Rethinking developer contributions and the use of viability assessments
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.
Viability assessments as a response to the recession, then the housing crisis
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.
Is viability at plan-making stage the solution?
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.
See our other blogs in this series:
Viability assessments at the plan-making stage, a step toward zoning?
The courts, the sums & Parkhurst
[i] HMCLG - Draft Revised National Planning Policy Framework HMCLG - Draft Planning Practice Guidance
[ii] Financial Viability Appraisal in Planning Decisions: Theory and Practice
Image credit: Ewan Munro