Residential developer Galliard Homes has called for a £7.2m affordable housing payment to be cancelled on its Capital Towers development in Stratford, London E15. The company complains that costs have increased since it received permission, making the project barely viable.
The move comes as the project is substantially under way, with most of the external cladding already in place. A completion date of mid 2017 has been set.
The project includes two towers, rising to 14 and 34 storeys, linked by a fourth floor skybridge with a communal roof garden. The towers accommodate 191 apartments with a mix of 1, 2 and 3 bedroom units.
Galliard, in an application under section 106BA, has applied to have its previously agreed affordable housing contribution cancelled. The application, to the London Legacy Development Corporation, complains that the development is not turning out to be as profitable as expected, giving it only a 1.3% margin. It argues it should therefore be let off the final affordable housing payment, leaving it with a “barely sufficient” 14.14% profit.
The project, approved by Newham in 2012, called for a £200,000 “First Affordable Housing Contribution” to be paid up front. A “Second Affordable Housing Contribution” was agreed for subsequent payment, but with the sum being calculated off a later surplus of funds, against a breakeven development value of £63.4m for the project. The original agreement included the phrase: “if the gross development value of £63,400,000…..is not exceeded then no
SAHC shall be payable.”
Flats in the development were offered to off-plan buyers in Kuala Lumpur in 2013, with Galliard making capital from the fact that the scheme had been negotiated with no on-site affordable housing. When The Standard drew attention to this, the company replied: “The development is being marketed in the Far East and a question that regularly arises is whether all units on a site are for private sale. We feel obliged to indicate this on Far East material.”
The company notes it pre-sold most of the units, including a wholesale deal with an early bulk buyer, who entered into a deal that has returned Galliard an overage, as the market prices for the units in Stratford rose. It has submitted evidence of the prices paid, and argues it should only be charged a contribution based on the net value, after all costs, not the gross value of the development.
However, it now argues that a number of issues have impacted the London housing market, and therefore development value. These include construction cost inflation, stamp duty increases, global economic uncertainty, the EU referendum and competing development outside the capital.
A Galliard spokesman said: “The correct and proper payment will be made when due. The monetary contribution is always based on viability and this particular viability has been materially affected by sharply increased construction costs during the build programme.”
Simon Rawlinson, head of strategic research and insight at Arcadis, told Estates Gazette: “Rising costs are obviously affecting viability. For developers on a pre-sale model who locked in values before costs rose rapidly in 2013, inflation could easily have eroded expected margins.”
The appeal decision is due by 4 July.
LPA Perspective: Heads we win, tales you lose. That seems to be the premise of the Galliard argument – and it’s one that the planners need to rail hard against.
Developers work off a high profit margin – 20% is considered acceptable in the arguments back and forth as this affordable housing contribution agreement was thrashed out. That high return reflects higher risk. And, as the market has improved over the last few years, so developments in London have undoubtedly produced returns considerably ahead of that number. Not that developers crow about the schemes that deliver super-profits – for the evidence, you’ll need to look deep into company accounts.
The development community has become highly creative with calculations of costs and scheme viability. Now regularly used to chip down affordable contributions at the outset, it now seems there’s an attempt to chip down final payments, too. No wonder London boroughs are increasingly insisting the calculations are publicly aired, and not hidden behind the cloak of commercial confidentiality.
And so developers need to take the rough with the smooth. Sometimes, that means building out a project with minimal profit in it. And, as Galliard forward sold most of the apartments in the scheme, it has put itself in a position where it cannot stall or mothball the development; such a set-up also leaves it unable to profit from a later uplift in values, as it completes the build.
This is an appeal the authorities need to stand up to. And, for future reference, greater clarity is needed in the drafting of affordable housing contribution calculations, to prevent developers from having the opportunity to come back and beat it down later.