Where the constant is the variable - RICS Draft Guidance on Viability in Planning

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Where the constant is the variable - RICS Draft Guidance on Viability in Planning

Where the constant is the variable - RICS Draft Guidance on Viability in Planning

Owain Nedin 29 Jan 2020
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 1st 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 9th 2020.

RICS context

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:
“The purpose of an FVA estimates whether planned developments with policy-compliant levels of developer contributions are able to provide:
  • a minimum reasonable return to the landowner (defined as the EUV plus a premium), and
  • a suitable return to the developer.
If the FVA shows that the specified landowner and developer return are not enough to satisfy these benchmarks, the development typology is unviable at the level of developer contributions being tested at the plan-making stage. Similarly, a development site is unviable at the level of developer contributions set out in the plan at the decision-taking stage. If the FVA illustrates that the typology or scheme is not viable, the plan-maker will need to adjust policy requirements (for example by reducing developer contributions or changing design standards) to return the typology or scheme to one that is viable. Amendments to the scheme (such as increasing density or altering the mix of uses) may have a similar result.”
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.

Developer Profit/return.

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).

Landowner Incentive to sell (the premium)

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.

Who blinks first

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.  

[1] Parkhurst Road Limited v SSCLG and London Borough of Islington (2018) EWHC991 (Admin)