Viability and development economics Warwick 25 th

Viability and development economics Warwick 25 th - 26 th Sept 2013 www. pas. gov. uk

What is PAS? PAS is a DCLG grant-funded programme but part of the Local Government Association • Governed by a ‘sector led’ board • 10 staff – commissioners, generalists, support “PAS exists to provide support to local planning authorities to provide efficient and effective planning services, to drive improvement in those services and to respond to and deliver changes in the planning system”

Organisation of the day • • Housekeeping- Phones off Presentations and activities Feedback forms and follow up survey Lunch and breaks

Learning and sharing • Different levels of knowledge • Sharing with each other • Learning from one another

Objectives • to improve your knowledge of: Ø viability and its relevance in planning and Ø the viability evidence you require to fulfil your planning role • For procurement – to improve the procurement outcome for your authority? • Make you more confident discussing, and negotiating upon, viability related to development and planning

‘‘ ‘Why straw? ’ you’re thinking. Let me tell you … We at Wolf Construction are committed to building affordable homes for first-time buyers, using local materials wherever possible”

“Maybe it was some kind of sustainable ecohouse. Anyway one puff and down it went”

Learning Objectives To ensure that the Council is a ‘highly informed client’ with the ability to: • undertake simple viability assessments • to appraise viability assessments submitted by developers • utilise viability testing in formulating policy • to know when to bring in outside consultants • fully engage with consultants

Session 1: An Introduction to viability (including definitions and terminology)

What is viability? An individual development can be said to be viable if, after taking account of all costs, including central and local government policy and regulatory costs and the costs and availability of development finance, the scheme provides a competitive return to the developer to ensure that development takes place and generates a land value sufficient to persuade a land owner to sell the land for the development proposed. If these conditions are not met, a scheme will not be delivered. Local Housing Delivery Group. Viability Testing in Local Plans – Advice for planning practitioners. (LGA/HBF – Sir John Harman) June

What is viability? An objective financial viability test of the ability of a development project to meet its costs including the cost of planning obligations, while ensuring an appropriate Site Value for the landowner and a market risk adjusted return to the developer in delivering that project. (Where viability is being used to test and inform planning policy it will be necessary to substitute “a development project” into the wider context) Financial viability in planning RICS guidance note

When is viability evidence required? Plan-making – Strategic Housing Land Availability Assessment – Affordable housing viability assessment – Whole local plan testing – Community Infrastructure Levy Development Management – Site specific viability testing for planning applications – Masterplan/major application viability testing, incorporating phasing etc.

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

Economic viability of a local plan

Regulatory Requirements – why is viability important? • NPPF 173 / 174 - the cumulative impact of the council’s ‘wish list’ (CIL/s 106, Cf. SH etc. ) • NPPF 178 – 181 duty to cooperate, work collaboratively, a continuous process • CIL Regulation 14 The effect of CIL on viability • SHLAA Are the sites deliverable, 5 year supply • S 106 / Individual, site specific In relation to planning applications, enabling

Context: Blyth Valley Lord Justice Keene - Conclusion: • [the inspector] failed to reflect the requirement of PPS 3 as to the need for an informed economic viability study as part of the process leading to a policy requiring a particular percentage of affordable housing…His approach was also vitiated by his perhaps understandable but erroneous application of a presumption of soundness, and his finding that there was no evidence that sites would not come forward if a 30 per cent requirement were imposed is incomprehensible.

Context: SHLAA Guidance 40. A site is considered achievable for development where there is a reasonable prospect that housing will be developed on the site …It will be affected by: market factors (such as locality), cost factors (e. g. site preparation costs); and delivery factors (e. g. developer’s own phasing) 41. There a number of residual valuation models available to help determine whether housing is an economically viable prospect for a particular site. In addition, the views of housebuilders and local property agents for example will also be useful where a more scientific approach is not considered necessary.

There is no statutory guidance…yet! NPPF says: ‘Evidence supporting the assessment should be proportionate, using only appropriate available evidence’. The CIL guidance says ‘The legislation (section 212 (4) (b)) requires a charging authority to use 'appropriate available evidence' to inform their draft charging schedule. It is recognised that the available data is unlikely to be fully comprehensive or exhaustive. Charging authorities need to demonstrate that their proposed CIL rate or rates are informed by ‘appropriate available’ evidence and consistent with that evidence across their area as a whole’.

