The views in this article are the views of the author only, and don’t necessarily reflect the views of Priced Out as a whole.
Developers’ Affordable Housing contributions can be provided in three ways; they can either provide completed units within their projects (Onsite Provision), they can directly pay councils the money needed to build new units (Cash-in-Lieu), or they can build homes in separate plots (Offsite Provision). Currently, National Planning Policy by default and local authorities by preference across the UK usually requires developers to make their contributions via Onsite Provision to prevent affordable housing from being concentrated in lower cost areas. Currently, local authorities in London are instructed to only accept in-Lieu payments in ‘exceptional cases’. This means that the money developers spend on building affordable homes doesn’t go as far and fewer units are built than would be if Offsite Provision or Cash-in-Lieu payments were preferred. Britain is facing a housing crisis. We simply do not have enough homes, and we need to build more. As long as the housing market remains imbalanced and supply constrained, National Planning Policy and Local Councils should preference Offsite Provision and Cash-in-Lieu payments when they decide how developers make their Affordable Housing Contributions.
Cash-in-Lieu payments lead to a greater total provision of housing. If a council demands that 35% of new housing be affordable, a 100-unit development will result in 65 private units and 35 affordable units. Cash-in-Lieu payments would result in more total housing and often more total affordable housing as the contributions would be spend building additional units. To see why, let’s assume that for this development, the private sales income is £600 psf, the affordable sales price is £300 psf, the total costs are £330 psf, and the developer requires a return of 1.5x. It is important to stress that this is the return is not some figure just picked by developers. It refers to the level of profit they need to get access to capital given the risks of construction and the rate of return available in other sectors. If developers cannot get this rate of return, money won’t be invested in building houses. With the above assumptions (and assuming the council/their partner can build at the same total cost as the developer & has the same cost of capital), Cash-in-Lieu set at a level so that the developers are indifferent between payment levels would allow for the financing for 36 units, resulting in 100 private units and 36 affordable units. Councils, however, have a lower cost of capital than the developer and may be able to leverage lower build costs through their access to cheap debt through the Public Works Loans Board; this will be discussed later.
A primary criticism of Cash-in-Lieu (and Offsite Provision) is that it results in unfair outcomes. Naturally, it encourages the developer or the council to provide affordable housing in lower-cost areas. After all, 35 units of affordable housing would be cheaper to build in Kensal Town than in Mayfair. Critics argue that this practice leads to siloing and with affordable housing concentrated together rather than mixed throughout the area. This is true, but the trade-off here is not just between better and worse-located housing. The trade-off is whether people have safe good quality homes or not. We have critical under-provision of all types of homes; making the mix less important than the mass. The greater harm is not that the people living in affordable housing have a worse product compared to their private housing neighbours but that some people who need it receive secure affordable housing, while others do not. Indeed, the lower land costs (and often build costs) in cheaper areas are a benefit as this allows for more units to be built at the same cost, increasing total supply.
An obvious criticism of Cash-in-Lieu or Offsite Contribution payments is that they would require higher initial funds from the developer; as many developers are capital-constrained, Cash-in-Lieu payments may be inappropriate for them, with them simply being unable to provide these additional funds. In these cases, onsite provision makes the most sense. The need for additional capital could also be reduced by requiring Cash-in-Lieu to be paid out on delivery or disposal of the units. Of course, this can expose the local authority to some risk, but this is low (particularly as the council implicitly takes this risk with onsite provision only receiving the units on delivery). The high cost of capital for developers would further benefit the council. Assuming a developer needs a 15% return and there are two years between issuance of planning permission and delivery, the developer would be indifferent between paying an amount on permission or 32.25% more on delivery. As (using PWLB rates) the council’s cost of capital would be only 5.4%, the council would be (implicitly) making a 9.6% annual return. Using our earlier example, payment on delivery of units (assuming instant disposal) would allow for 54 affordable units to be financed by the Cash-in-Lieu payment. That takes us from 100 total units to 154 total units.
Cash-in-Lieu payments are an underused tool for extracting affordable housing provision. In most cases, it results in more units provided, which is essential given the current chronic under-provision of the UK’s housing market. As Cash-in-Lieu dose not immediately build affordable houses, it has often been misconstrued as a way of ‘getting around’ rules providing affordable housing; this view is objectively incorrect and reduces the number of homes that get built.
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