Spring Conference Understanding Viability Simon Drummond-Hay MRICS Tuesday 10 th March

The planners’ lot – shifting sands?

What is 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 costs and availability of development finance, the scheme provides a competitive return to the developer to ensure that development takes place and generates a land value sufficient to persuade a land owner to sell the land for the development proposed. If these conditions are not met, a scheme will not be delivered. Local Housing Delivery Group. Viability Testing in Local Plans – Advice for planning practitioners. (LGA/HBF – Sir John Harman) June 2012

Economic viability of a scheme Source: ‘Financial Viability in Planning’, RICS

When is viability evidence required? Plan-making –Strategic Land Availability Assessment –Whole local plan testing –Community Infrastructure Levy –Neighbourhood Planning Development Management –Site specific viability testing for planning applications –Masterplan/major application viability testing, incorporating phasing etc.

Keep it simple? NPPF says: ‘Evidence supporting the assessment should be proportionate, using only appropriate available evidence’. The CIL guidance says A charging authority must use ‘appropriate available evidence’ (as defined in the Planning Act 2008 section 211(7A)) to inform their draft charging schedule. The Government recognises that the available data is unlikely to be fully comprehensive. Charging authorities need to demonstrate that their proposed levy rate or rates are informed by ‘appropriate available’ evidence and consistent with that evidence across their area as a whole (NPPG ID: ).Planning Act 2008 section 211(7A)

NPPF 173 “…Plans should be deliverable. Therefore, the sites and the scale of development identified in the plan should 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, such as requirements for affordable housing, standards, infrastructure contributions or other requirements 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.”

NPPF 174 “Local planning authorities…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. Evidence supporting the assessment should be proportionate, using only appropriate available evidence.”

The Residual Valuation based approach Step 1: Gross Development Value (The combined value of the complete development) LESS Cost of creating the asset, including a profit margin (Construction + fees + finance charges + Developer’s Profit, CIL, s106, CfSH etc.) = RESIDUAL VALUE Step 2: Residual Value v Existing Use Value

Gross Development Value All income from a Scheme Construction Site Remediation Abnormals S106 Etc. Fees Design Engineer Sales Etc. Profit Developers Builders Land Existing / Alternative Land Value + uplift CIL, Aff Housing, enviro, design, etc

The big question For a site to be viable, by how much must the Residual Value exceed the EUV? The ‘cushion’? What does ‘competitive return’ mean? What is the Viability Threshold You must understand the model, be able to interrogate the assumptions, be able to follow the calculation and challenge the ‘test'. The ‘cushion’ is central to developer behaviour. The Residual Method is very sensitive to inputs and assumptions.

Ever more cautious… Put the overall development of the area at serious risk (2010)  would not threaten delivery of the relevant Plan as a whole (2012)  should not be subject to such a scale of obligations and policy burdens that their ability to be developed viably is threatened (ID: )

Justified? – Brighton and Hove The Council’s Combined Policy Viability Study, which was unfortunately finalised after the plan was submitted for examination, finds that the combined requirements of the Plan raise serious doubts about the viability of development across the Plan area. The Council seeks to rely on the flexibility clauses in the policies, which it says will enable development to go ahead. It is useful to build in such flexibility to allow for site specific issues to be taken into consideration, but this is not an acceptable substitute for ensuring that the plan facilitates development throughout the economic cycle, as required by the Framework (paragraph 174). I am therefore inviting you to draft modifications to the Plan to ensure that the requirements of the Framework are met in relation to this issue and in accordance with the evidence now available. In particular, you may wish to consider whether the requirements of Policy CP8 can be justified in this context, particularly bearing in mind forthcoming changes to the Building Regulations. Furthermore, the characteristics of the housing stock in Brighton are not dissimilar to those in many established urban areas and I am not convinced that this justifies a local requirement, which is more onerous than the national standards provided by the Building Regulations.

