1. Introduction to Development Economics and Viability Thursday 10 th March 2016 www.pas.gov.uk

2. ‘‘ ‘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”

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

4. 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

5. 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

6. When is viability evidence required? Plan-making –Housing and Economic Land Availability Assessment –Whole local plan viability testing –Community Infrastructure Levy testing Development Management –Site specific viability testing for planning applications –Masterplan or development brief accompanying a major application viability testing, incorporating phasing etc. Local Development Orders

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

8. Economics of development Source: RICS Financial Viability in Planning

9. 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.

10. Why produce viability evidence? 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’ to inform their draft charging schedule. The Government recognises that the available data is unlikely to be fully comprehensive.

11. 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.”

12. 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.”

13. Discretionary policies

14. Viable policies?

15. 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

16. Non – Statutory Guidance Viability Testing in Local Plans – Advice for planning practitioners (June 2012). LHDG Financial Viability in Planning (August 2012). RICS

17. S106 guidance (April 2013) The G&I Act introduced a new application and appeal procedure for the review of planning obligations on planning permissions which relate to the provision of affordable housing. Does not replace existing powers to renegotiate Section 106 agreements on a voluntary basis. New procedure will assess the viability of affordable housing requirements only. It will not reopen any other planning policy considerations. Sites granted in accordance with a Rural Exceptions Site policy are exempt from this procedure.

18. S106 guidance (April 2013) S106BA – application can be made to LPA with viability evidence. LPA can produce their own viability evidence or provide commentary on applicants evidence. S106BC – where there is disagreement or LPA does not determine the application an applicant can appeal to the SoS. LPA can submit own evidence. Evidence – must show that affordable housing obligation as currently agreed makes the scheme unviable in current market conditions. Form of evidence – prepared in same form using methodology as close as reasonably possible to previous evidence Delivery – valid for 3 years to incentivise delivery Annex A/B – Summary of key variables/Procedural note

19. Statutory Guidance

20. PPG: What does the NPPF expect on viability? Understanding Local Plan viability is critical to the overall assessment of deliverability. Local Plans should present visions for an area in the context of an understanding of local economic conditions and market realities. This should not undermine ambition for high quality design and wider social and environmental benefit but such ambition should be tested against the realistic likelihood of delivery.

21. PPG: Principles for understanding viability Evidence based judgement: assessing viability requires a realistic understanding of the costs and the value of development in the local area and an understanding of the operation of the market (including past performance on build rates and planning obligations). Collaboration: a collaborative approach involving the business community, developers and landowners will improve knowledge of what is deliverable…Transparency of evidence is encouraged wherever possible. A consistent approach: where possible plan for infrastructure and prepare development policies in parallel. Authorities should seek to align the preparation of their CIL and Local Plans as far as practical.

22. PPG: Plan-making and viability Local Plans and neighbourhood plans should be based on a clear and deliverable vision of the area. Viability assessment should be considered as a tool that can assist with the development of plans and plan policies. It should not compromise the quality of development but should ensure that the Local Plan vision and policies are realistic and provide high level assurance that plan policies are viable.

23. PPG: land availability assessment Assessing the suitability, availability and achievability of sites including whether the site is economically viable will provide the information on which the judgement can be made in the plan-making context as to whether a site can be considered deliverable over the plan period. A site is considered achievable for development where there is a reasonable prospect that the particular type of development will be developed on the site at a particular point in time. This is essentially a judgement about the economic viability of a site

24. PPG: Decision-taking and viability This should be informed by the particular circumstances of the site in question. Assessing the viability of a particular site requires more detailed analysis than at plan level. A site is viable if the value generated by its development exceeds the costs of developing it and also provides sufficient incentive for the land to come forward and the development to be undertaken.

25. PPG: changes in values Viability assessment in decision-taking should be based on current costs and values. Planning applications should be considered in today’s circumstances. Where a scheme requires phased delivery over the longer term, changes in the value of development and changes in costs of delivery may be considered. Forecasts, based on relevant market data, should be agreed between the applicant and local planning authority wherever possible.

