Viability and development economics June – Sept

What is PAS? PAS is a DCLG grant-funded programme but part of the Local Government Association Governed by a ‘sector led’ board 10 staff – commissioners, generalists, support “PAS exists to provide support to local planning authorities to provide efficient and effective planning services, to drive improvement in those services and to respond to and deliver changes in the planning system”

Organisation of the day Housekeeping- Phones off Presentations and activities Feedback forms and follow up survey Lunch and breaks

Learning and sharing Different levels of knowledge Sharing with each other Learning from one another

Objectives to improve your knowledge of:  viability and its relevance in planning and  the viability evidence you require to fulfil your planning role For procurement – to improve the procurement outcome for your authority? Make you more confident discussing, and negotiating upon, viability related to development and planning

‘‘ ‘Why straw?’ you’re thinking. Let me tell you … We at Wolf Construction are committed to building affordable homes for first-time buyers, using local materials wherever possible”

“Maybe it was some kind of sustainable eco- house. Anyway one puff and down it went”

Learning Objectives To ensure that the Council is a ‘highly informed client’ with the ability to: undertake simple viability assessments to appraise viability assessments submitted by developers utilise viability testing in formulating policy to know when to bring in outside consultants fully engage with consultants

Session 1: An Introduction to viability (including definitions and terminology)

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

What is viability? An objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, while ensuring an appropriate Site Value for the landowner and a market risk adjusted return to the developer in delivering that project. (Where viability is being used to test and inform planning policy it will be necessary to substitute “a development project” into the wider context) Financial viability in planning RICS guidance note 1st edition (GN 94/2012) August 2012

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

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

Economic viability of a local plan

Regulatory Requirements – why is viability important? NPPF 173 / the cumulative impact of the council’s ‘wish list’ (CIL/s106, CfSH etc.) NPPF 178 – 181 duty to cooperate, work collaboratively, a continuous process CIL Regulation 14 The effect of CIL on viability SHLAA Are the sites deliverable, 5 year supply S106 / Individual, site specific In relation to planning applications, enabling development

Context: Blyth Valley Lord Justice Keene - Conclusion: [the inspector] failed to reflect the requirement of PPS3 as to the need for an informed economic viability study as part of the process leading to a policy requiring a particular percentage of affordable housing…His approach was also vitiated by his perhaps understandable but erroneous application of a presumption of soundness, and his finding that there was no evidence that sites would not come forward if a 30 per cent requirement were imposed is incomprehensible.

Context: SHLAA Guidance 40. A site is considered achievable for development where there is a reasonable prospect that housing will be developed on the site …It will be affected by: market factors (such as locality), cost factors (e.g. site preparation costs); and delivery factors (e.g. developer’s own phasing) 41. There are a number of residual valuation models available to help determine whether housing is an economically viable prospect for a particular site. In addition, the views of housebuilders and local property agents for example will also be useful where a more scientific approach is not considered necessary.

There is no statutory guidance NPPF says: ‘Evidence supporting the assessment should be proportionate, using only appropriate available evidence’. The CIL guidance says ‘The legislation (section 212 (4) (b)) requires a charging authority to use 'appropriate available evidence' to inform their draft charging schedule. It is recognised that the available data is unlikely to be fully comprehensive or exhaustive. Charging authorities need to demonstrate that their proposed CIL rate or rates are informed by ‘appropriate available’ evidence and consistent with that evidence across their area as a whole’.

Proportionate available evidence Adjourned GNDP Joint Core Strategy. The Inspector has requested that GNDP provide: “..financial viability testing using the Harman guidance, bearing in mind NPPF 173 and onwards. This should be strategic and proportionate, but should use any detailed information now available as result of the Local Investment Plan and Programme and AAP work. Key, critical infrastructure projects and the costs of these to the proposed developments should be identified. The Inspector has asked that this paper be kept as short and simple as possible.”

Context: CIL NPPF recommends plans are drawn up alongside CIL charging schedules "where practical" Avoids repetition and helps prioritise policies A balance between securing additional investment for infrastructure and the potential economic effect of imposing CIL upon development across their area It is for charging authorities to decide on the appropriate balance and ‘how much’ potential development they are willing to put at risk through the imposition of CIL Show how CIL will facilitate development

OLD (March 2010) CIL Guidance 10.The examiner should not use the CIL examination to question a charging authority’s choice in terms of 'the appropriate balance', unless the evidence available to the examination shows that the proposed rate (or rates) will put the overall development of the area at serious risk. The examiner should be ready to modify or reject the draft charging schedule if it puts at serious risk the overall development of the area.

OLD (March 2010) CIL Guidance 10.…In considering whether the overall development of the area has been put at serious risk, the examiner will want to consider the implications for the priorities that the authority has identified in its Development Plan…In considering whether the Development Plan and its targets have been put at serious risk, the examiner should only be concerned with whether the proposed CIL rate will make a material or significant difference to the level of that risk. It may be that the Development Plan and its targets would be at serious risk in the absence of CIL.

New (December 2012) CIL Guidance 9. The independent examiner should establish: the proposed rate or rates are informed by and consistent with, the evidence on economic viability across the charging authority's area; and evidence has been provided that shows the proposed rate (or rates) would not threaten delivery of the relevant Plan as a whole. 10. The examiner should be ready to recommend modification or rejection of the draft charging schedule if it threatens delivery of the relevant Plan as a whole.

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.”

Wish list of discretionary policies

PPS3 to NPPF to CIL Regs Will plan put the overall development of the area at serious risk vs. threaten delivery of the relevant Plan as a whole … charging authorities should show and explain how their proposed levy rate (or rates) will contribute towards the implementation of their relevant Plan and support the development of their area.

Examination – NPPF 182 The inspector will examine if plan is in accordance with the Duty to Cooperate, legal requirements, and whether it is “sound”: Positively prepared – the plan should be prepared based on a strategy which seeks to meet objectively assessed requirements Justified Effective – the plan should be deliverable over its period and based on effective joint working on cross- boundary strategic priorities Consistent with national policy

Planning Appeals Barnet: APP/Q5300/A/07/ /NWF Bristol: APP/P0119/A/08/ Beckenham: APP/G5180/A/08/ Woodstock: APP/D3125/A/09/ Shinfield: APP/X0360/A/12/

Non – Statutory Guidance Viability Testing in Local Plans – Advice for planning practitioners (June 2012). LHDG – Sir John Harman Financial Viability in Planning (August 2012). RICS HCA good practice manual ‘Investment and Planning Obligations: Responding to the Downturn’ (2009) Research by Chris Hill of Turner Morum on behalf of CLG entitled ‘Cumulative impacts of regulations on house builders and landowners’ (2011) PAS Viability Handbook

Read the Guidance!

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 Etc. Fees Design Engineer Sales Etc. Profit Developers Builders Land Existing / Alternative Use Value + premium (TLV/EUV+) Policies/CIL CIL, affordable housing, CfSH, open space 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? 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.

Contact us Web Phone Simon Drummond-Hay Phone / David Carlisle Phone /