CIL/s106 trends moving forward CIL Reg 122 –necessary to make the development acceptable in planning terms; –directly related to the development; and –fairly and reasonably related in scale and kind to the development. CIL Reg 123 –From April 2015, councils will be restricted in relation to pooling S106 or s278 contributions from more than five developments (where the obligation in the s106 or s278 agreement is a reason for granting consent) CIL Regulations 123(3)

Harman v RICS Harman: We recommend that the Threshold Land Value is based on a premium over current use values and credible alternative use values. RICS: Threshold land value. A term developed by the Homes and Communities Agency (HCA) being essentially a land value at or above that which it is assumed a landowner would be prepared to sell. It is not a recognised valuation definition or approach.

Local Market Evidence is Needed Source: Savills

Statutory Guidance

NPPG: Competitive return to developers and land owners This return will vary significantly between projects to reflect the size and risk profile of the development and the risks to the project. A rigid approach to assumed profit levels should be avoided and comparable schemes or data sources reflected wherever possible. A competitive return for the land owner is the price at which a reasonable land owner would be willing to sell their land for the development. The price will need to provide an incentive for the land owner to sell in comparison with the other options available. Those options may include the current use value of the land or its value for a realistic alternative use that complies with planning policy.

NPPG: Land Value Central to the consideration of viability is the assessment of land or site value. Land value should: reflect emerging policy requirements and planning obligations and, where applicable, any CIL charge; provide a competitive return to willing developers and land owners; and be informed by comparable, market-based evidence wherever possible. Where transacted bids are significantly above the market norm, they should not be used as part of this exercise.

Development site sales in County Durham Price Band Less than £9,999/acre Less than £24,706/ha 3 £10,000 to £99,999/acre £24,707 to £247,059/ha 6 £100,000 to £199,999/acre £247,060 to £494,199/acre 2 £200,000 to £299,000/acre £494,200 to £741,299/ha 1 £300,000 to £399,000/acre £741,300 to £988,399/ha 2 £400,000 to £500,000/acre £988,400k to £1,235k/ha 1

WPV & plans found sound in 2014 Local AuthorityDeveloper’s ProfitThreshold Land Value Barbergh17%£370,000/ha Cannock Chase20% on GDV£100,000-£400,000/ha Christchurch & East Dorset 20% on GDC£308,000/ha (un-serviced) £1,235,000/ha (serviced) East Hampshire20% market/6% Affordable£450,000/ha Erewash17%£300,000/ha Fenland15-20%£1-2m/ha (serviced) GNDP20% market/17.5% large sites/6% Affordable £370,000-£430,000/ha Reigate & Banstead17.5% market/6% Affordable£500,000/ha Stafford20% (comprising 5% for internal overheads). £250,000/ha Staffordshire Moorlands17.5% market/6% Affordable£1.26-£1.41m/ha (serviced) Warrington17.5%£100,000-£300,000/ha

CIL, s106, affordable housing trade off Source: Savills

Development Management Appeals Barnet: APP/Q5300/ A/07/ /NWF Bristol: APP/P0119/ A/08/ Beckenham: APP/G5180/ A/08/ Bishops Cleeve; APP/G1630/A/11/ Burgess Farm: APP/U4230/A/11/ CLAY FARM: APP/Q0505/A/09/ /NWF Woodstock: APP/D3125/ A/09/ Shinfield APP/X0360/ A/12/ Oxenholme Road, APP/M0933/A/13/ Vannes: Court of Appeal 22 April 2010, [2010] EWHC 1092 (Admin) 2010 WL

Shinfield APP/X0360/A/12/ Reading University Wokingham Council 8 th January 2013

Site and scheme 8.5 ha, 5 km south of Reading Was National Institute for Research into Dairying (closed in 1980s) 4.5 ha within development limits – with buildings etc 4 ha beyond development limits – pasture To clear site and build 126 new dwellings within development limits – remainder to be open space etc

The problem The Council wanted… £2,028,920 in developer contributions 40% affordable housing (policy says subject to viability) Higher sales prices Lower developers profit Different Benchmark land value / site value The Developer offered… £2,312,569 in developer contributions 2% affordable housing

Developers Profit The appellants supported their calculations by providing letters and s from six national housebuilders who set out their net profit margin targets for residential developments. The figures ranged from a minimum of 17% to 28%, with the usual target being in the range %. Those that differentiated between market and affordable housing in their correspondence did not set different profit margins. Due to the level and nature of the supporting evidence, I give great weight it. I conclude that the national housebuilders’ figures are to be preferred and that a figure of 20% of GDV, which is at the lower end of the range, is reasonable.

