Viability – A Planner’s Perspective

Structure

PART A – CONTEXT

• The Government’s Housing Supply Aspirations

• Economic Context

• Policy Context

PART B - VIABILITY

• What is viability?

• Viability in the Planning Process

• Key Issues and Best Practice

• Conclusions

1. PART A - CONTEXT

The Government’s

Housing Supply

Aspirations

What is the Government saying on the supply of new homes?

David Cameron, PM, 9 September 2012

“The measures announced today show this Government is serious about rolling its sleeves up and doing it all it can to kick-start the economy…they provide a comprehensive plan to unleash one of the biggest homebuilding programmes this country has seen in a generation.”

Eric Pickles, SoS for CLG, 9 September 2012

“The Coalition Government’s number one priority is to get the economy growing.”

“The need for new homes is acute, and supply remains constrained.”

“Given the current imperative for growth, we need to do more.”

“We must remove barriers that stop local businesses creating jobs and get Britain building again.”

NPPF

“Boost significantly the supply of housing”

Components of GDP growth

-5

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

Change (%)

Household consumption Business investment Dwellings investment

Government expenditure Inventories Net trade

Public

spending

Business

investment

Dwelling

investment

Economic Context

Market Difficulties

• Housing delivery pressures

• Reduced Mortgage Availability: 80%-90% below peak

• Average age of first time buyer = 37 years old

• Could be 40 by 2020

YH Housing Starts down 68% from 2007 peak

Yorkshire and Humber Housing Starts: % change

Ongoing delivery challenges

• Limited grant and public sector funding available

• Landowner expectations still high

• Continued reliance on “boom time” policies and assumptions amongst some LPAs

= Non-delivery

• VIABILITY IS A PROBLEM!

Policy Context

The NPPF places a far greater emphasis on ensuring viability and deliverability

Paragraph 173:

• “Pursuing sustainable development requires careful attention to viability and costs in plan-making and decision-taking.”

• “Plans should be deliverable. Therefore, the sites and the scale of development identified in the planshould not be subject to such a scale of obligations and policy burdens that their ability to be developed viably is threatened.”

• “To ensure viability, the costs of any requirements likely to be applied to development…should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing land owner and willing developer to enable the development to be deliverable.”

Requirement to balance local authority policy aspirations with delivery

Paragraph 174:

• “They [LPAs] should assess the likely cumulative impacts on development in their area of all existing and proposed local standards, supplementary planning documents and policies that support the development plan, when added to nationally required standards.

• In order to be appropriate, the cumulative impact of these standards and policies should not put implementation of the plan at serious risk, and should facilitate development throughout the economic cycle.”

Harman Review – Viability Testing Local Plans

The primary role of a Local

Plan viability assessment is to

provide evidence to show that

the requirements set out

within the NPPF are met.

Spending time during the

plan making process to

consider the cumulative

impact of policy on

development can result in a

number of benefits – for the

plan, for the communities

for which it seeks to

provide sustainable growth,

and for landowners and

developers.

Harman Review – Collaborative Approach

Given the purpose and

potential benefits of a Local

Plan viability assessment,

the process will benefit

from an approach that

seeks to bring people

together to discuss the key

issues at an early stage of

preparing the Local Plan,

well before the formal

examination in public.

Harman Review – How to assess the viability of

Local Plan

Step 1: Review existing evidence and consider scope for alignment of assessments

• Step 2: Agree the appraisal methodology, assumptions and information to be used

• Step 3: Information gathering and viability modelling

• Step 4: Viability appraisal and tests

• Step 5: Review outputs, refine and revise the modelling

New ways to get development going -The Growth and Infrastructure Act

“The Growth and Infrastructure Act is a

major landmark for the coalition government. These new laws will reform our economy so it can boost investment, growth and jobs by streamlining a lot of confusing and overlapping red tape that all too often gets in the way of people’s everyday lives.”

