Wisley Airfield, Surrey · Valuation Standards – Global and UK Edition, and does not form part of a formal “Red Book” valuation and should not be relied upon as such. 1.4. Date

01 March 2015

Wisley Airfield, Surrey PLANNING AND VIABILITY REPRESENTATION FOR PUBLIC CIL CONSULTATION

Prepared for:

WISLEY PROPERTY INVESTMENTS LTD

Submitted to:

GUILDFORD COUNCIL

Prepared by: Savills (UK) Limited

STRICTLY PRIVATE AND CONFIDENTIAL

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1. Introduction ............................................................................................................................... 3

2. Subject Site ............................................................................................................................... 4

3. Proposed Development............................................................................................................ 6

4. Viability Methodology ............................................................................................................. 10

5. Viability Assumptions ............................................................................................................ 12

6. Economic Modelling and Summary ...................................................................................... 19

7. Viability Results ...................................................................................................................... 21

8. Conclusions ............................................................................................................................ 24

Appendix 1 – Developer’s Profit Research ...................................................................................... 26


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1. Introduction

1.1. Client Instruction

1.1.1. Savills has been instructed by Wisley Property Investments Limited to prepare representations on their behalf in respect of the consultation on Guildford Borough Council’s (GBC) Community Infrastructure Levy (CIL).

1.1.2. The representation focuses on the viability evidence presented by Peter Brett Associates (PBA), to support the proposed CIL rates, in relation to the former Wisley Airfield.

1.1.3. Our client is the developer intending to bring forward a comprehensive residential led development of this site, and therefore has a more detailed understanding of the anticipated costs and revenues associated with this site. It is our intention to share this cost and revenue information in order to help the Council refine its CIL draft charging schedule.

1.1.4. The Council, supported by evidence from Peter Brett Associates, has applied a rate of £400 per square metre to Strategic sites, which includes Wisley Airfield. We believe this CIL rate to be unviable, and this documents sets out the reasons for this. This viability assessment forms part of the above planning submission.

1.1.5. This representation has been prepared and submitted by Savills, on behalf of Wisley Property Investments Limited, in connection with GBC’s CIL consultation. .

1.2. Confidentiality

1.2.1. This report has been prepared in conjunction with consultation on GBC’s proposed CIL, and is therefore suitable for public record. Confidential information has either been omitted or anonymised.

1.3. Report Limitations

1.3.1. This report has been prepared solely as a supporting document to inform CIL consultation, and without reliance or liability to any party. Its contents are excluded from the provisions of the RICS Valuations – Professional Standards January 2014 Incorporating the International Valuation Standards – Global and UK Edition, and does not form part of a formal “Red Book” valuation and should not be relied upon as such.

1.4. Date of Appraisal

1.4.1. The Date of Appraisal is the date of this report.


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2. Subject Site

2.1. Site Location

2.1.1. The Site is located within the administrative boundary of Guildford Borough Council, in an area of Greenfield land approximately 1.5km (1 mile) south of M25 junction 10, which connects to the A3.

2.1.2. It is approximately 30km (19 miles) south west of central London and 12km (8 miles) north east of Guildford.

2.1.3. To the north of the airfield lies Ockham and Wisley Common, to the west the A3, to the south the village of Ockham and to the east Old Lane.

2.1.4. The site boundaries for illustration purposes are shown in Figure 1 and Figure 2 below, which are images taken from the Design and Access Statement.

Figure 1


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2.2. Site Description

2.2.1. The whole of the site covers an area of approximately 114.7 hectares and comprises a disused airfield and areas of farmland, scrub and woodland. The existing site is characterised predominantly by the Airfield, which comprises concrete hardstanding of circa 30 hectares.

2.2.2. The airfield was built in 1944 for the testing of aircraft built at nearby Brooklands factory. It was used during the Cold War and closed in 1972. The airfield is no longer in operation, although the runway and large areas of hard-standing still survive. Most buildings have been demolished. An air traffic navigation beacon still remains in the south-east corner of the site.

2.2.3. A portion of the site has planning permission for the construction and operation of waste facilities.

2.2.4. 69 HA of the site has a draft allocation in the draft Local Plan as a new settlement. 39 HA in the north of the site has a draft allocation as Suitable Accessible Natural Greenspace (SANG) in the same document.


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3. Proposed Development

3.1. Planning Application

3.1.1. An outline planning application was submitted to GBC and registered in January 2014 for a development comprising:

‘The phased development of a new settlement of up to 2,100 dwellings incorporating up to 100 sheltered accommodation units and associated infrastructure including accesses onto the A3 (Ockham Interchange), Ockham Lane and Old Lane and revised access to Elm Corner, a primary school, community provision, nursery provision, health facility, a local centre (incorporating food & drink, retail, a visitor centre and offices), employment area, 8 travellers pitches, sports and recreational facilities (incorporating a floodlit sports pitch and pavilion). Sustainable Drainage Systems and an area of Suitable Alternative Natural Greenspace (SANG) incorporating a landform feature and car parking. The erection of associated utilities infrastructure. The development proposal to incorporate the demolition/ removal of the runway and VOR Beacon (and any associated outbuildings). Outline application, matter for determination access (matters reserved scale, appearance, landscaping and layout).’

