AGM PANEL PRESENTATION Affordable housing and viability
- Anthony Phillips
- Jan 5
- 13 min read
 | Susanna Jarman is Associate Director – Development Consultancy, at Lambert Smith Hampton SJarman@lsh.co.uk . She advises on the viability and feasibility of mixed use development and town centre regeneration.
Ashley Sorayapour is Associate Director - Development Consultancy Planning, Regeneration + Infrastructure at LSH ASorayapour@lsh.co.uk . His work is a mix of viability and valuation work and land agency, on behalf of local authorities and developers.
Isaac Daughtrey is an Associate at Fieldfisher Isaac.Daughtrey@fieldfisher.com . He is based in the Manchester office and advises landowners, pension funds and individuals on property rights.
Michael Norris is a Director at Fieldfisher Michael.Norris@fieldfisher.com . He is a director in the transactional team, with a focus on residential and commercial development, acting for landowners and developers. |
A panel of ‘young talent’ at Fieldfisher and Lambert Smith Hampton provided the CPD element of ACES’ Annual Meeting, chaired by Antony. Below is a summary of the presentations and Q&A session. |
Antony’s introduction
The topics we will be covering are affordable housing and viability. I think both those topics are things that probably come across your desks and are troubling you, probably on a daily basis so hopefully there's plenty in the next 45 minutes that is going to be of interest.
We will start with 15-20 minutes of presentation from each of our four speakers on these two topics. Then we will have a panel session led by me: I'm asking the questions and the panelists will answer them!
Susanna – Challenges in the affordable housing market
The sector faces supply shortages, rising costs, and funding constraints. Delivery of affordable housing is at a decade low, with only 43% of the 145,000 homes needed annually built last year. Only about 63,000 affordable homes were delivered in 2022/2023, revealing a significant shortfall.
The G15 Report (a group of London-based housing associations) reported that housing starts fell 76% in London and 37% outside London. The reasons for low delivery:
Rising costs
Ageing housing stock requires costly retrofitting (for example in relation to fire safety, damp, mould) are impacting housing associations’ plans to deliver new housing. There has been a 20% rise in remediation costs in Q3 2023 against 2022; major repairs/maintenance costs are up 43% in 2 years, totalling £7.7bn in 2023. Large registered providers are prioritising current residents over new builds.
Inflation and interest rates
The Bank of England base rate is at 4.75%; high interest rates increase development financing costs. Inflation at 6-7% creates uncertainty, discouraging large-scale investments.
Construction costs
Material and labour costs are up 10–15% due to inflation and supply chain issues. The decline in affordable homes delivered under s106 agreements has been from 51% in 2023 to 29% this year. Financial pressures lead registered providers to cut back on s106 purchases.
Funding shortages
Registered providers depend on government grants and rental income, but rising costs outpace available funds. There have been some budget measures which will partially alleviate the challenges: £500m has been added to the 2021–2026 Affordable Homes Programme; £3.1bn has been allocated for new/existing housing. However, funds remain stretched despite these measures.
The five-year Rent Settlement Proposal allows rent increases at CPI + 1% (from April 2026). The benefits of this settlement is that it will give financial stability for registered providers to improve long-term planning and investment. However, the challenges are that it may limit the ability to offset rising costs (e.g., inflation, repairs). Some projects may need additional government support.
Ashley – What is viability?
At its most basic level, viability relates to the relative balance between the value generated by a development and the costs associated with its delivery. Some of the key market drivers affecting viability are:
Capital values
From a residential perspective, during 2023 and into 2024, market conditions have begun to stabilise from previous negative house price growth, with inflation moderating and interest rate expectations easing. The sales market remains subdued, but there are signs of renewed buyer confidence, supported by interest rate cuts.
On the whole, house price growth has turned positive again, especially in northern regions, while areas previously popular during the pandemic, like coastal locations, are seeing weaker price performance. The rental market continues to face high demand but shows signs of softening as tenant affordability becomes stretched.
Build cost inflation and supply chains
Rising construction costs and supply chain disruptions have caused major changes over the last few years and have increased development costs, causing delays to project completion. Construction costs in the UK rose by approximately 11% during 2023, driven by labour shortages, increased material costs, and high energy prices. For instance, the cost of steel rose by over 40% in 2022, impacting both residential and commercial project budgets.
Supply chain issues persist post pandemic, compounded by Brexit and wars, which has led to logistical bottlenecks and material shortages. Labour shortages, especially for skilled trades, have further driven up costs. In 2023, construction labour costs rose by about 9%.
