The idea of developing the area to the east of London was first mooted back in 1987, prompted by the opening of the Channel Tunnel and the opportunities it presented. In 1991 Sir Peter Hall was appointed by Michael Heseltine, then Secretary of State for the Environment, to put some flesh on the bones of the idea; and so the Thames Gateway was born.
Back then, it seemed a brilliant and bold proposal. Today people are more circumspect. Daunted by the ambition of the project, they are hounded by fears of environmental degradation and whether anyone will want to live there. But the project is essential. Substantial development somewhere on the periphery of Greater London is vital. There is no other way to accommodate the burgeoning population of London and the South East, and to meet all our other development needs: industry, commerce, utilities, transport and services – all vital to keep the region functioning and attractive to investment.
In size, the Thames Gateway project has been compared to tacking a city the size of Leeds onto the side of London. It is meant to provide something in the region of 160,000 new homes and 225,000 new jobs by 2016 with the promise of more to follow (Department for Communities and Local Government [CLG], 2007).
As with any project requiring massive amounts of capital investment, progress has been slower than originally anticipated (see Abley and Woudhuysen, 2004 for a discussion of some of the constraints, including the ‘quango quagmire’). Housing completions are noticeably down. The Government’s latest Thames Gateway Delivery Plan (CLG, 2007) includes data on housing delivery numbers. This reveals a significant underperformance against the annual monitoring target of 16,000 net additions per year, with completions never exceeding 10,000 in any year from 2001-2007. In the London part of the Gateway the rate of completions is even poorer.
So what is the cause for the decline in completions? Could it be the credit crunch? The credit crunch is certainly an important factor – after all if people cannot secure mortgages then new housing construction will decline; but it is only a recent phenomenon and as an explanation it fails to account for the disappointing number of housing completions in the period 2001 to 2007.
An alternative explanation, and the one I would like to explore here, is the over-reliance by government on housebuilding activity as a means of generating the revenue needed to pay for infrastructure and services in the Gateway. Few people realise the extent to which new housing development is footing this infrastructure bill. Whether we actually need all the services, how much they cost and who ultimately pays, are the issues I would like to consider in the rest of this article.
Mention the Thames Gateway and you are likely to be met by one of two responses. The more extreme reaction is to decry the project outright as an environmental disaster: desecrating the marshes and despoiling the area’s unique character. In short, people and development should be discouraged as far as possible from encroaching on the area.
The second reaction, while less antagonistic, will tend to regard the Gateway as a necessary evil to reduce development pressure elsewhere in the capital, especially on London’s Western fringes where expansion was concentrated in the late 19th and early 20th centuries. Those voicing this response typically demand extensive environmental mitigation measures to counter the effect of the influx of new residents on the habitat of the Gateway, and substantial contributions from developers paid for in the form of Section 106 obligations (of which more later) to fund community infrastructure, thereby preventing the dumping of new residents in ‘soulless’ estates, isolated from the services of the metropolis (Glancey, 2003). ‘New Town Blues Revisited’, if you like. Copies of Young and Willmott (1957) and Jane Jacobs (1961) are dusted down in support of this line.
To this group the conditions necessary for these new Gateway communities to flourish, will be absent otherwise. In keeping with the compact city theory expounded within planning circles (for example Rogers and Power, 2000; the London Plan, 2004), its adherents maintain these brand new towns in the Gateway are liable to fail precisely because they are new and not adjuncts to a pre-existing community. The argument goes that unless a new community has some organic link to an existing one then it will be at much greater risk. To pre-empt this, much greater investment in ‘community infrastructure’ is considered necessary – not only in transport, schools and hospitals, but also in social services, libraries, public art, places of worship, and employment programmes, as well as sufficient ‘key worker’ housing to ensure there are enough public sector professionals on duty to keep an eye on everyone.
Perhaps we are becoming too timid about our ability to adapt to new settlements built entirely from scratch? Compare this with the spirit of the East Enders of the interwar period who in the celebrated ‘plotlands’ exodus simply got on and built new homes and settlements for themselves. Non-planned settlements like Peacehaven and Pitsea proved immensely popular with the working classes heading out of West Ham and Poplar, even if they were greeted with derision and hostility by the great and the good (Hall and Ward, 1998). All this happened without the expertise of planners, urban designers and sociologists. Such frontier spirit is entirely absent from today’s discussion about housing. Today we tend to worry about ‘sustainable communities’ instead.
