Local Plan Viability Assessment: Release of protected ... · 2015 Housing Price Index Update identifying that “ the annual pace of price growth edged up to 3.9% from 3.8 ” in

Local Plan Viability Assessment: Release of protected employment sites

Prepared for

London Borough of Brent

February 2016

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Contents 1 Summary 3 2 Introduction 5 3 Methodology and appraisal inputs 14 4 Appraisal assumptions 19 5 Appraisal outputs 28 6 Assessment of the results 29 7 Conclusions and recommendations 49

Appendices Appendix 1 - Policy analysis Appendix 2 - Examples of schemes meeting policy DMP19 Appendix 3 - Floorspace calculations Appendix 4 - Commercial lettings Appendix 5 - Appraisal outputs Appendix 6 - Brent PTAL map

Anthony Lee MRTPI MRICS Senior Director – Development Consulting BNP Paribas Real Estate 5 Aldermanbury Square London EC2V 7BP 020 7338 4061 [email protected] realestate.bnpparibas.co.uk

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1 Summary 1.1 This report tests the ability of a range of developments in the London Borough

of Brent to meet the requirements of Development Management Plan Policy DMP14. Policy DMP14 sets criteria for the release of Strategic Industrial Land (‘SIL’) and Locally Significant Industrial Sites (‘LSISs’) which include a requirement that at least 50% affordable housing be provided as part of any new development on the sites. This study therefore tests a range of development typologies in different parts of the Borough with varying percentages of affordable housing. The study takes account of the cumulative impact of the Council’s current planning requirements, in line with the requirements of the National Planning Policy Framework (‘NPPF’) and the Local Housing Delivery Group guidance ‘Viability Testing Local Plans: Advice for planning practitioners’.

Methodology

1.2 The study methodology compares the residual land values of hypothetical developments on SILs and LSISs throughout the Borough to their value in current use (plus a premium), herein after referred to as ‘benchmark land value’. If a development incorporating the Council’s policy requirements generates a higher residual land value than the benchmark land value, then it can be judged that the site is viable and deliverable. Following the adoption of policies, developers will need to reflect policy requirements in their bids for sites, in line with requirements set out in the RICS Guidance on ‘Financial Viability in Planning’1.

1.3 The study utilises the residual land value method of calculating the value of each development. This method is used by developers when determining how much to bid for land and involves calculating the value of the completed scheme and deducting development costs (construction, fees, finance, sustainability requirements and CIL) and developer’s profit. The residual amount is the sum left after these costs have been deducted from the value of the development, and guides a developer in determining an appropriate offer price for the site.

1.4 The housing and commercial property markets are inherently cyclical and the Council is testing the viability of potential development sites at a time when the market has recovered after a severe recession. Forecasts for future house price growth point to continuing growth in mainstream London housing markets. We have allowed for this by running a sensitivity analysis which varies the base sales values and build costs, with values increasing by 10% and costs by 5% as well as values increasing by 20% and costs by 10%.

1.5 This analysis is indicative only, but is intended to assist the Council in understanding the viability of the proposed criterion for release of employments sites on a high level basis, both in today’s terms but also in the future.

1.6 We understand that the Council intends to operate DMP 14 as a fixed quota and not the flexible approach adopted with regards to Core Strategy Policy CP2. This is clearly because the policy is intended to protect employment land

1 This guidance notes that when considering site-specific viability “Site Value should equate to the market value subject to the following assumption: that the value has regard to development plan policies and all other material planning considerations and disregards that which is contrary to the development plan”. Providing therefore that Site Value does not fall below a site’s existing use value, there should be no reason why policy requirements cannot be achieved.

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from change of use. Furthermore, the Council’s five year housing land supply2 does not include any SIL or LSIS sites, so delivery of the Plan does not rely upon them. Any SILs and LSISs that are released from employment use would therefore be windfall sites.

Key findings

1.7 The key findings of the study are as follows:

■ The results of this study are reflective of current market conditions, which will inevitably change over the medium term. It is therefore important that the Council keeps the viability situation under review so that policy requirements can be adjusted should conditions change markedly. We would suggest that the Council monitors market conditions and review the Policy is there are significant changes, rather than adopting a fixed time period for review.

■ Development value is finite and viability issues often emerge as

developers dedicate too greater a proportion of this value to land rather than meeting planning obligations. The policy approach proposed by DMP 14 should help to avoid the prospect of a change of use inflating landowners’ expectations by setting down a very clear set of conditions for the release of employment sites. The most pertinent of these conditions would be the requirement that sites that are released should provide 50% affordable housing.

■ In the context of these restrictions, individual site viability testing can be

carried out using benchmark land values that reflect existing use value plus a reasonable premium of circa 20%. Higher premiums would be unnecessary, as landowner expectations would be limited by the restrictions on release of land from employment use. A lower benchmark land value than might otherwise have been the case would leave more scheme value available to meet the Council’s affordable housing requirement.

■ Our appraisals reflect the heterogeneity of sites in terms of density of

development, sales values and (to a degree) benchmark land value, the latter being a function of the rent that could be achieved on existing floorspace. Consequently, there is a degree of variance in the ability of sites with different characteristics to viably achieve the 50% affordable housing. Sites at the lower end of the sales value range are unable to meet the target in full, although viability issues rapidly abate as sales values increase. Given that there is evidence that a majority ofthe development scenarios are viable over the plan period at the lower end of the value range, the 50% target complies with the requirements of the NPPF.

2 See www.brent.gov.uk/media/15668488/Brent-5-Year-Housing-Land-Supply.pdf

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2 Introduction 2.1 The Council has commissioned this study to contribute towards an evidence

base to underpin Policy DMP14 in its emerging ‘Development Management Policies’ (publication version September 2015). DMP14 seeks to protect SILs and LSISs as employment land and places restrictions on their release for other (non-employment related) uses. The aim of the study is to assess at high level the viability of the criterion that the Council has proposed for the release of SILs and LSISs. The Policy will allow release of such sites only when they are identified as low quality employment sites in the Council’s Employment Land Demand Study; and provide at least 50% affordable housing and 20% of the site area as high density employment use. Alternatively, the policy will allow release of employment sites for the delivery of social or physical infrastructure for which a need has been identified (e.g. new schools) and which cannot be provided on other sites. The purpose of the report is to test the viability of the criterion proposed by policy DMP14 alongside other Plan Policies and prevailing rates of Community Infrastructure Levy (‘CIL’).

2.2 In terms of methodology, we adopted standard residual valuation approaches to test the viability of hypothetical developments on SILs and LSISs across the Borough. These residual valuations incorporate the impact on viability of the Council’s planning policies alongside the adopted levels of CIL.

2.3 We understand that the Council intends to operate DMP 14 as a fixed quota and not the flexible approach adopted with regards to Core Strategy Policy CP2. This is clearly because the policy is intended to protect employment land from change of use. Furthermore, the Council’s five year housing land supply3 does not include any SIL or LSIS sites, so delivery of the Plan does not rely upon them. Any SILs and LSISs that are released from employment use would therefore be windfall sites and as such the Council does not rely upon them coming forward.

Economic and housing market context

2.4 The housing and commercial property markets are inherently cyclical. The Council’s Core Strategy was adopted in July 2010, at a time when the market was recovering after a severe recession and average sales values had yet to fully recover to the level seen at the peak of the market (which in Brent was in May 2008).

2.5 The historic highs achieved in the UK housing market by mid-2007 followed a prolonged period of real house price growth. However, a period of ‘readjustment’ began in the second half of 2007, triggered initially by rising interest rates and the emergence of the US subprime lending problems in the last quarter of 2007. The subsequent reduction in inter-bank lending led to a general “credit crunch” including a tightening of mortgage availability. The real crisis of confidence, however, followed the collapse of Lehman Brothers in September 2008, which forced the government and the Bank of England to intervene in the market to relieve a liquidity crisis.

2.6 The combination of successive shocks to consumer confidence and the difficulties in obtaining finance led to a sharp reduction in transactions and a significant correction in house prices in the UK, which fell to a level some 21% lower than at their UK-wide peak in August 2007 according to the Halifax House Price Index. Consequently, residential land values fell by some 50% 3 See www.brent.gov.uk/media/15668488/Brent-5-Year-Housing-Land-Supply.pdf

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from peak levels. One element of government intervention involved successive interest rate cuts and as the cost of servicing many people’s mortgages is linked to the base rate. This, together with a return to economic growth early in 2010 (see November 2015 Bank of England GDP fan chart below, showing the range of the Bank’s predictions for GDP growth up to 2018) meant that consumer confidence started to improve.