3.1.2. At this stage, and given the application is in outline, the scheme has not been fully designed and much of the information available is preliminary. An artist’s impression of how the scheme may look is below:

Figure 2


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3.2. Uses and Amount of Development

3.2.1. The Development will deliver a new residential settlement comprising a mix of complimentary retail, business, community and educational uses.

Residential

3.2.2. The Planning Statement submitted to the Council details an indicative mix as follows:

Table 1 Type Units 1-bedroom Flat (elderly) 100 1-bedroom Flat 222 2-bedroom Flat 422 3-bedroom Flat 96 2-bedroom House 132 3-bedroom House 604 4-bedroom House 373 5-bedroom House 151 Total 2,100

3.2.3. Whilst a fully designed scheme is not available, we have been provided with indicative unit sizes from our achitect, which we have used in our appraisal modelling:

Table 2 Type Area

(sqm) Area (sqft)

Total

1-bedroom Flat 48 517 100 1-bedroom Flat 48 517 222 2-bedroom Flat 65 700 185 2-bedroom Flat 75 807 148 2-bedroom Flat 85 915 89 2/3-bedroom Flat 95 1,023 37 2/3-bedroom Flat 110 1,184 37 3-bedroom Penthouse 140 1,507 22 2-bedroom House 69 743 132 3-bedroom House 98 1,055 604 4-bedroom House 151 1,631 373 5-bedroom House 191 2,061 151 Total 210,536 2,266,186 2,100

3.2.4. This means the indicative internal (saleable) area of residential development is 210,536 square metres (2,266,186 square foot).


Non-residential

3.2.5. The Site also includes a significant amount of non

Table 3 Use Class

A1 - A5 B1a D1 - Health Centre D1 - Nursery School (1FE) D1 - Primary School (2FE) with community facility and nursery (1FE) B2/B8 Total

Phasing Plan

3.2.6. The plan below is an excerpt of order of phasing.

Figure 3

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The Site also includes a significant amount of non-residential space as follows: :

Area (sqm)

Area (sqft)

2,240 24,111 1,790 19,267 730 7,858 400 4,306

Primary School (2FE) with community 3,230 34,767

2,500 26,910 10,890 117,219

ow is an excerpt of the Design and Access Statement, illustrating the

, illustrating the indicative


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Open Space

3.2.7. Approximately 56% of the site is proposed as open space, including circa 50ha of SANGs.


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4. Viability Methodology

4.1. Financial Viability Assessments

4.1.1. In line with the National Planning Policy Framework, The London Plan and local planning guidance as well as the GLA’s guidance, site-specific financial viabilities are a material consideration in determining how much Section 106 obligations should be required in mixed-use and residential developments.

4.1.2. As such viability appraisals can and should be used to analyse and justify planning applications to ensure that section 106 requirements do not make a scheme unviable.

4.1.3. The RICS define financial appraisals for planning purposes as, ‘an objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to a developer in delivering that project.’

4.1.4. The logic is that, if the residual value of a proposed scheme is reduced to significantly below an appropriate viability benchmark sum, it follows that it is commercially unviable to pursue such a scheme, and the scheme is unlikely to proceed.

4.1.5. If a scheme is being rendered unviable because of section 106 requirements, it may be appropriate to look at reducing the burden of those requirements in order to facilitate viability.

4.2. Factors affecting viability

4.2.1. The following factors are particularly relevant to viability:

• Timing of delivery/phasing requirements; • Abnormal building costs; • Large scale infrastructure requirements; • Particular planning requirements; • Community Infrastructure Levy (CIL); • 'Other' section 106 costs (e.g. transport etc), or planning gain works; • Optimum land uses within the development; and • Market conditions.


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4.3. Residual Land Valuation

4.3.1. The financial viability of development proposals is determined using the residual land valuation method. A summary of this valuation process can be seen below:

Figure 4

4.4. Developer’s Return

4.4.1. The above residual land approach can be inverted so that it becomes a ‘developer’s return residual’ based upon the insertion of a specific land cost (equivalent to the viability benchmark sum). By doing this, the focus is moved onto the level of return driven by a scheme.

4.4.2. This is the basis upon which this report is based, with a fixed land cost, and target residual profit level.

Built Value of proposed private residential and

other uses.

Built Value of affordable housing

Build Costs, finance costs,

other section 106 costs, sales fees, developers’ profit

etc

=

Residual Land Value

The Residual Land Value is then compared to a viability benchmark sum. If the RLV is lower and/or not sufficiently higher than the

benchmark the project is not technically viable.

