2. The challenge: Creating a financial model for green and affordable housing

2.

The challenge: Creating a financial model for green and affordable housing

Introduction The challenge: Creating a financial model for green and affordable housing About Bristol’s zero carbon housing challenge Social and development challenges Creating a conducive environment for climate-friendly housing innovation

In the UK the technology is currently available for every new build to be carbon neutral, and for the retrofit of existing housing stock. The primary barrier to achieving this is cost. Low-carbon housing that is built to enhance and protect wildlife habitats are not financially viable for all stakeholders, nor are they enforced by regulation. So, a new financial model is required to attain the priorities of carbon neutrality and affordable housing.

During a recent meeting of focus groups with city stakeholders, developers confirmed cost as the main barrier to delivery of net zero and affordable housing. Development is led by capital cost and return, and there is a clear viability issue from the perspective of these stakeholders. Other barriers identified were the lack of expertise, the need for a new supply chain and a shortage of skills to implement the new technology. For financiers, cost was also identified as the main barrier, and the risk factor in financing new and unproven technology. Ecologists and environmental specialists echoed the same concerns as financiers and developers.

Given this context, it is clear that innovation is most needed in the model used to deliver housing by multiple stakeholders. The challenge is both in the collaboration required and the financial models and development appraisal mindset that currently costs, values and processes transactions based on immediate capital return.

Central to this is a question of value. New housing technologies can deliver sustainable housing quickly and of comparable quality to traditional construction. While the initial cost may be higher, these buildings are arguably better value in terms of lifetime cost, living costs to residents and cost to the planet. As mankind builds for the future, considering all the challenges, a new definition of value will be needed to support a new definition of viability. Bristol’s Social Value Policy is a good start. It aims to ensure that social value principles are applied in a way that enables the City council to maximize economic, social, and environmental benefits for Bristol and its residents. In this policy, social impact is a term designed to demonstrate positive or negative outcomes to people and the planet. Social value, therefore, aims to move beyond making viability decisions based solely on financial cost or price.

However, to address the barrier of viability, it is necessary to take this concept of Social Value to the next level and to demonstrate how the quantification of Social Value can be improved. In addition, that process must address the issue of how to join the capital investment with the created value when they often exist in disparate relationships. In two of three focus groups, participants highlighted the social value calculator and the potential to harness the wider societal value of low carbon, sustainable homes to incentivize and encourage a holistic, outcomes-based approach by the public and private sector. In this way, the opportunity highlighted was for a value calculation that goes beyond maximizing profit.

Definition of affordability

“Affordable housing” is a specific term with specific meanings in specific contexts related to national and local policy for housing. It is important to understand the meaning and how it relates to the delivery of housing nationally and in Bristol, specifically.

Affordability is a technical term that is defined in national policy as “(i) social rented, (ii) affordable rented and (iii) intermediate housing, provided to eligible households whose needs are not met by the market.” Who is eligible for these homes is determined by local incomes and local house prices. Affordable Housing is broken up into specific categories nationally presented here:

 Social Rented Housing (let by local authorities or social housing providers to those eligible for social rented housing). Social rent is prescribed under section 80 of the Housing and Regeneration Act 2008 within guideline target rents determined through the national rent regime. They are the lowest form or rent and tend to be lower than Local Housing Allowance – essentially sub-market rents set by the national rent regime.

 Affordable Rented Housing (let by local authorities or social housing providers to those eligible for social rented housing). Affordable rent can be set up to 80% of the local market rent.

 Intermediate Housing is homes for sale and rent provided at a cost above social rent, but below market levels subject to the criteria of the affordable housing definition. These can include shared ownership (shared ownership is a product that lets buyers purchase a share of a property (25% to 75%) and pay rent on the remaining share. It is intended as an intermediate tenancy for households which would not otherwise be able to afford homeownership or equity loans, other low-cost homes for sale and intermediate rent, but not affordable rented housing or social rent.

Bristol City Council’s local policy

The council’s affordable housing policies are set out in the Bristol Local Plan and have to be consistent with National Planning Policy. These policies require that all new developments must to have a percentage of affordable housing according to the already stated definition. Specifically, development schemes of 15 dwellings and over are required to have 30% or 40% affordable housing (depending on their location), and development schemes of 10–14 dwellings are required to have 10% or 20% affordable housing.

Alongside this, the Affordable Housing Practice Note lays out how the council is helping to fast track planning applications that prioritize affordable housing. The practice note details a threshold approach which introduces greater flexibility in applying the council’s tenure requirements for affordable housing provided that certain conditions are met. Planning applications for sites located in Bristol’s inner west and inner east zones will have a fast-track route for processing applications if they are prepared to offer at least 20% on-site affordable housing. Alongside this, in some circumstances the council will accept 100% affordable rent as an alternative to 77% social rented and 23% intermediate affordable housing. In Bristol, two types of affordable housing are prioritized: social rented housing and shared ownership as defined within Intermediate Housing. These priorities are based on evidence of the local need.