26. PPG: planning obligations LPAs will need to understand the impact of planning obligations and should be flexible…Affordable housing contributions are often the largest single item sought on housing developments. These contributions should not be sought without regard to individual scheme viability. Assessing viability should lead to an understanding of the scale of planning obligations…where safeguards are necessary to make a particular development acceptable, and these safeguards cannot be secured, planning permission should not be granted.

27. PPG: 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.

28. PPG: 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.

29. 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

30. 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.

31. 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 viability modelling, be able to interrogate the assumptions of developers, 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.

32. The role of viability in plan-making and development management

33. A Development Viability Appraisal Income Costs Cash flow

34. Key Inputs - GDV Gross development value (GDV) The income from the development Sale of product Subsidy and grant. Expressed as £/m 2 Set by the market and largely beyond the control of LPA or developer

35. Key Inputs - Cost of development –Construction Costs (BCIS) –Site Costs –Policy costs e.g. Energy, Affordable Housing, CIL, s106 –Abnormal Costs e.g. Flood defence, Grouting, Demolition Contamination etc. –Fees i.e. Architects, Planning, Engineers –Finance i.e. Interest, Fees, Legal and valuation –Sales i.e. Agents, Advertising –Contingency and Profit

36. Key Inputs – Developer’s profit To reflect development risk Reward Cost of Capital Return on Capital Employed (reason why developers are obsessed with timing, how long planning takes and build rates/phasing? Loan to value (LtV) of funding Contingency Bankers security / risk / confidence We’re not trying to second guess a developer’s business model works. Risk and profit are more complicated that a simple percentage of Gross Development Value. However, a pragmatic approach is required for the purposes of modelling

37. 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

38. Effect of phasing

39. Dead Romans found in foundations….

40. English Heritage get involved…

41. Net developable area versus gross site area In all but the smallest redevelopment schemes, the net developable area (i.e. income generating land) is significantly smaller than the gross area that is required to support the development, given the need to provide open space, infrastructure etc. The net area can account for less than 50%, and sometimes as little as 30% on larger sites, of the site to be acquired (i.e. the size of the site with planning permission). Failure to take account of this difference can result in flawed assumptions and inaccurate viability studies. Gross area Net developable area

42. Strategic infrastructure and utility costs Cost indices (such as the BCIS) rarely provide data on the costs associated with providing serviced housing parcels, i.e. strategic infrastructure costs which are typically in the order of £17,000 - £23,000 per plot for larger scale schemes.

43. Key Inputs – Land Value The worth of the site Alternative use value When assessed – before planning starts Hope value should be disregarded ‘Competitive Return’ (Relates back to the ‘big question’) A life changing event? – Not what they paid!

44. 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.

45. MV vs. EUV (plus a premium)

46. Harman v RICS “It is somewhat misleading to describe this approach (EUV plus a margin) as totally arbitrary. The market value approach on the other hand, while offering certainty on the price paid for a development site, suffers from being based on prices agreed in an historic policy context…I don’t believe that the EUV approach can be accurately described as fundamentally flawed or that this examination should be adjourned to allow work based on the market approach to be done.” Report to The Mayor of London” Keith Holland BA (Hons) DipTP MRTPI ARICS (Jan 2012)

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

48. Lunch

49. The Mechanics of viability testing

50. A simple development viability appraisal Data Collection Calculation (Residual Value, Cashflow) Reality Check Interpretation Use of data Note: Will discuss consultation later – it is vital and required!

