The draft SPG provides guidance for housing associations on affordable housing and planning in London. It establishes that 35% of new developments must be affordable housing and encourages early collaboration between developers and housing associations. It also introduces new affordable housing products like London Living Rent, aimed at helping renters save for a deposit. While this may increase affordable options, it also reduces income caps which could impact viability. The guidance does not address starter homes and potential effects on contributions. Housing associations are advised to review the impacts and provide feedback on the draft.

1. Homes for Londoners – Draft affordable housing and viability Supplementary Planning
Guidance (SPG) as published by The Mayor of London, Sadiq Khan
What does this mean for Housing Associations?
The SPG is guidance only and does not introduce new policy, however the SPG will be a material
consideration from now for all planning applications across London. At the moment it is just a draft,
however, the weight of this material consideration will increase as the SPG progresses through the
consultation period, which runs from now until 28 February 2017.
Key point to note is that Starter Homes are not included within the SPG as Government has still to define
the policy. The amount of affordable housing becoming available via the planning gain route (via S106
agreements) may change if Starter Homes are introduced and included as a contribution to the
affordable element of a site.
Having a 35% affordable housing threshold (based on 35% of habitable rooms) on sites can only be a
good thing for housing associations (HAs) because it means an increase in the overall amount of
affordable homes being made available.
There is an expectation that schemes developed by HAs will provide higher proportions of affordable
homes simply because they are a HA. Many associations are, however, providing market led schemes
in order to cross-subsidise the affordable provision. If there is an expectation to increase the affordable
provision, either additional grant funding will be required and/or development activity may be reduced.
Grant
Grant is only available to provide affordable units over and above what is considered viable on a nil-
grant basis. If the total amount of affordable housing proposed at a scheme meets or exceeds 40%,
then the grant will apply to all units in the scheme. For anything below this level, then grant will only
apply to the additional units over and above the baseline level of affordable housing shown as being
viable on a nil grant basis. A cut off like this, just like the old stamp duty thresholds, could well result in
schemes clustering at just over the 40% mark.
The recent affordable housing prospectus offers fixed grant rates of £60,000 for rented units and
£28,000 for London Living Rent and shared ownership products, to providers willing to build 50%
affordable across their entire portfolio.
Getting in there early
The draft SPG advises developers to engage with HAs at an early stage so that the planning process can
be accelerated with improvements in design and integration of different tenures agreed early in the
process. This could lead to more strategic relationships between developers and HAs and an end to
the ’highest price wins’ bidding process which is the favoured approach of a lot of the major
housebuilders.

2. Tenure
The preferred tenure split for schemes is now:
 At least 30% low cost rent (social or affordable);
 At least 30% intermediate products with London Living Rent and Shared Ownership being the
default tenures; and
 40% to be determined by the relevant LPA.
Rents
The Mayor has introduced the London Affordable Rent (LAR) and any rents that are set above these
levels must be in line with what the LPA considers to be ‘genuinely affordable’. This is assumed to be
significantly less than 80% market rent. The benchmark LARs are given below:
(London Affordable Rent Benchmarks for 2017-18)
Bedsit and one bedroom £144.26
Two bedrooms £152.73
Three bedrooms £161.22
Four bedrooms £169.70
Five bedrooms £178.18
Six or more bedrooms £186.66
London Living Rent – a new product
London Living Rent (LLR) is a new type of intermediate affordable housing product that will help
households with average earnings save for a deposit to buy their own home. It is restricted to existing
private and social renters with a maximum income of £60k per household. HAs are expected to actively
encourage tenants to save for a deposit and assume within their appraisals that the properties will be
sold on a shared ownership basis by year 10.
Rents
The GLA has calculated ward level caps for LLR homes based on one-third of median gross household
income for the local borough. The cap varies from the Borough median by up to 20% in line with house
prices within the ward. The GLA will provide information on how the rents will be set.
Shared ownership
The current household income cap will remain at £90,000 for London, with some Local Authorities
setting their own limits. Whilst the London Living Rent product is ultimately a sales product, tenants
are expected to purchase their homes on a shared ownership basis within ten years, the household
income for this client group will be reduced to £60,000 in 2017.
Intermediate dwellings are to be considered affordable if the annual housing costs are no greater than
40% of household income.

