Grosvenor’s Bermondsey Rejection Is A Microcosm Of London’s Affordable Housing Quandary
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The decision by Southwark Council planning officers to recommend rejecting Grosvenor’s 1,342-apartment build-to-rent scheme provides a rare chance to examine in detail the maths and assumptions behind a controversial affordable housing planning decision. And in the case of this scheme, it is a microcosm of the complexities of making housing affordable to more people in London.
If a proposed new scheme does not meet affordable housing planning policy, developers have to provide a viability assessment outlining why it would not be financially viable to provide more affordable housing. The local authority appoints its own advisors to check this over, and then decides to either approve or reject the scheme.
Normally these viability assessments are secret. In the case of Grosvenor’s Biscuit Factory scheme in Bermondsey, the council has made the main numbers, though not the entire report, available to the public [p42]. So what do the figures show about why one of London’s largest-ever purpose-built BTR schemes was recommended for rejection?
The top line is that it did not provide enough affordable housing. Grosvenor proposed that 27.37% of the rooms in the scheme be affordable; and by affordable it meant a discount of 25% to open-market rents at the scheme. It did not hit a threshold of 35%, the council said, and the discount it was offering was not deep enough.
Grosvenor said that was the maximum it could afford while still making a decent return.
Grosvenor said in its viability assessment that the gross development value would be £766M, and that it would cost £465M to build. It would cost 30% to operate the open-market rent flats, and rents would equate to £37.81/SF. The yield on those flats would be 3.5%. It said professional fees would be £64M. All told, this would give it an internal rate of return of 12%.
The council’s advisor, GVA, disagreed pretty substantially. It said the scheme would cost £455M to build. It said it would cost 25% to operate and rents would be £40/SF. Finally, it said the yield would be 3.25% on open-market rent units. Professional fees were estimated at £50M. GVA estimated this would all equate to an IRR of 11% — not that different to Grosvenor’s. But it created a gross development value of £873M, a £107M difference from Grosvenor’s estimate, plus another £24M difference in cost estimates.
As a result, GVA estimated that Grosvenor should be offering 32% affordable housing and at deeper discounts: More of the units should be for social rent, or at the London Living Rent, which is less than Grosvenor’s 25% discounted market rents. It said this would still allow it to make an IRR of 11%.
What constitutes an acceptable level of return on major London housing schemes is a debate raging between councils and developers across the capital. At Battersea Power Station, the figure was 15%, and the council agreed and allowed the developer to lower the amount of affordable housing to be provided in later stages.
In Bermondsey, Grosvenor is targeting a lower return at 12%, and has said that given the cost of building, the scheme will be borne up front and since the yield on the units is low, it will only break even after 20 years. But in this instance Southwark Council does not agree.
In its proposal for the scheme, Grosvenor laid out some examples of who it thinks could afford to live there. It said the median income of people in Southwark in jobs like nursing, teaching and firefighting is £39K. Under its proposals it said that a couple earning £30K each would be able to afford all of its discount-rent one-bed flats, and 84% of the two-bed flats, and three people sharing could afford 98% of the three-bed flats. Southwark Council in its report pointed out that couples on the same income could afford just 49% of the one-bed open-market rent flats and 13% of the two-bed flats.
Grosvenor anticipated that affordable housing would be a sticking point.
In a statement during the planning process, its UK and Ireland Chief Executive Craig McWilliam said: “Our rental homes will be accessible to many more families and workers than an equivalent for sale development.
“But here's the rub. To make all of that happen, you have to accept that investing in build-to-rent housing is different to investing in housing for sale. Build-to-rent developments don't generate capital from sales and in comparison to housing for sale developments, don’t produce as great a financial contribution for traditional affordable housing — at below market rents.
“We have never shied away from those facts. We have been clear from the start that we cannot fund social housing without dramatically shrinking the number of discounted homes that will be accessible to a wider range of local people.
“Inevitably, we will not convince everyone. We're in the hands of public opinion and the decision makers who reflect it. I believe London needs a broader and more honest conversation about housing. The demands of this great city and its people call for it.”
At the moment, the decision makers are against Grosvenor. Southwark Council pointed out that these issues have been raised throughout the planning process, but Grosvenor has not amended the proposal. Now it seems a compromise will have to be sought.