51. Data Collection Rubbish in = Rubbish out All inputs MUST be sourced!

52. 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

53. Confidentiality FOI Act 2000 (Sections 41 and 43(2)) Environmental Information Regulations 12(5)(e) R (English) v East Staffordshire Borough Council and Anor (2010 EWHC 2744 Heygate Decision (2014) Recent ICO Decisions (2012-2014) RICS GN – Paragraph 4.3.3 “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.” Planning Performance Agreements

54. Income Data Basic Prices by £/m 2 Residential Prices – House v flats Commercial / non-residential Affordable Prices New v existing Incentives and discounts Variance by location or situation? Grants, subsidies

55. Gross internal area? BCIS (the costs) as ‘Rate per m 2 gross internal floor area for the building’ Direct from developers Calculate – it will be an estimate

56. Income Data – Non-Residential Sources: EGi Data / EGI Property Link Agents Valuation Office Agency Developers Key information: Rent per annum Yields Net Internal Area

57. Residential vs. commercial ResidentialCommercial Purchaser usually buying a home they intend to occupy themselves Purchaser usually buying a rental stream as well as the property itself One customer: Usually a purchaser looking for a new home. Two customers: Tenant looking for suitable premises and investor looking for a rental stream. Usually valued using GIAUsually valued using NIA

58. What is the ‘yield’? The rent as a proportion of the purchase price There is an inverse relationship between yields & values, i.e. a higher yield means a lower value & a lower yield means a higher value. Yields are often used in development appraisals to estimate the value of the completed development when it is expected to be rented to a tenant (or tenants). This consequently usually applies to commercial property, although it can apply to residential property where it is also rented.

59. What affects yields? Risk & future growth prospects (rental stream & capital value of property). High risk = high yield. But, the higher the future growth prospects = lower yield Low risk = lower return e.g. savings in an ISA. In a casino you would be aiming for a higher 'yield' to compensate for the probability of failure For the main investment classes Government Bonds (gilts) are used as a benchmark for a low risk Property investment is riskier than bonds but offers more income & capital growth potential

60. What affects yields? The tenant - Is it a strong tenant in terms of security of income (or rent)? Security is something you would normally expect to pay for, perhaps by accepting a lower initial return on your investment. The area - Is the location suitable for a building of this quality? Is it declining or improving? Is the access good? The building itself - What is it like? If the tenant goes bust, how easy will it be to find a new tenant? Do these and other lease clauses protect your investment e.g. upward only rent reviews etc.?

61. Yield example Offices are normally bought by investors such as pension funds. Let us assume a pension fund wants to buy an office when it is fully occupied by a tenant(s)… The developer should have a firm idea of what rent the building is likely to achieve e.g. £100,000pa. In basic development appraisals, the initial rent is therefore used to help estimate the development value. The key question is therefore how much should this rent should be multiplied by to calculate what price a purchaser will pay.

62. Yield example The “multiplier” is calculated as 100 / yield (also known as Years Purchase i.e. the number of years required for rental income to yield the purchase price) Development Value = Initial Rent x (100 / Yield) Let’s assume a pension fund requires a yield of 6%. The offices is let at £100k pa. Therefore the value of the rented office building as an investment is calculated as follows: £100,000 x (100 / 6) = £1.66m

63. Rent to Value Table 5.1 Capitalised typical rents £/m 2 Rent£/m2YieldCapitalised Rent £/m2 Large industrial417.0%586 Small industrial487.0%686 Distribution506.0%833 Large office936.5%1,431 Small office1007.0%1,429 Large retail - Convenience1305.0%2,600 Large retail - Other1207.0%1,714 Small Retail1057.0%1,500 Leicester Shops2367.0%3,371 Other Shops15011.0%1,364 Hotels 6.5%2,150 Student Halls 6.5%2,225 Leisure758.0%938

64. Cost Data

65. Construction costs BCIS Site Costs – 10% to 20% Abnormals – site by site basis e.g. highways, flooding demolition, design, decontamination etc. Contingency – 2.5% Greenfield 5% Brownfield +7% on horrible sites

66. Phasing and Build Rate Size of site Size of developer Availability of mortgages Pre 200745 to 50 per year Now?30 to 35 per year Multiple developers

67. Variables Small Changes to cost or income can have a huge difference in result – the bigger the numbers the more sensitive. Scenario/Sensitivity testing is recommended “…make some very cautious and transparent assumptions with sensitivity testing of the robustness of those assumptions it is important that variations against baseline costs, as well as values, are tested.” (page 27 – Viability Testing Local Plans)

68. PPG: How should changes in values and costs be treated in plan-making? Plan makers should not plan to the margin of viability but should allow for a buffer to respond to changing markets and to avoid the need for frequent plan updating. Current costs and values should be considered when assessing the viability of plan policy. Policies should be deliverable and should not be based on an expectation of future rises in values at least for the first five years of the plan period.