Viable amount of affordable However, it would not result in the land being released for development. Not only is this SV well below that calculated by the appellants, there is no incentive to sell. In short, the appellants would not be willing landowners. If a site is not willingly delivered, development will not take place. The appellants, rightly in my opinion, say that this would not represent a competitive return. They argue that the uplift in value should be split 50:50 between the landowner and the Council. This would, in this instance, represent the identified s106 requirements being paid as well as a contribution of 2% of the dwellings as affordable housing.

And finally I conclude on this issue that, allowing the landowner a competitive return of 50% of the uplift in value, the calculations in the development appraisal allowing for 2% affordable housing are reasonable and demonstrate that at this level of affordable housing the development would be viable (Document 26). The only alterations to these calculations are the relatively minor…

A Pragmatic Viability Test EUV Plus a premium – reality checked against market value. Will EUV Plus provide competitive returns? Land owner’s have expectations (life changing?) Will land come forward? PAS SUPPORT THIS APPROACH

Engagement Phases Delay at your peril Two or three stages

Ask for information early Landowners and site promoters should be prepared to provide sufficient and good quality information at an early stage……. This will allow an informed judgement by the planning authority regarding the inclusion or otherwise of sites based on their potential viability. Harman Guidance – Page 23 “This viability report is provided on a confidential basis to the Council. We therefore request that the report should not be disclosed to any third parties (other than consultants instructed by the Council to review this report) under the Freedom of Information Act 2000 (sections 41 and 43(2)) or under the Environmental Information Regulations.” RICS GN – Paragraph 4.3.3

Confidentiality of viability Disclosure is often necessary, even where there is harm Aarhus/ Environmental Information Regulations ICO: Lakota Building (no harm), Hampton Court (harm, but disclosure) CLG Guidance May 2013 …and particularly where there is an LPA land interest Summary data only, for public disclosure R (English) v East Staffs BC (2010) A balance is required Section 41 FOIA 2000 Is the information actually confidential? Is there really likely to be prejudice? Is there an overriding public interest? ICO: LB Southwark July 2013 Mechanisms to compromise Data ring 3 rd party adviser

Design and viability

Housing standards - Consultation ment_data/file/354095/03__140731__HSR_Supporting_Doc2_S pace.pdf This standard deals with internal space within new dwellings and is suitable for application across all tenures. It sets out requirements for the Gross Internal (floor) Area (GIA) of new dwellings at a defined level of occupancy as well as floor areas and dimensions for key parts of the home, notably bedrooms, storage and floor to ceiling height. Requirements may be exceeded but at the very least should be met. This standard is only applicable where a condition which is derived from a policy within a local plan is applied to a planning permission. This standard should be read alongside relevant guidance set in National planning policy.

Minimum gross internal floor areas and storage (m 2 ) number of bedrooms number of bedspaces 1 storey dwellings 2 storey dwellings 3 storey dwellings built-in storage studio1p39(37)* 1 1b2p b3p p7079 3b4p p p b5p p p p b6p p p b7p p

DECC: EPC ratings & house prices

Another Consultation

BREEAM Sweet Group and Building Research Establishment Lower BREEAM ratings barely increase costs Higher ratings +/-2% additional costs Substantial savings over lifecycle

The Supermarket Sector

The Future?????

