Transcript Document
Session 2: The role of viability in plan-making and development management A Development Viability Appraisal SITE NAME INCOME Av Size m2 % Number 87 Price £/m2 GDV £ GIA m2 95.0 70% 61 2,500 14,463,750 5,786 DEVELOPMENT COSTS LAND Market Housing Shared Ownership 95.0 9% 8 1,750 1,301,738 744 Affordable Rent 95.0 21% 18 1,200 2,082,780 1,736 95.0 0% 0 900 0 0 0 0 0 0 0 0 /unit or m2 42,499 Land Stamp Duty Easements etc. Legals Acquisition Planning fee calc Planning app fee No dwgs No dwgs under 50 No dwgs over 50 Total 3,697,391 1.50% 184,870 0 55,461 240,330 6.00% 1.00% 0.50% 2.50% 16,095 511,275 85,213 42,606 213,031 868,220 7,645,125 435,000 191,128 250,000 8,521,253 dwgs 87 37 37 rate 335 100 Total 12,395 3,700 16,095 PLANNING Social Rent Grant and Subsidy Shared Ownership Affordable Rent Social Rent SITE AREA 2.50 ha Sales per Quarter Unit Build Time 9 3 35 /ha 17,848,268 Planning Fee Architects QS / PM Planning Consultants Other Professional 8,265 CONSTRUCTION Build Cost - BCIS Based s106 / CIL Contingency Abnormals Quarters Residual Land Value Alternative Use Value Uplift 20% Plus /ha 250,000 Viability Threshold Whole Site 3,697,391 62,500 12,500 625,000 700,000 Per ha 1,478,956 25,000 5,000 250,000 280,000 RUN Residual MACRO ctrl+r Closing balance = 0 925 5,000 2.50% Stamp duty calc - Residual Land payment 125,000 0% 250,000 1% 500,000 3% 1,000,000 4% above 5% Stamp duty calc - Add Profit Land payment 125,000 0% 250,000 1% 500,000 3% 1,000,000 4% above 5% FINANCE Fees Interest Legal and Valuation RUN CIL MACRO ctrl+l Closing balance = 0 10,000 7.00% 7,500 3,697,391 1% 3% 4% 5% 5% Total 17,500 184,870 700,000 1% 3% 4% 5% 5% Total 35,000 SALES Additional Profit 3,645,527 Check on phasing dwgs nos correct 630 £/m2 Agents Legals Misc. 2.0% 0.5% 356,965 89,241 5,000 451,207 13,795,901 Developers Profit % of costs (before interest) % of GDV RESIDUAL CASH FLOW FOR INTEREST Q1 Year 1 Q2 INCOME UNITS Started Market Housing Shared Ownership Affordable Rent Social Rent Grant and Subsidy INCOME 0 EXPENDITURE Stamp Duty Easements etc. Legals Acquisition 184,870 0 55,461 Planning Fee Architects QS Planning Consultants Other Professional 16,095 255,638 42,606 21,303 106,516 Build Cost - BCIS Base s106/CIL Contingency Abnormals 0 0 0 0 10,000 7,500 Agents Legals Misc. COSTS BEFORE LAND INT AND PROFIT 0 0 0 0 699,988 0 Land Interest Profit on Costs Profit on GDV Q1 4 9 0 0 0 0 0 0 9 0 0 0 0 0 0 380,792 9,520 12,452 0 Q3 Q4 Q1 9 0 0 0 0 0 0 9 665,000 59,850 95,760 0 0 820,610 9 1,496,250 134,663 215,460 0 0 1,846,373 9 1,496,250 134,663 215,460 0 0 1,846,373 644,417 790,875 790,875 790,875 16,110 21,073 19,772 25,862 19,772 25,862 19,772 25,862 2,759,180 0 Q3 Q4 Q1 9 1,496,250 134,663 215,460 0 0 1,846,373 9 1,496,250 134,663 215,460 0 0 1,846,373 9 1,496,250 134,663 215,460 0 0 1,846,373 2 1,496,250 134,663 215,460 0 0 1,846,373 790,875 790,875 790,875 790,875 19,772 25,862 19,772 25,862 19,772 25,862 19,772 25,862 Year 4 Q2 Post CIL s106 Q3 Q4 Q1 1,496,250 134,663 215,460 0 0 1,846,373 1,496,250 134,663 215,460 0 0 1,846,373 1,496,250 134,663 215,460 0 0 1,846,373 332,500 29,925 47,880 0 0 410,305 585,833 322,208 58,583 0 14,646 19,157 8,055 10,536 1,465 1,916 0 0 1,000 Year 5 Q2 £/ Unit (all) Total 87,000 Year 6 Q2 Q3 Q4 Q1 Q3 Q4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 117,167 435,000 2,929 3,831 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5,000 989,990 0 0 0 0 0 0 16,412 4,103 36,927 9,232 36,927 9,232 36,927 9,232 36,927 9,232 36,927 9,232 36,927 9,232 36,927 9,232 36,927 9,232 36,927 9,232 8,206 2,052 0 0 0 0 0 0 0 0 0 0 0 0 0 0 402,764 681,600 836,509 857,024 882,668 882,668 882,668 882,668 882,668 665,796 386,959 108,123 46,159 10,258 0 0 0 0 0 0 0 3,697,391 Cash Flow -4,397,379 Opening Balance 0 Closing Balance -4,397,379 CASH FLOW FOR CIL ADDITIONAL PROFIT Q1 INCOME Q4 Year 3 Q2 255,638 42,606 21,303 106,516 Finance Fees Legal and Valuation For Residual Valuation Q3 Year 2 Q2 20.00% 0.00% 76,954 78,301 96,996 105,742 119,520 136,251 139,272 124,845 110,165 95,228 80,029 64,565 45,035 20,283 0 0 0 0 0 0 0 0 0 2,759,180 0 -76,954 -1,068,291 -499,759 -787,342 -956,029 -172,665 824,432 838,859 853,540 868,476 883,675 1,116,012 1,414,378 1,717,966 1,800,213 400,047 0 0 0 0 0 0 -2,759,180 -4,474,333 -5,542,624 -6,042,383 -6,829,725 -7,785,754 -7,958,419 -7,133,987 -6,295,127 -5,441,588 -4,573,111 -3,689,437 -2,573,425 -1,159,047 