Proportionate available evidence Adjourned GNDP Joint Core Strategy. The Inspector has requested that GNDP provide: “. . financial viability testing using the Harman guidance, bearing in mind NPPF 173 and onwards. This should be strategic and proportionate, but should use any detailed information now available as result of the Local Investment Plan and Programme and AAP work. Key, critical infrastructure projects and the costs of these to the proposed developments should be identified. The Inspector has asked that this paper be kept as short and simple as possible. ”

Context: CIL • NPPF recommends plans are drawn up alongside CIL charging schedules "where practical" • Avoids repetition and helps prioritise policies • A balance between securing additional investment for infrastructure and the potential economic effect of imposing CIL upon development across their area • It is for charging authorities to decide on the appropriate balance and ‘how much’ potential development they are willing to put at risk through the imposition of CIL

OLD (March 2010) CIL Guidance 10. The examiner should not use the CIL examination to question a charging authority’s choice in terms of 'the appropriate balance', unless the evidence available to the examination shows that the proposed rate (or rates) will put the overall development of the area at serious risk. The examiner should be ready to modify or reject the draft charging schedule if it puts at serious risk the overall development of the area.

OLD (March 2010) CIL Guidance 10. …In considering whether the overall development of the area has been put at serious risk, the examiner will want to consider the implications for the priorities that the authority has identified in its Development Plan…In considering whether the Development Plan and its targets have been put at serious risk, the examiner should only be concerned with whether the proposed CIL rate will make a material or significant difference to the level of that risk. It may be that the Development Plan and its targets would be at serious risk in the absence of CIL.

New (December 2012) CIL Guidance 9. The independent examiner should establish: • the proposed rate or rates are informed by and consistent with, the evidence on economic viability across the charging authority's area; and • evidence has been provided that shows the proposed rate (or rates) would not threaten delivery of the relevant Plan as a whole. 10. The examiner should be ready to recommend modification or rejection of the draft charging schedule if it threatens

NPPF 173 “…Plans should be deliverable. Therefore, the sites and the scale of development identified in the plan should not be subject to such a scale of obligations and policy burdens that their ability to be developed viably is threatened. To ensure viability, the costs of any requirements likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing land owner and willing developer to enable the development to be deliverable. ”

NPPF 174 “Local planning authorities…should assess the likely cumulative impacts on development in their area of all existing and proposed local standards, supplementary planning documents and policies that support the development plan, when added to nationally required standards. In order to be appropriate, the cumulative impact of these standards and policies should not put implementation of the plan at serious risk, and should facilitate development throughout the economic cycle. Evidence supporting the assessment should be proportionate, using only appropriate available evidence. ”

Wish list of discretionary policies + g in us o H e bl a rd ffo A Ds U /S ce a sp en Op + s le ab ew n Re & y rg e En + = gn i es s d e/ ard ac nd Sp sta Cumulativ e impact of policies

PPS 3 to NPPF to CIL Regs Will plan put the overall development of the area at serious risk vs. threaten delivery of the relevant Plan as a whole … charging authorities should show and explain how their proposed levy rate (or rates) will contribute towards the implementation of their relevant Plan and

Examination – NPPF 182 The inspector will examine if plan is in accordance with the Duty to Cooperate, legal requirements, and whether it is “sound”: • Positively prepared – the plan should be prepared based on a strategy which seeks to meet objectively assessed requirements • Justified • Effective – the plan should be deliverable over its period and based on effective joint working on cross-boundary strategic priorities • Consistent with national policy

Planning Appeals Barnet: APP/Q 5300/A/07/2043798/NWF Bristol: APP/P 0119/A/08/2069226 Beckenham: APP/G 5180/A/08/2084559 Woodstock: APP/D 3125/A/09/2104658 Shinfield: APP/X 0360/A/12/2179141 We shall discuss these in detail later!

Non – Statutory Guidance • Viability Testing in Local Plans – Advice for planning practitioners (June 2012). LHDG – Sir John Harman • Financial Viability in Planning (August 2012). RICS • HCA good practice manual ‘Investment and Planning Obligations: Responding to the Downturn’ (2009) • Research by Chris Hill of Turner Morum on behalf of CLG entitled ‘Cumulative impacts of regulations on house builders and landowners’ (2011)

Read the Guidance!

S 106 guidance (April 2013) • The G&I Act introduced a new application and appeal procedure for the review of planning obligations on planning permissions which relate to the provision of affordable housing. New Section 106 BA, BB and BC into the 1990 Town and Country Planning Act. • Does not replace existing powers to renegotiate Section 106 agreements on a voluntary basis. • New procedure will assess the viability of affordable housing requirements only. It will not reopen any other planning policy considerations. • Sites granted in accordance with a Rural Exceptions Site policy are exempt from this procedure.