Of course, the needs of a modern economy and workforce are of a different order to those of the 1930s. People need to be able to commute easily and rapidly from the Gateway towns into their centres of work in the capital. Key elements of infrastructure must be in place, especially transport. The question of infrastructure is thus critical to housing delivery in the Gateway, yet I wonder whether it isn’t used as an excuse to frustrate development in other areas; and sometimes in this area, too, as a dampener on expectations of development.
But how is this infrastructure to be paid for?
Most infrastructure and community services will be paid for through a mechanism know as a Section 106 planning obligation.
A Section 106 obligation is a financial contribution or service rendered for free by the developer to the community in return for planning permission to develop. The cost of this contribution is paid for out of the uplift in the value of the land following development (the added, and arguably unearned, increase in land value created as a result of the state conferring planning permission on one piece of land as opposed to another).
Section 106 is an important source of funding for most public works today: everything from capitalising major public sector building projects to covering the administrative costs of planning departments and paying for public art. Few people realise that most social housing in the UK is delivered in this way.
The housebuilder will build a number of homes on a site but then hand over gratis a pre-determined proportion of the total to a registered social landlord to manage. Within London 50% of all homes built should be set aside by the developer for social housing, although in actuality 30-40% tends to be achieved, reflecting the cost of all the other contributions that need to be met, alongside rising environmental and design standards. So, if fewer homes are built for owner-occupation then it follows that fewer social homes will also be built because the supply of the latter is contingent upon sales of the former.
So much of the infrastructure delivery in the Thames Gateway is dependent on funding via the Section 106 mechanism (the state taking a share of the uplift in the value of the land via a Section 106 deal) that the impact of the credit crunch could very well throw the infrastructure plans for the Gateway into disarray. As I said before, we must not underestimate the impact of the credit crunch because if people cannot secure mortgages then housing construction will decline. And fewer new homes will also mean that the amount of money the local authority can raise through Section 106 ‘planning obligations’ will decline commensurately.
All this is having an impact on development viability. Viability is assessed by totalling up the costs associated with building houses, paying the Section 106 contribution, ensuring an average 10% profit for the investor, and making sure there is sufficient ‘residual value’ left to pay the landowner for his piece of land at a price acceptable to him; and if the price ain’t right, he won’t sell. So, the greater the Section 106 demand to be deducted from the anticipated uplift in the land value, then the more likely it is that the residual land selling price will be forced down to a price unacceptable to the landowner. As a result, the landowner refuses to sell, the developer pulls out, and fewer homes are built.
While Government guidance is clear that Section 106 contributions should never be relied upon solely to pay for all the transport, education and health needs in an area (see Circular 5/2005) this is clearly the primary instrument of infrastructure delivery in the Gateway.
Just take the London part of the Thames Gateway Growth Area as an example. The latest plan from London Thames Gateway Development Corporation (LTGDC) shows how between 2008 and 2011 public capital investment is expected to total just £120 million, with a further £117 million expected through the sale or renting of publicly owned land assets. A total of only £237 million. Private sector investment is expected to be in the region of £1.8 billion (LTGDC, p46), so the Government’s contribution amounts to just one seventh of the total funding expected to come from the private sector, and this investment will mostly be in the form of anticipated Section 106 contributions which, as discussed above, are largely contingent upon the developer being relatively certain of site sales or rents, i.e. that there are people as well as businesses wanting to move to the Gateway.
However, because of the magnitude of the infrastructure need in the Gateway, and the public investment deficit, Section 106 should never have been relied upon to pay for all infrastructure required in the first place, even before the credit crunch began to take effect. This is especially the case when the Gateway is not yet a safe bet for many prospective purchasers (doubts which are only reinforced by the scepticism of the commentariat).
The LTGDC’s Section 106 tariff (its shopping list of the things it wants developers to pay for) does not include details of public sector contributions because whether the £237million materialises is still far from certain. But in terms of financial contributions from housebuilders, it is seeking £28.8k per home in London Riverside and £22.6k per home in the Lower Lea Valley. Such steep demands are pushing residential sites to the limits of their viability, and therefore jeopardising housebuilding in the Gateway.
The problem in the Gateway is that Section 106 obligations are looked upon as the solution to the non-availability of public sector funding, right across the board for everything from social housing and education and health to the subsidising of social services. Outside the Gateway these costs have, until recently, largely been met by land price inflation because of the shortage of land and the easy availability of mortgages. But this can no longer be relied upon, especially in the Gateway where the basic level of infrastructure is poor, land values are low (irrespective of current market conditions), and remediation and other development costs are high.
