What does affordable housing have to do with new real estate developments in London?
In this blog, we will examine the fascinating realm of affordable housing in London’s high-end new-build properties. In this post, we will explore the concept of affordable housing, assessing not only its definition but also the individuals who occupy these properties. Furthermore, we will discuss the reasons behind the presence of affordable housing within the context of London’s new real estate developments and the outlook. Join us as we embark on a journey to understand the intricacies and significance of affordable housing in one of the world’s most prestigious cities.
Affordable Housing in London
Quotas for London Residential Developments
In London, new residential developments are subject to a government policy known as “affordable housing quotas”. This has become a significant aspect of London’s real estate landscape. Property developers who require planning permission for their new projects are mandated to allocate a specific percentage of their developments to affordable housing. The exact percentage varies across different boroughs and individual developments.
The purpose of these quotas is to ensure that new residential developments contribute to addressing the shortage of affordable housing in London. By requiring a portion of the housing to be made available at below-market rates, the government aims to increase the supply of affordable homes for individuals and families with lower incomes and help promote social and economic diversity within the city.
The term “affordable housing” in London, typically refers to housing options that are designed to be more affordable for individuals and families with lower incomes. The definition of affordable housing can vary depending on the context and the specific policies in place. However, it generally refers to homes that are priced below the market rate or have rents set at lower levels than the prevailing market rents.
A Legal Obligation for London Developers
The planning system in the UK has a mechanism to ensure the delivery of affordable housing known as Section 106, or S106. Section 106 enables local planning authorities to impose conditions or financial contributions on developers as part of the planning permission process. These conditions can include various aspects, including investments in local infrastructure such as schools and roads. Notably, they can also require a specific proportion of affordable housing within residential developments.
Notably, in the fiscal year 2018/19, local authorities received a significant £7 billion in contributions from developers through Section 106. Moreover, it is worth mentioning that 90% of local planning authorities had imposed conditions on planning permission for new developments.
Therefore, we must highlight that the delivery of affordable housing through Section 106 is closely tied to the success of private real estate developments. The existence and sustainability of affordable housing depend on the dynamics of the housing market. To ensure the viability of affordable housing, a strong residential property market is required. This dynamic incentivizes the government to maintain house price growth to foster a favourable environment for affordable housing initiatives to thrive.
How does UK Affordable Housing work
The UK employs a range of government policies, regulations, and initiatives to facilitate the provision of affordable housing. These can include social housing, which is owned and managed by local authorities or housing associations, as well as intermediate housing options such as shared ownership or discounted rental schemes. These initiatives aim to increase the availability of affordable homes catering to those who would otherwise face challenges in affording housing within the open market.
The eligibility criteria for affordable housing can also vary, but they typically prioritise individuals and families with lower incomes. This includes key workers, individuals on lower wages, or those who meet specific local needs criteria. The aim is to ensure that a range of housing options is available to accommodate the diverse needs of the population while addressing affordability challenges in a high-cost city like London.
In order to meet the planning condition and ensure the provision of the necessary affordable homes, developers are obligated to partner with a Registered Provider of affordable housing. These providers play a vital role in the process as they become the rightful owners of the completed affordable homes. Upon the completion of the development, the Registered Provider takes over the ownership and takes the necessary steps to allocate these homes to eligible individuals and families. This can be done through affordable tenancies, where the homes are rented at affordable rates, or through shared ownership schemes, enabling prospective buyers to purchase a share of the property. These initiatives are designed to create housing opportunities for Londoners who would otherwise struggle to access housing within the competitive housing market.
Three Types of Affordable Housing in London
This type of affordable housing is typically determined based on a percentage of average earnings. Social rented housing consists of homes owned and managed by local authorities or registered housing providers, also known as housing associations. These homes are made available to individuals and families in need of affordable housing and are rented out at rates lower than the market average. Rent levels are often established using a formula based on the property’s value or as a percentage of income. Social rented housing offers long-term security of tenure, and tenants have rights and responsibilities similar to those of private renters.