558,920 2,359,133 2,759,180 2,759,180 2,759,180 2,759,180 2,759,180 2,759,180 2,759,180 0 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 Q1 Q3 Q4 0 0 0 0 0 820,610 1,846,373 1,846,373 1,846,373 1,846,373 1,846,373 1,846,373 1,846,373 1,846,373 1,846,373 410,305 0 0 0 0 0 0 0 Year 1 Q2 Year 2 Q2 Year 3 Q2 Year 4 Q2 Year 5 Q2 Year 6 Q2 As Above INCOME 0 EXPENDITURE Land 700,000 Stamp Duty Easements etc. Legals Acquisition 35,000 0 10,500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Planning Fee Architects QS Planning Consultants Other Professional 16,095 255,638 42,606 21,303 106,516 0 0 0 0 0 0 255,638 42,606 21,303 106,516 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 117,167 3,645,527 380,792 644,417 790,875 790,875 790,875 790,875 790,875 790,875 790,875 585,833 322,208 58,583 0 0 0 0 0 0 0 0 0 0 0 0 0 2,929 3,831 9,520 12,452 4,000 16,110 21,073 9,000 19,772 25,862 9,000 19,772 25,862 9,000 19,772 25,862 9,000 19,772 25,862 9,000 19,772 25,862 9,000 19,772 25,862 9,000 19,772 25,862 9,000 14,646 19,157 9,000 8,055 10,536 2,000 1,465 1,916 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10,000 7,500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,205,158 0 0 0 0 0 0 5,000 4,200,517 0 0 0 402,764 0 0 0 685,600 0 0 0 845,509 16,412 4,103 0 866,024 36,927 9,232 0 891,668 36,927 9,232 0 891,668 36,927 9,232 0 891,668 36,927 9,232 0 891,668 36,927 9,232 0 891,668 36,927 9,232 0 674,796 36,927 9,232 0 395,959 36,927 9,232 0 110,123 36,927 9,232 0 46,159 8,206 2,052 0 10,258 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Build Cost - BCIS Base POTENTIAL CIL Post CIL s106 Contingency Abnormals Finance Fees Legal and Valuation Agents Legals Misc. COSTS BEFORE LAND INT AND PROFIT For CIL calculation Interest Profit on cost Profit on GDV Cash Flow -1,205,158 Opening Balance 0 Closing Balance -1,205,158 21,090 21,459 95,344 104,061 117,880 134,739 137,892 123,598 109,053 94,254 79,197 63,875 44,490 19,887 0 0 0 0 0 0 0 0 0 2,780,241 0 -21,090 -4,221,976 -498,107 -789,661 -963,389 -180,153 816,812 831,107 845,651 860,450 875,508 1,107,702 1,405,923 1,716,363 1,800,213 400,047 0 0 0 0 0 0 -2,780,241 -1,226,248 -5,448,224 -5,946,332 -6,735,992 -7,699,381 -7,879,534 -7,062,722 -6,231,615 -5,385,964 -4,525,515 -3,650,007 -2,542,305 -1,136,382 579,981 2,380,194 2,780,241 2,780,241 2,780,241 2,780,241 2,780,241 2,780,241 2,780,241 0 Key Inputs - GDV Gross development value (GDV) • The income from the development • Sale of product • Subsidy and grant. • Expressed as £/m2 • Set by the market and largely beyond the control of LPA or developer Residential vs. commercial Residential Purchaser usually buying a home they intend to occupy themselves One customer: Usually a purchaser looking for a new home. Commercial Purchaser usually buying a rental stream as well as the property itself Two customers: Tenant looking for suitable premises and investor looking for a rental stream. Usually valued using GIA Usually valued using NIA What is the ‘yield’? • The rent as a proportion of the purchase price • There is an inverse relationship between yields & values, i.e. a higher yield means a lower value & a lower yield means a higher value. • Yields are often used in development appraisals to estimate the value of the completed development when it is expected to be rented to a tenant (or tenants). This consequently usually applies to commercial property, although it can apply to residential property where it is also rented. Yield example • Offices are normally bought by investors such as pension funds. Let us assume a pension fund wants to buy an office when it is fully occupied by a tenant(s)… • The developer should have a firm idea of what rent the building is likely to achieve e.g. £100,000pa. • In basic development appraisals, the initial rent is therefore used to help estimate the development value. The key question is therefore how much should this rent should be multiplied by to calculate what price a purchaser Yield example (continued…) • The “multiplier” is calculated as 1 / yield. Therefore: Development Value = Initial Rent x (1 / Yield) x 100 • Let’s assume the pension fund requires a return of 6% pa. Therefore the value of the rented office building as an investment is calculated as follows: £100,000 x (1 / 6) x 100 = £1.6m Yield example (continued…) • The previous scenario did not include assumptions on future rent or prospects for capital growth of