The economy
Interest rates have risen in recent years impacting project finance costs; interest rates have begun to slowly but gradually decrease - further cuts to the base rate are expected over the next 2 years, which should stimulate property market activity.
Inflation is now under the Bank of England target rate of 2%, which should improve economic performance. A low inflation environment increases real returns on investment and is beginning positively to stabilise the costs of construction materials and labour.
Planning
Lengthy planning processes increase costs, delay project revenues, and increase finance costs, depending on deal structure, directly impacting a development's financial viability. The UK planning system faces constant delays, with the average time to receive planning permission now exceeding 200 days, almost double the average from five years ago. These delays result in increased holding costs for developers.
New regulations, particularly environmental impact assessments and biodiversity net gain, add complexity, cost and length to the planning process. Although there are always calls for planning reform, the complexity and time required for approvals remain significant. Labour’s proposed planning reforms, aimed at expediting approvals for urban and brownfield sites, could improve some of these pressures.
Removal of affordable first homes will likely increase the percentage share of shared ownership units which should help improve viability margins.
Isaac – site assembly
The costs of purchasing a site are twofold – the initial acquisition, and then the tidying up of title that follows. Extensive due diligence at the outset can help mitigate both sets of costs, and both need to be considered in order to determine if a site is viable.
Regeneration sites typically throw up more issues than a greenfield site, because of the historic varied uses of the land, and that these sites are more likely to be parcels of land previously owned by different people. This gives rise to a wide variety of property issues that cannot be resolved from a title review or examination of deeds – actual inspections will need to be utilised to determine the existence of any third party rights.
A development constraints report can help flush out what the key issues are and what steps are needed to resolve them. Costs can be allocated to those issues and can shape whether or not a scheme is viable in light of them. It is at this stage where conditional contracts and option agreements can be really useful.
Failing to manage and resolve risks until a project starts will inevitably compromise any perceived viability. It is worth remembering that resolving issues does not necessarily mean more money (so higher costs to feed into calculations), but occupiers and those affected can sometimes take proprietary action, such as applying for an injunction to stop a development. Should that happen, a development could be stifled completely until a resolution is reached, but that stifling will have a knock-on impact on the supply chain and all other parties.
In the built environment an issue we see frequently cropping up is rights of light (ROL). It is sometimes only when a planning application is lodged that developers get a full sense of the potential impacts of infringement they may be causing others. While not impossible, it is hard to manage this risk with option agreements, because the property rights exist in any event.
Owners of regeneration sites should therefore seek to minimise the amount of claims by conducting due diligence (DD) at the outset and considering, where appropriate, not allowing further rights to accrue (e.g. by serving light obstruction notices) and seeing if existing rights can be challenged (eg. is there an argument that the rights of light claimed do not exist because they have not transferred?).
We have seen that this has become more important in the viability context as the compensation landscape changes. As we know, ROL compensation is traditionally awarded by the courts on a book value basis. We have seen that affected neighbours are now pushing for damages on the basis of a share of development profit (in respect of the part of a planned redevelopment that would need to be cut back so there is no infringement) which is usually much greater and obviously has a much more material impact on the viability and use of a site.
Extensive DD at site assembly stage sits well with the new ROL Protocol: it seeks to establish a procedural framework and encourage the early exchange of information. It however, understandably, does not seek to prescribe what the correct level of damages is, so the worry remains as to how the trend of seeking higher damages for interference with property rights can affect viability.
Of course, insurance for this type of risk does remain an option. We have seen that the insurance market is hardening, and extensive DD can mitigate the effects of this. We have found there are fewer products around allowing the insured to conduct claims on their own and instead, insurers are preferring the traditional wait and see policy (presumably because of the higher amounts being sought). That type of policy will reduce your ability to settle claims with neighbours directly. So one of the main ways to reduce the premium of any ROL policy, or indeed any title indemnity policy, is to show why the risk is not a big risk.
To sum up, all property issues with a site are best considered at the site assembly stage, even if you decide no further action needs to be taken. That consideration will feed into many different workstreams and will inform what further steps you need to take, for example what insurance product you need (if any), which will in turn guide you on how to approach those affected by your scheme.
Michael – partnerships and joint ventures in residential development
Overview of partnerships
How do house builders use partnerships and joint ventures to manage risk and optimise cash flow in residential developments? These partnerships are essential to balancing financial exposure, while ensuring steady capital throughout the development.