-

+ GDV

GDV =


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5. Viability Assumptions

5.1. Introduction

5.1.1. In this section we run though our viability assumptions, and where they differ from PBA’s assumptions. There are a number of supporting documents that can be made available upon request, but which are not appropriate for public CIL consultation.

5.2. Residential Values

Private Residential

5.2.1. We have assessed sales values using a comparative approach, having regard to the local housing market, both for new build and second-hand property. We have given consideration to the respective merits of this proposal against other schemes, in terms of factors such as location and amenities.

5.2.2. In summary there are three key schemes currently marketing in the area:

• Willow Reach, Crest Nicholson – This is a 150 unit scheme to the west of Woking (7m west of the Subject). All houses are 3 and 4 beds ranging in price from £519,995 to £534,950 equating to £358 psf - £403 psf. In our view this is currently the best comparable for Wisley Airfield.

• Brookwood Farm, Cala Homes – This scheme is also to the west of Woking (13.5m west of the Subject). 4-bedroom houses range in asking prices from £670-£690k, with 5 beds at £750k. A 2,020 sq ft 4-bedroom house is currently on the market for £670,000 equating to £331 psf.

• A scheme in Guildford town centre, 10 miles south west of the Subject, is also marketing. The majority of units have not been released yet, however 4-bedroom houses are currently on the market at £550k equating to £363psf.

5.2.3. Wisley Airfield is expected to be a high quality development with good on site amenities and as such is expected to achieve good levels of demand. We would therefore expect upper end values in the context of the local market.

5.2.4. The Council’s advisor, Peter Brett Associates, has placed a value for the Wisley Airfield of £327 per sqft (£3,520 per sqm) for houses and £355 per sqft (£3,826 per sqm) for flats. The upper limit of local values is represented by Guildford Town Centre, valued by PBA at £426 per sqft (£4,584 per sqm) for houses and £341 per sqft (£3,667 per sqm) for flats.


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5.2.5. On balance, having considered our own research and that of PBA, we consider that at this stage an ‘aspirational’ value for Wisley Airfield would currently be in the order of £375 per sqft for houses (£4,036 per sqm) and £350 per sqft (£3,767 per sqm) for flats. We have adopted these values in our appraisals.

Affordable Residential

5.2.6. We have appraised the proposed scheme using our bespoke discounted cashflow model.

5.2.7. In regards affordable rent, we have assuming in line with national guidance that rents of 80% of Market Rent could be charged.

5.2.8. In regards shared ownership, we have assumed that the units should be affordable to those on intermediate incomes of approximately £30,000 and £50,000. In our model this equates to an initial equity sale of 25%, with rent on retained equity of between 1.5% and 2.5% depending on unit type.

5.2.9. This results in an average value for the affordable housing, assuming a 70/30 mix between rented and shared ownership, and based on the residential mix detailed in Section 4, of approximately £215 per sqft (£2,314 per sqm).

5.2.10. PBA have not appraised the affordable housing quantum in any detailed way, choosing to adopt a basic %age of Market Value approach, which fails to consider the true value of the tenures being considered. PBA’s value equates to £193 per sqft (£2,081 per sqm).

Elderly Residential

5.2.11. PBA have provided comparable evidence in regards care homes, retirement homes and assisted living, which shows a range in values of between £199 and £251 per sqft (£2,145 and £2,699 per sqm).

5.2.12. We cannot improve on this research and have assumed a rate at the upper end of the evidence, £250 per sqft (£2,691 per sqm).

5.3. Non-residential Values

5.3.1. The following non-residential space is included in the indicative masterplan: Table 4 Use Class Area

(sqm) Area (sqft)

A1 - A5 2,240 24,111 B1a 1,790 19,267 D1 - Health Centre 730 7,858 D1 - Nursery School (1FE) 400 4,306 D1 - Primary School (2FE) with community facility and nursery (1FE) 3,230 34,767 B2/B8 2,500 26,910 Total 10,890 117,219


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5.3.2. There is no defined scheme and as such commercial unit sizes, locations and types of tenants cannot be considered. However, we have researched local commercial rents and yields, and have made value assumptions based on typical commercial stock in the area as follows:

• Retail (A1-5) - £250 per sqft

• Office (B1) - £250 per sqft

• Light Industrial (B2/8) - £100 per sqft

5.4. Build Costs

5.4.1. Gardiner and Theobald, a leading cost consultancy firm, is advising WPI and providing input on base build costs and the costs of installing all the infrastructure that is required for a major strategic site such as Wisley Airfield.

Infrastructure Costs

5.4.2. Detailed work has been carried out in regards infrastructure costs, as this would be the first phase of work to implement before any development can take place. As such, relatively detailed costs are available.

5.4.3. The costs are broken down into two categories: primary infrastructure and secondary infrastructure. Both include works that fall under categories such as: Site clearance; Earthworks; Access Roads; Landscaping & Public Space; Utilities; Substations; Drainage; and Highway Works.

5.4.4. In relation to, for example, access roads, a primary infrastructure cost might involve building a main spine road through the site and connecting it to the off-site road network, where as a secondary infrastructure cost might involve building spur roads to individual parcels of land.