the asset i.e. it assumed the pension fund would receive a flat £100,000 pa in perpetuity. • Let us now assume the office is in a good location with a good tenant and good prospects for rental growth e.g. up and coming area, office market looking healthy locally etc. With this information the pension fund is likely to accept a lower initial yield e.g. 5%: £100,000 x (1 / 5) x 100 = £2m Yield example (continued…) • Let us now assume the pension fund are less convinced that the rent will rise in the future and they are worried that the tenant found by the developer are unlikely to stay solvent or remain in the area long term. With this information the pension fund is likely to want a much higher yield e.g. 10%: £100,000 x (1 / 10) x 100 = £1m • These examples demonstrate the inverse relationship between yields & values. Clearly it would make no sense for the pension fund to pay over the odds for a riskier investment. What affects yields? • Risk & future growth prospects (rental stream & capital value of property). High risk = high yield. But, the higher the future growth prospects = lower yield • Low risk = lower return e.g. savings in an ISA. In a casino you would be aiming for a higher 'yield' to compensate for the probability of failure • For the main investment classes Government Bonds (gilts) are low risk whereas stocks & shares are more high risk. Returns on property investment tend to be in the middle, offering more income & capital growth potential than gilts and What affects property yields? • The tenant - Is it a strong tenant in terms of security of income (or rent)? Security is something you would normally expect to pay for, perhaps by accepting a lower initial return on your investment. • The area - Is the location suitable for a building of this quality? Is it declining or improving? Is the access good? • The building itself - What is it like? If the tenant goes bust, how easy will it be to find a new tenant? Do these and other lease clauses protect your investment e.g. upward only rent reviews etc.? Rent to Value Table 5.1 Capitalised typical rents £/m2 Rent£/m2 Yield Capitalised Rent £/m2 Large industrial 41 7.0% 586 Small industrial 48 7.0% 686 Distribution 50 6.0% 833 Large office 93 6.5% 1,431 Small office 100 7.0% 1,429 Large retail Convenience 130 5.0% 2,600 Large retail - Other 120 7.0% 1,714 Small Retail 105 7.0% 1,500 Leicester Shops 236 7.0% 3,371 Other Shops 150 11.0% 1,364 Hotels 6.5% 2,150 Student Halls 6.5% 2,225 Leisure 75 8.0% 938 Rents, Yield and Capital Value Development Value = Rent x (1 / Yield) x 100 Yield = (Rent / Value) x 100 Years Purchase (YP) = 1/Yield Yield Exercise Key Inputs - Cost of development – Construction Costs (BCIS) – Site Costs – LPA ‘discretionary’ costs e.g. CfSH, Affordable Housing, CIL, s106 etc. – Abnormal Costs e.g. Flood defences, Contamination etc. – Fees i.e. Architects, Planning, Engineers – Finance i.e. Interest, Fees, Legal and valuation – Sales i.e. Agents, Advertising Key Inputs - Profit • To reflect risk • Reward • Cost of Capital On GDV or on Cost? Profit On GDV or on Cost? Two schemes, A and B, each with a GDV £1,000,000 A has a development cost of £750,000 B a lesser cost of say £500,000 All being equal in the schemes the developer stands to lose £750,000 in scheme A, but only £500,000 in B. A is therefore more risky, it follows that the developer will wish (and need) a higher return. By calculating profit (at 20%) on costs, the developer’s return in scheme A would be £150,000 and in scheme B would be £100,000 and so reflect the risk – whereas if calculated on GDV the profits Profit On GDV or on Cost? Not trying to recreate a particular model. In fact risk and profit are more complicated. • • • • • • Profit Return on Capital Loan to value (LtV) of funding Contingency fund Development risk Bankers security / risk / confidence A pragmatic approach Phasing and Developer’s Return • Why are developers obsessed with build rates and phasing? • Return on Capital employed… Effect of phasing Year 1 Year 3 Year 2 Income Units sold Price Total 30 200,000 6,000,000 200,000 0 200,000 0 Costs Land Construction Fees Total 750,000 3,600,000 360,000 4,710,000 0 0 0 0 0 0 MARGIN 1,290,000 0 0 0 1,290,000 1,290,000 Opening Balance Closing Balance 1,290,000 1,290,000 1,290,000 Return on GDV 21.50% Dead Romans found in foundations…. Year 1 Year 2 Year 3 Income 15 15 Units sold 200,000 200,000 Price 3,000,000 3,000,000 