In last week’s article we looked at how leaseholders facing estate regeneration are getting a raw deal when their homes are subject to compulsory purchase orders.
Obviously the less money developers can offer to leaseholders to get them off the land they want to build on, the more profit for the developer.
And if developers make good profits, surely they will have enough money to provide affordable housing to replace the homes they are demolishing?
Sadly not. Yet more evidence has emerged as to how developers are gaming the system to reduce their affordable housing obligations. This time, by inflating the costs of compulsory purchase in their financial viability assessments.
The real values of surveyors
As has been discussed many times on this website, if a developer can demonstrate that their project is financially unviable, then they are able to reduce their obligation to build affordable housing.
Financial viability assessments (FVAs), the documents that underpin these claims, use estimates to work out how much profit a developer will make, and therefore how much affordable housing they will be able to build.
These estimates, like every estimate, could of course differ from the real amount of money actually paid or received; there will be a margin of error. However, the evidence uncovered by this website shows that the estimates frequently underestimate profit in order to make the case that affordable housing is not viable.
Occasionally, some of the real costs or values in a development proposal will be known before a scheme gains planning permission. You may think that if the real inputs into a financial viability appraisal are known before a planning application is made, then there will be less opportunity for the developers to game the FVA. With real values a more accurate picture of financial viability can be built.
Think again! Why should an FVA use those real values, when an assumed value, or “estimate”, may produced a more favourable outcome for the developer?
The Heygate was a Southwark Council owned estate in the Elephant and Castle. In 2010 the council signed a development agreement with Australian developer Lendlease to demolish all 1,200 homes on the site and rebuild the estate to a higher density and with more homes.
Over 1,000 council tenants were moved off the Heygate, but Lendlease claimed that it would only be viable to replace 83 homes at social rents. A viability assessment was produced by the developer to support their claim. Savills were the consultant employed by Lendlease to provide many the valuations for the FVA.
That viability appraisal was later obtained by Adrian Glasspool, one of the former Heygate Residents, after a two-year battle where he ended up taking Southwark to court to compel them to release the document. You can read about that story on the 35% campaign’s excellent website.
In order move forward with the scheme, the council needed to buy out some residents from their leases. In all there were around 200 leaseholders on the Heygate.
As it was part of a large regeneration project, the leaseholders became the subject of a compulsory purchase order.
Clearly the cost of buying the properties from existing residents was a cost of the development project that the scheme would have to bare. An allowance for the amount spent on buying leaseholders out of their leases was therefore part of the FVA.
In this case, the developers knew what this cost would be before the planning application was made. The council had been planning the regeneration of the estate for a long time and had started buying property on the estate in 2004.
However, when the developer submitted their FVA, they did not base their allowance for the cost of buying the leaseholders’ flats on the real amounts that had been paid, or even the real amounts plus an allowance for inflation, but instead used an ‘assumed’ valuation which was substantially higher.
According to freedom of information of requests the average amount paid to leaseholders at the Heygate was as follows:
- 1 Bed flat – £95,480
- 2 Bed flat – £107,230
- 3 Bed Maisonette – £156,833
- 4 Bed Maisonette – £177,421
As is clear, the values assumed by Savills were in most cases around £100,000 per unit higher than the real amounts paid. This has the effect of artificially suppressing the viability of the scheme, as the costs in the viability appraisal would be larger than the actual costs of the development.
Developers often make the argument that values in a financial viability assessment can sometimes differ from real values, because viability assessments are a snapshot at a certain point in time. But the huge cost inflation in this case can’t simply be explained away by a timing difference. Although Southwark council started buying homes on the estate in 2004, in 2011 the Council was still paying £115,000 for a two-bedroom flat on the estate. The planning application for the Heygate was submitted to Southwark Council in 2012.
In any event, compulsory purchase is a real cost which requires the payment of real money. If the real amount that has been paid is known, why not use that figure?
What is particularly galling about this case is that the council insisted that prices being offered were in line with market rates, and fought leaseholders who thought they should have been offered more during the compulsory purchase process.
However, when it came to determining the viability of the scheme the developer made the argument that the market rates of properties on the estate were much higher, and that prevented them from building more affordable housing.
Whichever valuation was the correct one, someone was getting screwed, and it wasn’t Lendlease.