CIL Review: A path to successful reform or the road to ruin?

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Kicking the can down the road…?

The CIL Review reported to Government in October 2016. DCLG withheld the report until publication of the Housing White Paper (HWP) in February. This delay fostered misplaced hope that concrete proposals for the reform of CIL and s106 would be presented within the HWP.

In fact, the HWP provided no details and made no endorsement of the CIL Review findings, only committing Government to a response at the Autumn 2017 Budget.

So what did the CIL Review say?

Housing and infrastructure Stratford, East London

CIL/Section 106 relationship

Positively, the Review proposes to end the pooling restrictions on s106 contributions. This will both simplify the delivery of infrastructure attributable to multiple developments and reduce the risks of relying on multiple s106 Agreements to contribute towards strategic infrastructure on large multi-phase, multi-developer schemes.

There is also a proposal to abolish ‘Regulation 123 lists’. These have proved to be ineffective. Lists have been manipulated to justify continued s106 contribution requests, well beyond the narrow site-specific requirements envisaged.

Local Infrastructure Tariff

At the heart of the recommendations is the call to reform CIL into a ‘twin track’ system of a new low-level tariff (the ‘LIT’), applying to virtually all development, with very few exceptions, and combined with more flexible use of s106 for sites of 11 or more dwellings. For smaller residential developments (10 or fewer units) only the LIT would apply, with the expectation of no planning obligations.

When setting LIT the Review suggests crudely pegging the tariff to a nationally-prescribed percentage of the value of a notional standard three-bed, 100 sq. metre house within a local authority area. A range of between 1.75% and 2.5% of the value of this ‘standard house’ is suggested, yet no impact analysis has been published.

Disappointingly, the Review fails to provide any considered analysis or equivalent benchmarks for non-residential development. Instead, there is only a vague assumption that the non-residential LIT would be pegged at a prescribed percentage of the residential rate, but never greater than 100%. This provides little clarity for developers of commercial, retail, student and other forms of non-residential development. It is a significant shortcoming of the Review.

A mandatory tariff

LIT is proposed to be mandatory for all Local Authorities in order to resolve the ‘patchy’ adoption of CIL. Whilst based on a valiant ambition to ensure that all development pays a fair share towards strategic infrastructure, this continues to take a South East centred view and ignores viability issues prevalent in parts of the Midlands and much of the north of England.

Few Local Authorities in these regions have introduced CIL. It renders development unviable and discourages inward investment in markets that badly need it to secure economic growth.

Will this tidier ‘one size fits all’ approach resolve this? No. Will it deliver on the Government’s objective to rebalance the national economy and support the Northern Powerhouse? We remain unconvinced. 

Removal of Vacant Floorspace Credit

Worryingly, the Review proposes to sweep away the ‘existing floorspace credit’. Under CIL this allows liabilities to be offset where existing buildings are to be demolished or subject to a change of use. This move will frustrate the industry, which campaigned hard to secure its inclusion within CIL.

It would undoubtedly penalise brownfield sites, further hampering viability and acting as a disincentive to reuse existing buildings efficiently, whilst creating a perverse incentive for ‘greenfield’ development.

Streamlined adoption

The Review proposes no substantive viability evidence or examination process in setting LIT. It recommends a single consultation, followed by setting the final rate, broadly equivalent to the procedure for Supplementary Planning Documents.

Oddly, this represents a departure from the findings of the Review, which highlights general support for the independent CIL examination process, with the industry calling for it to be more robust and consistent.

As a fall-back, the Review proposes introducing a mechanism for the industry to request a review of the rate-setting by an ‘appointed person’. Given the blunt nature of the LIT proposals we anticipate that additional viability evidence to support LIT setting would still be required. We envisage ‘appointed person’ reviews requested in almost every case to ensure evidence is robustly tested.

Strategic Infrastructure Tariff (SIT)

The Review recommends that where Combined Authorities (CA) are established, CAs also be permitted to introduce an additional levy: the ‘SIT’. This would be a CA-wide tariff on all development. Akin to London’s Mayoral CIL, the objective is to contribute specifically to funding major and cross-boundary strategic infrastructure projects.

The reported revenue streams emanating from the London Mayoral CIL will appear tempting for CA’s as a driver to roll-out SIT. Yet, this ignores the variance in functionality of land and property markets outside London and the South East.

The proposals raise fundamental questions for CAs, local authorities and the industry. Will a ‘perfect storm’ of LITs, a SIT and localised s106 ensue? How will local (LIT) and strategic (SIT) priorities for infrastructure funding be prioritised in weaker markets with stiff competition for industry investment? Will there be any, or sufficient, funds available for SIT after local authorities have set their local LIT rates? Will local authorities and CAs overcome political and local agendas to reach agreement on SIT projects and revenue expenditure? Will larger sites be able to contribute to either regime given that primary use of s106 obligations is to be reinstated?

The Review provides no answers. We remain unconvinced that the SIT model is scalable nationally as proposed.

Will the recommendations deliver successful reform?

In our view, there are fundamental problems with the Review’s proposals:

  • Inequity: Overall, the burden of developer contributions would increase for most development, whilst perversely reducing the burden for smaller residential schemes (1-10 units). Within areas currently charging CIL, smaller schemes often represent the more viable form of development.

  • Greater burden and complexity: Far from being ‘low level’, following the benchmark suggested residential LIT rates would often be broadly similar to or only slightly lower than current CIL rates. With an additional return to increased use of s106 for larger schemes, we anticipate real problems for strategic site viability, especially where a SIT is also sought.

  • Abolition of necessary relief: Whereas CIL provides relief for qualifying affordable and self-build housing it is our reading that the Review seeks to abolish such reliefs. This will place greater pressure on the viability of delivering affordable and self-build homes.

  • Punitive for non-residential uses: Including non-residential development within LIT/SIT ignores the evidence that such development (other than retail supermarkets) generally attracts a ‘zero CIL rate’ outside Greater London, due to restricted viability. Unviable or marginal locations and development types would be pushed further underwater undermining any prospective investment.

  • Weak transitional recommendations: Firstly, no detail as to the practicalities is provided. Secondly, the Review’s proposal for transition by 2020 is naïve. Primary legislation would be required, followed by comprehensive LIT/SIT regulations and revised guidance. This suggests a minimum of 3-4 years to us.

Given the Government will not progress LIT/SIT before autumn 2017, we consider it unlikely to have LIT/SIT in place prior to the general election. This could be hampered further by the anticipated Brexit-related bottleneck in Whitehall.

In the interim the Government should grasp the opportunity to refine the existing CIL regime to simplify the system, improve viability and accelerate development. Quick wins would include:

  • Removal of s106 pooling restrictions of five or fewer agreements for infrastructure projects/types and abolition of Regulation 123 lists;

  • Simplifying the process for securing CIL exemptions and reliefs; and

  • Shifting indexation of CIL rates from the volatile RICS BCIS All-in TPI to an alternative publicly-available index (such as CPI), which is more representative of national economic growth.

Such refinements would garner widespread industry support whilst remaining broadly consistent with the Review’s findings.

15 March 2017