Source: Bank of England

2.7 Throughout the first half of 2010 there were some tentative indications that improved consumer confidence was feeding through into more positive interest from potential house purchasers. Against the background of a much reduced supply of new housing, this would lead one to expect some recovery in prices. However, this brief resurgence abated with figures falling and then fluctuating in 2011 and 2012. The recovery during this period is partially attributed with first time buyers seeking to purchase prior to the reintroduction of stamp duty from 1st April 2012. The signs of improvement in the housing market towards the end of 2012 continued through into 2013 at which point the growth in sales values improved significantly through to the last quarter of 2014, where the pace of the improvement was seen to moderate and this has carried through into 2015.

2.8 Nationwide reports on the increase of annual price growth in their October 2015 Housing Price Index Update identifying that “the annual pace of price growth edged up to 3.9% from 3.8” in September. This view is shared with the Halifax who state that “the annual rate of price growth increased from 8.6% in September to 9.7%” in October. In addition to the annual house price growth, Nationwide report that the monthly UK house prices have also increased by 0.6% in October; whilst Halifax report an increase in quarterly change, reporting “house prices in the three months to October were 2.8% higher than in the previous three months”. Although both Halifax and Nationwide report positive trends in house prices, it should be noted that monthly movements can be volatile and the quarter on quarter change is a more reliable indicator of the underlying trend.

2.9 Both the Halifax and Nationwide report positively about the recent housing market growth and demand; Nationwide states that “over the past five months annual price growth has remained fairly consistent with earnings growth over

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the longer term and this bodes well for a sustainable increase in the housing market activity”. In the same way, the Halifax report “improving economic conditions and household finances, together with sustained low mortgage rates, have boosted housing demand during 2015”. However despite this positive outlook in the housing market both Halifax and Nationwide comment on the continuing concern of lack of supply. Halifax state that “the ongoing shortage of supply is acting as a significant constraint on activity” and “the imbalance between supply and demand is likely to persist over the coming months, maintaining upwards pressure on house prices”. Therefore continuing growth is clearly dependent on levels of building activity and new instructions of sales of second hand properties.

2.10 It is noted Halifax reports that “UK home sales increased by 1% between August and September to 106,030” and this is the “second successive monthly rise”. The Halifax continues to report that these increase in house sales are a direct result of mortgage approvals, stating that “the volume of mortgage approvals for house purchases is a leading indicator of completed house sales”.

2.11 Nationwide also comments on mortgages, reporting that “90% of new mortgages were contracted on fixed rates over the past twelve months” which is considered to be a direct result of ongoing uncertainty about the timing of UK interest rate increases and the “desire to lock in low interest rates”. Mortgage lending on fixed rates has been steadily increasing since 2010 and the “proportion of lending accounted for by fixed rate deals have surpassed the levels prevailing before the financial crisis”. Fixed rate mortgages are reported to be most popular amongst first time buyers, where the certainty of monthly payments is important for budgeting purposes. In the past twelve months “95% of new mortgage lending to first time buyers was on a fixed rate”.

2.12 Nationwide highlights that, “historically low interest rates have helped to offset the negative impact of rising house prices on affordability”. Further, “even though house prices are at an all-time high, the cost of servicing a typical mortgage is still close to the long term average as a share of take home pay”. They go on to consider whether the market will cope with higher interest rates, stating that the “proportion of outstanding mortgages on variable interest rates has declined steadily, and this should help to insulate many households from the impact of higher interest rates”. However it should be noted that “the majority of recent fixes are for short time periods of two and five years”. Nevertheless, “the market should be able to cope with higher interest rates in the year ahead provided the increase is modest and the economy and labour market remain in good shape”. It is expected that any increase in interest will be gradual and settle at a level below the average before the financial crisis, which should help ensure borrowing costs remain manageable.

2.13 The future trajectory of house prices is currently uncertain, although all forecasts by major property companies anticipate sales value growth over the next five years. There is a consensus that price growth is expected to continue in 2016 following the modest growth seen over the second half of 2015. BNP Paribas Real Estate’s UK Housing Market Prospectus Report (August 2015) summarises the future market outlook by identifying that, “there are both positive and negative factors to consider. Robust economic growth will continue to underpin earnings and employment; however, rising base rates will combine with the ongoing withdrawal of supportive monetary measures. This will dampen affordability and the capacity for house price growth to be delivered over the medium term. We forecast average annualised nominal growth of 7.6% per annum for the UK as a whole over the period 2016 to 2019”.

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2.14 According to Land Registry data, residential sales values in Brent have recovered since the lowest point in the cycle in August 2009. Prices increased by 71% between August 2009 and December 2015. In December 2015, sales values were 42% higher than the previous (May 2008) peak value (see figures 2.13.1 and 2.13.2). Figure 2.13.1: House prices in Brent

Figure 2.13.2: Sales volumes in Brent (sales per mo nth)

Source: Land Registry

2.15 The future trajectory of house prices is currently uncertain, although the November 2015 Knight Frank prediction is that values are expected to increase over the next five years. Medium term predictions are that properties in mainstream London markets will grow over the period between 2016 and 20204. Knight Frank predict that values in mainstream London markets (i.e. non-prime) will increase by 5.0% in 2016, 4.5% in 2017, 3.0% in 2018, 3.0% in 2019 and 2.5% in 2020. This equates to cumulative growth of 19.3% between 2016 and 2020 inclusive.

2.16 In common with other Boroughs in London, there are variations in sales values between different parts of Brent, as shown in Figure 2.15.1. Highest sales

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Knight Frank UK Residential Market Forecast, November 2015

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values are achieved in the Wembley regeneration area and the south-east of the Borough, with current schemes being marketed at values of £830 to £995 per square foot, while values elsewhere in the Borough range from £415 to £575 per square foot.

Figure 2.14.1: Sales values in Brent (approx. £s pe r square foot)

Sources: Map – Google; Values – comparable evidence

National Policy Context

The National Planning Policy Framework

2.17 After the Council adopted its Core Strategy in 2010, the old suite of planning policy statements and planning policy guidance were replaced by a single document – the National Planning Policy Framework (‘NPPF’). The NPPF has subsequently been supplemented by the National Planning Practice Guidance (‘NPPG’).

2.18 The NPPF provides more in-depth guidance on viability of development than Planning Policy Statement 3, which limited its attention to requiring local planning authorities to test the viability of their affordable housing targets. The NPPF requires that local planning authorities have regard to the impact on viability of the cumulative effect of all their planning requirements on viability. Paragraph 173 of the NPPF requires that local planning authorities give careful attention “to viability and costs in plan-making and decision-taking”. The NPPF requires that “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”. After taking account of policy requirements, land values should be sufficient to “provide competitive returns to a willing landowner and willing developer”.

2.19 The meaning of a “competitive return” has been the subject of considerable debate over the past year. For the purposes of testing the viability of a Local Plan, the Local Housing Delivery Group5 has concluded that the current use 5 Viability Testing Local Plans: Advice for planning practitioners, June 2012

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value of a site (or a credible alternative use value) plus an appropriate uplift, represents a competitive return to a landowner. Some members of the RICS consider that a competitive return is determined by market value6, although there is no consensus around this view. The Mayor of London has recently issued a Draft Interim Housing Supplementary Planning Document7, in which he expresses support for the current use value approach.

CIL Charging Schedule

2.20 The Council approved the CIL Charging Schedule on 25 February 2013 and it came into effect on 1 July 2013. Table 2.19.1 below summarises the rates of CIL charged, all of which apply across the Borough as a whole. In our appraisal, these rates are subject to indexation.

Table 2.19.1: CIL rates in the adopted Charging Sch edule

Intended use of development Rate per square metre (Borough wide)

Residential (Use Classes C3 & C4), Residential Institutions except Hospitals (Use Class C2), Student Accommodation, Hostels and HMOs (Sui Generis)

£200

Hotel (C1) £100

Retail (Use Class A1), Financial & Professional Services (Use Class A2), Restaurants & Cafes (Use Class A3), Drinking Establishments (Use Class A4), Hot Food Take-aways (Use Class A5), Office (Use Class B1a), All Sui Generis uses except Student Accommodation, Hostels, HMOs, Public Transport Stations, Theatres, Water and wastewater infrastructure, Fire stations and fire service facilities, Police stations and police facilities, and Warehouse Clubs

£40

Warehouse Clubs (sui generis) £14

Assembly and leisure, excluding swimming pools (D2) £5

All other uses £0

2.21 The Borough is located within Mayoral CIL Zone 2, which attracts a rate of £35 per square metre, subject to indexation. After indexation, the £35 per square metre rate has increased to £40.20 per square metre.