Modifications or discharge of

affordable housing requirements –

Amends TCPA 1990 to provide for

applications and appeals to modify

or discharge the affordable housing

elements of s106 agreements to

make developments viable which is

now in force. CLG issued guidance

on the 26th April on form and content

of application and appeals, including

viability evidence.

Viability and CIL

Paragraph 175:

• “Where practical, Community Infrastructure Levy charges should beworked up and tested alongside the Local Plan. The Community Infrastructure Levy should support and incentivise new development…”

CLG - CIL Guidance:

• “Charging authorities should set rates that “will not put the overall development across their area at serious risk”

CLG - CIL Overview:

• “Charging authorities will need to strike an appropriate balance between the desirability of funding infrastructure from the levy and the potential effects of the imposition of the levy upon the economic viability of development across their area.”

Yorkshire and Humber CIL Update

Consultation has ended on 4 draft charging schedules including:

• Wakefield – Maximum for Residential £100 per sqm

• Leeds – Maximum for Residential £90 per sqm

• Hambleton – Maximum for Residential £85 per sqm

• Sheffield - Maximum for Residential £100 per sqm

PART B - VIABILITY

What is viability?

A definition of viability

• “An individual development can be said to be viable if, after taking account of all costs including central and local government policy and regulatory costs and the cost and availability of finance, the scheme provides a competitive return to the developer to ensure that development takes place and generates a land value sufficient to persuade the landowner to sell the land for the development proposed. If these conditions are not met, a scheme will not be delivered.”

(Local Housing Delivery Group, June 2012)

The Residual Land Value (RLV) Approach to Assessing Viability

Gross Development Value (GDV)

– Total Costs (incl. Profit)

=

Residual Land Value (RLV)

HCA Toolkit is an RLV model

Recommended for use by LPAs in Steve Quartermain CLG letter (March 2011)

What goes into a viability assessment?

Viability in the Planning

Process

Plan Making

• Is the plan deliverable?

• Cumulative impact of policies

• Delivery risk vs. sustainable plan policies

• Failure to consider viability places local plan at risk of not being found sound

Decision Taking

• Considerable debate around viability

• Need for greater commercial realism

• Economic benefits and tax revenue from additional housing v no development

• Need to de-mystify viability assessments

• Arrive at a mutually beneficial position

Reviewing S106 Planning Obligations in changed economic circumstances

Section 106 Affordable Housing Requirements: Review and Appeal

• “Unrealistic Section 106 agreements negotiated in differing economic conditions can be an obstacle to house building. The Government is keen to encourage development to come forward, to provide more homes to meet a growing population and to promote construction and economic growth. Stalled schemes due to economically unviable affordable housing requirements result in no development, no regeneration and no community benefit. Reviewing such agreements will result in more housing and more affordable housing than would otherwise be the case.” (CLG, April 2013)

Case Study: South East Northumberland

• 275 unit scheme - greenfield site, weak market area

• Policy requirement for 30% affordable housing

• Viability of two ‘book-end’ scenarios used to inform early discussions

• 30% affordable housing: Unviable

• 0% affordable housing: Viable

• Tested viability at 5% increments to identify viability ‘tipping point’

• Permission granted with 15% affordable provision

Key Issues and Best

Practice

Key Issue – Determining Values

• Significant geographical and temporal variation

• Comparable developments a useful starting point

• Reality check using industry input and validation

• Avoid reliance on ‘asking prices’

• Need for cautious and transparent assumptions

Key Issue – Determining Costs

• Build Costs = Building Cost Information Service

• External Works = +15% (approx).

• Contingency = +5%

• Site Specific Costs (and ‘abnormals’) ?

• S106/Affordable Housing / CIL?

