Introduction

As the UK’s housing crisis continues to deepen, the pressure on developers and policymakers to meet government housing targets has reached new heights. While the need for new homes is undeniable, a significant barrier remains: the financial viability of potential development sites. This challenge is particularly acute within London’s Grey Belt—underutilised or derelict land within urban areas—where high land costs and stringent affordable housing requirements often render small-scale development projects financially unfeasible.

We recently conducted some analysis that sheds new light on this issue. The research reveals that, contrary to conventional wisdom, reducing affordable housing requirements can actually increase the number of affordable homes delivered. This article explores these findings and discusses how a balanced approach could unlock more development potential while still meeting affordability goals.

The Challenge of Site Viability

Site viability, especially for off market deals, ultimately comes down to whether a development can generate a land value over and above the existing use value to incentivise the land owner to sell, while also considering all other costs and constraints that may arise. As such, our research assumes that in order for a site to be considered ‘Viable’ it must generate a land value at least 20% above its existing use value and not have significant constraints. Sites that can only generate a land value between 10% and 20% above their existing use value are considered as moderately viable but come with higher risks. Conversely, sites that cannot achieve this value or face major constraints are considered financially unviable.

Developers often face a complex and time-consuming process when assessing site viability. Traditional methods of site analysis can take weeks or even months, and without the correct methodologies, the risk of missing details or not achieving full site optimisation remains high. Many developers, particularly those working on small-scale projects, struggle to navigate these challenges, making it difficult to bring new developments to market.

Our innovative software solution addresses this problem by automating the assessment process. By leveraging accurate data and industry-leading analysis, the software reduces the time required to evaluate a site’s viability from months to minutes. This rapid assessment capability allows developers to make informed decisions quickly, reducing risk and increasing the likelihood of successful developments.

Impact of Affordable Housing Requirements on Financial Viability

The concept of the Grey Belt is a recent proposal by the new Labour government as part of their efforts to address the UK’s housing crisis. Unlike the Greenbelt, which is intended to protect biodiverse areas and preserve natural landscapes, Grey Belt sites are poor quality areas within the Greenbelt characterised by a lack of biodiversity and have been identified as potential areas for development. This initiative represents a positive step forward, acknowledging the need to unlock land for housing in a sustainable way.

However, along with this proposal, the Labour government has imposed ‘Golden Rules’ on Grey Belt development, one of which is the requirement that 50% of new housing on these sites must be affordable. While this rule is clearly aimed at increasing the supply of affordable housing, our research suggests that such stringent requirements are likely to render a significant number of these sites financially unviable.

A summary of Viabilities Findings

  • 50% Affordable Housing Requirement: Under the current government guidelines, which suggest a “Golden Rule” of 50% affordable housing on new developments, 80% of small-scale Grey Belt sites are likely to be financially unviable. These sites pose significant financial risks, making them unlikely to be developed. As a result, very few new homes will be delivered including very few affordable homes.
  • 35% Affordable Housing Requirement: When the affordable housing requirement is reduced to 35%, the percentage of unviable sites decreases to 70%. While this may seem like a modest improvement, the impact on housing delivery is significant. More sites become financially viable, leading to an overall increase in the number of homes built, including affordable units.
  • 20% Affordable Housing Requirement: Further reducing the requirement to 20% results in 60% of the sites becoming viable, although 30% remain unviable due to financial risk. This scenario highlights the delicate balance between maintaining affordable housing targets and ensuring that development projects are financially viable.
Graph 1

The Paradox of Affordable Housing Requirements

The analysis uncovers a counterintuitive truth: higher affordable housing requirements may actually stifle the delivery of affordable homes. This paradox is evident when comparing the impact of different affordable housing thresholds.

  • 50% Affordable Housing Requirement: With a 50% requirement, the majority of sites are unviable. For example, consider a small Grey Belt site where the 50% affordable housing requirement makes the project financially unfeasible. In this scenario, no development occurs, and the potential for new homes—affordable or otherwise—is lost.
  • 35% Affordable Housing Requirement: Reducing the requirement to 35% improves the viability of the site. While only 35% of the homes are affordable, this still results in a significant number of new affordable homes being built—homes that would not exist under the 50% rule. Findings suggest that by lowering the affordable housing requirement from 50% to 35%, the number of affordable homes delivered could increase by up to 44%.
  • A Percentage of Something Is Better Than 100% of Nothing: This principle underscores the paradox. If 50% affordable housing renders a site unviable, resulting in zero development, it may be more beneficial to allow a lower percentage, such as 35%, which enables development to proceed. This approach ultimately leads to more affordable homes being built than under a higher, unachievable requirement.
  • 20% Affordable Housing Requirement: Reducing the requirement further to 20% could result in even more sites becoming viable. However, this comes with a trade-off: while the percentage of affordable units per site decreases, the total number of affordable homes increases.