69. Consultation Why Who with When So what and what do you do with the results?

70. Consultations Engagement A fundamental part of plan making and a requirement of NPPF, CIL Regs, Harman Guidance Don’t be afraid to ask the developers –For some evidence to support figures –To explain / for detail Record process and comments METICULOUSLY What have you actually asked and is it in the context of delivering the development plan

71. Engagement Phases Delay at your peril Two or three stages

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

73. Plan making case study

74. Case Study – South Worcestershire Local Plan

75. No additional requirements No affordable housing Built to Building Regulations (Part L) Density informed by consultation with officers and developers – lower than policy to reflect current delivery (targets assume high content of flats etc) Greenfield sites over 1 hectare have 40% open space No CIL or s106 All other requirements over high quality and locally distinctive design and safe design remain

76. No additional requirements

77. Build Standards Code for Sustainable Homes Level 4 from April 2013 –Add 6% to cost of house SWLP 26 Renewable and Low Carbon Energy (a)All new developments will be required to incorporate the generation of energy…by at least 10%. (b)All new development (as part of the major developments) will be required to incorporate the generation of energy…by at least 20%. –Add 2.5% to cost of house (+/- £2,500 /dwelling) NOT JUST REDUCING USE – ACTUALLY ABOUT GENERATION NO EVIDENCE OF ANY PRICE BENEFIT FROM REDUCED ENERGY BILLS

78. CfSH Level 4 + Onsite Generation

79. Affordable Housing 15 or more40% 10 – 14 30% 5 – 920% As social rented, affordable rented and intermediate tenure and provided on site NOT TESTEDLess than 5, a financial contribution will be required.

80. Affordable Housing

81. Density Density informed by consultation – lower than policy Greenfield sites over 1 hectare have 40% open space Brownfield sites NO Public Open Space Greenfield sites less than 1ha but more than 5 units 20% open space

82. Affordable Housing, Density, CfSH4, Onsite Generation, ‘No’ CIL

83. Uncertain Market Average Prices

84. Uncertain Market Indexed turn over (from January 2006)

85. 5% fall in prices

86. Cumulative Impact of Policies Affordable Housing, Density, CfSH4, Onsite Generation

87. So what? You have a residual value – how to assess viability –Competitive returns –Harman (EUV Plus) v RICS (Market Value) –Cushion EUV Plus – reality checked against the market Set it out – explain what you have done – don’t jump to a conclusion

88. Future considerations and viability over time Scenario testing Big impacts of little changes – hypersensitive model Cumulative impact of policy Pitfalls and preparing for the EiP Appraisal considerations

89. Context and Conundrum Informing plan making process v retrofitting evidence to policy Can you proceed Goes to the heart of soundness Cumulative impact Don’t get into endless cycle of consultation, evidence, consultation, doubt, evidence, consultation….

90. Development management appeal case studies

91. Barnet & Chase Farm: APP/Q5300/A/07/2043798/NWF The Inspector stated that: ‘the appropriate test is that the value generated by the scheme should exceed the value of the site in its current use. The logic is that, if the converse were the case, then sites would not come forward for development’.

92. Clay Farm, Cambridge - 07/0621/OUT The SoS agrees with the Inspector that the appellants’ approach to assessing viability has the effect of protecting historic land values as well as insulating the developer against a risk for which he is already indemnified by profit margins and that this would be at the expense of affordable housing levels. He therefore also agrees with the Inspector that the residual land value (RLV) approach used by the Council is the appropriate methodology for evaluating the economics of these developments…he is concerned that there is nowhere else to accommodate the affordable housing at the levels intended for these sites in the development plan. The SoS attaches very substantial weight to this matter and considers that it outweighs the shortfall in the Council's five year supply of developable sites.