Local Policy context

2.22 There are numerous policy requirements that are now embedded in base build costs for schemes in London addressing London Plan requirements, which are mirrored in Borough Core Strategies (i.e. secure by design, lifetime homes, landscaping, amenity space, internal space standards, car parking, waste storage, tree preservation and protection etc). Therefore it is unnecessary to establish the cost of all these pre-existing policy requirements.

2.23 The Council therefore considers it prudent to assume that developments can absorb the pre-existing requirements in the adopted policies. Therefore the purpose of the exercise in this report is to consider the specific impact of the criterion proposed for the release of SILs and LSISs in Policy DMP14.

6 RICS Guidance Note: Financial Viability in Planning, August 2012 7 Mayor of London: Draft Interim Housing Supplementary Planning Guidance, May 2015

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2.24 In addition to financing infrastructure through CIL and Section 106 (subject to pooling restrictions), the Council expects developments incorporating residential units to provide a mix of affordable housing tenures to help meet identified housing needs. Core Strategy Policy CP2 seeks 50% affordable housing 70% of which is to be provided as rented housing and 30% as intermediate housing. Both the overall percentage and tenure mix of the affordable housing may vary in response to site-specific circumstances, including viability. We have therefore tested the viability of schemes providing between 50% of units as affordable with sensitivity analyses at 60% and 30%.

2.25 The Council undertook a consultation on its Publication Version of Development Management Policies between September and November 2015. The Council has considered the viability implications of these emerging policies and aside from sustainability and affordable housing, the impacts were negligible. Although the costs of achieving Code for Sustainable Homes level 6 have been considered in national benchmarking data, the government recently announced in the budget that it no longer intends to incorporate this standard into building regulations in 2016 as previously planned. We have therefore included an allowance for Code for Sustainable Homes level 4 only as a proxy for the residual energy requirements.

2.26 The Development Management Policies document contains 21 policies, all of which apply to relevant sites across the Borough as a whole. A summary analysis of these policies is provided as Appendix 1.

2.27 Development Management Plan Policy DMP14 relating to employment sites seeks to encourage appropriate mixed use environments and local employment generation through the continued provision of sites for employment use. The policy seeks to limit the loss of employment sites to circa 11.5 hectares over the plan period to 2029.

2.28 Policy DMP14 goes on to set out conditions for the release of employment land within SILs and LSISs. The policy notes that land within SILs and LSISs will only be released where:

“a. it is a low quality employment site identified as suitable for release in the Employment Land Demand Study; and

b. it can be shown to be integral to and delivered as part of a wider comprehensive housing-led regeneration scheme with substantial benefits to Brent, providing at least 50% affordable housing, and consistent with the wider objectives of the Development Plan and/ or is of strategic significance to London; or

c. when it delivers social and physical infrastructure of a substantial scale, for example secondary schools, for which there is a significant identified Brent need and which cannot reasonably be provided on other sites in the Borough”.

2.29 Developments falling within criteria (a) should also incorporate high density employment uses on 20% of the site.

2.30 Importantly, the Council notes that potential release of land from the restrictive SIL or LSIS allocation should not result in assumptions of enhanced land values, given that sites will only be released if they meet criteria (b); i.e. provide 50% affordable housing.

2.31 The location of the SILs and LSISs across the Borough are show in Figure 2.31.1. SILs are shown with hatching and edged in purple, while LSISs are shown edged in pink.

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Figure 2.31.1: Location of SILs and LSISs

Source: LB Brent policies map (http://www.brent.gov.uk/policies-map)

2.32 The Council’s 2010 Core Strategy identifies four SILs and eight LSIS areas, as listed in Table 2.32.1.

Table 2.32.1: Brent’s SILs and LSISs

Name of SIL/LSIS Policy designation Area (hectares)

Park Royal SIL 164.30

Wembley Park SIL 73

East Lane SIL 22.5

Staples Corner SIL 40

Alperton LSIS 18.7

Brentfield Road LSIS 4.5

Church End LSIS 7.3

Neasden Lane LSIS 3.4

Cricklewood LSIS 1.3

Honeypot Lane LSIS 3.7

Colindale LSIS 7.8

Kingsbury LSIS 5.9

Total area 352.40

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Development context

2.33 Brent is a Borough which extends from inner London to outer North-West London (from Burnt Oak, Kenton and Kingsbury in the north, to Harlesden, Queen’s Park and Kilburn in the south). The National Stadium, constructed in 2007, is located at Wembley and is the focal point of an extensive regeneration area, which is expected to provide significant growth over the next fifteen years.

2.34 In recent years, the Borough has seen significant change of land use, including the redevelopment of office and industrial sites predominantly for residential use with some replacement of employment uses. Release of employment sites has helped to address some of the housing needs identified by the Borough’s Strategic Housing Market Assessment

2.35 The Borough’s high streets have suffered as a result of competition from retail facilities in neighbouring boroughs and one of the major challenges is improving town centres. Some progress is already being made, with new retail floorspace opening at Wembley Park adjacent to Wembley Stadium.

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3 Methodology and appraisal inputs 3.1 Our methodology follows standard development appraisal conventions, using

locally-based sites and assumptions that reflect local market and planning policy circumstances. The study is therefore specific to SILs and LSISs in Brent and reflects the Council’s existing and emerging planning policy requirements.

Approach to testing development viability

3.2 Appraisal models can be summarised via the following diagram. The total scheme value is calculated, as represented by the left hand bar. This includes the sales receipts from the private housing (the blue portion) and the payment from a Registered Provider (‘RP’) (the red portion) for the completed affordable housing units. For a commercial scheme, scheme value equates to the capital value of the rental income after allowing for rent free periods and purchaser’s costs. The model then deducts the build costs, fees, interest, CIL and developer’s profit. A ‘residual’ amount is left after all these costs are deducted – this is the land value that the Developer would pay to the landowner. The residual land value is represented by the brown portion of the right hand bar in the diagram.

3.3 The Residual Land Value is normally a key variable in determining whether a scheme will proceed. If a proposal generates sufficient positive land value (in excess of existing use value, discussed later), it will be implemented. If not, the proposal will not go ahead, unless there are alternative funding sources to bridge the ‘gap’.

3.4 Problems with key appraisal variables can be summarised as follows:

■ Development costs are subject to national and local monitoring and can be reasonably accurately assessed in ‘normal’ circumstances. In Boroughs like Brent, many sites will be previously developed. These sites can sometimes encounter ‘exceptional’ costs such as decontamination. Such

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costs can be very difficult to anticipate before detailed site surveys are undertaken;

■ Assumptions about development phasing, phasing of Section 106 contributions and infrastructure required to facilitate each phase of the development will affect residual values. Where the delivery of the obligations are deferred, the less the real cost to the applicant (and the greater the scope for increased affordable housing and other planning obligations). This is because the interest cost is reduced if the costs are incurred later in the development cashflow; and

■ While Developer’s Profit has to be assumed in any appraisal, its level is closely correlated with risk. The greater the risk, the higher the profit level required by lenders. While profit levels were typically up to around 15% of completed development value at the peak of the market in 2007, banks currently require schemes to show a higher profit to reflect the current risk. Typically developers and banks are targeting between 17% to 20% profit on value of the private housing element.

3.5 Ultimately, the landowner will make a decision on implementing a project on the basis of return and the potential for market change, and whether alternative developments might yield a higher value. The landowner’s ‘bottom line’ will be achieving a residual land value that sufficiently exceeds ‘existing use value8’ or another appropriate benchmark to make development worthwhile. The margin above existing use value may be considerably different on individual sites, where there might be particular reasons why the premium to the landowner should be lower or higher than other sites.

3.6 Clearly, however, landowners have expectations of the value of their land which often exceed the value of the current use, although it is important to note that expectations can be influenced by planning policy requirements. Ultimately, if landowners’ expectations are not met, they will not voluntarily sell their land and (unless a Local Authority is prepared to use its compulsory purchase powers) some may simply hold on to their sites, in the hope that policy may change at some future point with reduced requirements. It is within the scope of those expectations that developers have to formulate their offers for sites. The task of formulating an offer for a site is complicated further still during buoyant land markets, where developers have to compete with other developers to secure a site, often speculating on increases in value.

Viability benchmark

3.7 The NPPF is not prescriptive on the type of methodology local planning authorities should use when assessing viability. The National Planning Practice Guidance indicates that the NPPF requirement for a ‘competitive return’ to the landowner will need to allow for an incentive for the land owner to sell and options may include “the current use value of the land or its value for a realistic alternative use that complies with planning policy” (para 024; reference ID 10-024-20140306).

