Taking the development reins: a move away from Section 106

The move away from Section 106 is better viewed at an organisational level. Take Network Homes for instance, a 20,000-home London-based housing association that built 279 homes of all tenures last year and started 590.

In 2017/18 it made 758 starts, with 360 of these under Section 106. But in 2019/20, all of its 590 starts were land led and in the next two years just 96 (5%) of the 1,745 homes it plans to start will be Section 106.

Matt Bird, new business and partnerships director at Network Homes, says: “It’s not something that has happened by accident. Moving away from Section 106 gives you more control: the number of homes, where they are and the quality of them.”

This is a familiar theme. With the increased focus on build quality and building safety after Grenfell in particular, housing associations are fed up with being lumbered with mistakes made by private builders on assets they will own for decades.

This goes beyond fire safety, it is also about the design of the scheme. There have been high-profile examples of measures to exclude the social housing residents from amenities in recent years – with separate exits, separate gyms and restricted playgrounds. Build your own scheme and you can avoid all of this.

“If you receive a Section 106 and find out your residents don’t have access to a playground, you are stuck with that situation,” says Fiona Fletcher-Smith, group director of sales and development at L&Q. “That’s not what we wanted to be about.”

She adds that some private builders simply do not design with social housing in mind. Their focus on the sales market means they do not necessarily plan for families. “They just can’t cope with the child density, for example,” Ms Fletcher-Smith says. “I went to one recently and the kids were knocking holes in the walls, taking their bikes down the stairs because they were just too narrow.”

Carbon reduction is another driver. What is the value to a housing association of buying a home from a builder it will need to expensively retrofit, when it could build one to a high standard of environmental efficiency to begin with?

The other push away from Section 106 is increased competition. Large investors such as Sage Housing (backed by huge private equity firm Blackstone) have entered the market, as well as institutional investors, such as Legal and General (L&G), and housing associations registered by developers, such as British Land, to keep the Section 106 homes they develop in house.

“Competition for Section 106 has been very, very strong and the for-profit [providers] have been coming into that, too,” says Helen Collins, head of the Affordable Housing Consultancy at Savills.

“In recent times the investors, such as L&G, have come into this market with a bang,” adds Sara Bailey, managing partner at law firm Trowers & Hamlins.

While figures from these new entrants are not part of Inside Housing’s data, Sage in particular is making waves. It struck deals for 541 homes, worth £116m, in May and says it is in contract for around 10,000 units of some 20,000 it is targeting – this is a big slice of the pie.

Despite having much deeper pockets than traditional housing associations (Blackstone is the world’s largest property investor with assets worth more than $400bn – larger than the GDP of Ireland), it is not necessarily outbidding them. It is understood that the firm and other for-profit providers apply a tight criteria for bidding necessary for it to turn a profit on the homes. Nonetheless, more competition means less opportunity for the traditional sector – especially where a for-profit provider strikes an up-front deal with a house builder to take a large chunk of their product.

Finally, a move away from Section 106 insulates against a market downturn. When overall housebuilding dips, so does Section 106.

“The rationale behind doing less Section 106 is that you are less reliant on market forces,” says Joe Reeves, executive director of finance and growth at 33,000-home Midland Heart. “In a downturn, if you were purely reliant on Section 106 and they weren’t coming through, you would have nothing.”

He explains there has been a particular push for associations in the Midlands, where the Voluntary Right to Buy scheme is being piloted and housing associations are obliged to replace those homes but cannot use the cash to buy Section 106. So everyone selling Right to Buy must embark on at least a modest land-led programme.

So what does this shift mean for the business? The first is that a new skillset is required: an ability to understand and navigate the land market and the associated risks with buying something based on the money you will make from it years down the line.

“If you are carrying out mixed-use schemes, you need to ensure you understand the private residential market,” says Ms Bailey. “This is not about skillset in terms of technical expertise but commercial expertise.”

At L&Q, the development team has doubled to more than 650 members in recent years, with many of the new additions coming in from the private sector and bringing their commercial experience (and contacts) with them.

“We look for people who understand the commercial nature of what we do, but also the fact that we’re a charity and the ultimate goal is providing affordable housing,” says Ms Fletcher-Smith.

Mr Bird, on the other hand, says Network Homes has mainly recruited from within the sector, picking up employees who have built up knowledge of the land market at other housing associations.

A particularly challenging part of the land-led model for housing associations is that they often need to buy land without planning consent. Land promoters, organisations that purchase land without consent and then sell options to developers to purchase it once consented, will often price in the lowest amount of affordable housing possible.

This is within the commercial nature of what they do, but it tends to price out a social landlord seeking to maximise affordable housing. The answer is to buy the land unconsented, but that brings risk.

“One of the big things is if you are buying a site without planning permission, you need to understand the local planning policies and what the authority is likely to ask for. Then you need to know the local ecosystem and the local market to have an idea about what is going to sell and to who. There is risk all along that process,” explains Ms Fletcher-Smith.

“Where higher levels of affordable housing have been ruled out, these are effectively ruled out for us,” says Mr Bird. “It’s pushing us more and more to look at land that isn’t consented. The planning process is always a challenge. We are always learning and having to improve our knowledge.”

Nonetheless, the simple mathematics of the cost of land and the relatively low grant rates available mean that a proportion of market sale – or at least shared ownership – is required to make the schemes stack up.