House builders typically collaborate with:
Affordable housing providers - these partners acquire a set number of units in the development, which meets local affordable housing quotas and provides early-stage funding. More and more we are seeing 100% affordable sites being delivered by house builders
Build-to-Rent operators/institutional investors - increasingly, we see build-to-rent operators and institutional investors as major players in these partnerships. While this will mean fewer private market sales are made by house builders directly to plot purchasers, the partnerships provide sales certainty and support the builder's cash flow
Public sector bodies: These partnerships are particularly relevant where a public-sector asset is to be brought to market as a regeneration opportunity.
Partnership structures
A couple of examples of partnership structures include:
Subsale agreements - in this model, the house builder sells part or the entire development site to a partner. A development agreement is then signed, outlining that the builder will complete construction according to agreed standards. This structure allows house builders to generate cash early in the project and transfer some risk to the partner
Formal joint ventures - a more formal joint venture, like a Limited Liability Partnership (LLP), sees both parties sharing control, profits, and risks proportionately. These arrangements are mutually beneficial, as the house builder and partner co-manage the project, sharing both the upside and the risks.
Benefits of partnerships
These partnerships offer valuable benefits to both house builders and their partners: For house builders, there is reduced financial exposure: sharing project costs reduces financial strain, especially in uncertain markets. There is improved cash flow: receiving funds from partners at various project stages helps maintain liquidity. The partnerships give access to funding and expertise, where working with established investors or specialised operators opens access to resources that may otherwise be unavailable.
For partners, there is a secure pipeline of new assets. Institutional investors and build-to-rent operators secure reliable additions to their portfolios, meeting investment objectives. There is streamlined access to development expertise: by partnering with experienced builders, investors can rely on high-quality construction and operational expertise.
There is the potential for favorable terms and co-branding. Collaborations often allow partners favourable purchasing terms and opportunities to enhance brand exposure within desirable developments.
These partnerships are essential tools for de-risking developments, allowing both house builders and partners to realise mutual benefits in an evolving residential market.
Ashley – Future of viability in relation to the built environment
Sustainability and net-zero commitments
Environmental viability is central as governments and industries push toward net-zero carbon targets. New regulations on sustainability will continue to reshape project viability. Developers are now prioritising energy efficiency, green construction materials, and renewable energy sources. The viability of projects will hinge on their ability to meet or exceed environmental standards and reduce carbon footprints, affecting both initial designs and long-term operational strategies.
Cost management and resource prices
With fluctuating costs for materials, labour, and energy, maintaining financial viability will require developers to embrace cost-efficient technologies, modular construction, and alternative materials. Supply chain management and sourcing of goods is becoming more critical, along with a circular economy.
Focus on health and wellbeing
Post-Covid, there’s a growing emphasis on health and wellbeing in building design, including air quality, natural light, green spaces and office gyms. Buildings that support mental and physical health are more appealing to tenants and buyers, which bolsters their long-term viability and occupancy rates and rents.
Community and social value
There is increasing expectation for large-scale developments to benefit communities. Future viability depends on creating spaces that are both economically viable and socially positive. Community involvement in planning and prioritising social value, such as affordable housing or public spaces, can help reduce project risks and foster local support.
Diverse development product
To balance risk and diversify schemes, developers are now regularly including a mix of end products, from traditional build-to-sell units and commercial space to investment products, such as build-to-rent and single-family housing. The addition of these products improves cash flow for developers and reduces overall project risk, enabling sites deemed unviable to be brought forward. Once complete, development sites will benefit from encompassing a mix of home ownership, rental, and commercial products, creating a sense of placemaking and product diversification.
Question and answer session
Antony posed to the panel the following questions, which were addressed by one or more panelist.
Affordable housing – registered providers are relying more heavily on their existing stock. What actions
can be taken to future-proof costings?
From a legal perspective, a developer can be kept ‘on the hook’ for breaches in the initial construction for up to 12 years. Development agreements should make sure developers build quality stock that's free from defects. Terms in the contract should control the quality of the product – including specifications, variations, retain control of breaches, defects, etc.
There is always going to be that tension and always a need to value engineer the products, so as construction proceeds, the more control the affordable housing provider should have over variations,
possibly with signing off the works.