5.4.5. Primary Infrastructure costs have been estimated at £43.62m, and Secondary Infrastructure costs have been estimated at £19.98m. The total infrastructure cost is therefore estimated at £63.6m, or £30,286 per residential unit.

5.4.6. This compares to a cost of £42m, or £20,000 per residential units, as assumed by PBA.

5.4.7. As most of the infrastructure is required early on in the development, around 40% of this cost is incurred by the end of year 2, and almost 70% by the end of year 4. For instance significant advanced groundworks and planting will be required at least 12 months ahead of first occupation to deliver phase 1 SANG. This is a detrimental impact on the project’s cashflow and finance costs.


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Base Build Costs

5.4.8. Whilst infrastructure costs have been considered in some detail, the cost of building the residential and commercial units has not, due to the early design stage of the scheme. However, we have been provided with approximate costs as follows:

• Houses and flats (private sale specification): £154 per sqft

• Houses and flats (affordable specification): £138 per sqft

• Offices (assuming no air conditioning): £143 per sqft

• Retail (to shell finish): £88 per sqft*

• Light Industrial (assuming small units with no offices): £55 per sqft

*Some retail will be required to be fitted out at the developer’s expense, but any additional cost has not been factored in at this stage.

5.4.9. In each case the build rates are to be applied to the gross internal areas of the buildings. They include allowances for external works and a professional fee budget of 10%, but no contingency.

5.4.10. We have used these rates in our appraisals.

5.4.11. PBA state that their base build costs have been taken from the Build Cost Information Service (BCIS). To this they add 10% for plot externals, and a cost that equates to approximately 2% for site abnormal. This results in the following:

• £123 per sqft for flats (regardless of tenure or specification); and

• £104 per sqft for houses (regardless of tenure or specification).

5.4.12. We note that the above figures (from the text within PBA’s report), do not match the actual costs assumed in PBA’s appraisal for Wisley Airfield. Since the costs are taken from BCIS we have assumed that they are on a Gross Internal Area (GIA) basis.

5.4.13. PBA’s rates are said to be taken from April 2014, and there has been significant cost inflation over the last year, as the construction industry increased costs across all areas following the last few years of house price growth. The correct BCIS based rates at the time of writing, factoring in the same uplifts PBA have applied, as above, would be approximately:

• £136 per sqft for flats (regardless of tenure or specification); and

• £113 per sqft for houses (regardless of tenure or specification).


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5.4.14. BCIS produce generic build cost rates, which are typically based on source data from affordable housing developments. The GLA Development Control Toolkit is also based on BCIS data, which is then adjusted for use in the Toolkit. The Guidance Notes for the Toolkit state:

“‘Build costs’ are taken directly from the secondary data source, namely the BCIS Quarterly Review. These ‘costs’ are based on tender price/m2. The sample from which these costs are drawn are however predominantly social housing or RP development. The data has therefore been adjusted to reflect expected costs for market housing.

The base ‘build costs’ do not include certain elements The BCIS base costs, do not include an element for external infrastructure/special landscaping; they do not include an allowance for professional fees ...

... The Toolkit build costs have therefore been adjusted to include an additional 15% for external works and 15% to reflect the particular qualities of market speculative development.”

5.4.15. We therefore believe PBA’s costs to be too low, even if based on the more up to date BCIS rates, principally as they do not factor in the specification required for private housing, and do not include a sufficient allowance for external works. Such uplifts would bring the BCIS rate broadly into line with those provided to us by our cost consultant.

5.4.16. Whilst a difference of opinion in regards build costs of, for instance, £10 per sqft, may appear minor, on a strategic site such as Wisley Airfield this would translate to over £20m in cost.

Other Build Cost Assumptions

5.4.17. Build costs are applied to the gross area of a building. The gross and net area for houses tends to be the same, as there is no communal or ‘dead’ space to consider. PBA have estimated the net to gross ratio for blocks of flats to be just 94%. In other words, the communal space (hallways, entrance lobbies, lift shafts etc) is assumed to be just 6% of the building.

5.4.18. A common assumption for net to gross ratios is 80%, which is what we have adopted. This means that PBA could be underestimating the build cost for blocks of flats by about 14%.

5.4.19. Professional fees have been allowed for at 10%, which is at the low end of the range of acceptable allowances in our opinion. Large strategic sites can attract disproportionately high professional fee requirements, due to the range of issues that need to be considered. We have adopted the same assumption, but will keep this assumption under review.

5.4.20. A contingency has been allowed for by PBA at 5% of build costs, which is a generic assumption that we will adopt in our appraisals at this stage.


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5.5. Section 106 Costs

5.5.1. PBA have not incorporated any Section 106 costs in their appraisals for Wisley Airfield, which we consider is a major failing in the study.

