Jamie Purvis Viability appraisals

2 Agenda Basic principles and viability issues What are the key drivers in the market? Introduction to appraisal models Example of a review ‘Why aren’t we getting more affordable housing?’

Basic principles and issues 1 3

4 Presentation Footer Text Why has Viability become so Important?  Pre-2008 – assumption that values would keep going up  Developers and banks were getting lazy – taking a view on viability  Viability and deliverability of schemes is under pressure  Sales values have fallen and recovered to some extent  Selling homes became more difficult (choice; mortgages)  Potential planning obligations pot got smaller  Development finance more difficult to secure  Grant funding for affordable housing drastically reduced  Landowners have not yet adjusted to new market reality  Moving away from negotiated S106 to fixed CIL – viability impact

5 Presentation Footer Text Why are Planners interested in scheme finance? Securing affordable housing without public subsidy Enable RPs to purchase stock from developer at a discount Planning Obligations such as the Community Infrastructure Levy (CIL)

6 Presentation Footer Text Policy and Viability RBK Core Strategy policy – 50% AH subject to viability In the event that a development cannot support affordable housing policy the developer is required to submit a viability assessment demonstrating how much affordable housing (if any) that the scheme can support Onus on developer to fully evidence their viability assessment Independent analysis of the developer’s viability assessment is required to robustly scrutinise the developer’s departure from planning policy.

7 Presentation Footer Text Viability Methodology  The proposed scheme is considered on the basis of CURRENT day costs and values and considers the scheme viability at a snapshot in time  A residual valuation is undertaken of the proposed scheme in order to derive the scheme land value  In summary: Gross Development Value Less Total Development Costs Less Developer Profit = Residual Land Value

8 Presentation Footer Text  To determine viability, the land value of the proposed scheme is compared to a benchmark land value  Best practice directs that the benchmark comprises the ‘CURRENT USE VALUE’ of the site or an ‘ALTERNATIVE USE’ if acceptable to planning policy  For the purpose of this presentation, we’ll look at a current use value

9 Presentation Footer Text Current Use Value So in this case, the land value of the proposed scheme needs to be at least £600,000 to be viable, if the land value is below £600,000 it is not viable

10 Viability and sharing in land value uplift Value ‘created’ by grant of planning

11 Presentation Footer Text NPPF and NPPG place viability at centre stage Developers and landowners entitled to ‘competitive returns’ NPPF does not mean that: Developer’s returns should be protected against falling values If the commercial risk does not pay off, profits may have to fall Developers are protected if they over-pay for land Land values are fixed in stone Planning obligations are not the only factor that should take a hit! Higher land value = less AH Lower land value = more AH

12 What information does an appraisal generate? RESIDUAL LAND VALUE

13 A basic residual appraisal

14 A basic residual appraisal

15 A basic residual appraisal

16 Policy and viability RBK Core Strategy Policy – 50% AH subject to viability Schemes providing less than 40% can be policy compliant Viability ‘caveat’ essential to convince Inspector to accept policy Onus on developer to prove why policy target cannot be met Independent analysis to scrutinise case put forward

17 Issues to consider Evidence Sales values (unit by unit pricing; average for development) Affordable housing values (tenure mix; affordability criteria) Commercial rents and yields Build costs Fees Benchmark land values Rent levels Demand Yield Premium Timing Sales and sales rates; off-plan sales Affordable housing payments from RP CIL – fixed and no scope for varying timing on individual developments Section 106 payments and delivery of other obligations

Example scheme appraisal review 2 18

19 Example scheme review  Planning permission granted in 2010  31% affordable housing (by HR) secured through legal agreement  Grant funding of £5.63m, commensurate with other schemes  Re-appraisal clause in the event that grant funding not available  Coalition government CSR cuts grant funding  January 2013 – submission of appraisal pursuant to S106 review  Applicant proposed reduction to zero affordable on viability grounds  BNPPRE reviewed Applicant’s viability submission

20 The Applicant’s appraisal in (£m) Private sales values (£6,865 psm)£71.50 Car parking£0.36 Affordable housing£ of which grant£5.63 Ground rents£0.87 Office and retail£8.39 Total income£93.39 Build costs - residential£50.82 Build costs - commercial£10.41 Infrastructure£0.00 Fees£5.10 Marketing£2.26 Profit£15.98 Finance£6.51 Section 106£1.70 Total costs£92.77 Gross residual land value£0.62 Stamp duty and acquisition fees£0.14 Net residual land value£0.48 Benchmark£0.90 Surplus/Deficit against benchmark-£0.42

21 The Applicant’s appraisal in (£m)2013 (£m) Private sales values (£7,185 psm)£71.50£ Car parking£0.36£0.45 Affordable housing£12.27£ of which grant£5.63£0.00 Ground rents£0.87£1.28 Office and retail£8.39£9.85 Total income£93.39£ Build costs - residential£50.82£58.85 Build costs - commercial£10.41£12.47 Infrastructure£0.00 Fees£5.10£7.36 Marketing£2.26£3.80 Profit£15.98£22.98 Finance£6.51£7.58 Section 106£1.70£3.22 Total costs£92.77£ Gross residual land value£0.62£0.36 Stamp duty and acquisition fees£0.14£0.02 Net residual land value£0.48£0.34 Benchmark£0.90£0.45 Surplus/Deficit against benchmark-£0.42-£0.11

22 BNPPRE review of inputs  Private sales values  Not best location but values low for a high quality tower  Will be opposite new Nine Elms Underground Station  Comparable evidence – taking account of river and non-river views  St George - non river views – 2 nd hand: 1 bed £420k (£7,648 per sqm)  Scheme - non river views: 1 bed £345k (£6,997 per sqm)  Early values from Riverlight scheme (river and non-river views)  Values understated by 10% based on  position  Specification  Type and mix of units proposed

23 BNPPRE review of inputs  Car parking revenue  Low ratio of spaces to units  Revenue increased from £25,000 to £50,000 per space  Commercial values  Retail rents increased from £15 to £17.50 psf  Yield decreased from 8% to 7.5%  Void and rent free periods: reduced from 24 to 6 months  Build costs  Increased between 2010 and 2013  In line with costs on other schemes in the area

24 BNPPRE assessment Applicant (£m)BNPPRE (£m) Private sales values (£7,185 psm)£105.03£ Car parking£0.45£0.72 Affordable housing£ of which grant£0.00 Ground rents£1.28£1.19 Office and retail£9.85£10.59 Total income£116.61£ Build costs - residential£58.85£58.09 Build costs - commercial£12.47£12.48 Infrastructure£0.00 Fees£7.36£7.26 Marketing£3.80£4.17 Profit£22.98£25.25 Finance£7.58£7.93 Section 106£3.22 Total costs£116.26£ Gross residual land value£0.36£9.75 Stamp duty and acquisition fees£0.02£0.53 Net residual land value£0.34£9.22 Benchmark£0.45 Surplus/Deficit against benchmark-£0.11£8.77

25 Outcome of negotiations with Applicant  Applicant deficit of £0.11 million  BNPPRE assessment: £8.92 million surplus above benchmark  Surplus used to maintain rented housing element  Amended scheme: 35 rented units, 6 shared ownership units  Units preserved at target rents

Why aren’t we getting more affordable housing? 3 26

27 Scheme viability: market crash and recovery

28 Scheme viability: market crash and recovery

29 Scheme viability: market crash and recovery

30 Scheme viability: market crash and recovery

31 Scheme viability: market crash and recovery Risk Margin Grant funding Affordable Rent Mayoral CIL £35 Borough CIL £210

Jamie Purvis Viability appraisals and planning decisions