The Letwin Report

Posted on November 19, 2018

In the Autumn Budget (2017) it was noted that only just over half of development sites with granted planning permission were being built out.  In light of this, the government commissioned a review, led by Sir Oliver Letwin. The terms of reference were to “explain the significant gap between housing completions and the amount of land allocated or permissioned in areas of high housing demand, and make recommendations for closing it”. The report has been published in two parts – the first interim report sets out the findings into the fundamental drivers behind the slow build-out rates, and the second, final review presents Letwin’s recommendations to the government as to how to solve this.

The Draft Analysis was published in June 2018 and focuses on large sites (defined as those with over 1,500 units), in areas of high housing demand.

Prior to this interim report’s findings being published, speculation pointed the blame towards developers “land-banking” – sitting on land and waiting for land values to rise – and indeed, Letwin was specifically asked to investigate this issue. However, Letwin following consultations with developers, reported that he could not find “any evidence” of major developers “holding land as a purely speculative activity”. Indeed, he argued that developers’ business models and profits rely on selling units, and not from the incremental increases in land values.

Instead, the Draft Analysis found that the fundamental driver of slow build-out rates (and hence, delivery rates) on large sites is due to absorption rates, defined as the rate at which houses are sold in a given area and time period. He argues that the root of this problem lies in the homogeneity of new homes being offered to the market.  However, there are “limits on the rate at which the market will absorb such homogeneous products” without depreciating market values, thus developers drip-feed these homogeneous units into the market, hence slowing delivery. Indeed, Letwin found that on average it took 15.5 years for a large housing development to be completed.

Therefore, he concluded that if developers were to provide a more diverse range of housing, which “matched appropriately the differing desires and financial capacities of the people wanting to live in each particular area of high housing demand”, absorption rates and thus build-out rates could accelerate.

The report also found that delays in infrastructure provision have a “huge effect” on build out rates, and cited Barking Riverside as an example in this matter.

Furthermore, the report claimed that there is a shortage of around 15,000 bricklayers that are needed in order to succeed in the delivery of the annual housing target.

In his final report, published on 29 October 2018 in concurrence with the government’s Budget, Letwin has provided his recommendations to the government to improve build-out rates. The principal recommendation is that new legislation should be put into place to ensure that diversity of tenure is offered on large development sites (over 1,500 units) in areas of high housing demand. Diversification refers to “housing of various types, designs and tenures including a high proportion of affordable housing”. This would, Letwin argues, ensure that completions can be rolled out more quickly without saturating the market with a number of “highly uniform” properties.

The report also recommends that a new National Expert Committee be established to advise local authorities and developers on the interpretation of the above diversification policy, and to play the role of arbitrator in the event of disputes over applications.

Prior to this new legislation being put in place (if adopted, it is suggested that this legislation should come into force in 2021), the report recommends that diversity of tenure could be provided in the interim short-term ‘by making government funding conditional upon a section 106 agreement that specifies a mix of housing types’ i.e. incentivising developers to develop in line with these diversification principles where public sector funding is involved. .

Letwin has also recommended “that the Government should, as part of the new primary legislation, introduce a power for local planning authorities in places with high housing demand to designate particular areas within their local plans as land which can be developed only as single large sites, and to create master plans and design codes for these sites which will ensure both a high degree of diversity and good design to promote rapid market absorption and rapid build out rates.”  

Moreover, he recommends that the government should consider granting local authorities the power to compulsorily purchase sites that have been allocated within their local plan, but have not sought planning permission, in the interest of unlocking land and speeding up delivery.

Letwin argues that a “system for large sites which depends exclusively on new planning rules is…unlikely to provide the full extent of the diversity and hence the full gain in build out rates that we seek”. In order to “ensure that a reasonable balance is struck between promoting the public interest through increased diversity and faster build out rates on the one hand, and proper recognition of the value of the land on the other hand”, he recommends that residual land values for large sites should be capped at ten times their existing use value; thus ensuring that any betterment in value doesn’t favour the landowner to the detriment of quality and the delivery of affordable units / S106 requirements.

The report essentially focuses on the large strategic sites and speeding up delivery by diversifying the product and capping the benchmark land value.  Although, we welcome the recommendations about speeding up delivery, it is important to consider whether capping the land value is appropriate and whether the findings are applicable to all parts of the UK. The report is primarily based on consultations in respect of large sites in the south east; would the same be true in the North? The report recommends a more proactive role for the public sector; however, do they have the skills sets in-house and more importantly the resources (financial and human) to undertake the masterplanning of these sites and potentially acquiring sites. Homes England may need to take a leading role in respect of these strategic sites, as they have done so in respective of the Northern Arc site in Burgess Hill (proposed development of 3,5000 homes), where AspinallVerdi have been acting on behalf of the Council to monitor the viability and delivery from the Council’s perspective.