3. Interestingly, the draft SPG advises that generally shared ownership is not appropriate where
unrestricted market value is more than £600,000. How developers manage delivery of shared ownership
in many areas where even one bedroom unit prices exceed this level, is not clear.
Assumptions for appraising shared ownership affordability
HAs and developers are advised to assume a mortgage term of 25 years with a 90% loan to value ratio
with the prevailing average interest rate being offered by lenders to calculate monthly payments.
Affordable Homes in perpetuity
The usual clauses regarding the perpetuity of affordable homes should be included within S106
Agreements. However, the intermediate product is being treated slightly differently within the SPG. It
is recommended that the S106 should provide for the recycling of any subsidy for alternative affordable
provision in the event of the affordable unit being lost. Subsidy in this case relates to reduced land
costs and the developer contribution gained through a S106 as well as grant funding. HAs will need to
maintain detailed records to accurately demonstrate the recycling of these subsidies when leaseholders
staircase to 100%.
Loss of existing affordable housing
There is an expectation that existing affordable housing will be replaced on a like-for-like basis, meaning
there should no net loss of existing affordable housing tenures (including social rented housing). This
will impact on estate regeneration schemes which are often only financially viable if rents can be
increased or tenures changed.
Affordable Housing Values
Developers are encouraged to have early dialogue with HAs who should also be involved in pre-
application discussions. The values used should reflect the offer made by the HA and they will be asked
to provide evidence through calculations of rental and capital receipts (including staircasing receipts for
shared ownership units) to support an application. Timings of payments by HAs should also be included
in the appraisals meaning that the terms of the deal will need to be agreed at an early stage. For HAs
this may mean a new spirit of openness with developer partners.
Affordable Housing and the Private Rented Sector (PRS)
The SPG encourages the provision of new PRS stock but recognises the “distinct economics” associated
with the sector, setting out a separate pathway through the planning system for PRS schemes. PRS does
not have a separate planning use class from traditional housing built for sale yet, so the SPG sets out
various conditions that a development must satisfy in order to be treated as PRS for planning purposes.
The key conditions are:

4.  At least 50 units (either as a standalone development or a block within a larger
development);
 Units to remain for rent under a covenant for 15 years;
 All units self-contained and let separately; and
 All units under unified ownership and management
The requirement for PRS schemes to be under unified management has a knock-on effect for associated
affordable housing, since it means that HAs cannot be involved (unless they are the developer) due to
the requirement to have unified management. As a solution, the SPG states that any affordable housing
within a PRS scheme can be provided entirely for Discounted Market Rent (DMR), to be managed by
the developer or provider.
The quantum of affordable within PRS schemes is to be ascertained through viability (there is no option
to bypass this), although the SPG does acknowledge that PRS schemes are unlikely to provide as much
affordable housing as an equivalent scheme built to sell. The DMR units within a PRS scheme must
remain affordable in perpetuity, and it is envisaged that rents will be set at the London Living Rent. This
is an elegant solution to what has been a problem for a number of years. We anticipate increased
interest from funds in the sector since they can now maintain full control of the entire PRS asset and
income stream.
In summary
Key points for HAs:
 No clarity on starter homes;
 Income cap reduction to stretch viability of shared ownership models;
 London Affordable Rents introduced; and
 A new product, London Living Rent presented
If you would like to discuss how the SPG might impact on your development activities in London further,
please get in touch with our affordable housing team. We would also be pleased to assist you in drafting
and submitting any Written Representations.
Contact Us
Thomas Mudd
020 7312 7465
thomas.mudd@montagu-evans.co.uk
Jenny Kay
020 7312 7525
jenny.kay@montagu-evans.co.uk
Zarah Taj
020 7312 7691
zarah.taj@montagu-evans.co.uk