5.5.2. We have estimated the likely Section 106 burden on the development to be a total £38.57m, or £18,300 per residential unit, which comprises the following principal elements:

• Education Contributions

• Transport Contributions

• Environmental Mitigation Contributions

• Community Buildings and other contributions

5.5.3. The principal costs come from the likely requirement to provide an on site primary school, and contribute towards upgrading existing secondary schools, as well as enhancing local roads to handle the development. A number of community buildings may also be required as part of a development of this size, in particular a health facility.

5.5.4. Our research has uncovered four recent schemes in the Borough, all comprising less than 100 residential units, with s106 costs per unit of between £7,000 and £23,000.

5.5.5. As with the infrastructure costs above, most of this cost must be expended up front, with over 40% of the cost spent by the end of year two, and around two thirds by the end of year four. This will have a detrimental impact on cashflow and finance costs.

5.6. Finance Costs and TImings

5.6.1. Finance costs and timings are directly linked. A project such as Wisley Airfield will be require very large up front expenditure before any units can be sold, which will in turn lead to high finance costs.

5.6.2. Development finance cost has been assumed by PBA at 6%. In our experience this is unrealistically low, and we have assumed a rate of 7%.

5.6.3. Due to the nature of the appraisal model PBA has used, being an ‘in house’ spreadsheet model, we cannot see any of their assumptions on how they have cashflowed any of the costs or revenues, and as such, how finance charges have been accounted for.

5.6.4. We have an informed estimate on how most of the costs and revenues would be profiled over this development. This is from the phasing plan (at 3.2.6 above), and the infrastructure cost profile discussed in a previous section.


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5.6.5. We have therefore modelled the following key timings:

• 2-year planning and pre-construction period

• 12-year construction period

• 12-year sales period, commencing 12 months into construction

5.7. Developer’s Profit

5.7.1. PBA has adopted an assumption of 20% profit on the Gross Development Value of market housing, and 6% profit on the affordable build cost. We feel this is too low.

5.7.2. In our experience developers rarely assume a differential rate in mixed tenure schemes. Further, in our experience developers assume, depending on the characterises of the site, a minimum target profit on cost of between 20% and 25%.

5.7.3. We note that, as part of the LB Hammersmith and Fulham CIL study, PBA have applied a profit rate of 20% on total development costs.

5.7.4. There is some appeal evidence that is relent in relation to this topic. The appeal for ‘Land at The Manor, Shinfield, Reading RG2 9BX’, decided in 2012, is a landmark case in respect of developer’s profit, as it was a central issue of the appeal:

“The parties were agreed that costs should be assessed at 25% of costs or 20% of gross development value (GDV). The parties disagreed in respect of the profit required in respect of the affordable housing element of the development with the Council suggesting that the figure for this should be reduced to 6%....

The appellants supported their calculations by providing letters and emails from six national housebuilders who set out their net profit margin targets for residential developments. The figures ranged from a minimum of 17% to 28%, with the usual target being in the range 20-25%. Those that differentiated between market and affordable housing in their correspondence did not set different profit margins. Due to the level and nature of the supporting evidence, I give great weight it. I conclude that the national housebuilders’ figures are to be preferred and that a figure of 20% of GDV, which is at the lower end of the range, is reasonable.”

5.7.5. We suggest that a developer’s profit of 20% on Gross Development Value or 25% on cost (mathematically these are the same) across the scheme should be adopted.

5.7.6. Further evidence is provided at Appendix 1.


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6. Economic Modelling and Summary

6.1. Economic Model Used

6.1.1. We have used software called Argus Developer (version 6) to appraise the proposed scheme. This is an ‘off the shelf’ residual appraisal model that is widely used across the industry and known to be accurate.

6.1.2. PBA have used their own in house model, which appears to be based in Microsoft Excel. We cannot verify the reliability of such a model, or interrogate some of the assumptions used, particularly around timings, which impacts on finance costs.

6.2. Economic Modelling Assumptions

6.2.1. The following table summarises the assumptions made by both parties, as described in more detail above:

Table 5 Input PBA Assumption Savills Assumption

Basic Scheme Information

Assumed based on a generic mix. Residential only, no non-residential space included.

Based on the indicative masterplan and architects’ advice

Appraisal model PBA’s in house model, which cannot be checked for errors, or audited to ensure hidden assumptions are sensible

Industry standard appraisal model

Private Residential Values

£327psf for houses (£3,520psm) £355psf for flats (£3,826psm)

£375psf for houses (£4,037psm) £350psf for flats (£3,737psm)

Affordable Residential Values

An average value of £193psf (£2,081psm) based on PBA assumed mix and a basic %age of private value approach.

An average value of £215psf (£2,314psm), based on masterplan indicative mix, and a recognised valuation approach. .

Non-Residential Values

Not included Retail - £250psf Office B1 - £250psf Business/Light Industrial B2/8 - £100psf

Residential Build Costs (including professional fees and external works)

Flats: £123 per sqft Houses: £104 per sqft Regardless of tenure. Based on generic costs from BCIS.

