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…