Actual Analysis of Grey Belt Development Sites

In the actual analysis of ten potential Grey Belt development sites, the results show a significant variation in the total number of homes delivered and the proportion of affordable housing based on different affordable housing thresholds.

  • 50% Threshold:
    • The analysis shows that only a limited number of sites are viable under this strict threshold, leading to the development of 17 homes in total.
    • Of these, 9 homes were affordable, reflecting the difficulty in meeting higher affordable housing requirements without sacrificing overall development.
  • 35% Threshold:
    • When the affordable housing requirement is lowered to 35%, the total number of homes more than doubles, with 37 homes in total being delivered.
    • However, the number of affordable homes increases significantly to 13, representing a 44% increase in affordable housing compared to the 50% threshold.
  • 20% Threshold:
    • Further reducing the affordable housing requirement to 20% results in the total of homes almost doubling again with 73 homes being delivered, but with a further increase in affordable housing to 15 homes.
    • This demonstrates that more flexible policies can enable a higher number of affordable homes to be delivered, particularly as the overall number of homes increases.

These findings illustrate the impact of different affordable housing thresholds on development viability and the delivery of affordable housing. The analysis clearly demonstrates that reducing the affordable housing requirement can lead to a significant increase in the number of affordable homes while actually increasing the total number of homes developed.

Graph 2
Graph 3

Comparing Local Planning Policies

The research also examined the impact of adhering strictly to local planning policies, which often do not require affordable housing on smaller sites. Under this approach, 60% of the sites were viable, but the overall delivery of affordable housing was significantly lower compared to other scenarios.

While this approach increases the number of sites that can be developed, it comes at the cost of delivering fewer affordable homes. This finding suggests that local policies may not always align with broader housing objectives, particularly when it comes to affordability.

The Case for Balanced Policy

The analysis of Grey Belt sites highlights the importance of a balanced approach to affordable housing requirements. The findings demonstrate that overly stringent policies can hinder the development of viable sites, significantly reducing the overall housing supply. For instance, under the 50% requirement, only 2 out of 10 sites were developed, delivering just 9 affordable homes. In contrast, a more flexible approach, such as lowering the requirement to 20%, allowed 6 out of 10 sites to be developed, resulting in 15 affordable homes being delivered.

This evidence clearly shows that by adopting more adaptable affordable housing policies, it is possible to significantly increase the number of homes delivered, including affordable units. Such an approach not only helps meet housing targets but also ensures that developments remain financially sustainable for developers.

Conclusion

It is essential for policymakers, developers, and other stakeholders to consider these findings when crafting housing strategies. A balanced approach that considers both affordability and viability is crucial to addressing the housing crisis effectively.

As technology continues to evolve, tools like Viability’s software offer new possibilities for streamlining the development process. By making viability assessments faster and more accurate, these innovations can play a key role in unlocking the development potential of sites that might otherwise be overlooked, ultimately contributing to a more robust and sustainable housing market.

Explore the Power of Data-Driven Decision Making

The insights presented in this analysis underscore the critical role that detailed data and accurate appraisals play in making informed decisions about development projects. Understanding the financial viability of sites under different policy scenarios is crucial, especially in a challenging market where every decision can significantly impact your bottom line.

Imagine having the ability to quickly and confidently assess the viability of potential development sites, tailor affordable housing strategies to maximise both profitability and social impact, and stay ahead of policy changes—all from one powerful platform.

With Viability, you can:

  • Access Comprehensive Data: Dive deep into the data that powers our analyses. From site viability to detailed financials, you’ll have the information you need at your fingertips.
  • Conduct Detailed Appraisals: Our intuitive tools allow you to carry out comprehensive appraisals in minutes, not months. Optimise scenarios and explore how different affordable housing requirements impact your projects.
  • Make Informed Decisions: Empower your team to make smarter, faster decisions with real-time insights and forecasts. Whether you’re a developer, planner, or investor, our platform equips you with the knowledge to succeed.

Start Your Free Trial Today

Experience firsthand how our platform can transform your approach to site appraisal and development. Click the link below to start your free trial and discover the value of data-driven decision-making.

If you’re ready to elevate your projects and make more informed decisions, Viability is here to help. Join the growing number of professionals who trust our platform to de-risk their development opportunities.