Viability Policy and Guidance – the current position and

Viability Policy and Guidance –the current position and the way forward?12 October 2017

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 2

Introduction

Nigel Simkin• Director - Planning and Development

• JLL Birmingham Office

Specialise – Development Viability in Planning • Development Management

• Policy Formulation


Agenda

1. What is Development Viability?2. Planning Policy

– The NPPF

3. The Guidance– PPG– RICS– Others

4. Interesting Appeal Decisions5. The Future?


Apologies – I’m recovering from a cold!

• ‘Development Viability’ is not defined in policy or statute

• But RICS definition Para 2.1.1:• ‘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 Valuefor the land owner and a market risk adjusted return to the developer in delivering the project.’


What is Development Viability?


Example Viability Appraisal - Unviable

Example Development Appraisal 2017

1. SALES (Gross Development Value, GDV) Area (sq ft) £ per sq ft Total

Residential Market Housing 30,000 £200 £6,000,000

Affordable Housing 5,000 £100 £500,000

Total GDV £6,500,000

2. Less Development Costs

Build Costs 35,000 £100 £3,500,000

Professional Fees at 10% £350,000

Contingency at 3% £105,000

Sales Agent Fees at 1% £35,000

Legal Fees at 0.5% £17,500

Total Costs (before finace and profit) £4,007,500

Finance at 3% £120,225

Developer's Profit at 20% on GDV £825,545

3. Residual Land Value £1,546,730

4. Benchmark for Site Viability £2,000,0005. Surplus for Section 106 -£453,270


Example Viability Appraisal – Now Viable!

Example Development Appraisal 2017

1. SALES (Gross Development Value, GDV) Area (sq ft) £ per sq ft Total

Residential Market Housing 35,000 £200 £7,000,000

Affordable Housing 0,000 £100 £000,000

Total GDV £7,000,000

2. Less Development Costs

Build Costs 35,000 £100 £3,500,000

Professional Fees at 10% £350,000

Contingency at 3% £105,000

Sales Agent Fees at 1% £35,000

Legal Fees at 0.5% £17,500

Total Costs (before finace and profit) £4,007,500

Finance at 3% £120,225

Developer's Profit at 20% on GDV £825,545

3. Residual Land Value £1,979,230

4. Benchmark for Site Viability £2,000,0005. Surplus for Section 106 -£20,770

• Relevant Paragraphs:– Paragraph 47 (footnote 11 and 12) – housing delivery

– Footnote 11 - ‘To be considered deliverable, sites should be available now, offer a suitable location for development now, and be achievable with a realistic prospect that housing will be delivered on the site within five years and in particular that the development of the site is viable.

– Footnote 12 – ‘To be considered developable, sites should be in a suitable location for housing development and there should be a reasonable prospect that the site is available and could be viably developed at the point envisaged’

– Paragraph 96 – in terms of renewable projects ‘should comply with adopted Local Plan policies on local requirements for decentralised energy supply unless it can be demonstrated by the applicant, having regard to the type of development involved and design, that this is not feasible or viable’


Policy – National Planning Policy Framework (NPPF)

• Relevant Paragraphs:– Historic Environment:

– Paragraph 126 ‘Local planning authorities should set out in their Local Plan a positive strategy for the conservation and enjoyment of the historic environment… local authorities should take into account the desirability of sustaining and enhancing the significance of heritage assets and putting them to viable uses consistent with their conservation.’

– Paragraph 131 ‘In determining planning applications, local planning authorities should take account of:

– the desirability of sustaining and enhancing the significance of heritage assets and putting them to viable uses consistent with their conservation…’



• Relevant Paragraphs:– Historic Environment:

– Paragraph 133 – Consent should be refused unless where there is substantial harm or total loss of a designated heritage asset unless… ‘no viable use of the heritage asset itself can be found in the medium term through appropriate marketing that will enable its conservation’.

– Paragraph 134 – ‘Where a development proposal will lead to less than substantial harm to the significance of the heritage asset, this harm should be weighed against the public benefits of the proposal, including securing its optimum viable use.’



• Relevant Paragraphs:– Using a proportionate evidence base (in plan making):

– Paragraph 160 – ‘Local planning authorities should have a clear understanding of business needs within the economic markets operating in and across their area. To achieve this, they should…

– Work closely with the business community to understand their changing needs and identify and address barriers to investment, including a lack of housing, infrastructure or viability’.

– Finally - Paragraphs 173 and 174 – very important!



Paragraph 173 – Ensuring viability and deliverability‘Pursuing sustainable development requires careful attention to viability and costs in plan-making and decision-taking. 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.’