93. Bath Road, Bristol: APP/P0119/A/08/2069226

94. McCarthy & Stone – 29 sheltered apartments for the elderly including associated communal facilities and car parking. A main issue at appeal was whether the proposal would make suitable provision for affordable housing. Policy seeks 33.3% affordable housing. On-site not suitable therefore parties agreed that an off-site contribution was acceptable subject to viability. At the Inquiry appellant stated viability of the proposal would only allow a contribution of £115,000 which would fund only 1 or 2 affordable units, and is well below the target of 33.3%. The LPA were seeking circa £414k based on previous successful appeal decisions.

95. Bath Road, Bristol: APP/P0119/A/08/2069226 Both parties conducted appraisals using the old Housing Corporation model. There were differences between the parties on BCIS construction costs, finance costs, contingency, developers profit, build rates and CfSH. Resulting in different residual values from LPA and appellant. LPA argued that the appellant had inflated costs of the scheme. LPA used a comparable site from another appeal. Inspector placed little weight on this approach as that comparable scheme had not yet come forward. Further he felt the appellants assumptions were reasonable and evidenced.

96. Bath Road, Bristol: APP/P0119/A/08/2069226 ‘the difference between the Residual Land Value (RLV) and the existing site value provides a basis for ascertaining the viability of contributing towards affordable housing’. “Any reservations that I may have about the balance of viability arguments are outweighed by what I consider are clear benefits of the proposal.” (due to lack of sheltered housing locally).

97. Beckenham: APP/G5180/A/08/2084559

98. At the Inquiry a SoCG was submitted agreeing the residual site value with no affordable housing (£2.773 million), the residual value with affordable housing (£1.9223 million) and the existing use value of the site (£2.482 million). These agreed values determine that without an affordable housing contribution, the scheme will only yield less than 12% above the existing use value, 8% below the generally accepted margin necessary to induce such development to proceed. Self-evidently, with a 35% AH target, such a scheme must also be, in the view of the appellant, considered non-viable.

99. Beckenham: APP/G5180/A/08/2084559 …when the agreed residual value of the site, incorporating 35% affordable housing is set against CUV, the development becomes unviable. Having carefully weighed the matter, I conclude the viability report convincingly demonstrates that the proposals cannot support any affordable housing; accordingly they are not in contravention of LBB and LP affordable housing policy.

100. Oxford Street, Woodstock: APP/D3125/A/09/2104658

101. This case focuses on the margin required over and above the Existing Use Value in order to achieve a change of use of the land: ‘The main parties valuations of the current existing value of the land are not dissimilar but the Appellant has sought to add a 10% premium. Though the site is owned by the Appellants it must be assumed, for valuation purposes, that the land is being acquired now. It is unreasonable to assume that an existing owner and user of the land would not require a premium over the actual value of the land to offset inconvenience and assist with relocation. The Appellants addition of the 10% premium is not unreasonable in these circumstances.’

102. Oxenholme Road, Kendal, Cumbria APP/M0933/A/13/2193338

103. Oxenholme Road Background and main issues Appeal for outline planning permission for the construction of 148 no. dwellings at land to the west of Oxenholme Road, Kendal, Cumbria (6.95 hectares at the edge of the built-up area of Kendal) Main issue is if there is less than a five year supply of developable housing land Also the provision of affordable housing; the effect on highway and transport infrastructure; the suitability of the site for residential development, in particular the effect on the Green Gap between Kendal and Oxenholme.

104. Oxenholme Road 16. …requirement for 35% affordable housing 18. …appellants dispute the viability implications 21. The concept of a ‘competitive return’ is not further defined by the NPPF, and could be the subject of differing interpretations by the parties involved in any particular development. The assessment of a competitive return will involve an element of judgement. Clearly, however, excessively ambitious predictions must be tempered by comparison with industry norms and local circumstances.