If the builder is specific for that site, you may wish to consider a parent company guarantee, new homes warranties, insolvency covers, collateral warranties – all tools to pursue if necessary. But key is to get the legals right; so often people come to us (not where we have drafted the documentation!), saying I'm sure that we agreed “blah blah”; well you may have agreed that, but if it's not in the legal documentation, tough.
House builders drive a hard bargain, as well you know, when negotiating their development agreements. It depends where the balance of power lies. The affordable housing provider may have pressure to provide stock in that district by a certain date and alternative sites to get that stock from may not be available.
What impact will the Five Year Rent Settlements have on registered providers?
The main benefit is it allows RPs certainty in financial planning, revenue projections and future proofing. The projections can then free up potential capital for acquiring new sites and new stock.
But if market rents increase significantly and an RP is limited at CPI +1 (see above), it restricts their potential funds for new developments and imposes inflexibility. Where costs are increasing, there is an inbalance against rising costs.
Construction costs have roughly doubled in the last seven or eight years; we referred to the price of steel rising by 40% during 2022, so that’s a massive impact on residential and commercial budgets. What can people do to mitigate those costs?
A lot of developers are turning to fixed price contracts over one to two years. They are also using alternative materials and prefabrication, which can reduce costs; you can value engineer and try to streamline the development process.
But probably the easiest thing to do for developers, investors, local authorities when they're looking at their own development, is just increase your build rate. Also, factor in higher contingencies, from 5% typically to 7.5 to 10%.
Land values in many sectors have held up reasonably well. What can landowners do to protect their land or even enhance their land values?
It is fundamentally about sharing in any super profits and avoiding embarrassment obtaining best value. There is a basic price that needs to be set in the overage agreement. It is a massively disputed issue. Care is needed in the wording, and what you want to get out of the arrangement, make sure finds its way into legal documentation – a well-drafted overage provision includes worked examples at the back, making sure that you properly work through the various scenarios.
And making sure you actually get paid is obviously pretty crucial! Therefore, do you want a legal charge over the site?
How do you assess viability and what do you encounter when you are looking at viability for schemes?
Traditionally, the real estate market uses current day costs to give a snapshot. This is fine if you are developing something over a 1-3-year period. But for sites where you might want to hold part and sell off part, there are cash flow systems where you can model and manipulate variables. This gives a more accurate return over say, a 10 or 20-year period.
On the face of it, a development might not be viable over 2-3 years, but if you hold that as an investment and sell off parts of it, it can become viable.
Viability is the ratio between value and costs. A large site with a mix of tenures (sell, rent) will benefit from a cash flow basis of your investment products. Selling parts at the start will improve your finance rate; together with a diverse product will increase viability.
The Building Safety Act - what impact is it going to have? We know the impact it's having in relation to current buildings, but what about future schemes?
On a practical level, what we are seeing is the delay that's being caused by the Building Safety Regulator because of the checkpoints to get through and you can't move forward until you have satisfied each, which upsets contractors’ supply chains.
Some parts of the Building Safety Act work retrospectively, so for example, extending the limitation period for 30 years, so back to 1992. That is going to have an impact on a huge number of factors including insurance. We have been instructed to look at building remediation orders and building liability orders. The courts can look to who was responsible for the defects - and in fact, look at those with the biggest pockets. The Triathlon Homes case in 2024 is a very good judgement because it takes you through what the court looks at when they consider liability and to impose a Remediation Contribution Order.
Are there any clever ways of delivering social housing?
This tends to be the most negative part of the appraisal: build costs in some instances will be higher. There is a reliance on grant funding, eg Affordable Housing Programme – development doesn’t work without it. Without grant funding, it is a real challenge to deliver. Once the 2021-26 programme ends, there is the promised £3.1bn, but it will be interesting to see how funding is allocated.
Every year that goes by, there is greater reliance on the private sector or affordable housing providers to provide social housing from the private sale element of the development, or there will be external subsidies such as Homes England. There is going to be the challenge with the government really wanting to commit to those sorts of grants in this economic climate. It used to be a very open and transparent systems, but under the new programmes there wasn't really much insight as to how much funding will ultimately be going into an individual development.
Modern methods of construction – what are the opportunities?
It is never seen as an opportunity to bring forward full 3D construction, probably because not a lot of people use it, so the whole system is not as efficient as it could be, than if it was mass produced on a bigger scale. In this scenario, a lot of build costs could start to reduce on an MMC basis.
There are supply chain issues, which drives the costs up. There is available an additional £10,000 per unit of grant funding with MMC.
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