Paragraph 174 – Ensuring viability and deliverability‘Local planning authorities should set out their policy on local standards in the Local Plan, including requirements for affordable housing. They 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 through the economic cycle. Evidence supporting the assessment should be proportionate, using only appropriate available evidence.’


• PPG – Viability − Reinforces Paragraph 173 of the NPPF – ‘Where the viability of a

development is in question, local planning authorities should look to be flexible in applying policy requirements wherever possible’. (Para 001)

− No standard approach – ‘There is no standard answer to questions of viability, nor is there a single approach for assessing viability. The National Planning Policy Framework, informed by this guidance, sets out the policy principles relating to viability assessment. A range of sector led guidance on viability methodologies in plan making and decision taking is widely available.’ (Para 002)


The Guidance – Planning Practice Guidance (PPG)

• PPG – Viability − Para 004 sets out the underlying principles:− Evidence based judgement – realistic understanding of costs and values− Understanding past performance – promotes direct engagement with

development sector− Collaboration – including transparency of evidence− Consistent Approach promoted

− Other considerations:− Not every site is required to be tested− Don’t plan to the margin of viability (buffer)− Consider costs of remediating Brownfield sites


The Guidance – Planning Practice Guidance (PPG)

• Covers plan making and decision taking

• Identifies concepts such as:− Gross Development Value (GDV)− Costs− Site Value (benchmarking)− Current cost and value basis

• Crucial – ‘competitive returns’ to developers and land owners

• Supports RICS or Harman Guidance approach to benchmarking?


PPG - Viability

• Paragraph 014: ‘The most appropriate way to assess land or site value will vary but there are common principles which should be reflected.

In all cases, estimated land or site value should:

• Reflect emerging policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy Charge;

• Provide a competitive return to willing developers and land owners (including equity resulting from those building their own homes); 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.’


PPG - Viability

• Assist in mitigating the impacts of development (Para 001)

• Obligations to be set out in Local Plan (SPD’s should not be used to add unnecessarily to financial burdens and should not establish rates and charges not established through development plan policy) – Para 003

• LPA needs to fully justify and evidence (Para 004)

• Planning obligations for Permitted Development (PD) should only relate to Prior Approval matters (Para 004).

• LPA to be flexible in their requirements and take into account site specific circumstances (Para 006)

• Need to meet the three tests (Para 004):• Necessary to make the development acceptable in planning terms• Directly related to the development• Fairly and reasonably related in scale and kind

• Note ‘pooling restrictions’ (Para 015) and Regulation 123 List© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 18

PPG – Planning Obligations

− Para 031 - No affordable housing or tariff style contributions where:− Development of 10 units or less, and which have a maximum combined

gross floorspace of no more than 1,000 sq m (gross)− LPA’s can apply a lower threshold of 5 units or less in designated areas− Rural Areas – Cash payments between 6 and 10 units.

− Vacant Building Credit (Para 020)− ‘Where a vacant building is brought back into any lawful use, or is

demolished to be replaced by a new building, the developer should be offered a financial credit equivalent to the existing floorspace of relevant buildings when the planning authority calculates any affordable housing contribution which may be sought. Affordable housing may be required for any increase in floorspace. (Para 021)

− Example of methodology at Paragraph 022.


PPG – 10 Unit Threshold and VBC

− But…!− The policy is intended to incentivise Brownfield development, including

the reuse of empty and redundant buildings− …it may be appropriate for authorities to consider:

− Whether the building has been made vacant for the sole purposes of re-development.

− Whether the building is covered by an extant or recently expired planning permission for the same or substantially the same development.

(Para 023)


PPG – VBC (continued)

RICS Financial Viability in Planning (2012)• A definition• General framework for viability testing• Resolving benchmarking (Para 3.3.3)?

− ‘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.’



RICS Financial Viability in Planning (2012)• In line with NPPF ‘competitive returns’ approach?• Para 3.4.3:

‘The residual land value (ignoring any planning obligations and assuming planning permission is in place) and current use value represent the parameters within which to assess the level of planning contributions. Any planning obligations imposed will need to be paid out of this uplift but cannot use up the whole of this difference, other than in exceptional circumstances, as that would remove the likelihood of the land being released for development.’