Total 200,000 0 Costs 750,000 Land 1,800,000 1,800,000 Construction 180,000 180,000 Fees 2,730,000 1,980,000 Total 0 0 0 270,000 1,020,000 0 MARGIN Opening Balance Closing Balance Return on GDV 0 270,000 1,290,000 270,000 1,290,000 1,290,000 10.75% English Heritage get involved… Year 1 Year 2 Year 3 Income 10 10 10 Units sold 200,000 200,000 200,000 Price 2,000,000 2,000,000 2,000,000 Total Costs 750,000 Land 1,200,000 1,200,000 1,200,000 Construction 120,000 120,000 120,000 Fees 2,070,000 1,320,000 1,320,000 Total MARGIN Opening Balance Closing Balance Return on GDV 680,000 -70,000 680,000 0 -70,000 -70,000 610,000 610,000 1,290,000 7.17% Year 1 Year 2 Year 3 Income Units sold Price Total 30 200,000 6,000,000 Costs Land Construction Fees Total 750,000 3,600,000 360,000 4,710,000 0 0 0 MARGIN 1,290,000 0 200,000 0 Year 1 Year 2 Year 3 Income Units sold 15 15 Price 200,000 200,000 200,000 Total 3,000,000 3,000,000 0 Year 1 Year 2 Year 3 Income Units sold 10 10 10 Price 200,000 200,000 200,000 Total 2,000,000 2,000,000 2,000,000 0 0 0 Costs Land 750,000 Construction 1,800,000 1,800,000 Fees 180,000 180,000 Total 2,730,000 1,980,000 0 0 0 Costs Land 750,000 Construction 1,200,000 1,200,000 1,200,000 Fees 120,000 120,000 120,000 Total 2,070,000 1,320,000 1,320,000 0 MARGIN 0 MARGIN 200,000 0 Opening Balance 0 1,290,000 1,290,000 Opening Balance Closing Balance 1,290,000 1,290,000 1,290,000 Closing Balance Return on GDV 21.50% Return on GDV 270,000 1,020,000 0 270,000 1,290,000 Opening Balance 270,000 1,290,000 1,290,000 Closing Balance 10.75% Return on GDV -70,000 680,000 680,000 0 -70,000 -70,000 610,000 610,000 1,290,000 7.17% How much equity at risk and what is the return on that? % Equity 0.00% 30.00% 50.00% 100.00% Income Units sold Price Total 30 200,000 6,000,000 30 200,000 6,000,000 30 200,000 6,000,000 30 200,000 6,000,000 Costs Land Construction Fees Total 750,000 3,600,000 360,000 4,710,000 750,000 3,600,000 360,000 4,710,000 750,000 3,600,000 360,000 4,710,000 750,000 3,600,000 360,000 4,710,000 MARGIN 1,290,000 1,290,000 1,290,000 1,290,000 0 1,413,000 2,355,000 4,710,000 91.30% 54.78% 27.39% Equity Return on GDV #DIV/0! Internal Rate of Return – IRR The rate of interest (expressed as a percentage) at which all future cash flows (positive and negative) must be discounted in order that the net present value of those cash flows, including the initial investment, should be equal to zero. It is found by trial and error by applying present values at different rates of interest in turn to the net cash flow. It is sometimes called the discounted cash flow rate of return. In development financial viability appraisals the IRR is commonly, although not always, calculated on a without-finance basis as a total project IRR. (RICS Guidance) Key Inputs – Land Value • • • • • The worth of the site Alternative use value When assessed – before planning starts Hope value Competitive Return (Relates back to the ‘big question’) A life changing event? – Not what they paid! Harman v RICS Harman: We recommend that the Threshold Land Value is based on a premium over current use values and credible alternative use values. RICS: Threshold land value. A term developed by the Homes and Communities Agency (HCA) being essentially a land value at or above that which it is assumed a landowner would be prepared to sell. It is not a recognised valuation definition or approach. Harman v RICS • “It is somewhat misleading to describe this approach (EUV plus a margin) as totally arbitrary. The market value approach on the other hand, while offering certainty on the price paid for a development site, suffers from being based on prices agreed in an historic policy context…I don’t believe that the EUV approach can be accurately described as fundamentally flawed or that this examination should be adjourned to allow work based on the market approach to be done.” Report to The Mayor of London” Keith Holland BA (Hons) DipTP MRTPI ARICS (Jan 2012) A Pragmatic Viability Test EUV Plus a premium – reality checked against market value. Will EUV Plus provide competitive returns? Land owner’s have expectations (life changing?) Will land come forward? PAS SUPPORT THIS APPROACH 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+ CfSH, open ) space etc. Overview of the HDH simple viability model Using the model in practice The model used on this course is a basic residual method based on a residential scheme. In practice you will be faced with more complex scenarios such as: • Mixed use schemes incorporating commercial therefore you’ll need to grasp what a ‘yield’ is. • Alternative or more complex viability models e.g. Internal Rate of Return (IRR) based models Valuation is a 3 year degree on its own, but you need to be able to interrogate the evidence provided to you. Residual appraisal exercise 1 Context: Savills research • Looked at appeals data for major schemes in the past 2 years for 190 authorities across southern England • Proportion of major appeals relating to schemes of 10+ homes going against councils has risen. 