• Development Fees = 10%

• Site Acquisition (agent & legal fees 1.75% + stamp duty 4/5%)

• Sales & Marketing = 6%

• Finance Costs = 3-5% above LIBOR

• Developer’s Profit…

Key Issue – Developer Profit

• “…most developers will target a return of around 20% per annum or more on their investment” (Planning Advisory Service ‘Viability Handbook and Exercises (January 2011))

• “…banks will not provide funding for a scheme that shows a profit level of less than 20% on gross development value "(Stockton Council Economic Viability of Affordable Housing Requirements Report (BNP Paribas, August 2009)

• “…using an average figure of 20% [profit] across the city is not unreasonable or unrealistic” (Bristol City Council Draft CIL Charging Schedule, Examiner’s Report (July 2012))

• “a [profit] figure of 20%, which is at the lower end of the range, is reasonable (Shinfield, Reading Appeal Decision (October 2012))

Key Issue – Developer Profit

• What drives the 20% requirement?

• Accessing finance: risk vs reward

• Uncertain housing market post-recession

• No fixed point of sale, no fixed value, no certainty over costs

• Competition for investment: competitive returns

Key Issue – What is an appropriate Threshold Land Value?

• “…the landowner holds the key to any decision as to whether development takes place…”

• “…unless landowners can be persuaded that it is worth their allowing their site to be (re)developed then they will not make the decision to allow their land to be brought forward and the development land market will not function.”(PINS Report into Barking and Dagenham EVA)

Key Issue – What is an appropriate Threshold Land Value?

• “In simplistic terms the viability of a site is whether or not it is viable for the landowner to bring it forward for development…”

• “It has nothing whatsoever to do with the viability to a developer because his viability i.e. his profit, is already built into the calculation.”

• “If the costs of the scheme compared to the revenues are so great that the landowner will not accept the price that he is being offered for his site, then development will not take place.” (PINS Report into Eden Valley EVA)

Key Issue – What is an appropriate Threshold Land Value?

Brownfield land / redevelopment

• Analysis of Existing Use Value (EUV)

• Comparator sites, VOA data etc

• RLV must exceed EUV to incentivise delivery

• “…we recommend that a premium hurdle rate uplift of 25% on Existing Use Value is assumed to realise development on ‘brown land’…” (Cumulative Impacts of Regulations on House Builders and Landowners’ CLG (June 2011))

Key Issue – What is an appropriate Threshold Land Value?

Greenfield / undeveloped sites

• Low EUV (typically agricultural land)

• BUT – landowners still need to be incentivised

• Minimum price thresholds

• “…we would recommend that minimum land value requirements of £200k per acre (£500k per ha) (gross) are assumed for release of greenfield land…”‘Cumulative Impacts of Regulations on House Builders and Landowners’ CLG (June 2011)

• “…based on experience, most landowners would not be prepared to sell at figures for between 10 and 20% of GDV” (Planning Inspectorate – Report on the Economic Viability Appraisal for Eden Valley Council)

• “…we have taken a figure of 25% of Gross Development Value… for the level at which Residual Land Value may need to reach in order to incentivise the landowner...” (Darlington BC Planning Obligation Scenario Testing (January 2012))

Case Study: North Yorkshire

• C.200 unit scheme – allocated housing site

• CS target of 50% AH. BUT – “actual provision determined through negotiation, taking into account viability and the economics of provision”

• Application refused – insufficient AH

• Public Inquiry April 2013 – key differences in appraisals:

• Developer profit: 15% vs 20% (on GDV)

• Threshold land value: £160k per acre vs £250k per acre

• Build costs: c.£3m difference in costs

• Professional fees and contingency

Conclusions

How can we do viability better? We need…

• To understand the market

• A shared understanding of the development process:

• The motivations for developing

• Commercial considerations / realism

• A collaborative and transparent approach to viability assessment

• An understanding of the implications for the viability of development associated with interventions made through the planning system

Outcomes and Benefits

• Doing viability well means:

• More certainty for developers and LPAs

• Avoids re-opening policies for negotiation after permission granted (reviewing S106 etc)

• The Local Plan is sound / development is built!