Viability Testing Local Plans – Advice for Planning Practitioners (June 2012 – Harman)• Viability of Local Plans (rather than decision taking)• Suggests collaborative approach:

– Review existing evidence– Agree appraisal methodology– Gather information and viability modelling– Viability appraisal– Review outputs and refine– Keep viability of plans under review


Viability Testing Local Plans – Advice for Planning Practitioners (June 2012 – Harman)• Tension in benchmark approach with RICS (cf. TLV – Page 29) – prefer CUV plus

an uplift and caution ‘Market Value’ approach.• ‘Consideration of an appropriate Threshold Land Value needs to take account of the fact

that future plan policy 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. Reference to market values can still provide a useful ‘sense check’ on the threshold values that are being used in the model (making use of cost-effective sources of local information), but it is not recommended that these are used as the basis for the input to a model. We recommend that the Threshold Land Value is based on a premium over current use values and credible alternative use values…’


Other Relevant Guidance

• HCA DAT Model and associated guidance• PAS (wealth of guidance and courses for planning professionals)• English Heritage Guidance (now Historic England) ‘Enabling Development and the

Conservation of Significant Places’ (2008)• Specific guidance for Enabling Development cases• Para 4.3.6 ‘Enabling Development as the subsidy of last resort’• Section 4.7 – the need for market testing• Section 5.4 – the ‘Conservation Deficit’ and how it is calculated.• Section 5.6 – ‘Site Value – has too much been paid?’

• ‘The actual purchase price paid by the developer must be disregarded if it is based upon the hope or anticipation of consent for development contrary to established planning policy’ (Para 5.6.1)



Key planning appeals (1)

• Land at the Manor, Shinfield, Reading (2013)– The Shinfield Approach to Site Value benchmarking (50/50 split of uplift in

value from CUV to RLV).– 20% on GDV developer’s return for risk (There are others but will this

change?)– Other issues (treatment of historic costs, etc.).



• Former Territorial Army Site, London (Appeal Reference: APP/V557/A/14/2227656)– Need for market based evidence (as required by the PPG)– Purchase price - Inspector had regard to:

• the level of the successful bid and the other information that was provided about the bid process available.

• An unsolicited offer which was made by previously unsuccessful bidders

• An independent valuation of the site which was undertaken on a ‘Red Book’ basis

• Comparable transactions.



• Former Territorial Army Site, London (Appeal Reference: APP/V557/A/14/2227656)– The Inspector concluded at Paragraph 69 that whilst these individual

elements of the Appellant’s evidence each have limitations, taken together, they provide a consistent indication that the price paid for the site was not at a level significantly above the market norm. There was also no counter evidence to contradict this picture, and having regard to the advice of the PPG, there was no reason to exclude the purchase price as part of the exercise of arriving at a land value for the site.



• Former Territorial Army Site, London (Appeal Reference: APP/V5570/W/16/3151698)– ‘It seems to me that a purely market based approach to site valuation

where there are no demonstrably comparable schemes available for benchmarking seeks to prioritise the third limb of paragraph 023 of the PPG dealing with viability…’ (Paragraph 39).

– ‘…in light of my consideration above I consider that the EUV Plus methodology is appropriate in this case and is to be preferred to a purely market value approach, allowing for value to have regard to the market as a consideration, rather than the determining factor.’ (Paragraph 40)


The Way Forward?• Balance between housing delivery and increasing affordable

housing provision– ‘Dispatches’ and sale of public sector land– Political change post Grenfell Tower?

• Mayor of London ‘Homes for Londoners: Affordable Housing and Viability SPD’ (2017) –– Threshold Approach to Viability (Fast-track 35% or Viability Tested Route)– The SPD is explicit about the Mayor’s preference for using the ‘Existing

Use Value Plus’ as the comparable Benchmark Land Value when assessing the viability of a proposal’.


The Way Forward? (2)• Viability and the Planning System: The Relationship

between Economic Viability Testing, Land Values and Affordable Housing in London (Kingston University, Ramidus, Royal Agricultural University Cirencester, University of Reading) - January 2017 – ‘Unintended consequences of changes to the planning system has been

to create a series of assumptions and practices that have reduced the delivery of affordable housing whilst having an inflationary impact on land values’


The Way Forward? (3)• Viability and the Planning System (cont):

– Recommends:• Site Value benchmark – Reconsider the approach to

address ‘circularity’ – ‘EUV Plus’ Approach• Fixed tariff (like CIL)• Abolish site level viability testing completely?• More transparency in viability testing• More guidance on ‘developer’s returns’• More training for LPA Planners• Consider other ways of bringing land forward.


The Way Forward? (4)• CIL – Recommendations of Review of CIL?• CLG Consultation ‘Planning for the right homes in the right

places: consultation proposals’– Local Plans – how could viability testing be improved?– Where policy requirements have been tested for viability, the issue should

not usually be tested again. • Historic England Consultation (March 2017) on Enabling

Development and Heritage Assets.• RICS Financial Viability in Planning (2nd Edition)?


Nigel Simkin

[email protected] 214 9972

Documents

Viability Policy and Guidance – the current position and