72% cent of schemes allowed following inquiry (October December 2012) • Average of 5.7 years land supply • 34% of LPAs in 20% buffer category Bishops Cleeve, Tewkesbury, Gloucestershire 1,000 homes – SoS decision letter said that the most significant material consideration was the requirement for a five-year housing land supply, which he said could not be demonstrated against the plan. Compliance with objectively assessed housing needs is key. DCS Number 100-078-098 Burgess Farm, Salford 350 homes on a greenfield site was allowed by the SoS against the inspector's advice. Despite the permanent loss of an area of open countryside and the fact that the development would seriously degrade the character and appearance of the area. SoS considered that this was outweighed by the scheme's contribution to reducing the significant shortfall of some 4,000 homes (2.5 years supply) against the five year housing land requirement. DCS Number 100-078-099 Clay Farm, Cambridge - 07/0621/OUT The SoS agrees with the Inspector that the appellants’ approach to assessing viability has the effect of protecting historic land values as well as insulating the developer against a risk for which he is already indemnified by profit margins and that this would be at the expense of affordable housing levels. He therefore also agrees with the Inspector that the residual land value (RLV) approach used by the Council is the appropriate methodology for evaluating the economics of these developments…he is concerned that there is nowhere else to accommodate the affordable housing at the levels intended for these sites in the development plan. The SoS attaches very substantial weight to this matter and considers that it outweighs the shortfall in the Council's five year supply of developable sites. Bristol: APP/P0119/A/08/2069226 • McCarthy & Stone – 29 sheltered apartments for the elderly including associated communal facilities and car parking. • A main issue at appeal was whether the proposal would make suitable provision for affordable housing. Policy seeks 33.3% affordable housing. On-site not suitable therefore parties agreed that an off-site contribution was acceptable subject to viability. • At the Inquiry appellant stated viability of the proposal would only allow a contribution of £115,000 which would fund only 1 or 2 affordable units, and is well below the target of 33.3%. The LPA were seeking circa £414k based on previous successful appeal decisions. Bristol: APP/P0119/A/08/2069226 • Both parties conducted appraisals using the old Housing Corporation model. There were differences between the parties on BCIS construction costs, finance costs, contingency, developers profit, build rates and CfSH. Resulting in different residual values from LPA and appellant. • LPA argued that the appellant had inflated costs of the scheme. LPA used a comparable site from another appeal. Inspector placed little weight on this approach as that comparable scheme had not yet come forward. Further he felt the appellants assumptions were reasonable and evidenced. • “Any reservations that I may have about the balance of viability arguments are outweighed by what I consider are clear benefits of the proposal.” (due to Beckenham: APP/G5180/A/08/2084559 • change of use of office building to residential and enlargement to comprise 55 dwellings including key worker and affordable housing. • Main issues – whether the proposed development meets development plan policies concerning the provision of affordable housing or a payment inlieu thereof and, whether there are any other material planning considerations relevant to the determination of the case. Beckenham: APP/G5180/A/08/2084559 • At the Inquiry a SoCG was submitted agreeing a) the residual site value with no affordable housing (£2.773 million) b) the