105. Oxenholme Road 22. …it is common ground that a competitive return for the developer can be taken as a profit of 18-20% of GDV 23. …The issue therefore becomes the achievement of a competitive return for the land owner. 24. …the Council proposes the margin settled upon by the consultants who prepared the recent Viability Study in support of the Local Plan. At an EUV of £50,000/hectare, to reflect higher value ‘paddock’ use at the urban fringe rather than basic agricultural value, with a margin of 20% plus £400,000/hectare the site value would amount to £3,197,000 [£246,873/net developable acre]

106. Oxenholme Road 25. However, the RICS guidance note on viability points out concerns about the potential inaccuracy of the EUV plus margin method, and does not recommend it. The Harman report on viability testing of plans also points out the weakness of this approach when dealing with agricultural land at the urban edge. In the present case, the figures adapted from the LADPD Viability Study are broad brush, and the precise rationale for the £400,000 margin is not open to interrogation.

107. Oxenholme Road 25. …Furthermore, I note that representations made for the Local Plan on behalf of the Cumbria House Builder Group in response to the Viability Study are firmly of the view that the level proposed would not encourage landowners to bring forward sites for development. The figure of £246,873 would be well below the £500,000/net developable acre proposed by the House Builder Group and favoured by the appellants in this appeal.

108. Oxenholme Road 26. Therefore, although I note that the EUV plus margin method has been accepted in other situations, such as the examination of the London CIL charging schedule, and may be useful at an area-wide level, in this case I consider that greater weight must be given to the residual method of determining the site value, which has also been followed by the appellants.

109. Oxenholme Road 27. … The appellants’ single appraisal seeks to demonstrate that, at their preferred lower sales values and the same benchmark land value, the scheme without any affordable housing would result in a surplus of £335,000the appellants’ conclusion is that this amount would allow 10% affordable housing provision, subject to some ‘flex’ by the parties on their level of return and on the tenure of the housing.

110. Oxenholme Road The Council and appellant differed on build costs and sale prices Inspector accepted evidence from QS that costs were reasonable The Council claimed the lower market values taken from their LADPD viability study were cautious ‘worst case’ approach. However, without enough available comparables the Inspector sides with the appellant stating the Council’s values would be uncompetitive, harm cash flow and could affect buyers’ ability to access borrowing i.e. he used a reality check!

111. Oxenholme Road On land value the Council defended it’s £4000,000/net developable acres (backed by the LADPD viability study) vs. the appellants £500,000/net developable acre (backed by the Cumbria House Builder Group) Various comparables were used in favour of each benchmark land value level.

112. Oxenholme Road 47. The parties refer to an appeal decision for land at Shinfield, Berkshire, which is quoted in the LADPD Viability Study. However, little weight can be given to that decision in the present case, as the nature of the site was quite different, being partly previously developed, and the positions taken by the parties on the proportion of uplift in site value that should be directed to the provision of affordable housing were at odds with those now proposed. There is no reason in the present case to assume that either 100% or 50% of the uplift in site value is the correct proportion to fund community benefits.

113. Oxenholme Road 51. …I am unable to conclude that a higher benchmark value than £400,000/net developable acre should be accepted in this appeal. The evidence for the higher figure proposed by the appellants is not conclusive, being based largely on one small comparator site of a different quality and on a relatively broad brush method of checking land value against GDV. Although contested, the LADPD Viability Study suggests that not all owners have expectations in excess of the £400,000 level...the expectations of one land owner are not critical in the determination of a benchmark level, which relates to the reasonable expectation of a typical owner.

114. Oxenholme Road 52. …a lower benchmark figure would be reasonable. I conclude that the need to set a benchmark land value of £500,000/net developable acre, on which the appellants’ case is based, has not been conclusively demonstrated. 53. The appellants’ viability appraisal shows that with no affordable housing, the scheme could generate a surplus of £335,000 at the higher benchmark land value, which the appellants state could support an affordable housing provision of 10%. It is clear that a lower land value would generate a larger surplus, which would thus support a higher proportion of affordable housing…which would equate to more than £400,000/net developable acre.

115. Oxenholme Road 57. …in the absence of clear evidence that the proposal could not generate a competitive return for both developer and landowner at the policy approved level of provision, I conclude that a condition requiring 35% affordable housing would be reasonable and necessary and would comply with the guidance of the NPPF and meet the tests of Circular 11/95 95. The acute need for affordable housing is accepted. It has not been shown that the development requires a proportion of affordable housing below the policy minimum of 35% in order to generate a competitive return.