Case study: South Lakeland

EUV + 20% + £400,000/ha on greenfield Table 10.4 Residual Value compared to 20% + £400,000/ha Uplift Viability Threshold (£/net ha) Alternative Land Value Viability Threshold Affordable % 0%25%30%35%40% Site 1Urban Edge 1Kendal25,000430,0001,443,0271,148,2551,083,9081,017,109948,778 Site 2Urban Edge 2Kendal25,000430,0001,455,2401,130,6801,059,830986,281911,045 Site 3 Office re- developmentKendal400,000480,000732,148412,529346,134272,991198,171 Site 4Estate InfillKendal50,000460,0001,716,2951,404,6681,333,5301,258,4691,182,385 Site 5LSC InfillArnside50,000460,0001,089,497860,561808,331754,112698,649 Site 6LSC InfillGrange50,000460,0001,315,0921,015,954950,654882,866813,524 Site 7Cleared UrbanUlverston300,000360,000399,698153,528100,14743,821-13,273 Site 8KSC Urban EdgeMilnthorpe25,000430,0001,319,6271,034,413971,956908,733841,158 Site 9LSC EdgeAllithwaite50,000460,0001,879,3181,474,1141,385,3831,307,8481,210,926 Site 10LSC EdgeEndmoor50,000460,0001,266,3311,000,000949,065889,158825,151 Site 11LSC PaddockPenny Bridge50,000460,0001,648,6361,320,8901,245,6981,169,5861,088,227 Site 12Small VillageLune Valley50,000460,0001,952,203 Site 13Ex Garage SiteCentral SLDC400,000480,000457,674212,560159,053103,50746,688 Site 14Village InfillCartmel Peninsula50,000460,0001,522,4981,203,1861,130,0731,056,066976,954 Site 15Village InfillEastern Area50,000460,000552,018 Site 16Rural HouseRural west50,000310,00075,454 Castle Green RoadKendal25,000430,0001,098,652858,474806,045751,618695,942 Quarry LaneStorth25,000430,0001,175,868866,671799,175729,108663,665 South UlverstonUlverston25,000430,000852,535623,926573,994522,158469,132 Ulverston Canal HeadUlverston300,000360,000928,748625,484559,283495,210424,244

£1,000,000 viability Threshold Table 10.3 Residual Value compared to £1,000,000/ha Viability Threshold (£/net ha) Alternativ e Land Value Viability Threshol d Affordable % 0%25%30%35%40% Site 1Urban Edge 1Kendal25,000 1,000,00 01,443,0271,148,2551,083,9081,017,109948,778 Site 2Urban Edge 2Kendal25,000 1,000,00 01,455,2401,130,6801,059,830986,281911,045 Site 3Office re-developmentKendal400,000 1,000, ,148412,529346,134272,991198,171 Site 4Estate InfillKendal50,000 1,000,00 01,716,2951,404,6681,333,5301,258,4691,182,385 Site 5LSC InfillArnside50,000 1,000,00 01,089,497860,561808,331754,112698,649 Site 6LSC InfillGrange50,000 1,000,00 01,315,0921,015,954950,654882,866813,524 Site 7Cleared UrbanUlverston300,000 1,000, ,698153,528100,14743,821-13,273 Site 8KSC Urban EdgeMilnthorpe25,000 1,000,00 01,319,6271,034,413971,956908,733841,158 Site 9LSC EdgeAllithwaite50,000 1,000,00 01,879,3181,474,1141,385,3831,307,8481,210,926 Site 10LSC EdgeEndmoor50,000 1,000,00 01,266,3311,000,000949,065889,158825,151 Site 11LSC PaddockPenny Bridge50,000 1,000,00 01,648,6361,320,8901,245,6981,169,5861,088,227 Site 12Small VillageLune Valley50,000 1,000,00 01,952,203 Site 13Ex Garage SiteCentral SLDC400,000 1,000, ,674212,560159,053103,50746,688 Site 14Village InfillCartmel Peninsula50,000 1,000,00 01,522,4981,203,1861,130,0731,056,066976,954 Site 15Village InfillEastern Area50,000 1,000, ,018 Site 16Rural HouseRural west50,000 1,000,00 075,454 Castle Green RoadKendal25,000 1,000,00 01,098,652858,474806,045751,618695,942 Quarry LaneStorth25,000 1,000,00 01,175,868866,671799,175729,108663,665 South UlverstonUlverston25,000 1,000, ,535623,926573,994522,158469,132 Ulverston Canal HeadUlverston300,000 1,000, ,748625,484559,283495,210424,244

