Our survey of developing Housing Associations revealed scaled back requirements for Section 106. This is driven primarily by a lack of financial capacity and a focus on delivering grant funded commitments. Underlying concerns around build standards and sustainability features of Section 106 homes have also gained prominence. 

Here are five key takeaways from our survey of developing Housing Associations: 

A declining market for Section 106 

Housing Associations face a perfect storm of mounting pressures from severely constrained financial capacity, higher costs of finance, rising building costs and commitments to remediate existing stock to meet building safety and decarbonisation requirements, all of which have reduced sector capacity to finance and develop new affordable homes. The biggest drop off in new affordable housing delivery will be through the scaling back of Section 106 acquisitions. 

Just over half of Housing Associations surveyed (53%) reported that they were either no longer intending to acquire Section 106 homes or had reduced their requirements for them. In contrast, 6% of Housing Associations surveyed reported increased requirements for Section 106 homes. With providers scaling back their requirements in general, the market for Section 106 homes has diminished significantly. There does remain some appetite, but notably from a limited pool of providers. 

Alongside a wider step back from development, the pattern of future affordable housing delivery is expected to shift. Housing Associations have other routes to development where they have greater control and ability to influence the design of homes than through Section 106.  

Over the next five years, grant funded delivery is expected to contribute to over half of affordable housing delivery (53%) as providers focus on grant funded commitments, including through Strategic Partnerships. This is a considerable increase on the previous five years where grant funding has accounted for 36% of new affordable housing supply. This helps Housing Associations mitigate development risk and meet Affordable Homes Programme targets in which nil grant Section 106 homes do not count.  

Almost a third (29%) of future affordable housing supply is expected to be comprised of nil or part grant Section 106 delivery. This is a significant reduction when compared to the last five years, where developer contributions have accounted for 51% of affordable housing supply in England. 

Strapped for cash  

75% of Housing Associations surveyed reported that financial capacity has affected appetite to buy Section 106 stock. In London, this increased to 100%, underlining the challenges of high rise buildings within existing stock, related to building and fire safety. 

Whilst finances amongst Housing Associations have deteriorated, the need to invest in existing stock has grown. Housing Associations have had to allocate both operational and financial capacity towards upgrading existing stock. Major repairs and maintenance expenditure rose to £7.7 billion in 2023, marking a 43% increase on the previous two years, according to the Regulator of Social Housing 2023 Global Accounts. And providers are forecasting further increases in spending to maintain their current stock, rising to £9 billion per year over the next five years. A significant increase in the cost of debt over the last couple of years has also contributed to severely constrained financial capacity.

Improving sector financial capacity is unlikely to be a short term fix. 67% of Housing Associations surveyed expect financial capacity to remain a fundamental barrier for at least the next two to five years and even beyond that in some instances. Only 8% of Housing Associations expect financial capacity to improve in the next year. 

A need for greater policy certainty 

Beyond addressing pricing levels and improving build standards, a significant fall in the cost of debt alongside a long term rent settlement at CPI + 1% were cited as the most important factors to encourage more demand for Section 106 homes. Both would contribute to improving sector financial capacity and provide greater certainty around future rental income.

Shining the spotlight on standards

In the current market where Housing Associations haven’t been buying as much Section 106 housing, underlying concerns around build standards and the type of Section 106 homes have gained greater prominence. Given the lack of active players, Housing Associations are now in a position to be more selective around the housebuilders that they work with, and the type and specification of homes that they purchase. These issues have gained greater prominence whilst the level of demand for Section 106 from Registered Providers is reduced.

We asked Housing Associations what developers could do to encourage more demand for Section 106. An adjustment in pricing levels was ranked as the most significant factor in encouraging a return in appetite for Section 106 housing, indicating a mismatch in value expectations between developers and Housing Associations.

This was followed by higher build standards for Section 106 homes, with enhanced sustainability and energy efficiency credentials being most important. Generally, developers build Section 106 homes to meet regulations around building safety, space standards and energy efficiency. But many providers are looking to futureproof their pipelines in anticipation of changes to building regulation. Therefore, in many cases, they are looking to acquire Section 106 homes that exceed current standards to avoid additional costs to upgrade and retrofit these homes in the future. For example, some providers are looking for enhanced sustainability credentials on homes such as air source heat pumps. Housing Associations have also noted issues relating to property size and proportions. Bedrooms in new build homes are only large enough for one person but to comply with space standards in the Housing Act 1985, these bedrooms may need to accommodate two people.

Quality of customer service, namely the speed at which snagging issues and defects are addressed and resolved has also become increasingly important and is causing providers to be more selective over who they will work with. Housing Associations are looking to acquire new stock for the long term and, as regulated landlords, have a responsibility to provide a decent home for their tenants. The Regulator’s emphasis on consumer standards has brought these concerns into sharp focus.

_{Read the articles within Spotlight: The challenges of unlocking Section 106 delivery report below}