Trowers & Hamlins

The credit crunch is jeopardising a rising number of social housing developments, warns Trowers & Hamlins, the City law firm, and all parties involved may need to make concessions to avoid the costly failure of these schemes.

Trowers & Hamlins says that falling land and property prices combined with higher costs of borrowing mean that the existing business plans of social housing developments may be unviable and risk failure.

Trowers & Hamlins suggests that Local Authorities, Registered Social Landlords (RSLs) and developers will need to  take a pragmatic approach.   Terms of contracts that were negotiated on the profit margins, land and property values anticipated before the credit crunch hit may need to be revisited and renegotiated.

Says Jeremy Hunt, Partner, of Trowers & Hamlins: "Joint ventures between private developers and RSLs  are likely to fair far better in the current economic climate than purely private sector residential developments however more of them are coming under pressure as the market conditions bite and sales, whether on an outright or shared equity basis, slow or stall completely.  Many of these schemes can be saved if all the parties involved are prepared to make some pragmatic concessions to cater for the new market reality."

Trowers & Hamlins says that local authorities can, for their part, look at reducing the Section 106 financial  contributions they command from developments.   In some cases the balance of housing for sale and for rent may need to be adjusted.

Developers could consider restructuring the phasing of their development plans. Trowers & Hamlins suggests that as lenders have more faith in demand from RSLs than from private buyers  so  they should consider completing the affordable housing element first.  This would help cash flows and reassure the local authority that much needed social housing will be delivered on time.

Jeremy Hunt also suggests that developers may  want to consider breaking their development down to smaller phases, so that each phase carries less risk.

Developers might be allowed to incorporate a viability test so that  once the development starts, the developer is not forced to progress from phase to phase unless the market conditions allow them a reasonable financial return.

Explains Jeremy Hunt: "Large residential property schemes can take years to plan and very significant amounts of money are invested in the beauty parades, due diligence and negotiations that precede the actual construction work.  If a scheme can not progress then all of that upfront investment will be wasted.  It is in everyone’s interest to explore possible and pragmatic compromises."