Reassessing land values

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Reassessing land values

Reassessing land values

Simon Coop 20 Jun 2019
In April 2018, Holgate J handed down his decision in respect on Parkhurst Road Ltd (PRL) and Secretary of State for Communities and Local Government and the Council of the London Borough of Islington (“the Parkhurst Case”) (EWHC 991). This judgment related to a long running dispute over the proposed redevelopment of the former Territorial Army Centre on Parkhurst Road in Islington and focused in particular on the Council’s view that the scheme failed to comply with the Core Strategy requirement for 50% of new housing to be affordable.

This has become a landmark case in relation to viability, with the key issue relating to the impact of land value on the viability of development. The judge expressed concern about the “circularity” that arises from purchase prices being:

  1. Based on a downgrading of policy expectation for affordable housing; or,

  2. Inflated due to overly optimistic expectations about the amount of development that might be permitted on site.

Either scenario could result in argument being made that a policy-compliant scheme is not viable because of the amount paid for the land (a situation that occurred in the Parkhurst case). This concern has now been reflected in the revised NPPF and PPG which state that:

  1. The price paid for land not a justification for failing to accord with relevant policies;

  2. An “interpretation” of policy should not dictate the price paid for a site; and,

  3. Historic land values achieved in respect of non-policy compliant schemes should not be permitted to inflate current or future values.

Going back to Parkhurst, the site was redundant, and it was agreed by both parties that it had a negligible existing use value (EUV) and no alternative land value. This created clear difficulties in trying to determine its value for the purposes of the viability assessment. The Claimant (PRL) had held throughout the two planning appeals that preceded the litigation that “an approach based on EUV with some uplift was inappropriate where the EUV of the site was negligible” (HCJ paragraph 23). This view was supported by the 2012 RICS Professional Guidance on Financial Viability in Planning which:

discourages reliance on the EUV Plus as the sole basis for arriving at site value, because the uplift is an arbitrary and the method does not reflect the workings of the market. Furthermore, the EUV Plus method is not based upon the value of the land if the redevelopment involves a different land use.” (HCJ paragraph 57)

The Claimant’s first ground of challenge stated that the Inspector had erred in law because he incorrectly stated that the Council was promoting an EUV Plus method of valuation when that was not the case and that he “relied upon his erroneous misunderstanding of the Council’s position as one reason for not accepting PRL’s contention that a market approach was ‘the only reasonable means by which to establish land value’.” (HCJ paragraph 94). In dismissing this ground, Holgate J accepted that the Inspector had appropriately considered the EUV Plus method to be “preferable to a purely market value approach, allowing for value to have regard to the market as a consideration rather than the determining factor.(HCJ paragraph 97)

The relevance of the Parkhurst case is also underlined by the (rare) inclusion of a lengthy post-script by the judge. In addition to stating that the High Court was “not the appropriate forum for resolving issues of the kind” (HCJ paragraph 147), he called upon the RICS:

“to consider revisiting its 2012 Guidance Note, perhaps in conjunction with MHCLG and the RTPI, in order to address any misunderstandings about market valuation concepts and techniques, the ‘circularity’ issues and any other problems encountered in practice over the last 6 years or so.” (HCJ paragraph 147).

Following the judgment, the deputy mayor for housing of Islington Council also wrote an open letter to the RICS urging it to revise its 2012 guidance note.

These calls have fallen on fertile ground. The EUV Plus method is now enshrined in the NPPF and PPG as the approach that should be taken in relation to land valuation, and the RICS is currently reviewing its guidance note, the revised version of which is expected to be subject to consultation later in the summer. In the meantime, the RICS has recently (May 2019) published a professional statement on conduct and reporting in relation to financial viability in planning. The purpose of this is to set out mandatory requirements for those involved in the preparation of viability assessments, emphasising the importance of impartiality, objectivity and transparency. Whilst important, this may be viewed as having limited interest beyond RICS members. However, it clearly points towards an EUV Plus approach to land valuation being enshrined in the forthcoming updated guidance note.

Given the approach now required by the NPPF and PPG, this reversal of the approach previously endorsed by the 2012 note is not at all surprising. However, it will not overcome all of the problems associated with land valuation, and it will be interesting to see how the revised RICS guidance, any future changes to the PPG and the approach taken by local planning authorities and Inspectors address the following:

  1. What constitutes a reasonable premium: Under this approach, the “premium” should provide incentive and represent minimum that a “reasonable” landowner would accept for land. But how is that to be quantified?

  2. How to apply this approach when the existing land value is negligible or even negative (for example, due to very high remediation costs).

  3. The extent to which it is possible to apply a standardisation of the EUV Plus approach (particularly in the case of the to the typology approach to viability assessment that the NPPF requires as part of plan-preparation process), bearing in mind that there may be substantial differences in acceptable/appropriate uplift across a local authority area.

  4. Notwithstanding the requirements of the NPPF and PPG, how to achieve a widespread application of the EUV Plus approach by all involved in the development industry.

  5. How to ensure an equal playing field in relation to the consideration of land values and policy requirements: In a competitive market, how to ensure that those seeking to acquire sites do not keep losing out to those that continue to disregard policy expectations.

The RICS consultation process will provide an opportunity to debate some of these issues, with the aim of increasing clarity for all involved in the development process – whilst also maintaining the flexibility that is essential in dealing with different sites in different areas. We will review the consultation draft of the guidance note when it is available but the debate about the appropriate land value to use for the purpose of viability assessments looks set to rumble on.