116. Shinfield APP/X0360/A/12/2179141 Reading University Wokingham Council 8 th January 2013

117. 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

118. History Long history 18,766m2 of B1 in 1992 2001 identified as being suitable for 80 dwellings by Local Plan inspector 2003 part of site developed The principle of development was not contested.

119. Main Issues ‘The main issues are: (i) whether the proposals make adequate provision for mitigating any adverse impact they would have upon local services and infrastructure; and (ii) whether the proposed amount of affordable housing would be appropriate in the context of the viability of the development, the National Planning Policy Framework, development plan policy and all other material planning considerations.’

120. 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

121. Developers Profit The appellants supported their calculations by providing letters and emails 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 20- 25%. 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.

122. Benchmark land value There is a significant difference in the figures produced by the parties. The Council calculated a Benchmark Land Value of £1,984,000 (reduced to about £1,865,000 when decontamination costs were agreed); the appellants calculate it to be £2,325,000. During the Inquiry reference was made to Current Use Value (CUV) and Existing Use Value (EUV) but it was agreed that these definitions are interchangeable in respect of the calculations used for this site.

123. The Appellant’s approach The appellants’ valuation of the site is £2,325,000 based upon 8 acres of commercial open storage/ industrial land and buildings at £250,000 per acre and 13 acres of settlement fringe at £25,000 per acre. The figure of £250,000 per acre seems reasonable in the light of the recent sale value achieved at the smaller site at Paddock Road (£330,000 per acre).

124. The Council’s approach The Council did not use comparators; instead it relied upon a valuation based upon a substantial office scheme on the appeal site. This was based upon the outline planning permission for offices on the site in 2003 that was renewed in 2006 but which has since lapsed...I am concerned about this approach in that the Council has failed to demonstrate that there is any market for such a substantial office development here. Indeed, the only recently completed (2009) office development of comparable scale, The Blade in Reading, is still largely vacant.

125. Competitive Return Determining what constitutes a competitive return inevitably involves making a subjective judgement based upon the evidence. Two very different viewpoints were put forward at the Inquiry with the appellants seeking a land value of £4,750,000 which is roughly the mid-point between the EUV/CUV and the RLV with planning permission for housing and no obligations. This ties in with the 50:50 split between the community and the landowner sought by the appellants. The Council considered that a sum of £1.865m would ensure a competitive return; that is to say the Council’s calculation of the EUV/CUV.

126. Competitive Return Paragraph 173 of the Framework says that the costs of any requirements should provide competitive returns to a willing landowner and willing developer to enable the development to be deliverable. The paragraph heading is “Ensuring viability and deliverability”; it is clear that its objective is to ensure that land comes forward for development.

127. Competitive Return I am not convinced that a land value that equates to the EUV/CUV would provide any incentive to the landowner to sell the site...such a conclusion would not provide any incentive to the landowner to carry out any remediation work. There would be no incentive to sell the land and so such a low return would fail to achieve the delivery of this site for housing development. In these circumstances, and given the fact that in this case only two very different viewpoints on what constitutes a competitive return have been put forward, the appellants’ conclusions are to be preferred. In the scenario preferred by the Council, I do not consider that the appellants would be a willing vendor.

128. Viable amount of affordable The RICS GN says that any planning obligations imposed on a development will need to be paid out of the uplift in the value of the land but it cannot use up the whole of the difference, other than in exceptional circumstances, as that would remove the likelihood of land being released for development. That is exactly what is at issue here in that the Council’s valuation witness, in cross examination, stated that a landowner should be content to receive what the land is worth, that is to say the SV. In his opinion this stands at £1.865m. I accept that, if this figure was agreed (and it is not), it would mean that the development would be viable.

129. 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.

130. 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…

131. Contact us David Carlisle Emaildavid.a.carlisle@aecom.com Phone020 7821 4194 / 07827353558