miss its target to create 3,000 homes, as documents show developers are planning to build just 106 properties by the 2018 deadline. Its website today talks of support for just 643 homes.

Graduates, young professionals, essential workers in service sectors like health, i.e., the very people that cities need to attract to be competitive and successful, are being priced out of London by the housing market. This is overheated due to a combination of lack of supply and investors from overseas buying up houses which then sit empty. Since 2002, London’s population has increased by 14 per cent, yet housing stock has only increased by 9 per cent during the same period.

The city’s average house price was £450,000 in December 2013, 73% higher than the national average and up 12% in the last year.

According to housing charity Shelter, the four main barriers to housing development in London are the same as for the rest of the country, but made worse by London’s tight administrative boundaries, status as an international property market and lack of fully devolved powers, including those over taxes.

The development market in London has become concentrated into too few firms, and the hurdles to involvement are too high. The price of land is also too high.

The Mayor’s London Housing Strategy itself states that delivering 42,000 per year will be ‘a huge challenge in itself.’

So is PPP the answer to this problem?

In 1980-81 local authorities were responsible for 70% of housing completions in London. Then Margaret Thatcher declared war on local authorities in England and introduced the Right to Buy for council tenants, stopping local councils from reinvesting the proceeds from the sale of their housing stock to tenants in building new homes. So in 2014-15 the equivalent figure was 2%.

Post 1980, new home building in the British capital reached a peak of 24,060 in 2004-05, in comparison to the lowest figures of 10,960 in 1984-85 (data from the Department of Communities and Local Government (DCLG)). So even the 2004-05 peak is less than half of the more conservative estimates for the need for new homes.

In other words, it was better when councils were allowed greater control of their finances and able to build council homes themselves.

Many of these homes must be affordable, although there is some debate over what this actually means. Nevertheless, according to one definition in 2013-14, just 9,200 affordable new homes were provided in London. 88% of these were new build, and comprised 45% of all new dwellings. The rest were provided by acquisition of existing stock. This shows just how far behind the need the situation is and why homelessness is such a big problem.

The Housing Bank, to be fair, is meant to solve these problems. Some social housing associations like the Peabody Trust are taking advantage of it. But it is not up to the scale of the challenge.

Jamie Ratcliff, assistant director for programme, policy and services at the Greater London Authority, says the Housing Bank is offering deals at an initial one per cent, "approximately a third of the recent historic record low rate achieved by The Housing Finance Corporation/Affordable Housing Finance with their Government-guaranteed bond". He adds: "There are projects in parts of London where the costs, including decants, leaseholder buybacks and demolition, exceed projected sales values. This at best delays and at worst prevents the development of homes for sale or shared ownership."

The point of accessing funding from the London Housing Bank is to help "cash flow the development, allowing viable homes to be built now and sold in later years, once values have adjusted, ensuring the building of homes now, not vacant sites", he adds.

Yet finance is only one part of the obstacle course facing anyone wanting to tackle this problem. The lid is taken off this by a House of Commons briefing paper published a month ago called "Meeting London’s housing need", which cites many of these barriers.

At the institutional level there are staff and resource shortages in the planning departments, a lack of institutional memory within local authorities and limited partnership working between the many boroughs which make up London. From the point of view of developers there are uncertainty in the planning system, dysfunctional viability procedures, difficulties in land assembly and complex land ownership. The briefing note also acknowledges high land values, density being too low, and land supply constraints.

The solutions suggested include a more strategic outlook across boroughs, redefining the role of the Greater London Authority, modifying compulsory purchase order powers and procedures and introducing more consistent targets for affordable housing. Support also needs to be given to builders and developers to bring more players into the market.

Going back to the Urban Land Institute (ULI) report, it makes little reference to the complexity that is seen on the ground in this type of situation. One of its conclusions is:

"Cities that build an idea and ambition about what they want to become, and which instil this aspiration in their citizens, find it much easier to achieve the behaviour change that is necessary to increase densities of interaction and development."

But the experience of London shows it's not the citizens whose behaviour needs changing. The required changes are institutional.

Large house builders like Persimmon and The Berkeley Group are reported as giving their executives record bonuses despite building fewer homes: Berkeley bosses will pocket £42m this year and up to £500m in the next five years, while Persimmon boss Jeff Fairburn could get £100m by 2021 according to Sunday's Observer magazine – are they members of the ULI, I wonder? Something clearly needs to change.

David Thorpe is the author of: