Planning matters

Following the recent Tory election victory, where seats were secured in a number of traditional Labour strongholds, the Government's attention appears to have once again turned to the North.  As the Country awaits the March 2020 budget announcement, this blog looks at some of the potential benefits of proposed transport infrastructure provision in the north, and the implications for its delivery.

One of the key issues in the North is inadequate transport connectivity which acts as a barrier to attracting investment.  This also means that firms cannot tap into the labour market and get the skilled workers they need.  A number of infrastructure initiatives are proposed to help address this issue including Northern Powerhouse Rail and HS2 and these initiatives have been carried forward into a range of strategies and transport plans.

For example, the Transport for the North [TfN] Strategic Transport Plan sets a number of objectives to achieve a vison of “a thriving North of England, where world class transport supports sustainable economic growth, excellent quality of life and improved opportunities for all” ^[1] including increasing efficiency, reliability, integration, and resilience in the transport system. It seeks to realise the benefits of agglomeration and economic mass, in the North by providing faster, more efficient, reliable and sustainable journeys on the road and rail networks. Under the transformational growth scenario outlined in the plan, it notes that growth is expected in high and medium-skilled occupations (an increase of 35,300 and 1,600 jobs per annum by 2050, respectively).

In addition, the Greater Manchester Strategy, which provides a framework for the Local Industrial Strategy, states that it will capitalise on the investment planned at Manchester Airport, including the arrival of HS2 and Northern Powerhouse Rail, to strengthen Greater Manchester as an internationally competitive employment location. It emphasises the importance of delivering this infrastructure in order for Greater Manchester to achieve economic growth and states[2]:

“Given the decision to withdraw from the European Union, we need to focus on maximising our existing competitive advantages.  Greater Manchester has always been an outward looking city with a rich history of global trade and welcoming of diversity and talent. Remaining open, international and connected will be ever more important in the coming years. As the heart and driver of the Northern Powerhouse economy, we need to prepare for, and take advantage of, the transformational opportunities major infrastructure improvements, such as HS2 and Northern Powerhouse Rail, will provide”.

The Strategy notes that a skilled workforce is essential to deliver the key infrastructure projects on which prosperity depends. It emphasises the need to bring together policies and investments around housing and transport to create inclusive, sustainable, growth locations. To provide one example of the amount of employment which may be generated by these strategic infrastructure improvements, GMCA growth and reform plans ^[3] suggest that the HS2 hub at Piccadilly station has the potential to create 30,000 additional jobs in the immediate vicinity of the station.

We are also seeing initiatives in the wider North West to help maximise the benefits of new infrastructure provision, such as the Crewe Hub Area Action Plan, which establishes a development framework to facilitate and manage development around a future HS2 station within the town. The proposals include a new commercial district, mixed use commercial and residential development within walking distance of the station, advanced digital infrastructure and vastly improved physical connectivity to the station, supported by environmental and social infrastructure. Development strategies suggest growth at Crewe of around 7,000 new homes and 37,00 new jobs by 2043 as part of this process.

However, there is a long way to go and those with experience of using the northern rail network will be familiar with delays, slow services, and poor carriage quality which have contributed to the Government’s recent decision to nationalise Northern Rail. This does however help create new possibilities for the future of services in the northern franchise area.   

One of the key initiatives for ensuring that sub-regional connectivity is improved is Northern Powerhouse Rail.  This would offer much faster, more frequent and reliable rail links and open up new opportunities for people and businesses by linking the North’s six main cities. At the moment, fewer than 2 million people in the North can access four or more of the North’s largest economic centres within an hour. This would rise to 10 million once Northern Powerhouse Rail is delivered; transforming the job market and giving businesses access to skilled workers. 

The Prime Minister recently gave his backing for the Leeds to Manchester route which would reduce travel time between the two cities from 50 minutes to less than 30.  Major upgrades to four stations, the electrification of lines and the installation of more railway tracks are part of a planned £2.9bn upgrade of the route.  Whilst this has been greeted with optimism from some, Liverpool Metro Mayor Steve Rotheram has questioned the focus on Transpennine connectivity over routes linking Liverpool and Manchester.

The delivery of both HS2 and Northern Powerhouse Rail, in tandem, would arguably do most to achieve economic prosperity and continue to encourage investment in northern businesses.  However, it is still not certain whether either scheme will fully deliver. 

The cost of HS2 in particular has been subject to criticism from some quarters recently, perhaps most vociferously from Lord Berkeley, the former deputy chair of the Oakervee Review into HS2, who, in his own review of the scheme has claimed the project costs are likely to soar to more than £108 billion.  This is almost double from the £56bn expected in 2015.  So, it is no surprise to learn that the Transport Secretary, Grant Shapps, requested more data before making a decision on the scheme. 

There are currently various levels of commitment to each section of HS2 and the future of the whole network is uncertain. For example, the Rail Reform and High Speed Rail 2 (West Midlands - Crewe) Bill, which gives the powers to build and operate Phase 2a between Birmingham and Crewe, passed through the House of Commons and had completed Second Reading in the House of Lords before the dissolution of the previous Parliament, and was covered in the December 2019 Queen’s Speech. However, reference to Phase 2b, the eastern link of the route, connecting the East Midlands into Yorkshire, was absent in the Queen’s Speech and there have been media reports that Phase 2b could be dropped.  A decision on the future of HS2 is expected imminently. 

The fate of other schemes has still also yet to be sealed.  For example, the proposed £560m ‘Northern Hub’ to increase capacity within a bottleneck at Manchester Piccadilly station, first announced by George Osborne in 2014, has yet to reach fruition.

Over the coming weeks and when the Chancellor’s budget is revealed on 11^th March it should hopefully become clearer whether there is a light at the end of the tunnel or whether we will still be stuck at the station.

Following the Parkhurst Judgment[1] and the advice that Holgate J appended to it, RICS were somewhat obligated to update its guidance on the practice of appraising development viability (see my colleagues blog for more details). This process began in May 2019 with the publication of 1^st edition of a new RICS Professional Statement on “Financial viability in planning: conduct and reporting”.

RICS has since followed with the publication of a consultation draft “Assessing financial viability in planning under the National Planning Policy Framework for England, 1st edition”.

The consultation runs until February 9^th 2020.

The focus of the RICS document is the role a Financial Viability Appraisal (FVA) might play in plan making and decision taking. The document neatly sums this up on pages 19-20:

• a minimum reasonable return to the landowner (defined as the EUV plus a premium), and
• a suitable return to the developer.

The revised RICS guidance now aligns with the PPG in respect of the importance given to ensuring that Local Plans are robustly tested to deliver their objectives.

On first glance, the RICS guidance suggests that if a site is not found to be viable, the contributions asked of it must be reduced. However, the RICS now aligns itself with the new PPG to ensure that  the many variables of a FVA are set so as to ensure the site does all that it can to maximise contributions it makes.

There are a significant number of variables that could be considered (including Existing Use Value, Costs, Sales values, late stage reviews etc.), however for the purpose of this blog we consider the two that go to the heart of the RICS FVA:

• Developers profit/return; and,
• Landowner incentive to sell.

The PPG considers a reasonable return to the developer of 15-20% of Gross Development Value (GDV) – although it notes that a lower return may be more appropriate in certain circumstances, where risk (presumed market enabled) is reduced. This approach is supported by  the RICS guidance which makes it clear that the target return is risk adjusted and therefore already compensating the developer for taking on the risk of development (in other words – the profit is the reward for the market risk, if this risk is reduced then the profit target should fall). An example of this can be seen in respect of affordable housing, which has lower market risk and therefore a reduced return is more generally accepted.

RICS guidance, aligns with PPG, agreeing that on occasions ”much lower rates of return should be used” (pg. 28), subject to the use of appropriate evidence. This seemingly gives the plan maker/decision taker opportunity to adjust developer profit as a means by which to deliver policy expectations. In this sense perhaps setting Developer Return at a standard 20% on GDV for all forms of development should be approached with some caution.

And as the RICS guidance is at pains to point out – “where land is overpriced in relation to plan policy, profitability will have been sacrificed and it is not the role of an FVA to protect the developer return in these circumstances.” (pg. 33).

The “EUV plus” relies on setting an existing use value (a debate for an entirely different blog) plus a premium which offers the land owner a reasonable incentive to sell – thus setting a benchmark land value (BLV). The RICS guidance makes it clear that in setting the premium it should still allow for policy requirements to be met, in line with the PPG.

Whether it’s at plan making or decision taking stage, the premium must allow for a reasonable incentive to sell whilst having regard for the policy requirements. But as the RICS guidance (pg. 36) points out, “there is no standard amount for the premium, and each assessment needs to the properly evidenced”. This reflects the approach taken by Holgate J in Parkhurst who emphasised that a simple percentage uplift would be inappropriate – one size does not fit all circumstances. Scope therefore exists for a flexible approach to setting a premium to allow development to meet policy expectations. It is for the plan maker/decision taker to make the final decision on the appropriate amount.

If properly evidenced, reasonable adjustments to Return and Premium may be appropriate if it can maximise public benefits from development. But what happens in marginal cases and where do you draw the line before adjusting policy expectations in lieu of seeking to reduce Premium or Developer Return?

The panacea is clearly a plan-led approach whereby site viability is established at the outset allowing (Evidenced Council adjusted/agreed) developer return and premium whilst delivering schemes with contributions meeting identified local need. And if market conditions have changed prior to the submission of a planning application, the Council may need to adjust its required contributions and/or the developer return, accordingly.

However, life is not so straight forward. The guidance and policy are designed in such a way that they contain a significant number of variables, many of which are to be determined by the Council. For the developer this creates significant uncertainty. If Councils are able to set premiums and reduce return levels then developers may be left with sites that become marginal or not viable despite having been purchased on seemingly reasonable assumptions. Likewise, at plan stage, it risks stalemate in land release if premiums are set too low removing incentive to sell.

But the jeopardy is not just for the developer. How does a local authority deal with meeting its targets and delivering infrastructure through contributions if plan stage viability shows that to do so offers no reasonable developers return or incentive to sell? Do Councils have to push their emerging Local Plans through regardless, making viability the new battle ground at Examinations or do they sacrifice infrastructure delivery in order to release housing sites by reducing contributions – risking unsound Plans on the basis of failure to meet their wider needs?

The existence of risks for both sides will necessitate collaboration if plans are to be found sound and sites are to come forward for much-needed development.

The RICS guidance does what it needs to do, in the same way the PPG does. Neither could reasonably be expected to provide more detail or certainty. Afterall, as the RICS guidance points out “Land and property markets are cyclical, and the impacts of developer contributions change in periods of both economic/market upturn and downturn” (Pg. 16). Not to mentions the extreme variables between land parcels. To be more prescriptive would be to risk being out of date or irrelevant the moment pen is put to paper. Both PPG and RICS now move in the same direction – and that should be welcomed – however the scope for uncertainty and complications remains.