Financing Urban Resiliency
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MILKEN INSTITUTE FINANCING URBAN RESILIENCY Financing Urban Resiliency Investing in Complete Communities in the London City Region The United Kingdom has some of the highest housing prices among countries in the Project Background Organization for Economic Co-operation and Development, a factor that exacerbates the housing shortfall.3 The need in England alone By 2050, 68 percent of the world’s now totals 4 million residential units, according to the National Housing Federation; if that need population will be living in cities, more than is to be met by 2031, it will require the delivery double the percentage reported in 1950.1 of 340,000 units annually,4 and of those, 145,000 will have to be affordable housing units. This is a Urban growth has risen sharply since 2000, herculean task; at its peak in the 1970s, England’s and many cities, London among them, are annual housing starts reached 300,000. Since the under extreme pressure to improve their late 1980s, the yearly total has failed to rise above 200,000, and in 2018, housing starts were down long-term resilience. Metropolitan London’s to around 163,000.5 population is expected to hit 9.84 million In the “London city region,” an area beyond in 2031 and 10.11 million in 2036,2 giving Greater London that is economically, functionally, it official designation as a megacity. The and culturally connected to the capital, not only is housing expensive but also land for immediate challenge is to prepare not new development is scarce. The London mayor only for environmental shocks attendant has set an ambitious plan to add thousands with population and industrial growth of new affordable homes, but the market is volatile, and developers remain wary. The and global climate change but also for the supply of developable sites is limited to increasing infrastructure and social stresses strategic opportunities requiring more advanced infrastructure to unlock the potential. More that accompany population density. Chief Londoners increasingly live further away from among them is a lack of housing and their jobs, driving up population growth in the city’s outskirts and beyond the city limits in the particularly affordable housing. surrounding counties of the London city region. 1 MILKEN INSTITUTE FINANCING URBAN RESILIENCY Broadly a concentric area, extending out in a associations. The BBC reports that, 40 years ago, 55-mile (90 km) radius from central London (see local authorities provided some 40 percent of figure 1 below), the London city region falls within new-builds in England, but in 2017, their share many different administrative authorities. This was under 2 percent.6 The 1988 Housing Act city region reflects the real scale of the capital formalized this shift, which made it possible for city’s influence, with connected communities and the private sector to engage directly with housing business districts that fuel this area. Commute associations in transactions to build affordable time within the radius to London proper is and subsidized housing. about an hour. But there is a race against time and competition for resources. Other cities This is why complete settlements, a series of new in the London city region, such as Oxford and towns, are critical to meet housing demand. As Cambridge, are experiencing high housing demand the London city region grows and pressure on along with economic growth. Notably, the wider the limited supply of developable land intensifies, city region lacks the infrastructure, in every local and national governments must increasingly sense of the word, to facilitate economic growth look to designing complete settlements, opportunities and allow people to live closer (in high-quality communities with a full range of distance or time) to where they work. housing tenures and robust social infrastructure, including schools, hospitals, etc. In other words, Housing policy has changed in the past four development should be consistent with the latest decades as well, with troubling consequences National Planning Policy Framework (NPPF) and for the affordable housing market. Beginning as recommended by Sir Oliver Letwin’s 2018 in 1979, the UK government cut public funds build-out housing report.7 Complete settlement for housing, gradually shifted support away development considers affordability as well from local authority delivery toward the more as connectivity to an economic hub; the new independent housing associations, and eliminated community cannot be a lone commuter hub some funding channels as incentives for the disconnected from the broader economy. councils to transfer their housing stocks to the Figure 1: London City Region Source: AECOM. 2 MILKEN INSTITUTE FINANCING URBAN RESILIENCY Development of complete communities will public housing sector. Incentives made it possible also require new financing solutions to bridge for tenants in local council housing to buy their current funding gaps. Both developers and local homes at significant discounts. The existing community representatives identify infrastructure public housing stock became monetized. The financing as one of their biggest challenges. local councils also lost several revenue-collecting Now, more than ever, a mix of public and private advantages that previously helped them to capital is needed to support housing delivery and underwrite new-builds, and almost all building infrastructure to create sustainable and high- activity shifted to the private sector. The quality new communities. The UK government has government established housing associations, prioritized housing and set aside significant funds which operated with greater independence than to meet targets. the elected councils, and gave them the mandate to deliver affordable and subsidized housing, using To address London’s affordability crisis, the Milken some government grants and contributions made Institute, in collaboration with AECOM, examined by private developers in exchange for planning opportunities for innovative public financing and permits. But housing associations/private-sector private-market partnership as a means to enhance delivery has slowed. In 2018, out of approximately future development. On December 3, 2018, the 160,000 new homes built, private developers Milken Institute convened a Financial Innovations built 82 percent, housing associations built 17 Lab in London to discuss policy and financing percent, and local councils built just 1 percent, strategies to accelerate the delivery of complete representative of the shift in homebuilding across settlement development in the London city region. the UK.9 Of new homes built across England last year, only 20 percent were deemed affordable for purchase or rent, and the construction of social Resilience and Housing housing rentals is at a 70-year low.10 Development in the In recent years, perhaps driven by the lack of London City Region supply of affordable homes, there has also been increasing demand for diversification in tenure and type of units offered to the market. One The London city region continues to rank low on format relatively new for the UK is professionally new housing starts relative to the other areas of managed rental units, termed the “Private England.8 At the same time, the strong economic Rented Sector”11 or “build to rent.” Private growth in Greater London and the London city rental units, either market rate or subsidized by region continues to attract talent, many of whom housing benefits, are developed by the same are willing to pay increasingly higher prices for sets of stakeholders as traditional homes. As of housing. The gap between supply and demand 2017, 28 percent (1.5 million units) of private accounts for a large part of the rise in property rented households received housing benefits.12 and rental costs. However, as shown below in figure 2, this has only made a dent in the growing housing shortage. Public-private collaboration could be used to help Acknowledging the importance of this sector narrow the gap, much as it did for the creation of in reaching national affordable housing targets, new settlements after World War II when private the level and mix of affordable housing are set developers collaborated with local authorities, out in planning permissions at the onset of new the new town development corporations, and developments. philanthropists. When the government introduced its first Right to Buy program in 1980, which allowed tenants in public-sector housing to purchase their homes at heavily discounted rates, it ushered in a pivotal moment for England’s 3 MILKEN INSTITUTE FINANCING URBAN RESILIENCY Figure 2: London City Region Housing Deficit, 2014-2015 Source: AECOM, London 2065 - Big Bold Global Connected. Funding for complete settlements, meaning for of the scheme they are developing).14 Part of this new residential construction, infrastructure, and contributes to the delivery of affordable housing. services, comes from a variety of sources. Local In 2018, s106 agreements funded 47 percent of councils can borrow from either the public or affordable housing.15 private debt markets; yet, this option has not manifested itself in a significant way. In October Additionally, councils can share the cost of 2018, the prime minister announced the removal providing strategic infrastructure with developers of a cap on borrowing limits, known as Housing in other ways, including the Community Revenue Accounts (HRA), paving the way for Infrastructure Levy (CIL), which operates as a pre- councils to take on more debt to deliver homes. It determined “roof tax,” to fund specific physical is too early in the process to make determinations and social infrastructure requirements. The CIL of its real potential given reluctance to make full was instituted in 2010 to help close the estimated use of the relaxed measure.13 £500 billion funding gap required to meet the UK’s current and future infrastructure demands.16 The majority of funding for onsite and offsite In the UK, strategic infrastructure is mostly built infrastructure is available through fees and levies by the central government or private entities.17 on development.