3.8 The Local Housing Delivery Group published guidance9 in June 2012 which provides guidance on testing viability of Local Plan policies. The guidance notes that “consideration of an appropriate Threshold Land Value [or viability benchmark] needs to take account of the fact that future plan policy

8 For the purposes of this report, existing use value is defined as the value of the site in its existing use, assuming that it remains in that use. We are not referring to the RICS Valuation Standards definition of ‘Existing Use Value’. 9 Viability Testing Local Plans: Advice for planning practitioners, Local Housing Delivery Group, Chaired by Sir John Harman, June 2012

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requirements will have an impact on land values and landowner expectations. Therefore, using a market value approach as the starting point carries the risk of building-in assumptions of current policy costs rather than helping to inform the potential for future policy”.

3.9 In light of the weaknesses in the market value approach, the Local Housing Delivery Group guidance recommends that benchmark land value “is based on a premium over current use values” with the “precise figure that should be used as an appropriate premium above current use value [being] determined locally”. The guidance considers that this approach “is in line with reference in the NPPF to take account of a “competitive return” to a willing land owner”.

3.10 The examination on the Mayor of London’s CIL charging schedule considered the issue of an appropriate land value benchmark. The Mayor had adopted existing use value, while certain objectors suggested that ‘Market Value’ was a more appropriate benchmark. The Examiner concluded that:

“The market value approach…. while offering certainty on the price paid for a development site, suffers from being based on prices agreed in an historic policy context.” (para 8) and that “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” (para 9).

3.11 In his concluding remark, the Examiner points out that “the price paid for development land may be reduced [so that CIL may be accommodated]. As with profit levels there may be cries that this is unrealistic, but a reduction in development land value is an inherent part of the CIL concept. It may be argued that such a reduction may be all very well in the medium to long term but it is impossible in the short term because of the price already paid/agreed for development land. The difficulty with that argument is that if accepted the prospect of raising funds for infrastructure would be forever receding into the future. In any event in some instances it may be possible for contracts and options to be re-negotiated in the light of the changed circumstances arising from the imposition of CIL charges. (para 32 – emphasis added).

3.12 It is important to stress, therefore, that there is no single threshold land value at which land will come forward for development. The decision to bring land forward will depend on the type of owner and, in particular, whether the owner occupies the site or holds it as an asset; the strength of demand for the site’s current use in comparison to others; how offers received compare to the owner’s perception of the value of the site, which in turn is influenced by prices achieved by other sites. Given the lack of a single threshold land value, it is difficult for policy makers to determine the minimum land value that sites should achieve. This will ultimately be a matter of judgement for each planning authority.

3.13 Respondents to consultations on planning policy documents in other authorities in London have made various references to the RICS Guidance on ‘Viability in Planning’ and have suggested that councils should run their analysis on market values. This would be an extremely misleading measure against which to test viability, as market values should reflect existing policies already in place, and would consequently tell us nothing as to how future (as yet un-adopted) policies might impact on viability. It has been widely accepted elsewhere that market values are inappropriate for testing planning policy requirements.

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3.14 Relying upon historic transactions is a fundamentally flawed approach, as offers for these sites will have been framed in the context of current planning policy requirements, so an exercise using these transactions as a benchmark would tell the Council nothing about the potential for sites to absorb as yet unadopted policies. Various Local Plan inspectors and CIL examiners have accepted the key point that Local Plan policies and CIL will ultimately result in a reduction in land values, so benchmarks must consider a reasonable minimum threshold which landowners will accept. For local authority areas such as Brent, where the vast majority of sites are previously developed, the ‘bottom line’ in terms of land value will be the value of the site in its existing use. This fundamental point is recognised by the RICS at paragraph 3.4.4. of their Guidance Note on ‘Financial Viability in Planning”:

“For a development to be financially viable, any uplift from current use value to residual land value that arises when planning permission is granted should be able to meet 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 (the NPPF refers to this as ‘competitive returns’ respectively). The return to the landowner will be in the form of a land value in excess of current use value”.

3.15 Commentators also make reference to ‘market testing’ of benchmark land values. This is another variant of the benchmarking advocated by respondents outlined at paragraph 3.13. These respondents advocate using benchmarks that are based on the prices that sites have been bought and sold for. There are significant weaknesses in this approach which none of the respondents who advocate this have addressed. In brief, prices paid for sites are a highly unreliable indicator of their actual value, due to the following reasons:

■ Transactions are often based on bids that ‘take a view’ on squeezing planning policy requirements below target levels. This results in prices paid being too high to allow for policy targets to be met. If these transactions are used to ‘market test’ benchmark land values for testing planning policies, the outcome would be unreliable and potentially highly misleading.

■ Historic transactions of housing sites are often based on the receipt of grant funding, which is no longer available.

■ There would be a need to determine whether the developer who built out the comparator sites actually achieved a profit at the equivalent level to the profit adopted in the viability testing. If the developer achieved a sub-optimal level of profit, then any benchmarking using these transactions would produce unreliable and misleading results.

■ Developers often build assumptions of growth in sales values into their appraisals, which provides a higher gross development value than would actually be achieved today. Given that our appraisals are based on current values, using prices paid would result in an inconsistent comparison (i.e. current values against the developer’s assumed future values). Using these transactions would produce unreliable and misleading results.

3.16 These issues are evident from a recent BNP Paribas Real Estate review of the differences between the value ascribed to developments by applicants in their viability appraisals and the amounts the sites were purchased for by the same parties. The prices paid exceeded the value of the consented schemes by between 52% and 1,300%.

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3.17 For the reasons set out above, the approach of using current use values is a more reliable indicator of viability than using market values or prices paid for sites, as advocated by certain respondents. Our assessment follows this approach, as set out in Section 4.

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4 Appraisal assumptions 4.1 We have appraised 15 hypothetical development scenarios identified with the

Council to provide a representative sample of the circumstances in which policy DMP14 might be implemented. This section sets out our approach to these development scenarios and the inputs to our appraisals.

Hypothetical development scenarios

4.2 We have tested each hypothetical development scenario using a notional hectare of land within a SIL or LSIS. Given that the SILs and LSISs are located across the Borough, they will have different Public Transport Accessibility Levels (‘PTALs’) and thus different densities. To an extent, the nature of the surrounding area in terms of built form will also influence site density. Site density is informed by the London Plan density matrix (see Table 4.2.2).

Table 4.2.1: Development scenarios

Scenario number

PTAL Density (units per ha)

Commercial floorspace

Number of residential units

1 0-1 70 20% 70

2 0-1 90 20% 90

3 0-1 110 20% 110

4 0-1 130 20% 130

5 0-1 70 Nil 70

6 0-1 90 Nil 90

7 0-1 110 Nil 110

8 0-1 130 Nil 130

9 2-3 95 20% 95

10 2-3 140 20% 140

11 2-3 170 20% 170

12 2-3 240 20% 240

13 2-3 95 Nil 95

14 2-3 140 Nil 140

15 2-3 170 Nil 170

16 2-3 240 Nil 240

17 4-6 130 20% 130

18 4-6 260 20% 260

19 4-6 350 20% 350

20 4-6 405 20% 405

21 4-6 130 Nil 130

22 4-6 260 Nil 260

23 4-6 350 Nil 350

24 4-6 405 Nil 405

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Table 4.2.2: London Plan density matrix

4.3 The number of residential units is calculated assuming an average net internal floor area of 75 square metres. All scenarios include amenity space provision in line with DMP 19 (i.e. 20 square metres per unit rather than the 10 square metres per unit in the London Plan). The Council has been operating this policy for some time and applications have been able to achieve the densities assumed in our development scenarios whilst also meeting the amenity space requirement (see Appendix 2). Where the scenario includes commercial floorspace, this is assumed to be 20% of the remaining notional residential floorspace. Finally, the remaining floorspace is divided by the average unit size of 75 square metres to determine an adjusted number of units. The calculations are attached at Appendix 3.

Residential sales values

4.4 Residential values in Brent reflect national trends in recent years but do of course vary between different sub-markets, as noted in the previous section. We have considered comparable evidence of transacted properties in the area and also properties on the market to establish appropriate values for each scheme for testing purposes (see Table 4.4.1). This exercise indicates that the developments in the Borough will attract average sales values ranging from circa £5,500 per square metre (£511 per square foot) to £10,818 per square metre (£1,005 per square foot).

4.5 As noted earlier in the report, Knight Frank predicts that sales values will increase over the medium term (i.e. the next five years). Whilst this predicted growth cannot be guaranteed, we have run a series of sensitivity analyses assuming growth in sales values of 10%, accompanied by cost inflation of 5%10 and growth in values by 20% and cost inflation of 10%. These sensitivity analyses provide the Council with an indication of the impact of changes in values and costs on scheme viability.

