Will the proposed Section 106 reforms work?

The current Section 106 system is slow, complex and inefficient. This initiative is great news to deal with the current backlog of units that haven’t been sold, of which there are thousands either standing empty and unused or in the immediate pipeline.

Under the roadmap, any unsold unit needs to be placed on the government clearing site for six weeks without a sale. After this, discussions can open about overturning the agreement and changing tenure, so the initiatives join up nicely and will create activity.

The positive actions of standard Section 106 templates, earlier registered provider engagement, clearer design standards and greater pricing transparency should result in reduced negotiations, lower transaction and legal costs and increased financial capacity.

The latter, however, is very modest in scale, with just £2.5bn allocated to low interest loans. Even with these loans, most RPs cannot currently afford to buy Section 106 homes at viable prices.

“Private-side developers can ill afford to take a risk on Section 106 as there isn’t a ready and willing buyer cohort guaranteed”

The core issues remain with grant funding, balance sheet constraints, rent caps limiting income, construction cost inflation, decarbonisation programmes, cladding issues and critical improvements following Awaab’s Law.

Furthermore, while the roadmap is strong on process reform, it is weak on fundamental market economics – it’s treating the symptoms but not the root causes. It’s very much for the short term: at present these emergency measures are only for developments that already exist or will complete by the end of 2027. 

This may mean some movement immediately, but it doesn’t address any of the core issues as to why the problems exist and, without that, we will find ourselves in the same situation in due course.

The biggest obstacle to long-term delivery of affordable housing remains the level of grant funding, which should cover 50-70% of the purchase cost but currently only makes up 10-30%, forcing RPs to rely on borrowing and placing them at risk of further debt or being unable to afford to acquire or develop. The private sector is still subsidising affordable housing, which means a private slowdown knocks into affordable too.

Private-side developers can ill afford to take a risk on Section 106 as there isn’t a ready and willing buyer cohort guaranteed. Recent data highlights this in London, where figures are hugely down for planning, starts and deliveries across private and social housing as the two are inextricably linked.

From a planning point of view, technically, councils already have the ability to vary Section 106 agreements on the basis of changing circumstances and ability to deliver: if they want to be proactive in engaging with developers, they already have the tools to do so. This therefore could be more of an incentive to push local authorities to take a more visible role, whereas currently they prefer to stay under the radar on such matters.

Hopefully this will give developers more power to engage with their local authority, increase their confidence on planning matters and cut some of the red tape at the same time. However, on the planning side, this means nothing unless the development itself is viable.

“Another measure would be to line up Homes England or the government as a guaranteed buyer of last resort. This would eliminate the perceived risk of developing and help stabilise the system”

So what are the potential solutions?

In order to fundamentally fix the financial viability gap and risk allocation in the Section 106 system, the government needs to go much further, and there are several very key actions that could and should be taken.

First, grant funding. This would close the viability gap, increase provider spending capacity, reduce resilience on cross-subsidy and stabilise delivery. Historically grant funding was the backbone of all delivery, and we need to bring it back to a significant level.

Another measure would be to line up Homes England or the government as a guaranteed buyer of last resort. This would eliminate the perceived risk of developing and help stabilise the system.

More needs to be done to get councils building again. In the 1970s, councils were the biggest developer of housing, but now they are the smallest, while still sitting on swathes of land. If local authorities could be pressured into developing again, this would drive delivery.

And the government should incentivise private investment in social housing. Consider vehicles to encourage and attract further private investment in the sector alongside tax breaks. While the latter could prove politically unpopular – after all, many of the biggest investors in this part of the market will no doubt be global or institutional funds – it would allow investors to view the asset class as less risky.

Nick Fell, head of residential, Rapleys