New levy will scare off home builders

6 February 2012 | By Jason Orme, editor, Homebuilding and Renovating

As the patient was coming round, housing has been hit by a long-planned initiative called the Community Infrastructure Levy, the effects of which have only just begun to hit home.

The CIL is a charge that local authorities in England and Wales can make on new developments - the proceeds of which are designed to support infrastructure as required by local people.

Of course, the compulsion on developers to give something back has been in place for many years, usually through so-called Section 106 agreements - individually negotiated arrangements made on an ad hoc basis, say for a new playground or level crossing, between the council and developer.

The CIL is designed eventually to replace this informal array of agreements, making the system more transparent and enabling developers to be sure in advance of what they’re going to have to cough up to get building.

So far, so good. Who wouldn’t agree that local people should benefit in some way from the huge uplift in values that a landowner enjoys when their land is granted planning permission?

A one acre site that might be worth no more than £10,000 as agricultural land may well be worth over £500,000 with planning in place for residential development - and carving off a small portion of that £490,000 or so profit for the local good seems reasonable enough.

So what’s the problem? Well, let’s look at the reality of the situation as the CIL finally gets implemented.

While it will see the light of day in almost all 400-plus local authorities, around 20 have volunteered to be front runners and will implement it this year.

Let’s start with how much it’s going to cost developers. The CIL is administered on a cost/m2 basis so the bigger the development, the more the developer pays.

Local authorities have to publish and consult on a charging schedule before being able to round up the money, and the early findings are a bit worrying. Figures range from the reasonable at £40/m2 or so to positively eye-watering sums. For example, anyone building a house in Wimbledon will now be forced to pay just over £400/m2 for the privilege.

If you consider that typical house building costs are in the ballpark of £1,000/m2, you’re instantly increasing builders’ costs by 10% to 40%.

In a climate where end values are rising, that kind of impact on costs is something that builders can just about swallow. Yet in a housing market like today’s, where no-one can second guess where prices are going and developer margins are incredibly uncertain, the impact of adding, for example, £20,000 a house to costs is deleterious.

I haven’t met anyone in the industry who thinks it will help to see more homes being built and the general consensus is that the CIL is the last thing we need right now.

So just when we need more houses from the current record lows, the likelihood is that we’ll be seeing even fewer homes built in 2012.

Defenders of the charge say developers have known for years that CIL is coming and have had months to factor it in. They should have allowed for the cost in their land purchase price and the removal of Section 106 agreements enables transparency.

But many smaller developers and practically all self-builders - a key sector of the house building industry, according to the government - look set to be flattened by this transition period. Many of them wouldn’t have been aware of the future burden of CIL when they bought their plot in, say, 2010 or 2011, and as a result the sudden requirement for them to cough up potentially tens of thousands of pounds is crippling.

They will have stretched themselves to be able to afford the plot and any cash they have is likely to have gone into the deposit - typical self-build mortgages require a deposit of at least 15%.

I have already heard from would-be self-builders, some of whom have land ready to build on, who have given up on their dream as a result of the CIL.

Is there any good news? Well, there are a couple of things to hold on to. The first is that any development under 100m2 is exempt and the chargeable sum allows for any existing building being replaced to be discounted. For example, a 200m2 house replacing a 50m2 bungalow will only be charged for 150m2 of new space.

Also, there are exemptions in place for any development that is a change of use, such as a barn conversion or office block conversion.

But the CIL is also applicable to extensions, so any extension over 100m2 in size - which is admittedly large - would be forced to pay the charge too.

It’s not so much the principle of CIL that small developers and self-builders are objecting to. After all, local people have a right to benefit in some way from the granting of planning permission near them, and to account for the additional demands that a new house near them might incur on the local infrastructure, although the additional council tax would in theory help with this.

The problem is with the implication of the CIL and the lack of any transitional arrangements, leaving many would-be home builders wondering how to find the additional thousands of pounds their council is demanding. It’s a case of the right tax at the wrong time.

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