10 Our appraisals do not, however, include any inflation on existing use values, as commercial floorspace is not expected to increase in value over the next four to five years. This is due to general weakness in the economy.

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Table 4.4.1: Residential sales vales

Map ref Scheme Postcode Date of sales Average unit size (per sq ft)

Average sales value (per sq ft)

1 Alpine Place11 NW9 9RX Sep - Dec 2014

986 £406

2 Spring (Stonebridge Site 10)12

NW10 8EA Apr 2014 – ongoing

939 £449

3 Northern Quarter

NW9 0EQ Mar 2014 – ongoing

710 £558

4 Lime Walk HA9 8PH Jan 2015 – Aug 2015

771 £507

5 Queens Park Place

NW6 5DT Jun 2014 – ongoing

755 £841

6 Parkside Place HA0 2NE Oct 2014 – ongoing

803 £407

7 Argo House NW6 5LF Sep 2014 – ongoing

784 £1,005

8 Forty Avenue HA9 8QQ Mar 2013 – Mar 2015

No data No data

9 First Central NW10 7RT Feb 2014 – ongoing

818 £541

10 243 Ealing Road13

HA04LF Dec 2013 – ongoing

751 £549

11 Royal Waterside NW10 7RT Mar 2014 – Dec 2015

805 £581

12 Wembley Park NW01

HA9 0ES Mar 2014 – ongoing

701 £674

13 Wembley Central 4

HA9 7AH Apr 2014 – Sept 2014

No data No data

14 Silver Works NW9 9EB Mar 2015 – ongoing

755 £574

15 Wembley Park NW06

Apr 2015 – ongoing

721 £833

16 Wembley Park Gate Plot C

HA9 0TB Sep 2015 - ongoing

749 £682

*17 Hendon Waterside

NW9 7QS July 2014 – ongoing

791 £561

*18 Claremont Village 14

NW2 1AE Oct 2015 – ongoing

1,382 £443

*located in adjacent Borough (LB Barnet)

11 Large units, generating lower value per square foot than standard sized flats. 12 All large houses, which generate a lower value per square foot than standard sized flats. 13 2015 sales only 14 Only two comps currently available – both large houses, which will generate lower values per square foot than standard sized flats.

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Figure 4.4.2: Location of comparables and SILs/LSIS s

Affordable housing tenure and values

4.6 The Council’s Core Strategy Policy CP2 seeks up to 50% affordable housing on individual sites. We have assumed that the Council will continue to seek 70% of affordable housing provision as rented housing and the remaining 30% as intermediate housing. We have tested the impact of seeking affordable housing at 50% of units in with sensitivity analyses at 30% and 60%.

4.7 Our appraisals assume that the rented housing is let at rents that do not exceed Local Housing Allowance rates, so that they are affordable to households subject to the Universal Credit, as shown in Table 4.7.115. This level reflects the cap introduced on new RP rents following the Autumn Statement.

Table 4.7.1: Weekly rents and Local Housing Allowan ce limits (North West London Broad Rental Market Area)

Unit type

Local Housing Allowance per week

Maximum rent charged (% of local housing allowance)

Net rent assumed in appraisals per week

1 bed £185.81 80% £149

2 beds £242.33 80% £194

3 beds £303.00 70% £212

4+ beds £374.40 65% £243

15 Some sites will fall within the Inner North London and Inner West London BRMAs, where Local Housing Allowances are higher than the West London BRMA.

1

3

14

17

5

7

2

18

12 16

8 4

6

9

13

11

10

15

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4.8 In the July 2015 Budget, the Chancellor announced that RPs will be required to reduce rents by 1% per annum for the next four years. This will reduce the capital values that RPs will pay developers for completed affordable housing units. At this stage, it is unclear whether this requirement will roll forward beyond the four year period 2015/16 to 2018/19. We have therefore adopted a cautious assumption and assumed that the restriction will remain in place in perpetuity (i.e. on a rolling basis with each new scheme having falling rents for the first four years).

4.9 Based on the rents above, our modelling indicates that RPs would pay an average of £2,388 per square metre (£222 per square foot) to acquire completed affordable rented units.

4.10 The CLG/HCA ‘Affordable Homes Programme 2015-2018: Prospectus’ document clearly states that Registered Providers will not receive grant funding for any affordable housing provided through planning obligations. Consequently, all our appraisals assume nil grant.

4.11 For shared ownership units, we have assumed that Registered Providers will sell 40% initial equity stakes and charge 2.75% on the retained equity. The rent on retained equity is capitalised using a yield of 6%. The average value payable by RPs on the basis of these assumptions would be £3,420 per square metre (£318 per square foot)..

Rents and yields for replacement commercial floorsp ace

4.12 Where we have reflected the requirement in DMP 14 that the development scenarios include 20% of new floorspace as replacement (high density) commercial floorspace, we have assumed this is provided as predominantly office with some retail. Our assumptions on rents and yields for the commercial floorspace in the developments are summarised in Tables 4.12.1. These assumptions are informed by lettings of similar floorspace in the area over the past year. Our appraisals assume a 12 month rent free period for both uses.

Table 4.13.1: Commercial rents (£s per square metre ) and yields

Use Rent per square metre Yield Rent free period (months)

Office £323 6% 12

Retail £277 6% 12

Build costs

4.13 We have sourced build costs from the RICS Building Cost Information Service (BCIS), which is based on tenders for actual schemes. Base costs (adjusted for local circumstances by reference to BCIS multiplier) are as follows:

■ Houses (terraced): £1,290 per square metre;

■ Flats 3-5 storeys: £1,520 per square metre;

■ Flats 6+ storeys: £1,948 per square metre;

■ Retail: £1,299 per square metre; and

■ Offices: £1,832 per square metre.

4.14 In addition, the base costs above are increased by 10% to account for external works and an additional 4% for the elements of Code for Sustainable Homes

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Level 4 carried forward into Part L of the Building Regulations. In addition, we have incorporated an allowance of 2.5% of build costs for demolition and site preparation costs.

4.15 Our appraisals assume an average net internal floor area of 75 square metres for flats, with a gross to net ratio of 85% for flats.

4.16 The costs of making units wheelchair accessible is broadly neutral and is more of a design and unit size issue. Wheelchair requirements will be accommodated within schemes by varying unit sizes to accommodate the additional floorspace required for turning circles.

4.17 For commercial development, we have incorporated an allowance of 5% of base build costs to account for BREEAM requirements.

Professional fees

4.18 In addition to base build costs, schemes will incur professional fees, covering design, valuation, highways consultants and so on. Our appraisals incorporate a 10% allowance, which is at the middle to higher end of the range for most schemes.

Development finance

4.19 Our appraisals assume that development finance can be secured at a rate of 7%, inclusive of arrangement and exit fees, reflective of current funding conditions.

Marketing costs

4.20 Our appraisals incorporate an allowance of 3% for marketing costs, which includes show homes, agents’ fees and sales legal fees.

Mayoral CIL and Crossrail Section 106

4.21 Mayoral CIL is payable on most developments that receive planning consent from 1 April 2012 onwards. Brent falls within Zone 2, where a CIL of £35 per square metre (£40.20 with indexation) will be levied. The Mayoral CIL takes precedence over Borough requirements, including affordable housing. Our appraisals take into account Mayoral CIL. Developments in Brent are not subject to Crossrail Section 106 top up payments.

Brent CIL

4.22 As noted previously, the Council started charging CIL on 1 July 2013. The rates of Borough CIL are summarised in Table 4.22.1 and these rates have been applied in our appraisals, subject to indexation.

Table 4.22.1: Brent CIL rates adopted in the apprai sals

Intended use of development Rate per square metre (Borough wide)

Residential £200

Retail and offices £40

All other uses £0

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4.23 The amended CIL Regulations specify that if any part of an existing building is in lawful use for 6 months within the 36 months prior to the time at which planning permission first permits development, all of the existing floorspace will be deducted when determining the amount of chargeable floorspace. This will be the case for many development sites in Brent and we have netted off the notional 4,500 square metres in each development scenario (see paragraph 4.36) .

4.24 Our appraisals assume that all infrastructure requirements are addressed through CIL and no additional Section 106 contributions are sought.

Development and sales periods

4.25 Development and sales periods vary between type of scheme. However, our sales periods are based on an assumption of a sales rate of 6 units per month, with an element of off-plan sales of circa 50% reflected in the timing of receipts. This is reflective of current market conditions, whereas in improved markets, a sales rate of up to 8 units per month might be expected. We also note that many schemes in London have sold entirely off-plan, in some cases well in advance of completion of construction.

