Revealed: London council took on financial risk of estate development

Previously unseen document shows Southwark assuming substantial risk over Aylesbury estate, while development partners have returns guaranteed

A London council assumed all the financial risk on a huge regeneration project to demolish more than 2,000 council homes, while the return to the housing association redeveloping the estate is guaranteed, according to a previously unseen document obtained by Guardian Cities.

The 2014 document relates to Aylesbury, one of the largest council estates in Europe. Southwark council is demolishing the estate block by block and plans to replace it with up to 3,575 new homes by 2032.

Before demolition, the Aylesbury estate had 2,402 homes being rented out by the council at social rents, which in Southwark averages just under £100 a week. A further 356 homes had been sold under right to buy and were in private ownership.

According to the council’s revised affordable housing statement the new development, to be built by the housing association Notting Hill Genesis, will have 1,323 units at social rent and 1,773 for private sale. A further 479 homes will be offered on a shared ownership basis. The numbers may vary with subsequent planning permissions as the development progresses.

Notting Hill Genesis is a housing association with charitable status and was set up to build and maintain social housing. As such it does not have shareholders, and profits (called a surplus) made by the organisation are recycled into maintaining existing homes or building new ones.

In recent years there has been growing concern about the way in which housing associations have set up private sector development arms and commercialised their operations, taking on the building of more private homes for sale on the open market. In the year ended March 2018, Notting Hill Housing – as it was known before its merger with Genesis Housing Association – had an income of £100m from commercial operations, according to its latest financial statements.

At the same time, the pay packets of housing association executives have skyrocketed. Before the merger, the association had seven executives earning more than £150,000, with the group chief executive, Kate Davies, paid £220,000.

The costs of the redevelopment for Southwark council are substantial. It has already spent £49m. In 2014 it was estimated that the total bill – for clearing the site, rehousing the tenants and buying out leaseholders – would come to £150m. Southwark says Notting Hill Genesis is investing an expected £1.5bn.

Southwark has always insisted the redevelopment will pay for itself. Stephen Platts, the council’s director of regeneration, told a recent public inquiry that “receipts from market sales will offset the costs of the scheme”. Despite requests from campaigners, Southwark has never released details of the deal it has with Notting Hill Genesis.

Guardian Cities has obtained an unredacted copy of the Development Partnership Agreement signed in 2014. The document states that the housing association receives a “priority return”, while Southwark takes on a substantial financial risk, and could end up losing large amounts of money.

The development, slated for completion in 2032, is to be built in four phases. The document shows the council will receive three fixed land payments for phase one, totalling £16.3m. The developer is also contributing £9m for costs, and a variety of other smaller payments that come to about £35m. The council is expecting to gain another £33.5m in land payments for subsequent phases of the scheme, although these payments are yet to be fixed.

In total those figures would leave Southwark council with a deficit of £85m on the scheme. That deficit is supposed to be made up by profit sharing. In phase one, the council will receive 50% of any “super profits” made by the developer (defined as any revenue above a fixed price per home sold).

For the remaining three phases, there are no guaranteed payments to the council. Instead, it takes a land payment based on a viability assessment (to be done before the development starts). This payment is the leftover profit after the developer gets a “priority return”, set at 21% of the revenues from the private housing sales. In addition, the council will receive an overage payment if prices rise later: this is set at 50% of the additional profits, again only after the developer gets its 21% priority return.

The priority return ensures that the Notting Hill Genesis has its surplus protected. Southwark council, however, has no such assurance. To cover a deficit of £85m, an analysis of the Development Agreement suggests the price of every home sold on the open market would need to increase by more than £100,000.

Although house prices have risen since 2014, it is unclear whether they have done so by enough to ensure Southwark does not lose money on the deal. It is also likely costs have increased substantially since then: in addition to inflation and construction delays, the council has been involved in an expensive legal battle with residents who refuse to leave.

The deal agreed in 2014 is similar to another widely pilloried agreement also signed by Southwark council, in which it reached a deal with the developer Lendlease on the nearby Heygate estate for a 50% profit share on the sales of new homes.

With the redevelopment of that site (known as Elephant Park) well under way, Southwark council has been forced to admit it does not expect to receive anything from the profit share agreement.

The council maintains that knocking down the Aylesbury estate and incorporating market housing is the only way of raising the funds required to improve the housing conditions of those living on the estate.

However, the money to fund Southwark council’s contribution comes from the Housing Revenue Account, which holds rent from council tenants. It is generally used to pay for the upkeep and repair of social housing, but it can also fund the construction of new social housing.

Critics have argued this effectively means social housing tenants are paying to get rid of social housing.

Tanya Murat, chair of Southwark Defend Council Housing, said: “It is shocking if Southwark stands to lose money from a development that is a commercial venture for Notting Hill Housing, who stand to make a profit from it. Any money lost will be lost to repairs and maintenance of other council properties.”

But Platts, the council’s director of regeneration, said the Aylesbury project “was never about financial returns”.

Instead, he argued its goals include delivering 3,500 new homes, with 50% affordable and prioritised for existing Aylesbury residents, as well as new community facilities and a range of training and employment programmes. He added: “In terms of risk share, Notting Hill are investing approximately £1.5bn as opposed to the £150m by the council, a ratio of about 10:1. It is our view and that of our expert consultants that the apportionment of risk is appropriate given each party’s financial exposure.”

Platts also argued that there would be a cost to keeping the estate intact. “If the council was to retain the estate, significant investment would be required in the homes, community facilities, utilities and the public realm … The costs would easily exceed £150m, [with] the only mechanisms for the council to recover those costs being from our tenants’ rents and by passing on capital charges to leaseholders.”

Southwark has recently secured an agreement with the last remaining leaseholders who had been holding out on the first development site. The former secretary of state for communities and local government, Sajid Javid, had blocked Southwark’s attempt to seek a compulsory purchase order, claiming the council was not offering residents enough money to be able to stay in London.
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That process has further increased costs to Southwark, as have construction delays, which would be likely to push the total bill for the Aylesbury regeneration higher than £150m.

Johnson Situ, a Southwark councillor and cabinet member for development, growth and planning, said: “We remain committed to the regeneration of the Aylesbury estate, which in the council’s view is not about profit but about building thousands of new, high-quality homes for the people of Southwark, including new homes at social rents.
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“These new homes will be of the best quality, replacing the poorly designed buildings which are at the end of their life with near-constant heating breakdowns and leaks despite significant investment.

“In addition to the new homes, the investment will revitalise the area, bringing jobs and new opportunities, plus new facilities for local people including a brand new library with stay-and-play facilities, GP surgery and health centre, community trust offices and early years nursery centre, plus a new high-quality public square that the whole community can enjoy – all of which already have planning permission and are ready to be built.

“We will not be drawn into discussions regarding figures that should not be in the public domain, and are from a document that is now four years old – as figures are continually reviewed.”

Notting Hill Genesis said the council would also receive £30m as a land payment and a cash contribution towards new community facilities, including a library and health centre.

“Our intention is to provide an increased number of larger family homes that more accurately meet the needs of Southwark residents,” a spokesperson said. “The proposed mix of affordable housing is in line with the council’s adopted planning policy for the area which includes shared ownership for other London residents who do not qualify for social housing but cannot otherwise afford to live in London.

“Across the housing association sector there has been an increased amount of commercial activity as government subsidy has decreased. The provision of private sale homes subsidises increased affordable housing. All of the income from private sales goes into our surpluses and is therefore invested in providing homes for those who need them in London and the south-east.”