The plans for the Gateway were never coherent because of the extent of the public sector funding deficit to pay for essential infrastructure, particularly transport. The Government’s development model has relied upon Section 106 contributions and this has been possible up until now because the costs have been absorbed by the rising price of land (itself a consequence of land rationing through the planning system) and the easy availability of mortgages. This has allowed the state to cream off a bigger share of the uplift to pay for all its Section 106 demands. Land price inflation, in other words, has helped bridge the gap between an acceptable margin for developers and the increasing demands of the planning authorities in the Gateway. Or to put it another way, you could say that over the past decade the Government has really been robbing Peter to pay Paul: subsidising infrastructure delivery and core services but only at the expense of house purchasers; either by passing on these costs onto the public in the form of steeper prices over the past decade or by making it more difficult to build houses by refusing to reduce its infrastructure demand. With collapse in the housing market and consequently the collapse in the value of land for residential development, an impasse has now been reached in the Gateway: no infrastructure, no housing.
So who really carries the cost of paying for the infrastructure? The developer, the landowner, or the purchaser?
The accepted view is that it is the landowner, since the developer will not purchase the land from the owner unless he can be sure of generating a reasonable profit, usually about 10% net after all other construction costs have been deducted, e.g. the cost of land purchase, materials, labour, time spent negotiating with the local planning authority etc.
Therefore it is the landowner who is usually expected to take the hit by reflecting in his asking price the totality of the public sector contributions in return for the planning permission which he needs to un-lock the potential development value of his land.
But within a context of overall land constraint, brought about by a planning system which effectively rations land supply, why should landowners accept a price lower than the one they want? A recent report by the GLA sounds a cautionary note on the likelihood of land vendors accepting lower prices in the current market downturn, especially for as long as housing need in London remains so high (GLA, 2008).
So it is the new resident who ultimately absorbs the cost, either through land price inflation translating into higher housing prices, or else diminished supply as prospective sites become unviable by unrealistic demands from local planning authorities for contributions to infrastructure.
Possibly the tariff is too ambitious. In seeking too great a share of the planning gain, maybe the state is frustrating housing delivery. To boost output, infrastructure contributions should be scaled back and more support could be given to housebuilders through the gift of discounted public sector land, thus helping to invigorate sales by reducing the costs associated with land purchase. This is what happened in the London Docklands in the 1980s (see Ambrose, 1986 for a more critical discussion).
Enabling housing delivery would ultimately help increase the local tax base, which in turn would subsidise those less essential, but desirable, community services. However, this would still not obviate the need for substantial up-front public sector investment in critical infrastructure projects: it is not plausible to rely on council tax revenue as a funding stream for infrastructure if the putative tax payers’ homes are not being built.
House building is an important social activity in its own right, irrespective of whether this function is carried out by the state or by a speculative housebuilder in pursuit of a profit. Just as the business world is granted certain concessions, so housebuilding should be encouraged and not taxed out of existence. Afterall it is the planning system itself that inflates land values through the control of development rights. If the 1947 planning system did not exist then no money would be forthcoming to the Government. Greater profitability, on the other hand, might encourage more investment in housebuilding, instilling competition and investment in research and development.
So perhaps if we bothered less about taxing the unearned increment and focused instead upon optimising housing delivery, maybe housing delivery would accelerate in the Gateway. Developers could still contribute to the community chest but with resources prioritised for delivering more social housing or transport.
Possibly we are all more robust than many commentators actually think. How many of us really need all the community services the authorities insist are good for us? If we paid for fewer urban design consultants, environmental appraisals and social inclusion strategies then we might just get some more homes.
James Stevens is London Regional Planner for the Home Builders’ Federation. Opinions expressed here are his own, not those of the Federation.
© 2009
Current commodity price inflation is not driven by actual consumption of commodities in production; it exemplifies the fetishism of commodity production brought on by the displacement of production from West to East.
Andrew Calcutt
Can't find what you're looking for on this page?
Click here to start a search
This page has been archived.
For a general description of these pages and an explanation of how they should work with screenreading equipment please follow this link:Link to general description
For further information on this web site’s accessibility features please follow this link:Link to accessibility information
The following message does not apply to screenreader users:
You will still be able to access all the essential content of this web site, but it will not look, or function, exactly as intended.