Developer’s profit

4.26 Developer’s profit is closely correlated with the perceived risk of residential development. The greater the risk, the greater the required profit level, which helps to mitigate against the risk, but also to ensure that the potential rewards are sufficiently attractive for a bank and other equity providers to fund a scheme. In 2007, profit levels were at around 15-17% of development costs. However, following the impact of the credit crunch and the collapse in interbank lending and the various government bailouts of the banking sector, profit margins have increased. It is important to emphasise that the level of minimum profit is not necessarily determined by developers (although they will have their own view and the Boards of the major housebuilders will set targets for minimum profit).

4.27 The views of the banks which fund development are more important; if the banks decline an application by a developer to borrow to fund a development, it is very unlikely to proceed, as developers rarely carry sufficient cash to fund it themselves. Consequently, future movements in profit levels will largely be determined by the attitudes of the banks towards development proposals.

4.28 The near collapse of the global banking system in the final quarter of 2008 is resulting in a much tighter regulatory system, with UK banks having to take a much more cautious approach to all lending. In this context, and against the backdrop of the current sovereign debt crisis in the Eurozone, the banks were for a time reluctant to allow profit levels to decrease. However, perceived risk in the in the UK housing market is receding. We have therefore adopted a profit margin of 20% for testing purposes.

4.29 Our assumed return on the affordable housing GDV is 6%. A lower return on the affordable housing is appropriate as there is very limited sales risk on these units for the developer; there is often a pre-sale of the units to an RP prior to commencement. Any risk associated with take up of intermediate housing is borne by the acquiring RP, not by the developer. A reduced profit level on the affordable housing reflects the GLA ‘Development Control Toolkit’ guidance (February 2014) and Homes and Communities Agency’s guidelines in its Development Appraisal Tool (August 2013).

Remediation costs

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4.30 Exceptional costs can be an issue for development viability on previously developed land. Exceptional costs relate to works that are ‘atypical’, such as remediation of sites in former industrial use and that are over and above standard build costs. However, in the absence of detailed site investigations, it is only possible to incorporate a high level estimate of what exceptional costs might be.

4.31 The Homes and Communities Agency recently published guidance on the ranges of cost likely to be incurred on remediating sites in former industrial use. The cost on any given site will depend upon the sensitivity of the end use, risk of contaminate being carried by sub-surface water and the previous industrial use on site. Sites which were previously in heavy industrial use (major gas works, iron and steel works, large chemical works and so on) are likely to have the highest potential for contamination and have the highest remediation costs.

Figure 4.31: HCA estimate of ranges of remediation costs

Source: ‘Guidance on dereliction, demolition and remediation costs’, Homes and Communities Agency, March 2015

4.32 For the purposes of our assessment, we have assumed that the sites will have been in site category B and located in areas of moderate to high water risk. Given that the residential development is highly likely to be in the form of flats, we have assumed a development of ‘moderate sensitivity’, for which the cost

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range is £360,000 to £920,000 per hectare. We have adopted a cost in the middle of this range (£640,000 per hectare).

4.33 In addition, we have included an allowance of 2.5% of build costs for the demolition of existing buildings and site clearance.

Benchmark land values

4.34 Benchmark land values, based on the existing use value or alternative use value of sites are key considerations in the assessment of development economics for testing planning policies and tariffs. Clearly, there is a point where the Residual Land Value (what the landowner receives from a developer) that results from a scheme may be less than the land’s existing use value. Existing use values can vary significantly, depending on the demand for the type of building relative to other areas. Similarly, subject to planning permission, the potential development site may be capable of being used in different ways – as a hotel rather than residential for example; or at least a different mix of uses. Existing use value or alternative use value are effectively the ‘bottom line’ in a financial sense and therefore a key factor in this study.

4.35 The existing use value for the notional hectare of land upon which our hypothetical developments are constructed is determined by the local market rents for industrial buildings in Brent. The 50 most recent lettings in the Borough (see Appendix 4) generate an average achieved rent of £12.05 per square foot (with a range from £4.20 to £14.50 per square foot). Clearly for a site to meet the requirements on Policy DMP14, it would need to be identified as a low quality employment site and the rent is likely to reflect this status. We have therefore adopted two rent levels for testing purposes at the bottom end of the identified range, namely £5 and £6 per square foot.

4.36 Assuming a 45% site coverage (in line with the Council’s 2015 Employment Land Study), a one hectare site could accommodate 4,500 square metres (48,438 square feet). An existing building could therefore achieve an annual rental of £242,190 (at £5 per square foot) or £290,628 (at £6 per square foot), deferred by a 12 month rent free period. The unit would generate a capital value of between £3.5 million and £4.2 million , assuming a 6.5% yield.

4.37 In order to reflect the NPPF requirement for a competitive return, we have allowed a 20% premium above existing use value. This has regard to Policy DMP 14 which seeks to resist the loss of employment space; clearly higher premiums may act as a perverse incentive to landowners. After applying a premium, the capital values above would increase to £3.5 million and £5.04 million per hectare (£1.42 to £2.04 million per acr e).

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5 Appraisal outputs 5.1 The full inputs to and outputs from our appraisals of the various developments

are set out in Section 4 and Appendix 5. We have appraised 24 hypothetical development scenarios, reflecting different densities and types of development across the Borough, linked to differing PTALs. Each appraisal incorporates the Council’s affordable housing requirement (50%) along with a higher and lower level (60% and 30%) for comparative purposes..

5.2 The results of the appraisals are summarised in a series of tables which compare the residual values of each site to their benchmark land value, with the range of private sales values identified in Section 4. If the residual value of a scheme is higher than the two benchmark land values in paragraph 4.36, the result is shaded in green, to indicate that the scheme is viable. However, if the residual value is lower than the benchmark land value, the result is shaded in red to indicate that it is unviable. This shading provides an indication of the ‘tipping points’ where changes in private sales values (alongside other factors, such as density, employment space requirements and amount of amenity space provided) start to render schemes unviable. An example is provided below (Table 5.2.1), which is based on 50% affordable housing. Site 3 is shown as having an unviable result until sales values reach £7,000 per square metre. In contrast, Site 10 is shown to be viable from the lowest sales value of £5,500 per square metre.

Table 5.2.1: Example of appraisal results

5.3 For each affordable housing quantum (i.e. 30%, 50% and 60%), we have tested the following scenarios:

■ Current costs and values – lower and higher benchmark land value;

■ Value growth of 10% and cost inflation of 5% - lower and higher benchmark land values; and

■ Value growth of 20% and cost inflation of 10% - lower and higher benchmark land values.

Site No Site

Benchmark land value £5,500 £6,000 £6,500 £7,000 £7,500 £8,000 £8,500 £9,000 £9,500

1 PTAL 0-1, 70 DPH, 20% comm £3,500,000 £3,487,247 £4,305,412 £5,119,259 £5,933,108 £6,746,956 £7,560,804 £8,374,652 £9,188,501 £10,002,3492 PTAL 0-1, 90 DPH, 20% comm £3,500,000 £4,337,983 £5,392,372 £6,438,747 £7,485,124 £8,531,500 £9,577,876 £10,624,253 £11,670,628 £12,717,0053 PTAL 0-1, 110 DPH, 20% comm £3,500,000 £5,188,717 £6,479,331 £7,758,236 £9,037,139 £10,316,044 £11,594,948 £12,873,852 £14,152,757 £15,431,6614 PTAL 0-1, 130 DPH, 20% comm £3,500,000 £6,039,452 £7,566,291 £9,077,723 £10,589,156 £12,100,588 £13,612,021 £15,123,453 £16,634,885 £18,146,3175 PTAL 0-1, 70 DPH, Nil comm £3,500,000 £3,210,413 £4,036,469 £4,862,525 £5,688,581 £6,512,023 £7,332,276 £8,152,528 £8,972,780 £9,793,0326 PTAL 0-1, 90 DPH, Nil comm £3,500,000 £4,003,819 £5,065,891 £6,127,963 £7,190,035 £8,250,476 £9,305,085 £10,359,696 £11,414,305 £12,468,9167 PTAL 0-1, 110 DPH, Nil comm £3,500,000 £4,797,226 £6,095,315 £7,393,402 £8,691,490 £9,988,927 £11,277,895 £12,566,863 £13,855,831 £15,144,7998 PTAL 0-1, 130 DPH, Nil comm £3,500,000 £5,590,633 £7,124,737 £8,658,840 £10,192,945 £11,727,048 £13,250,705 £14,774,031 £16,297,356 £17,820,6839 PTAL 2-3, 95 DPH, 20% comm £3,500,000 £4,550,665 £5,664,111 £6,768,619 £7,873,128 £8,977,636 £10,082,144 £11,186,652 £12,291,160 £13,395,669

10 PTAL 2-3, 140 DPH, 20% comm £3,500,000 £6,464,819 £8,109,770 £9,737,467 £11,365,163 £12,992,860 £14,620,556 £16,248,253 £17,875,949 £19,503,646

Sales values per sq m

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6 Assessment of the results 6.1 This section sets out the results of our appraisals with the residual land values

calculated for the 24 development scenarios with sales values and capital values reflective of market conditions across the Borough. These RLVs are then compared to two benchmark land values representing lower quality industrial space in the Borough.