Private sale specification: £154 per sqft Affordable specification: £138 per sqft Based on the proposed scheme mix and cost consultant advice


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Input PBA Assumption Savills Assumption

Infrastructure Costs £42m £63.6m, based on formal cost advice

Contingency 5% 5%

Section 106 Not included £38.571m

Interest Rate 6% Debt Finance on all costs 7% Debt Finance on all costs

Timings Unclear Based on cost consultant advice and phasing plan.

Developer’s Profit 20% Profit on the value of private residential units, plus 6% of the cost of

25% profit on cost


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7. Viability Results

7.1. Appraisal Results

7.1.1. The results of the development appraisal, based on 35% affordable housing, are as follows:

Table 6 Values PBA Savills Private Residential (1364 units) £462,031,000 £529,273,000 Affordable Residential (735 units) £156,955,000 £179,126,000 Commercial - £13,535,000 Total Value £618,986,000 £721,934,000 Base Build Costs (inc external works & professional fees) £281,840,000 £379,229,000 Infrastructure Costs £42,000,000 £63,600,000 Section 106 Costs - £38,571,000 Contingency (5%) £12,552,000 £18,961,000 Developer's Profit £101,824,000 £144,387,000 Finance Costs £23,950,000 £26,328,000 Others £24,320,000 £26,658,000 Total Costs £486,486,000 £697,734,000 Residual Land Value £132,500,000 £24,200,000

7.1.2. All figures have been sourced and summarised from our Argus Developer model or PBA’s appraisal for Wisley Airfield.

7.1.3. This shows that, in aggregate, the differences between our assumptions and those of PBA result in a significantly lower residual land value for Wisley Airfield of £24.2m, as opposed to £132.5m.

7.1.4. In order to determine at what point a residual land value becomes too low, and therefore unviable, it must be compared to a benchmark land value.

7.2. Viability Benchmarks

7.2.1. Identifying an appropriate viability benchmark sum requires judgement bearing in mind that national planning guidance indicates that appropriate land for housing should be 'encouraged' to come forward for development. The GLA provides guidance on viability benchmarks for planning purposes and the Royal Institution of Chartered Surveyors (RICS) issued a guidance note on ‘Financial Viability in Planning’ in 2012. Given the available guidance and our own professional experience our views on what constitutes an appropriate viability benchmark are outlined below.


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Current Use Value (CUV)

7.2.2. The CUV refers to the value of the asset at today’s date in the adopted planning use. It refers to the Market Value of the asset on the special assumption reflecting the current use of the property only and disregarding any prospect of development other than for continuation/expansion of the current use.

7.2.3. In line with the NPPF we understand that a landowner premium over and above CUV is considered appropriate in order to reflect the fact that sites will not be encouraged to come forward for re-development potential if vendors can only sell them at pure CUV levels. Having consideration to planning appeal precedents we understand an acceptable level of landowner premium to be at least 15% - 30%.

Alternative Use Value (AUV)

7.2.4. The AUV refers to the value of the asset under an alternative planning use, either consented or for which permission might reasonably be expected to be obtained.

Market Value

7.2.5. The guidance from RICS contained within ‘Financial Viability in Planning’ (August 2012) states that when considering the value of the development site for planning purposes the:

“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.”

7.2.6. The Market Value as defined by RICS is:

“the estimated amount for which the asset should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

7.2.7. National planning policy states that:

‘...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’.

Para173, National Planning Policy Framework

7.2.8. As such we understand that, in having regard to the development plan the Market Value of a site should reflect a financially viable scheme.


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7.3. Choice of Viability Benchmark

CUV/AUV

7.3.1. The Site has stood vacant and largely unused for several decades, having been earmarked as a residential-led redevelopment opportunity. We therefore consider the value of any current uses on site, or any potential alternative uses, to be of minimal relevance to this exercise.

Market Value

7.3.2. We have a number of concerns relating to the methodology and assumptions made by the Viability Study in determining the BLVs. PBA state that the “threshold/benchmark land value is based on a review of recent viability evidence of sites currently on the market, a review of submitted viability appraisal by applicants, published data on land values and discussions with stakeholders.”

7.3.3. The BLVs are based on both serviced land sales with planning consent, and disposals of land (existing use) without the benefit of planning permission. Land with planning will vastly differ in value to land without planning. It is therefore unclear how the BLVs have been calculated from these comparables.

7.3.4. When considering BLVs we are concerned that these are set too low and do not reflect market expectations. In the case of Wisley Airfield, a value of £1m per net developable hectare is applied. PBA quote this as being 57 hectares, meaning a target residual land vale of £57,000,000. We believe the net developable area is higher, 69 hectares, meaning a target residual land value of £69,000,000.

7.3.5. It is concerning that there is no comparable evidence provided to support the figures stated in the Viability Study. We would therefore ask that GBC provide more evidence to justify these values. Further, no value is attributed to the non-developable part of the site, which accounts for over half the site, but which is integral to a strategic site such as this. .

