Planning matters

The two previous blogs covered changes to viability assessments proposed in the recent draft National Planning Policy Framework and accompanying guidance [i], and how these changes present a shift towards greater levels of prescription, in a bid to increase certainty over developer contributions.

Whilst the second blog in this series highlighted that we are still some way away from a zonal-approach to planning, recent events show signs that the Government’s subtle zoning moves are being taken seriously, with many in the industry paying close attention to a recent case in the High Court, already known simply as ‘Parkhurst’.

In April, a High Court judge ruled in favour of the London Borough of Islington over a long and drawn out dispute between the council and developer Parkhurst Road Ltd., over the levels of affordable housing which would be provided on a new-build development on the site of a former territorial army base [ii].

The appellant’s claim involved a challenge to an Inspector's refusal of an appeal against the decision the council took to refuse planning permission for a residential scheme, they claimed could only viably support 10% of affordable housing on-site.

The appellant attempted to justify this based on the purchase price of the land and comparable transactions on other schemes in the area, claiming that delivering any more affordable housing would make the scheme unviable. However, using the EUV + method, the council argued that the benchmark land value was much lower than the figure reached by the developer.

Whilst finding some fault with the council’s calculations, the Judge ruled the Inspector had validly rejected the evidence of the Claimant, as the appellant had failed to adjust the market evidence in order to ensure that it took account of local policy requirements.

In a post-script to the ruling, the judge advised that the guidance on viability assessments by the Royal Institution of Chartered Surveyors should be revised “in order to address any misunderstandings about market valuation concepts and techniques, the ‘circularity’ issue and any other problems encountered in practice over the last six years, so as to help avoid protracted disputes of the kind we have seen in the present case and achieve more efficient decision-making”.

This has of course caused a stir in the development industry, especially from those with sites already in the pipeline. But the case is being viewed by many as a landmark decision, potentially becoming an important piece of case law on land valuation, viability and the funding of affordable housing.

But there is a very clear down-side already in evidence. There is the risk that landowners will not bring forward sites, in the hope that policy will one day change in their favour. Of course, local authorities could use compulsory purchase orders, but interference in private property rights is politically unpopular and rare, especially when the money used could arguably better subsidise social and affordable housing.

With cross-party consensus on the issue of land value, viability and developer contributions, and a suitable return for landowners factored into any new guidance on all three, the chance of this hiatus happening could be curbed – especially if there were to be clear transitional arrangements and no sudden change in approach. The government will still need to think hard about how to manage the transition period, as sites will not be built out if there is no feasible return for the developer and landowner.

Whilst it seems likely (and necessary to some extent) that viability assessments will continue to be deployed at the application stage because almost no development project is fully policy-compliant, having a defined approach which is publicly accessible will hopefully reduce appeals, speed up the planning process and increase transparency.

Increasing certainty has been a long-term aim for planning professionals, and repeatedly called for by developers and the public. Achieving this through prescriptive zoning-type measures seems like a dramatic step; however, when considering that development pressure and the scarcity of land are only likely to increase, it seems likely that the Government will continue to explore routes which have proven successful elsewhere.

Housing issues are never far from the headlines, and one simple truth lies at the heart of the matter: we are not building enough new homes. But in addition to ensuring that sufficient new homes are delivered, we must also ensure that an appropriate mix of housing is achieved. If the emerging housing supply does not reflect the needs and demands of existing and potential future residents, there is a risk that an imbalance will emerge between the supply of and demand for certain types of residential property. The consequence would be that the prices of those properties that are more in demand would increase at a faster rate than that of the overall housing stock, exacerbating affordability issues and undermining the ability of certain sectors of the population to meet their housing needs.  

The importance of achieving an appropriate housing mix is reflected in government policy, which states at paragraph 50 of the National Planning Policy Framework (NPPF):

“To deliver a wide choice of high quality homes, widen opportunities for homes ownership and create sustainable, inclusive communities, local planning authorities should:

• “Plan for a mix of housing …;
• “Identify the size, type, tenure and range of housing that is required in particular locations, reflecting local demand…;”

The draft NPPF launched for public consultation in March 2018 adopts a similar approach; paragraph 62 states:

“Policies should identify the size, type and tenure of homes required for different groups in the community…”

The current PPG provides some detail about how to identify the need for certain types of housing and the needs of different groups, but does not provide any specific guidance on how to identify the mix of different house sizes that is required.

Lichfields has launched a new product, Sizemix, which provides a robust and transparent means for identifying the size, type and range of housing that is required in a local area, in line with national policy.