6.2 Development value is finite and – in densely developed Boroughs such as Brent - is rarely enhanced through the adoption of new policy requirements. This is because existing use values are sometimes relatively high prior to development. In the case of low quality industrial sites, existing use values will be lower and they will clearly have greater scope to secure an uplift in land value through the planning process. Such sites are also more vulnerable to speculative purchase with purchasers often paying far more than existing use value in the hope of securing a change of use. Policy DMP14 gives a strong signal to potential purchasers that low quality industrial sites will only be released from their current use if residential development provides 50% affordable housing.

Appraisal results – 50% affordable housing

6.3 The results of our appraisals incorporating 50% affordable housing are summarised in tables 6.3.1 to 6.3.6.

6.4 The results show a degree of variance between sites with lower and higher density, with a small number of schemes at lower sales values generating residual land values that are lower than the benchmark land value. However, at a relatively low PTAL of 2-3, all development scenarios are viable at 50% affordable housing. Very high density developments are unviable at lower sales values, due to higher build costs and the lower efficiency of taller buildings.

6.5 At present values, 17 of the 24 development scenarios would be viable at the lowest end of the sales value range when residual values are measured against the lower of the two benchmark land values. Even at the higher benchmark land value, 12 of the 24 developments would be viable. It is clearly important that less weight is placed on the results with the higher benchmark, given that the Policy is for release of the poorest quality industrial space. Under changing market conditions, viability would improve further, with sixteen scenarios generating a viable result if values grow by 20% and costs grow by 10%, when residual values are compared to the higher benchmark land value.

6.6 Although the Council could adopt differential affordable housing targets depending on PTAL (and therefore density), this would be difficult to apply as there is no direct correlation between the location of SILs and LSISs and PTALs. Transport for London’s PTAL map of the London Borough of Brent (attached as Appendix 6). Given that there is sufficient evidence to justify 50% as a target, a differential target would be likely to result in some sites providing less than could viably deliver.


6.7 When the affordable housing is reduced to 30%, there is an increase in the number of viable development scenarios, albeit only modestly. At current costs and values, the number of viable scenarios increases from 17 (at 50% affordable housing) to 19 (at 30% affordable housing) at the lowest sales value in the range. Improvements in viability are more significant when sales values increase above £6,000 per square metre, where all development scenarios are viable.

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6.8 As noted above, there would be little benefit in terms of implementation of the policy of applying a differential affordable housing target given the limited changes to viability at lower density and/or in areas with lower sales values. Differential targets mightbe used to enhance hope value of a change of use which would simply inflate land values and frustrate delivery. The Council will need to provide clear guidance on how the target will be applied and make it clear to landowners that release of sites from employment use would not be sanctioned unless affordable housing targets are achieved.


6.9 When affordable housing is increased to 60%, a significantly higher proportion of development scenarios are unviable at current costs and values (10 when residual values are compared to the lower benchmark and 20 copmared to the higher benchmark. However, as with lower levels of affordable housing, there are some development scenarios where 60% affordable housing would be viable. Although the Council could seek 60% affordable housing, the target would be met in a lower proportion of cases and more schemes would require a test of viability. This would increase administration and may slow down the development management process. We would therefore recommend that the Council does not adopt a target of more than 50%, which would also have the benefit of consistency with the pan-Borough affordable housing target.

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Table 6.3.1: Residual land values @ 50% affordable housing – lower benchmark land value (current costs and current values)

Site No Site



10 PTAL 2-3, 140 DPH, 20% comm £3,500,000 £6,464,819 £8,109,770 £9,737,467 £11,365,163 £12,992,860 £14,620,556 £16,248,253 £17,875,949 £19,503,64611 PTAL 2-3, 170 DPH, 20% comm £3,500,000 £6,239,475 £8,129,482 £10,019,488 £11,909,495 £13,799,501 £15,685,851 £17,562,578 £19,439,306 £21,316,03312 PTAL 2-3, 240 DPH, 20% comm £3,500,000 £7,139,458 £9,726,846 £12,314,235 £14,901,623 £17,489,011 £20,076,399 £22,660,417 £25,229,627 £27,798,83713 PTAL 2-3, 95 DPH, Nil comm £3,500,000 £4,202,172 £5,323,248 £6,444,323 £7,565,399 £8,685,088 £9,798,288 £10,911,487 £12,024,686 £13,137,88714 PTAL 2-3, 140 DPH, Nil comm £3,500,000 £5,987,336 £7,639,449 £9,291,560 £10,943,672 £12,595,783 £14,237,110 £15,877,614 £17,518,119 £19,158,62415 PTAL 2-3, 170 DPH, Nil comm £3,500,000 £5,670,474 £7,560,480 £9,450,486 £11,340,492 £13,230,498 £15,120,504 £17,001,516 £18,878,242 £20,754,97016 PTAL 2-3, 240 DPH, Nil comm £3,500,000 -£4,466,329 -£1,670,872 £1,108,893 £3,865,344 £6,621,795 £9,378,246 £12,134,696 £14,891,147 £17,647,59817 PTAL 4-6, 130 DPH, 20% comm £3,500,000 £6,039,452 £7,566,291 £9,077,723 £10,589,156 £12,100,588 £13,612,021 £15,123,453 £16,634,885 £18,146,31718 PTAL 4-6, 260 DPH, 20% comm £3,500,000 -£4,033,608 -£1,005,196 £1,994,985 £4,981,140 £7,967,295 £10,953,450 £13,939,605 £16,925,760 £19,911,91419 PTAL 4-6, 350 DPH, 20% comm £3,500,000 £9,869,204 £13,613,081 £17,345,772 £21,054,578 £24,763,385 £28,472,190 £32,180,996 £35,889,802 £39,598,60820 PTAL 4-6, 405 DPH, 20% comm £3,500,000 -£7,305,798 -£2,661,608 £1,954,918 £6,534,305 £11,113,693 £15,693,081 £20,262,141 £24,793,269 £29,324,39921 PTAL 4-6, 130 DPH, Nil comm £3,500,000 £5,590,633 £7,124,737 £8,658,840 £10,192,945 £11,727,048 £13,250,705 £14,774,031 £16,297,356 £17,820,68322 PTAL 4-6, 260 DPH, Nil comm £3,500,000 -£4,875,097 -£1,846,685 £1,165,238 £4,151,392 £7,137,547 £10,123,702 £13,109,857 £16,096,012 £19,082,16723 PTAL 4-6, 350 DPH, Nil comm £3,500,000 £8,779,625 £12,523,501 £16,267,378 £19,980,201 £23,689,008 £27,397,814 £31,106,619 £34,815,425 £38,524,23224 PTAL 4-6, 405 DPH, Nil comm £3,500,000 -£8,571,201 -£3,927,011 £707,173 £5,286,560 £9,865,948 £14,445,335 £19,024,722 £23,562,935 £28,094,063


32

Table 6.3.2: Residual land values @ 50% affordable housing (70%/30% rent/intermediate) – higher benchm ark land value (current costs and current values)