7.4. Summary

7.4.1. Based on PBA’s benchmark of £69,000,00 (i.e. using the larger site area for the subject site), the scheme has the following viability results: Values PBA Savills Residual Land Value £132,500,000 £24,200,000 Benchmark Land Value £69,000,000 £69,000,000 Difference £63,000,000 -£44.800,000

7.4.2. This means that, compared to PBA’s benchmark land value Wisley Airfield is unviable based on our assumptions.


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8. Conclusions

8.1.1. We have reviewed the appraisals undertaken by PBA in relation to Wisley Airfield, and the assumptions that sit behind them. We find that we have differences of opinion of the potential value of the proposed scheme, but the principal difference stems from the estimated cost of delivering a strategic site such as this.

8.1.2. In short, we believe PBA have significantly under estimated the costs associated with inputting the necessary infrastructure, as well as building flats and houses to a good standard. Further, we believe that there will remain a significant Section 106 burden on such sites, which has not been considered by PBA.

8.1.3. For these key reasons our indicative assessment of the viability of the proposed scheme, based on the information available at the time of writing, is that the scheme cannot viably suppose a CIL charge.

8.1.4. Our indicative assessment of the value of the site, when considering the significant costs associated with it, is that it falls well below the benchmark land value measures set by PBA.

8.1.5. Our appraisals show that the proposed scheme falls significantly short of commonly adopted tests in CIL examinations:

• the industry expectation / buffer of 30% in excess of a benchmark land value if not met – it is instead -65%;

• the CIL ceiling of approximately 3% of GDV is breeched by some margin – in the case of our assumptions the proposed CIL charge would total approximately £55m, which would equate to approximately 7.5% of GDV;

• CIL should not equate to more than 25% of a scheme’s residual land value, and in the case of our assumptions it would equate to approximately 200%, or in the case of PBA’s assumptions it would equate to over 40%.

8.1.6. We therefore propose that this strategic site is zero rated for Borough CIL.

8.1.7. It is important to note that the necessary infrastructure and Section 106 contributions required to implement this scheme amounts to over £100m. If represented as a cost per private residential square metre in the same way as the Borough CIL, this would amount to a cost of approximately £750psm.


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8.2. Sensitivity Analysis

8.2.1. It is helpful to consider how changes in key assumptions might impact on the Residual Land Value of the proposed scheme. This is particularly relevant given the early stage nature of most of the information available.

8.2.2. We have therefore considered how +/-5% and +/-10% changes to both the Gross Development Value (GDV) and total build cost might impact on the Residual Land Value:

Table 7

Construction (below) / GDV (right) -10% -5% 0% 5% 10%

-10% £14.4m £30.2m £46.0m £61.8m £77.6m -5% £3.5m £19.3m £35.1m £50.9m £66.7m 0% -£8.5m £8.4m £24.2m £40.0m £55.8m 5% -£21.7m -£2.9m £13.3m £29.1m £44.9m

10% -£37.7m -£15.8m £2.3m £18.2m £34.0m

8.2.3. This shows that only if the estimated cost of construction decreases by between 5% and 10%, and at the same time the value of the development increases by 10%, would the scheme become commercially viable when compared to PBA’s benchmark measure (which we do not necessarily agree with).

8.2.4. This adds weight to the proposition to zero rate a site such as Wisley Airfield for CIL purposes.


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Appendix 1 – Developer’s Profit Research

Home Builders Federation September 2014

Developer Profit

Competitive Return to a Willing Developer

savills.co.uk

Developer Profit Competitive Return to a Willing Developer

September 2014 1

Introduction

1.2 Savills is representing HBF members and other house builders and landowners nationwide on emerging CIL Charging Schedules, to scrutinise the available evidence, notably in respect of infrastructure provision and the testing of viability against both the emerging planning policy requirements and the identified housing land supply. We are therefore well placed to observe trends in the emerging viability work and subsequent CIL examinations.

1.3 The purpose of this Briefing Note is to present the evidence of what represents a competitive return to a willing developer.


September 2014 2

2.1 The NPPF states that to ensure viability developments should provide competitive returns to a willing land owner and willing developer1. A competitive return to a developer is one that provides a sufficient return for the developer to continue a successful business through the economic cycle, taking account of the risk profile of the business. The most readily available market evidence of a competitive return is the return required by the shareholders of the quoted Plc housebuilders, noting that the Top 10 House Builders accounted for 45% of completions in England 2012/132.

2.2 Shareholders are principally institutional investors - pension funds, insurance companies and private equity funds. They have a wide range of companies and sectors to choose from, including retail, housebuilding, mining, transport, energy and telecommunications, all with different risk and return profiles. invest in other sectors, reducing the development capacity of the housebuilding sector.

2.3 The key measures are Operating Margin and Return on Capital Employed (ROCE). For a development to be viable, both measures need to meet acceptable target levels. ROCE and Internal Rate of Return (IRR) are closely related; IRR is the projected compound annual rate of return on capital employed across the life of the scheme, compared with ROCE which is the return on capital employed in any one year.