residual value with affordable housing (£1.9223 million) and c) the existing use value of the site (£2.482 million). These agreed values determine that without an affordable housing contribution, the scheme will only yield less than 12% above the existing use value, 8% below the generally accepted margin necessary to induce such development to proceed. Self-evidently, with a 35% AH target, such a scheme must also be, in the view of the appellant, considered non-viable. Beckenham: APP/G5180/A/08/2084559 • The appellant maintains that the CUV is an ‘abnormal cost’ insofar as it is an intrinsic and unique component of the market value of the site, which they are bound to take into account when assessing the relative residual values of the site. • The Council maintain CUV cannot be deemed ‘abnormal’, and should not be accounted (notwithstanding their acceptance of the figure in the SoCG) in relation to viability. Beckenham: APP/G5180/A/08/2084559 • It seems to me therefore that the CUV of the appeal site, as agreed in the SoCG, is a legitimate component of market value, and so an intrinsic and necessary component of the viability analysis. I conclude the CUV constitutes an abnormal cost in this specific case. Such a conclusion determines that when the agreed residual value of the site, incorporating 35% affordable housing is set against CUV, the development becomes unviable. Having carefully weighed the matter, I conclude the viability report convincingly demonstrates that the proposals cannot support any affordable housing; accordingly they are not in contravention of LBB and LP affordable housing policy. Shinfield • • • • APP/X0360/A/12/2179141 Reading University Wokingham Council 8th January 2013 Site and scheme • 8.5 ha, 5 km south of Reading • Was National Institute for Research into Dairying (closed in 1980s) • 4.5 ha within development limits – with buildings etc • 4 ha beyond development limits – pasture • To clear site and build 126 new dwellings within development limits – remainder to be open space etc History • Long history • 18,766m2 of B1 in 1992 • 2001 identified as being suitable for 80 dwellings by Local Plan inspector • 2003 part of site developed • The principle of development was not contested. Main Issues ‘The main issues are: (i) whether the proposals make adequate provision for mitigating any adverse impact they would have upon local services and infrastructure; and (ii) whether the proposed amount of affordable housing would be appropriate in the context of the viability of the development, the National Planning Policy Framework, development plan policy and all other material planning considerations.’ The problem The Council wanted… • £2,028,920 in developer contributions • 40% affordable housing (policy says subject to viability) • Higher sales prices • Lower developers profit • Different Benchmark land value / site value The Developer offered… • £2,312,569 in developer contributions • 2% affordable housing Developers Profit The appellants supported their calculations by providing letters and emails from six national housebuilders who set out their net profit margin targets for residential developments. The figures ranged from a minimum of 17% to 28%, with the usual target being in the range 20-25%. Those that differentiated between market and affordable housing in their correspondence did not set different profit margins. Due to the level and nature of the supporting evidence, I give great weight it. I conclude that the national housebuilders’ figures are to be preferred and that a figure of 20% of GDV, which is at the lower end of the range, is Benchmark land value There is a significant difference in the figures produced by the parties. The Council calculated a Benchmark Land Value of £1,984,000 (reduced to about £1,865,000 when decontamination costs were agreed); the appellants calculate it to be £2,325,000. During the Inquiry reference was made to Current Use Value (CUV) and Existing Use Value (EUV) but it was agreed that these definitions are interchangeable in respect of the calculations used for this site. The Appellant’s approach The appellants’ valuation of the site is £2,325,000 based upon 8 acres of commercial open storage/ industrial land and buildings at £250,000 per acre and 13 acres of settlement fringe at £25,000 per acre. The figure of £250,000 per acre seems reasonable in the light of the recent sale value achieved at the smaller