In the context of new builds / offplan properties in London, developers may be required to allocate a specific percentage of units as social rented housing as part of the Section 106 agreement. The exact percentage varies depending on the development and local planning policies. The provision of social rented homes within new builds contributes to meeting the housing needs of low-income households. It aims to provide secure and affordable housing options for those who may otherwise struggle to access suitable accommodation in the private rental market.
Applicants for intermediate housing are not eligible for social rented housing due to their incomes exceeding the threshold set for social rented housing. Intermediate housing bridges the gap between social rented housing and market-priced housing. It offers affordable housing options for individuals and families who may not qualify for social rented housing but cannot afford to purchase or rent at market rates. Intermediate housing commonly includes shared ownership and discounted rental schemes.
Shared ownership enables individuals to purchase a portion of the property (typically between 25% and 75%) while paying rent on the remaining share. Over time, individuals may have the opportunity to increase their ownership stake through a process known as staircasing. Discounted rental schemes offer below-market rents for a specified period, providing tenants with a more affordable rental option.
In London, intermediate housing serves individuals and families who fall between the eligibility criteria for social rented housing and those who can afford market-rate housing. It provides affordable housing options for people with moderate incomes.
Here are some of the groups of individuals who may live in intermediate housing:
a – Young first-time buyers: Shared ownership schemes are often appealing to first-time buyers who have stable incomes but struggle to purchase a property outright in the open market. Shared ownership allows them to acquire a share of the property and pay rent on the remaining portion, making homeownership more accessible.
b – Young professionals: Intermediate housing can be suitable for young professionals with relatively higher incomes who face challenges in affording market-rate housing. These individuals may be early in their careers or have recently graduated, making it difficult to save for a full property deposit or afford high rental costs in Central London.
c- Key workers: Intermediate housing options are relevant for key workers such as nurses, teachers, and other professionals who provide essential services in the city. These individuals may have moderate incomes but struggle to afford housing at market rates. Intermediate housing schemes can provide a pathway to homeownership or offer more affordable rental opportunities.
This refers to rent set at 80% of the open market rent, inclusive of applicable service charges. Affordable rent is a category of housing that offers a reduced rental rate compared to the open market, providing more affordable options for tenants. The 80% threshold is intended to make housing more accessible to individuals and families with lower incomes while still considering the market conditions. The Regulator of Social Housing (RSH) has published data showing that affordable rent is typically 30% more expensive than social rent within the same location.
Recent developments for Affordable Housing in new build properties
It is significant to note that since the year 2013, there have been over 257,000 affordable rent homes built throughout England whilst only 66,635 social rented homes in the whole of England. The majority of the social rented housing was built due to legacy programs whilst more and more are being converted to affordable rent as time goes on.
Whilst the focus on affordable rent and affordable housing grows, properties on social rent decline throughout England. With an overall fall being witnessed in the last number of years. As affordable rent is linked to market prices, residents must still be of strong financial standing in order to not be priced out in prime London locations. In the years between 2020 and 2021, the most common type of affordable housing which was supplied to the market was affordable rent which made up 46% of the total. Whilst affordable home ownership such as shared ownership made up 35%.
This indicates that the majority of affordable housing in prestigious newly built properties goes to young professionals who are still early in their careers or key workers whose earnings are slightly lower than required to keep up with market rates. Therefore rather than diminishing the exclusivity of these developments, the provision of affordable housing offers an opportunity for essential members of society, such as doctors, nurses, young professionals, and such, to reside in close proximity to their workplaces.
In conclusion, by mandating affordable housing quotas and implementing mechanisms like Section 106 agreements, the government ensures that a portion of the housing supply caters to individuals and families with lower incomes. This allows key workers, who play a vital role in supporting the city’s infrastructure and services, to access affordable homes within desirable locations.
In summary, the integration of affordable housing within London’s new real estate developments not only supports the needs of key workers but also fosters a more diverse and inclusive urban landscape. It showcases London’s commitment to ensuring that everyone, regardless of income level, has access to suitable and affordable housing options, contributing to the overall vitality and harmony of the city.