Report on the work of the 2021 Affordable Housing Investment Benchmarks Working Group

Having considered the wide range of information and material presented during the review, the group agreed that adjustments should be made to the current set of benchmark assumptions to account for the following:

• the need to better reflect the differential in costs to deliver in rural and remote rural areas, as opposed to city and urban areas
• inflation beyond that assumed at the time of setting the current benchmarks
• additional specifications and costs stemming from the 2015 building regulations, beyond that assumed at the time of setting the current benchmarks
• the additional quality measures that are being phased into the Affordable Housing Supply Programme from 2021-22

• the size and location of homes being developed by councils for social rent (moving from a flat rate benchmark per unit to applying the three-person equivalent conversion factor and geographic variations), and
• the size and location of homes being developed for mid-market rent (also moving from a flat rate benchmark per unit to applying the three-person equivalent conversion factor and geographic variations).

The group also agreed that councils should now be able to apply for grant support for mid-market rent on the same basis as RSLs.  And, in recognition of the challenges that some areas face due to differing housing market conditions, the Scottish Government judged in relation to mid-market rent that (a) an uplift of £2,000 to the baseline benchmark assumptions – beyond the adjustments being proposed above – would assist with the issues of flexibility to reach wider client groups and deliver a wider range of build types, and (b) other specific local issues should be taken forward as required through the flexibility within the benchmark system. 

Differing views were expressed however on whether (a) a differential should be maintained between the benchmark assumptions that apply to RSLs and councils and (b) an amendment should be made to the current methodology for assessing a project’s geographic classification.  These issues are discussed in turn below.

During the review, the Scottish Government proposed that the benchmark assumptions for both councils and RSLs should be based on the same framework, with variations for geography and the size of homes (as per the proposed adjustments noted above).  The Scottish Government is of the view however that councils benefit from a more advantageous financial position than RSLs in terms of borrowing, alongside the option to use income from council tax on second homes, and is therefore proposing a lower set of baseline benchmarks for councils albeit at a significantly reduced differential.  While this position was supported by RSL representatives on the group, local government representatives presented evidence showing (a) that there were additional costs faced by local authorities and (b) that the borrowing costs argument was not as straightforward as set out by the Scottish Government.  They also advised that it had always been COSLA Leaders’ position (supported by members representing local government) that the benchmarks should be the same for both sectors.  

On the issue of determining the appropriate geographic classification of a project, local government representatives were of the view that the Scottish Government Urban Rural Classification, six-fold should be the methodology used in all cases.  The Scottish Government considered however that applying the six-fold classification only would result in anomalies and provided examples during the review to illustrate this point (Annex C).  The Scottish Government believed that the flexible process outlined in current guidance should remain, particularly as any changes to this would radically alter the geographic classification of some projects and would likely bring down the ‘rural’ and ‘remote rural’ benchmark assumptions.  RSL representatives on the group confirmed that they would also be content to continue with the current approach (which uses the six-fold classification as the ‘starting point’), whilst noting that refreshed guidance on the operation of the Affordable Housing Supply Programme should clarify the process for agreeing the application of geographic benchmarks. 

Baseline benchmark assumptions

Taking account of the above, Scottish Government officials are proposing that the undernoted baseline benchmark assumptions are introduced – and that these would apply to all homes delivered by RSLs and councils with grant support through the Affordable Housing Supply Programme (except for second-hand purchases (see below)): 

RSL representatives, while recognising that the benchmarks were used only as an appraisal threshold, were not in favour of the above proposal due to concerns that setting the benchmarks at these levels would not result in the desired position of the majority of projects coming in at or below benchmark.  They submitted the following alternative set of baseline benchmark assumptions, based on evidence collected from RSLs:

Local government officials were also unable to support the introduction of the set of baseline benchmark assumptions proposed by the Scottish Government, arguing that they had presented evidence which shows that there is no justification for the differential and with a mandate from COSLA Leaders.  As such, local government officials are proposing that the following set of baseline benchmark assumptions are introduced:  

Additional quality measures benchmark assumptions

Whilst expressing concern that some of the benchmark assumptions for the undernoted additional quality measures may be too low, all members of the group agreed that these were acceptable on the basis that the actual cost of certain installations would be monitored (see below) and – as per the proposed baseline benchmark assumptions – these (a) do not signify upper limits (b) are not intended as the expected cost against which any extra costs would need to be justified and (c) have no role other than in determining the appraisal route: 

Annex D sets out the workings used to determine the Scottish Government’s new proposed set of baseline benchmark assumptions, with Annex E providing illustrative examples of how the Scottish Government’s overall proposed set of benchmark assumptions would work in practice.

Purchasing existing homes

Due to the varied strategies being adopted by individual local authorities across Scotland with respect to second-hand purchases, alongside the varied market conditions, the Scottish Government noted that setting benchmark assumptions for these acquisitions would be difficult.  It is therefore proposing that the benchmark system does not apply to these cases – instead, decisions should be agreed locally with relevant grant providers on whether individual applications for grant funding to facilitate second-hand purchases follow a streamlined application and appraisal process or are subject to a more detailed value for money assessment.