site at Paddock Road (£330,000 per acre). The Council’s approach The Council did not use comparators; instead it relied upon a valuation based upon a substantial office scheme on the appeal site. This was based upon the outline planning permission for offices on the site in 2003 that was renewed in 2006 but which has since lapsed. This development provided a value of £2.75m; from this it is necessary to subtract the cost of decontaminating the land. This gives a benchmark SV of £1.865m, a figure revised from the Council’s original evidence to take account of the agreed costs of decontamination. I am concerned about this approach in that the Council has failed to demonstrate that there is any market for such a substantial office development here. Indeed, the only recently completed (2009) office development of comparable scale, The Blade in Reading, is still largely vacant. Competitive Return Determining what constitutes a competitive return inevitably involves making a subjective judgement based upon the evidence. Two very different viewpoints were put forward at the Inquiry with the appellants seeking a land value of £4,750,000 which is roughly the mid-point between the EUV/CUV and the RLV with planning permission for housing and no obligations. This ties in with the 50:50 split between the community and the landowner sought by the appellants. The Council considered that a sum of £1.865m would ensure a competitive return; that is to say the Council’s calculation of the EUV/CUV. Competitive Return Paragraph 173 of the Framework says that the costs of any requirements should provide competitive returns to a willing landowner and willing developer to enable the development to be deliverable. The paragraph heading is “Ensuring viability and deliverability”; it is clear that its objective is to ensure that land comes forward for development. Competitive Return I am not convinced that a land value that equates to the EUV/CUV would provide any incentive to the landowner to sell the site. Due to the particular circumstances of this site, including the need to remediate the highly significant level of contamination, such a conclusion would not provide any incentive to the landowner to carry out any remediation work. There would be no incentive to sell the land and so such a low return would fail to achieve the delivery of this site for housing development. In these circumstances, and given the fact that in this case only two very different viewpoints on what constitutes a competitive return have been put forward, the appellants’ conclusions are to be preferred. In the scenario preferred by the Council, I do not consider that the appellants would be a willing vendor. Viable amount of affordable The RICS GN says that any planning obligations imposed on a development will need to be paid out of the uplift in the value of the land but it cannot use up the whole of the difference, other than in exceptional circumstances, as that would remove the likelihood of land being released for development. That is exactly what is at issue here in that the Council’s valuation witness, in cross examination, stated that a landowner should be content to receive what the land is worth, that is to say the SV. In his opinion this stands at £1.865m. I accept that, if this figure was agreed (and it is not), it would mean that the development would be viable. Viable amount of affordable However, it would not result in the land being released for development. Not only is this SV well below that calculated by the appellants, there is no incentive to sell. In short, the appellants would not be willing landowners. If a site is not willingly delivered, development will not take place. The appellants, rightly in my opinion, say that this would not represent a competitive return. They argue that the uplift in value should be split 50:50 between the landowner and the Council. This would, in this instance, represent the identified s106 requirements being paid as well as a contribution of 2% of the dwellings as affordable housing. And finally I conclude on this issue that, allowing the landowner a competitive return of 50% of the uplift in value, the calculations in the development appraisal allowing for 2% affordable housing are reasonable and demonstrate that at this level of affordable housing the development would be viable (Document 26). The only alterations to these calculations are the relatively minor…