S 106 guidance (April 2013) • S 106 BA – application can be made to LPA with viability evidence. LPA can produce their own viability evidence or provide commentary on applicants evidence. • S 106 BC – where there is disagreement or LPA does not determine the application an applicant can appeal to the So. S. LPA can submit own evidence. • Evidence – must show that affordable housing obligation as currently agreed makes the scheme unviable in current market conditions. • Form of evidence – prepared in same form using methodology as close as reasonably possible to previous evidence • Delivery – valid for 3 years to incentivise delivery • Annex A/B – Summary of key variables/Procedural note

Draft Statutory Guidance

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

What does the NPPF expect on viability? NPPF policy on viability applies to decision-taking. Decision-taking on individual schemes does not normally require an assessment…However, viability can be important where planning obligations or other costs are being introduced. In these cases decisions must be underpinned by an understanding of viability, ensuring realistic decisions are made to support development and promote economic growth. Where the viability of a development is in question, LPAs should look to be flexible in applying policy requirements wherever possible.

What are the underlying principles for understanding viability in planning? 1 • Evidence based judgement: assessing viability requires judgements which are informed by the relevant available facts. It requires a realistic understanding of the costs and the value of development in the local area and an understanding of the operation of the market. Understanding past performance, such as in relation to build rates and the scale of historic planning obligations can be a useful start. Direct engagement with the development sector may be helpful in accessing evidence.

What are the underlying principles for understanding viability in planning? 2 • Collaboration: a collaborative approach involving the local planning authority, business community, developers and landowners will improve understanding of deliverability and viability. Transparency of evidence is encouraged wherever possible. Where communities are preparing a neighbourhood plan (or Neighbourhood Development Order), local planning authorities are encouraged to share evidence to ensure that local viability assumptions are clearly understood.

What are the underlying principles for understanding viability in planning? 3 • A consistent approach: LPAs are encouraged to ensure that their evidence base for housing, economic and retail policy is fully supported by a comprehensive and consistent understanding of viability across their areas. The NPPF requires LPAs to consider district -wide development costs when Local Plans are formulated, and where possible to plan for infrastructure and prepare development policies in parallel. A masterplan approach can be helpful in creating sustainable locations, identifying cumulative infrastructure requirements of development across the area and assessing the impact on scheme viability…LPAs should align the preparation of their CIL

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

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

How should different development types be treated in decision-taking? • Viability of individual development types, commercial and residential, should be considered. Relevant factors will vary from one land use type to another. • For residential schemes, viability will vary with housing type e. g. large scale private rented sector housing that is built for long-term institutional or RSPs, viability considerations in decision-taking should take account of the economics of such schemes, which will differ from build for sale. This may require a different approach to planning obligations or an

How should different development types be treated in decision-taking? • Similarly, in respect of self build, any viability assessment should take account of average plot values and build costs for self build development. The build route proposed (eg whether it is contractor-led or a DIY project) and any nondevelopment costs related to the project such as project management and professional fees should be considered. • For older people’s housing, the scheme format and projected sales rates may be a factor in assessing viability.

Viability of planning obligations to be considered in decisiontaking • LPAs will need to understand the impact of planning obligations on the proposal. The LPA should be flexible in seeking planning obligations. • Affordable housing contributions are often the largest single item sought on housing developments. These contributions should not be sought without regard to individual scheme viability. • Assessing viability should lead to an understanding of the scale of planning obligations. However, the NPPF is clear that where safeguards are necessary to make a particular development acceptable, and these safeguards cannot be secured, planning permission should not be granted.

Land Value Central to the consideration of viability is the assessment of land or site value. 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 CIL charge; • provide a competitive return to willing developers and land owners (including equity resulting from self build developments); 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.

Competitive return to developers and land owners • This return will vary significantly between projects to reflect the size and risk profile of the development and the risks to the project. A rigid approach to assumed profit levels should be avoided and comparable schemes or data sources reflected wherever possible. • A competitive return for the land owner is the price at which a reasonable land owner would be willing to sell their land for the development. The price will need to provide an incentive for the land owner to sell in comparison with the other options available. Those options may include the current use value of the land or its value for a realistic alternative use that complies with planning policy.

The Residual Valuation based approach Step 1: Gross Development Value (The combined value of the complete development) LESS Cost of creating the asset, including a profit margin (Construction + fees + finance charges + Developer’s Profit, CIL, s 106, Cf. SH etc. ) = RESIDUAL VALUE Step 2: Residual Value v Existing Use Value

Gross Development Value All income from a Scheme Construction Fees Site Remediation Design Abnormals Engineer Etc. Sales Etc. Profit Land Policies/CI Developers Existing / L Builders Alternative CIL, Use Value affordable + premium housing, (TLV/EUV Cf. SH, open +) space etc.

The big question • For a site to be viable, by how much must the Residual Value exceed the EUV? • The ‘cushion’? • What does ‘competitive return’ mean? You must understand the model, be able to interrogate the assumptions, be able to follow the calculation and challenge the ‘test'. The ‘cushion’ is central to developer behaviour. The Residual Method is very sensitive to inputs and assumptions.

Viability and development economics Warwick 25 th —