Understanding the right mix of housing relies on an appreciation of the differences between housing need and demand. This difference is particularly acute in the open market sector, where households are free to occupy housing in accordance with what they want and can afford. In this context, whilst housing need draws solely on the size and structure of individual households, housing demand reflects the reality that many people will often deliberately under-occupy their homes and thereby express a demand for a property that is larger than they might specifically need. For example, a couple might only need a one-bedroom property but might want a larger property. This pattern leads to a combination of overcrowding and under-occupation.

According to the latest available ONS’ standards of occupancy[1], 700,000 households in England were overcrowded at the time of the 2011 Census, of which over 400,000 were households with dependent children. A total of 3.8m households (c.20%) occupied housing in line with their needs, whilst 7m households had at least 2 spare bedrooms. Figure 1 provides a breakdown of occupancy patterns by household type. The highest levels of under-occupancy are amongst older households and couples without children, compared to the highest level of over-occupancy amongst households with children and multi-adult households.

Table 1 considers the relationship between household and dwelling size in more detail by illustrating the occupancy patterns of all private sector households in England. It shows that 2-person households in 3-bed dwellings form the largest household-dwelling group, with 16.1% of households falling within this group. Contrary to what might be expected, most single person households (19.9%) occupy 2 and 3-bed dwellings, with relatively few occupying 1-bed dwellings. Interestingly, a similar number of 5-bed dwellings are occupied by 4-person households as by 2-person households.

Explaining the relationship between household size and dwelling type

A range of factors impacts on housing requirements, in addition to household size. The fact that many people view their home as an investment means that they will often seek to buy one that they can afford, rather than the space that they actually need, even though such a property might be too large. Having spare bedrooms is viewed positively by many households; it provides flexibility for changing circumstances (such as the birth of a child) and allows visitors to stay, with both being significant factors for many people when searching for and choosing to buy a new home.

Another factor that might influence the current and future demand for larger homes is the trend for working from home. There has been a steady rise in the proportion of people in employment working from home. As of 2017 this stands at 13.6% of people in employment. Increases in the number of people working from home may translate into a demand for larger housing as people seek additional space for use as an office.

Whilst some changes to households result in the need for larger properties, others may create the opportunity to downsize – for example, when ‘empty-nesters’ no longer need all the space in their family home. However, as shown above, this often does not happen, with 2.4m households (84%) over the age of 65 having at least 1 spare bedroom, and just 718,000 (15%) occupying housing in line with their ‘needs’. This might relate to a lack of sufficient supply of housing products perceived to be attractive to those downsizing, but equally research suggests there is simply a strong preference from many people to remain in their existing home. The English Housing Survey shows that older households are the least likely to move, with just 2.3% of households over the age of 75 and 3.1% of households aged between 65 and 74 moving in the previous 12 months. By comparison, younger

Within the context of a need to increase the rate of house building, it is of critical importance to ensure that an appropriate mix of housing is provided to meet demand. Sizemix represents an important addition to the range of tools provided by Lichfields. It supports all involved in the development process by helping to ensure an adequate supply of the right type of houses can be delivered, in line with local requirements.

Further details of Sizemix are available here. Please contact any of our offices to discuss how we might be able to assist you.

 

 

 

 

 

 

In the same week, the GLA-commissioned report ‘Capital Gains - A Better Land Assembly Model for London’ has called for powers to be granted to London boroughs that would allow them to designate ‘Land Assembly Zones’ [iii]. Although some London boroughs like Croydon and Hackney have taken a very pro-active approach to regeneration in their areas, this has tended to be on a site-by-site basis and is far from being comprehensive. By assembling smaller plots together, development and infrastructure could be better consolidated, whilst the cost and risk of development could -  in the right circumstances - be shared through land-pooling, in a similar fashion to that outlined above.

With paragraph 34 of the draft NPPF stating that “plans should also set out any circumstances in which further viability assessment may be required in determining individual applications”, without any stricter controls over development in plans themselves, it seems likely that this will be an option which many applicants decide to pursue.

Few would doubt there is a problem in housing in the UK - the crux of this decades-old problem being that we have failed to build enough, and what we have built has often failed to meet our needs - either in terms of affordability, location, size or quality.

The Government’s proposed reforms to national planning policy and guidance published in March attempt to get to the root of the problem [i]. Whilst the pressure has increased for local authorities to turn allocations into completions, attention has also turned to the role that developers, land promoters and landowners have played in the current crisis.

Following widespread criticism from the press and public, there has been a radical rethink in the Government’s approach to developer contributions. In particular, major changes have been proposed to policy and guidance relating to the use of viability assessments; the changes aim to increase the certainty of outcomes on policy requirements and improve the speed of decision-making, whilst increasing the transparency of transactions to make the system more accountable to the public.