Developers Profit 20% and 25% GDV Table 10.5 Residual Value compared to 20% + £400,000/ha Uplift Viability Threshold (£/net ha) Developers’ return of 20% and 25% 20% GDV25% GDV Site 1Urban Edge 1Kendal25,000430,0001,017,109831,087 Site 2Urban Edge 2Kendal25,000430,000986,281772,718 Site 3Office re-developmentKendal400,000480,000272,99130,763 Site 4Estate InfillKendal50,000460,0001,258,469988,341 Site 5LSC InfillArnside50,000460,000754,112565,668 Site 6LSC InfillGrange50,000460,000882,866694,863 Site 7Cleared UrbanUlverston300,000360,00043, ,517 Site 8KSC Urban EdgeMilnthorpe25,000430,000908,733712,529 Site 9LSC EdgeAllithwaite50,000460,0001,307,8481,060,360 Site 10LSC EdgeEndmoor50,000460,000889,158703,008 Site 11LSC PaddockPenny Bridge50,000460,0001,169,586960,717 Site 12Small VillageLune Valley50,000460,0001,952,2031,677,952 Site 13Ex Garage SiteCentral SLDC400,000480,000103,507-73,964 Site 14Village InfillCartmel Peninsula50,000460,0001,056,066854,394 Site 15Village InfillEastern Area50,000460,000552,018455,105 Site 16Rural HouseRural west50,000310,00075,45458,142 Castle Green RoadKendal25,000430,000751,618615,149 Quarry LaneStorth25,000430,000729,108538,318 South UlverstonUlverston25,000430,000522,158343,462 Ulverston Canal HeadUlverston300,000360,000495,210259,067

Viability Threshold = 25% of GDV Table 10.7 Residual Value compared to Viability Threshold of 25% of GDV GDV% GDVResidual% of GDV Site 1Urban Edge 1Kendal27,652,6296,913,1575,339,82319% Site 2Urban Edge 2Kendal34,474,0928,618,5235,720,43017% Site 3Office re-developmentKendal1,751,290437,82284,6275% Site 4Estate InfillKendal1,945,866486,466377,54119% Site 5LSC InfillArnside4,812,1891,203,047754,11216% Site 6LSC InfillGrange7,144,6401,786,1601,324,29919% Site 7Cleared UrbanUlverston1,786,127446,53210,9551% Site 8KSC Urban EdgeMilnthorpe13,091,1053,272,7762,271,83317% Site 9LSC EdgeAllithwaite4,578,3281,144,582980,88621% Site 10LSC EdgeEndmoor2,273,993568,498444,57920% Site 11LSC PaddockPenny Bridge3,733,644933,411818,71022% Site 12Small VillageLune Valley1,002,000250,500292,83129% Site 13Ex Garage SiteCentral SLDC827,808206,95220,7013% Site 14Village InfillCartmel Peninsula1,970,884492,721422,42621% Site 15Village InfillEastern Area684,750171,188165,60524% Site 16Rural HouseRural west390,00097,50075,45419% Castle Green RoadKendal11,024,9042,756,2262,314,98221% Quarry LaneStorth7,045,6981,761,4251,035,33315% South UlverstonUlverston111,430,80127,857,70011,581,45910% Ulverston Canal HeadUlverston12,225,8823,056,471955,7558%

Shinfield Test We do not accept that Shinfield is an authoritative precedent for Plan wide viability testing Under the Shinfield principles the uplift from granting planning consent is shared 50:50 between the landowner and the local authority.

