Cash in lieu of affordable housing – a pragmatic solution or a dangerous precedent?

The revised NPPF’s proposals to strengthen support for small sites and to introduce a new ‘medium development’ category, defined as 10 to 49 homes and up to two and a half hectares, are linked to policy and regulatory easements.

For the ever-declining SME housebuilder market, this is a welcome change. Analysis by the HBF shows that in 2024, just over 17,000 homes were approved on sites of three to nine units, compared with around 35,000 in an average year during the 2000s. The share of plots on these sites has fallen from almost 20% in 2008 to 6-8% now, while the average site size has climbed to just over 41 units per site.

The bottlenecks are often procedural, but they are also cumulative and expensive and more often than not seem to push a marginal scheme into the red. Section 106 is a further complication, becoming synonymous with delay.

On one scheme I worked on recently, the application was resolved to approve in Autumn 2024 and the Section 106 agreement has still not been signed. The contributions were not heavily debated – it has been delay by a thousand emails, including minor drafting points.

The revised NPPF does at least acknowledge planning obligations as a pinch point. It seeks to provide a basis for the use of national model conditions and  obligations, including a standard template for small and medium sites which could remove a lot of waste from the system.

The most significant, and perhaps most contentious of the proposed changes, is potentially the introduction of cash in lieu of on-site affordable housing. Used carefully, I believe this is a sensible move. A medium scheme can regularly struggle to integrate on-site provision in a way that works for a registered provider (RP), particularly where tenure needs are complex or where there is limited RP appetite for small numbers in a certain location. If a commuted sum removes this deadlock and brings a scheme forward, that is better than a stalled site delivering nothing.

Potentially this brings the issue of delivery capacity to the fore. Cash in lieu shifts responsibility onto local authorities for turning money into homes. That requires land, procurement capability and staff time, at a point when many councils are already stretched. It also requires strong monitoring, because planning obligations often include time limits and repayment clauses if money sits unspent. Research by the HBF estimates that there is currently over £8bn of unspent developer contributions sitting in local authorities; with 26% of unspent Section 106 funds having been held for more than five years. In the past five years, some 80 local authorities returned a total of £20.6m in unspent contributions to developers.

If cash in lieu is to appear credible, it needs transparent valuation methods, clear ring-fencing, reporting that shows where receipts are spent and timeframes that keep money moving rather than sitting in accounts.

Furthermore, policy change alone will not rebuild the SME sector. The most meaningful measure of success is not simply the number of permissions categorised as medium. It is whether more SMEs re-enter the market and whether those already active can scale from small to medium without being trapped by process risk. The number of active SMEs has more than halved since 2007, a trend that needs reversing urgently.

The draft NPPF has opened the door for a more balanced market. Once this in place, further work will be required to standardise obligations, rebuild capacity and make sure flexibility supports delivery without hollowing out affordable housing.

Chris Green is an associate director at Boyer