Battersea Power Station Developer Wants To Cut Its Affordable Housing Unless It Makes 15% Return
The developer behind the huge residential scheme being built at London’s famous Battersea Power Station has asked to reduce its affordable housing commitment by up to 40% unless it makes a 15% return.
Battersea Power Station Development Co. has applied to amend its planning application to Wandsworth Council, the scheme’s local authority. The details can be found here.
The amount of affordable housing that is built in new developments in the U.K. is dependent on the return that a developer and local authority agree makes a scheme viable.
London suffers from a lack of affordable housing, so it becomes a question of what society deems an acceptable return for developers, and if that return is not met, who suffers. Such figures are usually kept confidential, so this request is a rare peek behind the curtain.
The developer has planning permission for up to 4,239 houses to be built in five phases at the redevelopment. BPSDC had agreed that it would build 635 affordable units, or 15% of the scheme.
It wants to bring the building of some of those units forward, but delay the construction of 250 of them to the final phase of the development. And it wants to undertake an end-of-scheme review to determine whether it has to build that final 250 units at all.
BPSDC has proposed that if it is not going to hit a 15% internal rate of return, it will not build the final 250 units, which would drop the number of affordable housing in the scheme to 9%. BPSDC would build more than 250 units if it would beat a 20% IRR hurdle.
Wandsworth Council is being advised by BNP Paribas Real Estate, which has advised that it is very unlikely it will hit a 15% IRR, given the projections for scheme costs and the sales value of completed units.
“The results of sensitivity testing in our report indicates that even when applying very optimistic assumptions of growth and cost reduction, the scheme does not generate a return at the first proposed IRR threshold and is significantly lower than the second IRR threshold above which additional affordable housing units would be provided,” BNP PRE said.
“It is very unlikely that these units will be delivered,” it said.
The developer is not saying it would lose money if it builds these affordable units, but that it would make less than it had originally anticipated. Another report submitted to the council in March said it was on track to make an IRR of around 9% on the project.
BPSDC — a consortium of listed Malaysian firms SP Setia and Sime Darby and the Malaysian Employees Provident Fund — commenced construction in 2013 with an estimated cost of £5.5B and goal of 20% IRR. Reports to the council highlight how construction costs have increased by 11% in the last year and sales values have fallen.
A report by a Wandsworth Council planning officer shows BPSDC has been willing to drop its target return from 20% to 15%. It says it must debate with the company whether 15% is an acceptable IRR, but recommends approving the changes meanwhile, so the final 250 affordable housing units would only be built once the return level is reviewed at the end of the scheme.
“Reducing the level of affordable housing from 15% to 9% … would be consistent with the Council’s priorities for the site, which include ensuring delivery of the works to the listed building, delivery of the Northern Line Extension and securing the maximum provision of affordable housing,” the report said.
“The results of our assessment indicate that the provision of affordable housing at a reduced level of 9% would still represent the maximum reasonable level and would assist in securing the delivery of the other key priorities.”
London Mayor Sadiq Khan said on Twitter that he was against the changes. “London needs more affordable housing, not less,” he said.
But his office said it did not have the power to intervene in the matter as it was an amendment to a planning application, not a new application.
Khan has said he wants to change the system whereby the amount of affordable housing is dependent on an assessment of what is considered viable and an acceptable return for a scheme.
He wants any scheme proposing 35% affordable housing to get planning straight away, and wants viability assessments for schemes proposing less than 35% to be a lot tougher.
BPSDC said it was still hopeful the final 250 units would be built, and said in a statement: “Later this year we expect to start work on the first 386 affordable homes which will be ready for local people to move into in 2020, three years ahead of schedule. The team remains focused on delivering the full amount of 15% affordable homes, which equates to 636 affordable homes over the course of the project.”