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10 PTAL 2-3, 140 DPH, 20% comm £5,040,000 £6,464,819 £8,109,770 £9,737,467 £11,365,163 £12,992,860 £14,620,556 £16,248,253 £17,875,949 £19,503,64611 PTAL 2-3, 170 DPH, 20% comm £5,040,000 £6,239,475 £8,129,482 £10,019,488 £11,909,495 £13,799,501 £15,685,851 £17,562,578 £19,439,306 £21,316,03312 PTAL 2-3, 240 DPH, 20% comm £5,040,000 £7,139,458 £9,726,846 £12,314,235 £14,901,623 £17,489,011 £20,076,399 £22,660,417 £25,229,627 £27,798,83713 PTAL 2-3, 95 DPH, Nil comm £5,040,000 £4,202,172 £5,323,248 £6,444,323 £7,565,399 £8,685,088 £9,798,288 £10,911,487 £12,024,686 £13,137,88714 PTAL 2-3, 140 DPH, Nil comm £5,040,000 £5,987,336 £7,639,449 £9,291,560 £10,943,672 £12,595,783 £14,237,110 £15,877,614 £17,518,119 £19,158,62415 PTAL 2-3, 170 DPH, Nil comm £5,040,000 £5,670,474 £7,560,480 £9,450,486 £11,340,492 £13,230,498 £15,120,504 £17,001,516 £18,878,242 £20,754,97016 PTAL 2-3, 240 DPH, Nil comm £5,040,000 -£4,466,329 -£1,670,872 £1,108,893 £3,865,344 £6,621,795 £9,378,246 £12,134,696 £14,891,147 £17,647,59817 PTAL 4-6, 130 DPH, 20% comm £5,040,000 £6,039,452 £7,566,291 £9,077,723 £10,589,156 £12,100,588 £13,612,021 £15,123,453 £16,634,885 £18,146,31718 PTAL 4-6, 260 DPH, 20% comm £5,040,000 -£4,033,608 -£1,005,196 £1,994,985 £4,981,140 £7,967,295 £10,953,450 £13,939,605 £16,925,760 £19,911,91419 PTAL 4-6, 350 DPH, 20% comm £5,040,000 £9,869,204 £13,613,081 £17,345,772 £21,054,578 £24,763,385 £28,472,190 £32,180,996 £35,889,802 £39,598,60820 PTAL 4-6, 405 DPH, 20% comm £5,040,000 -£7,305,798 -£2,661,608 £1,954,918 £6,534,305 £11,113,693 £15,693,081 £20,262,141 £24,793,269 £29,324,39921 PTAL 4-6, 130 DPH, Nil comm £5,040,000 £5,590,633 £7,124,737 £8,658,840 £10,192,945 £11,727,048 £13,250,705 £14,774,031 £16,297,356 £17,820,68322 PTAL 4-6, 260 DPH, Nil comm £5,040,000 -£4,875,097 -£1,846,685 £1,165,238 £4,151,392 £7,137,547 £10,123,702 £13,109,857 £16,096,012 £19,082,16723 PTAL 4-6, 350 DPH, Nil comm £5,040,000 £8,779,625 £12,523,501 £16,267,378 £19,980,201 £23,689,008 £27,397,814 £31,106,619 £34,815,425 £38,524,23224 PTAL 4-6, 405 DPH, Nil comm £5,040,000 -£8,571,201 -£3,927,011 £707,173 £5,286,560 £9,865,948 £14,445,335 £19,024,722 £23,562,935 £28,094,063


33

Table 6.3.3: Residual land values @ 50% affordable housing (70%/30% rent/intermediate) – lower benchma rk land value (10% sales value growth and 5% cost inflation)

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10 PTAL 2-3, 140 DPH, 20% comm £3,500,000 £7,665,766 £9,467,755 £11,258,221 £13,048,687 £14,839,154 £16,629,620 £18,420,086 £20,210,552 £22,001,01811 PTAL 2-3, 170 DPH, 20% comm £3,500,000 £7,591,107 £9,670,114 £11,749,121 £13,828,129 £15,906,988 £17,971,388 £20,035,789 £22,100,189 £24,164,59012 PTAL 2-3, 240 DPH, 20% comm £3,500,000 £8,959,471 £11,805,599 £14,651,726 £17,497,853 £20,343,980 £23,190,108 £26,016,278 £28,842,409 £31,668,54013 PTAL 2-3, 95 DPH, Nil comm £3,500,000 £4,692,738 £5,925,921 £7,159,105 £8,392,288 £9,622,633 £10,847,153 £12,071,672 £13,296,191 £14,520,71114 PTAL 2-3, 140 DPH, Nil comm £3,500,000 £6,710,277 £8,527,599 £10,344,922 £12,162,246 £13,978,249 £15,782,805 £17,587,359 £19,391,915 £21,196,47015 PTAL 2-3, 170 DPH, Nil comm £3,500,000 £6,441,019 £8,520,026 £10,599,033 £12,678,040 £14,757,047 £16,836,054 £18,901,749 £20,966,149 £23,030,54916 PTAL 2-3, 240 DPH, Nil comm £3,500,000 -£3,949,085 -£874,083 £2,170,210 £5,202,305 £8,234,402 £11,266,497 £14,298,593 £17,330,689 £20,362,78417 PTAL 4-6, 130 DPH, 20% comm £3,500,000 £7,154,482 £8,827,133 £10,489,709 £12,152,285 £13,814,861 £15,477,436 £17,140,011 £18,802,587 £20,465,16318 PTAL 4-6, 260 DPH, 20% comm £3,500,000 -£2,570,962 £749,682 £4,034,453 £7,319,223 £10,603,993 £13,888,764 £17,173,534 £20,458,305 £23,743,07519 PTAL 4-6, 350 DPH, 20% comm £3,500,000 £12,493,161 £16,611,426 £20,693,764 £24,773,450 £28,853,136 £32,932,823 £37,012,509 £41,092,196 £45,171,88220 PTAL 4-6, 405 DPH, 20% comm £3,500,000 -£5,101,980 £6,536 £5,043,863 £10,081,189 £15,118,515 £20,155,841 £25,140,767 £30,125,007 £35,109,24921 PTAL 4-6, 130 DPH, Nil comm £3,500,000 £6,261,935 £7,949,449 £9,636,963 £11,324,477 £13,010,335 £14,685,993 £16,361,652 £18,037,310 £19,712,96722 PTAL 4-6, 260 DPH, Nil comm £3,500,000 -£4,314,750 -£983,497 £2,314,997 £5,599,767 £8,884,538 £12,169,308 £15,454,079 £18,738,849 £22,023,61923 PTAL 4-6, 350 DPH, Nil comm £3,500,000 £10,206,252 £14,324,516 £18,438,765 £22,518,451 £26,598,138 £30,677,824 £34,757,510 £38,837,197 £42,916,88324 PTAL 4-6, 405 DPH, Nil comm £3,500,000 -£7,771,592 -£2,662,983 £2,411,501 £7,448,827 £12,486,153 £17,523,480 £22,545,136 £27,529,377 £32,513,619


34

Table 6.3.4: Residual land values @ 50% affordable housing (70%/30% rent/intermediate) – higher benchm ark land value (10% sales value growth and 5% cost inflation)

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10 PTAL 2-3, 140 DPH, 20% comm £5,040,000 £7,665,766 £9,467,755 £11,258,221 £13,048,687 £14,839,154 £16,629,620 £18,420,086 £20,210,552 £22,001,01811 PTAL 2-3, 170 DPH, 20% comm £5,040,000 £7,591,107 £9,670,114 £11,749,121 £13,828,129 £15,906,988 £17,971,388 £20,035,789 £22,100,189 £24,164,59012 PTAL 2-3, 240 DPH, 20% comm £5,040,000 £8,959,471 £11,805,599 £14,651,726 £17,497,853 £20,343,980 £23,190,108 £26,016,278 £28,842,409 £31,668,54013 PTAL 2-3, 95 DPH, Nil comm £5,040,000 £4,692,738 £5,925,921 £7,159,105 £8,392,288 £9,622,633 £10,847,153 £12,071,672 £13,296,191 £14,520,71114 PTAL 2-3, 140 DPH, Nil comm £5,040,000 £6,710,277 £8,527,599 £10,344,922 £12,162,246 £13,978,249 £15,782,805 £17,587,359 £19,391,915 £21,196,47015 PTAL 2-3, 170 DPH, Nil comm £5,040,000 £6,441,019 £8,520,026 £10,599,033 £12,678,040 £14,757,047 £16,836,054 £18,901,749 £20,966,149 £23,030,54916 PTAL 2-3, 240 DPH, Nil comm £5,040,000 -£3,949,085 -£874,083 £2,170,210 £5,202,305 £8,234,402 £11,266,497 £14,298,593 £17,330,689 £20,362,78417 PTAL 4-6, 130 DPH, 20% comm £5,040,000 £7,154,482 £8,827,133 £10,489,709 £12,152,285 £13,814,861 £15,477,436 £17,140,011 £18,802,587 £20,465,16318 PTAL 4-6, 260 DPH, 20% comm £5,040,000 -£2,570,962 £749,682 £4,034,453 £7,319,223 £10,603,993 £13,888,764 £17,173,534 £20,458,305 £23,743,07519 PTAL 4-6, 350 DPH, 20% comm £5,040,000 £12,493,161 £16,611,426 £20,693,764 £24,773,450 £28,853,136 £32,932,823 £37,012,509 £41,092,196

Documents

Local Plan Viability Assessment: Release of protected ... · 2015 Housing Price Index Update identifying that “ the annual pace of price growth edged up to 3.9% from 3.8 ” in