2.4 The operating margins (based on Earnings or Profit before Interest and Tax) of the Plc housebuilders are shown in Figure 1. The average margin has recovered from a low of 4.3% in 2009 to 14.6% in 2013. Within this, Berkeley has maintained a margin of between 15% and 20% throughout the cycle, as has Crest Nicholson since 2010. All other housebuilders are rebuilding margins towards that level. As examples:

o in August 2013 Persimmon stated that it had reached its target margin of 15-17% of revenue, 18 months ahead of plan; and

o in July 2014 Taylor Wimpey announced targets for the 2015-17 period of an average

20% operating margin and a return on net operating assets of 20% per annum.

1 NPPF, Communities and Local Government. Para 173. March 2012 2 Facts & Statistics, House Building Statistics, HBF, August 2014


September 2014 3

Figure 1 - Net Operating Margins 2006 - 2013

Source: Savills 2.5 It is important to distinguish between gross (site level) margin and net operating margin. This

Overheads for house-building typically lie in the range of 5% - 10% of gross development value, with only the very largest developers 3.

2.6 JP Morgan analysis4 of Plc housebuilder performance for the financial years 2012 and 2013 indicates that the average overheads of housebuilders (the difference between Gross Margin and Earnings Before Interest and Tax) were 6.4% and 6.0% of revenue respectively, averaging 6.2%.

2.7 Therefore a target operating margin of 15% to 20% of revenue equates to a target gross margin of 21% to 26% of gross development value. Barratt stated in its 2012 annual report (and in its July 2014 trading update) that its minimum hurdle rates for land acquisition are 20% gross margin and 25% ROCE.

2.8 Both operating margin and gross margin are quoted before deduction of the cost of paying interest on debt, which has averaged 1.2% of GDV over the 2013 and 2013 financial years. Therefore the hurdle rate of gross margin after deduction of the cost of debt is 20-25% of gross development value.

3 Viability Testing Local Plans, Chaired by Sir John Harman, June 2012 4 UK Housebuilding, Europe Equity Research. J.P. Morgan. September 2013


September 2014 4

2.9 This is the basis of the developer margin hurdle rate that is applicable to site level development appraisals of Residual Land Value, in which the cost of debt is included separately as a cost. More specifically, this is the average hurdle rate across all sites developed by the housebuilder during any one year. Around this average, there will be a range of site specific development risk and therefore a range of site level hurdle rates for developer margin. Smaller lower density sites are inherently less capital intensive and less risky than costlier larger sites and higher density sites, so for smaller lower density sites the hurdle rate will be below the corporate average and for larger complex sites and higher density sites it will be above the corporate level average.

2.10 This is particularly relevant for large Greenfield sites and regeneration areas, where large up-,

as a higher margin is required to reflect the higher risk. In these instances, the profit margin and ROCE become much more important as highlighted by the Harman Report

ts of large flatted blocks on previously used land in urban areas with high cash requirements will demand significantly higher levels of profit to achieve an acceptable ROCE than developments of a more standard, less cash intensive nature on virgin ground. Likewise, projects with significant up-front infrastructure may also require higher levels of profit to

5

Figure 2 -

Source: Savills

2.11 A minimum developer margin of 20% of Gross Development Value was supported by the

appeal decisions relating to The Manor, Shinfield6 and Lydney7. It has also been included in Development

who are currently preparing supporting viability evidence for 24 Local Authorities8.

5 Viability Testing Local Plans, p46, Chaired by Sir John Harman, June 2012 6 Ref: APP/X0360/A/12/2179141, 8 January 2013 7 Ref: APP/P165/Q/14/2215840, 3 September 2014 8 Local Plan & CIL Viability Study Post Consultation Update (November 2013)


September 2014 5

2.12 The evidence in this paper indicates that the minimum profit level used within viability testing should be a blended rate of 20% on Gross Development Value plus 25% ROCE across all tenures, subject to consideration of the risk profile of the scheme. The reference to ROCE is particularly important on large capital intensive schemes. In these cases the relevant hurdle rate for site specific appraisal is an Internal Rate of Return of at least 25%.

2.13 A number of viability consultants argue that a different profit level should be applied to private and affordable housing. If this is the case, then the blended margin across all tenure should equate to the hurdle margin on site of 20% of Gross Development Value could be a combination of Affordable Housing at an 8% margin on cost and Market Housing at a 23% margin on Gross Development Value.

2.14 It is increasingly common for developers to purchase land prior to securing an offer from Registered Providers who are subject to more market risk from the current affordable housing regime than in previous systems of funding. There is subsequently a risk associated with the affordable housing, in addition to increased holding and finance costs.

Documents

Wisley Airfield, Surrey · Valuation Standards – Global and UK Edition, and does not form part of a formal “Red Book” valuation and should not be relied upon as such. 1.4. Date