 

In 2012, when national guidance on viability was introduced and the idea of a competitive return was first given material weight, construction and housebuilding had almost come to a complete halt as a result of the 2008 financial crisis. Many sites with policy requirements set before the recession were no longer viable from a developer’s perspective.

The chief concern for the Conservative / Lib Dem coalition at the time was to get the economy moving, allowing some flexibility over developer contributions set out in local policies helped ensure that new housing continued to be built, keeping the construction industry afloat.

Viability assessments allow developers to appraise the economic case of a scheme, ensuring that after all the costs associated with development have been met, the margin of profit is great enough, relative to the level of risk for the development, to provide a competitive return. If an assessment shows that a scheme is not viable (usually meaning that the expected profit is below 20%), the developer is in a position to negotiate with the local planning authority (LPA) over the level of contributions they will make toward affordable housing, infrastructure or amenities for the local community.

However, despite the housing market making somewhat of a recovery, land prices have escalated (particularly in London and the south east, but in other locations too) and developers continue to submit viability appraisals alongside most major applications. As a consequence, local policy targets for affordable housing can rarely be met and development funding local amenities, where there is no community infrastructure levy (CIL) in place, has not reached expected levels at a time when local authorities are most reliant on such sources.

A key reason has been the inconsistency of past guidance. With no fixed methodology, assessments undertaken by different stakeholders can reach vastly different conclusions. Whilst an LPA may find their policies to be deliverable when tested at the plan-making stage, the scheme-specific calculations produced by a developer can show a project to be unviable.

Developers have predominantly used the Residual Valuation Method in determining the maximum price they can pay for land. This is calculated by taking the total value of the completed development, deducting the total development costs (including those incurred through planning obligations and CIL), and then finally subtracting the developer’s profit - the amount left over is the residual land value. The development is assumed viable if this amount is sufficiently above the existing use value, or that of an alternative use, for the landowner to sell the land. Developers’ cost projections often incorporate comparable market evidence, although as research from the RICs highlighted, this has not always properly accounted for local policy requirements [ii].

This has led to the emergence of a circularity, where developers have overpaid for sites based on the evidence of comparable transactions – where comparable evidence has not sufficiently taken account of planning obligations set out in policy. This subsequently leads to a reduction in the level of affordable housing that can be provided, justified through the submission of a viability assessment on application, in effect transferring a large degree of risk from the developer to the community.

With the mainstream media regularly covering stories of developers using viability assessments to justify schemes with little to no affordable homes, often with no detailed understanding of the projects themselves, trust in the industry has waned, whilst the legitimacy of planning has simultaneously been undermined.

 

The 2017 Housing White Paper made clear that there would be changes to the existing system of viability appraisals; the recent proposals perhaps go further than many would have expected.

The new draft guidance recommends that viability assessments use a standardised methodology for determining land value. This largely mirrors the Mayor of London’s Affordable Housing and Viability SPG, which recommends the ‘Existing Use Value Plus’ (EUV +) method for scheme appraisals.  

This approach establishes a benchmark land value based on its existing use, plus a premium for the landowner, high enough to make the sale worthwhile from their perspective. The draft guidance also makes clear that benchmark values should “fully reflect the total cost of all relevant policy requirements including planning obligations and, where applicable, any Community Infrastructure Levy charge”.

The draft national Planning Practice Guidance (PPG) also states that viability assessment ought to take place at the plan-making stage, rather than for individual schemes at the application stage.

Paragraph 58 of the new National Planning Policy Framework states that where a proposal for development is compliant with all local policies, no viability assessment should be needed at application stage. Development plans should set out the expected contributions for different sites and different types of development, with the suggestion that sites could be grouped by common characteristics such as location, the current or proposed land use, and size.

There is also an expectation that viability assessments will be publicly available as default, to increase the transparency over negotiations developers have with councils.

By prescribing contributions and setting a standard approach for determining residual land values, the Government is trying to narrow the scope for what can often be a protracted period of negotiation.

Essentially, the proposals seem to suggest a move away from the flexibility and discretion that have characterised the planning system in England, towards a more prescriptive approach not dissimilar to the zonal ordinances used elsewhere – all with the intention of creating more certainty and speeding up housing delivery via the planning process.

With viability assessment-related disagreement across the industry, greater clarity at national level is certainly needed; how much of this will come through in the finalised PPG and how effective it will be remains to be seen.

The implications of planning in England moving more toward a system of zoning will be explored in a second blog, published later this week.