Shinfield Test Existing Use Value Residual - No affordable, no developer contributions Shinfield Threshold Residual - Base Modelled Site 1Urban Edge 1Kendal25,0001,043,694534,347711,976 Site 2Urban Edge 2Kendal25,0001,049,780537,390686,726 Site 3Office re-developmentKendal400,000797,456598,728272,991 Site 4Estate InfillKendal50,0001,239,640644,820878,002 Site 5LSC InfillArnside50,0001,038,143544,071685,556 Site 6LSC InfillGrange50,0001,020,043535,022662,150 Site 7Cleared UrbanUlverston300,000475,187387,59443,821 Site 8KSC Urban EdgeMilnthorpe25,000898,153461,576597,851 Site 9LSC EdgeAllithwaite50,0001,445,461747,731980,886 Site 10LSC EdgeEndmoor50,000936,945493,472635,113 Site 11LSC PaddockPenny Bridge50,0001,274,754662,377880,333 Site 12Small VillageLune Valley50,0001,494,704772,3521,464,153 Site 13Ex Garage SiteCentral SLDC400,000496,992448,496103,507 Site 14Village InfillCartmel Peninsular50,000780,162415,081528,033 Site 15Village InfillEastern Area50,000567,592308,796552,018 Site 16Rural HouseRural west50,00077,02763,51375,454

Full Policy + Developer Contributions Table 10.9 Impact of different Developer Contributions Alternative Use Value Viability Threshold Developer Contributions. £/ unit (market and affordable) £/ha £1,500£2,500£5,000£7,500£10,000 Site 1Urban Edge 1Kendal25,000430,000 1,017, ,133905,194825,255745,315 Site 2Urban Edge 2Kendal25,000430, , ,307863,874776,440689,006 Site 3 Office re- development Kendal400,000480, , ,023119,1039, ,736 Site 4Estate InfillKendal50,000460,000 1,258,469 1,217,7351,115,8981,014,061912,225 Site 5LSC InfillArnside50,000460, , ,807630,544542,282458,364 Site 6LSC InfillGrange50,000460, , ,889777,946703,003634,013 Site 7Cleared UrbanUlverston300,000360,000 43,821 -6, , , ,862 Site 8KSC Urban EdgeMilnthorpe25,000430, , ,356802,414726,471650,529 Site 9LSC EdgeAllithwaite50,000460,000 1,307,848 1,275,5691,194,8721,114,1751,033,478 Site 10LSC EdgeEndmoor50,000460, , ,607782,230705,852629,475 Site 11LSC PaddockPenny Bridge50,000460,000 1,169,586 1,139,3241,063,671988,017912,364 Site 12Small VillageLune Valley50,000460,000 1,952,203 1,925,0471,857,1561,789,2651,721,374 Site 13Ex Garage SiteCentral SLDC400,000480, ,507 77,29611,767-53, ,292 Site 14Village InfillCartmel Peninsula50,000460,000 1,056,066 1,030,607966,959903,311839,663 Site 15Village InfillEastern Area50,000460, , ,636515,680489,724463,768 Site 16Rural HouseRural west50,000310,000 75,454 74,40671,78569,16366,542

Carveth Read: “It is better to be vaguely right than exactly wrong” Logic, deductive and inductive (1898), p. 351

Lessons (1) Read and follow the NPPF and CIL Regs –Cumulative impact of all policies and requirements –‘Effect’ of CIL Numbers are good – interpretation is bad –Set in context of NPPF and CIL Regs

Lessons (2) Affordable Housing v CIL v s106 –Be clear Be transparent and consistent –Set out methodology and assumptions, go the extra mile to agree

Lessons (3) Use existing available evidence –Don’t rely on consultants viability study alone –Track record / what is happening on ground –DM appraisals –Estates team Acknowledge viability problems and set out how to facilitate development.

And Finally The Golden rules of viability testing: Transparency Evidence based Simple Guidance

Contact us Simon Drummond-Hay Phone /