Viability appraisals for planning: importance of market evidence

17 July 2017

Simon Radford outlines the importance of market evidence in viability appraisals for planning and the way it is operating in reality

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In 2012, the government published the National Planning Policy Framework (NPPF), replacing around 1,000 pages of policy statements. This was intended to streamline planning policy by reducing it to 52 pages, putting an emphasis on enabling housing construction after the financial crisis brought development to a standstill.

At the same time, RICS produced practice guidance on viability in the Financial viability in planning guidance note, in response to members’ concerns about unviable development. This guidance concentrated on site-specific schemes to support development in line with the NPPF. The Community Infrastructure Levy (CIL) was also introduced, while the Local Housing Delivery Group produced viability guidance to support the production of area-wide appraisals for levy purposes. The Homes and Communities Agency had also developed a number of viability toolkits, while there was the original Greater London Authority model as well, which was initially intended for assessments for grant purposes.

In 2014, the government published Planning Practice Guidance (PPG) to support the policy, and a number of local authorities developed Supplementary Planning Guidance (SPG), as did the Mayor of London; the government has recognised that there is a wide range of approaches to assessing viability.

Paragraph 173 of the NPPF describes the test to be fulfilled; specifically: 'To ensure viability, the costs of any requirement likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing landowner and willing developer to enable the development to be deliverable.'

In paragraph 205, it adds: 'local planning authorities should take account of changes in market conditions over time and wherever appropriate, be sufficiently flexible to prevent planned development being stalled.'

The government followed this up in paragraph 023 of the PPG, which states that, in each case, the estimated land or site value should:

• reflect emerging policy requirements and planning obligations and, where applicable, any CIL charge;
• provide a competitive return to willing developers and landowners, including equity resulting from those building their own homes; and
• be informed by comparable, market-based evidence wherever this is possible; where transacted bids significantly exceed the market norm, then they should not be used as part of this exercise.

Two distinct starting points to comply with the NPPF by establishing the competitive return to the landowner have arisen from the approaches:

1. existing use value (EUV) plus a percentage uplift.
2. 'market value having regard to policy” (RICS definition).'

Typically, the greatest challenges arise from establishing the level of affordable housing required. Properly applied, both of these approaches should have no impact on policy and ought to lead to similar outcomes. In practice, this has not proven to be the case, and what should be an objective assessment of BLV is frequently replaced with arbitrary measures that would not seem to conform with government policy.

EUV plus percentage uplift

For land to come forward for development, the bid price must in principle exceed the EUV; this is the primary function for establishing EUV.

For the purposes of establishing a competitive return, the second component – percentage uplift – has no relationship whatsoever with EUV. The percentage uplift necessary to prompt delivery is derived from market evidence of comparable land sales, which reflect planning policy.

So practice advice – which establishes a fixed percentage uplift of, say, EUV plus 20–30% – would not, in principle, always give sufficient incentive to a landowner to bring land forward. It therefore could not comply with the NPPF if market evidence were to show that transacted sales reflecting policy are taking place well above these percentages, even at multiples of the EUV.

Value having regard to policy

The starting point in this approach is comparable evidence of transactions, which ideally are roughly similar in scale and location, and subject to similar policy frameworks as well as being recent enough to serve as valid comparisons.

Given the diverse nature of development land and proposed developments, this market evidence will need to be adjusted having regard to the application of policy so as to provide comparative market evidence that is as close as possible to the application site. What is regarded as the market norm will be discernible from a clustering of values at a certain level.

Relying on market evidence that reflects policy is what brings both approaches into alignment and satisfies the requirements of the NPPF.

What is 'policy-compliant'?

A great deal of the argument around viability is concerned with reaching agreement on how policy compliance is to be satisfied in accordance with the various levels of national policy, national practice guidance, Greater London Authority (GLA) plan policy, GLA SPG, local plan policy and local SPG.

In particular, recent discussion has been prompted about the meaning of 'reflect' in the context of paragraph 023 of the PPG, with some opting for a narrowly literal interpretation, while others favour an interpretation based on the intention of the term.

In the decision letter on the Parkhurst Road, Islington planning appeal (see Land journal March/April 2016 p.6), the inspector would seem to have rejected the literal interpretation when applied to affordable housing. He concluded that any amount of affordable housing between 0% and 50% was capable of satisfying the strategic affordable housing objective of 50% across the borough from all sources, including sites with 100% affordable housing. This range could also be consistent with ensuring the delivery of the 'maximum reasonable' amount of affordable housing as required by the London Plan.

Compliance v target

The appropriate use of 'policy-compliant' and 'policy target' in the context of affordable housing provision in the GLA area could be described as follows.

• Policy-compliant: a scheme is policy-compliant if it provides the maximum reasonable amount of affordable housing. If the calculations show that the maximum affordable housing a scheme can supply while also offering an appropriate return for the developer is 37%, the provision of 37% is considered policy-compliant. Likewise, if the calculations show that a scheme can provide only 5%, then 5% will be policy-compliant. Any provision below the maximum reasonable amount that is also below the policy target, however, will not be policy-compliant.
• Policy target: a borough-wide strategic target for affordable housing – in accordance with its policy of 50% of additional housing to be built over the plan period – is the policy target. The level of provision the policy target requires for an individual scheme or site to be subject to viability testing; the level will therefore fluctuate, which, in turn, will affect the totality having regard to what is being provided elsewhere during the plan period and what is anticipated to be provided during the remainder of the same period.

Application informs analysis

In determining what counts as policy-compliant in advance of a bid process, it is therefore not unreasonable for informed market participants to take account of planning decisions that are being made in similar locations with similar site characteristics. It will also be instructive to look at the priorities in decisions taken by central and local government and other public-sector bodies (see Table 1) acting as landowners in the disposal of public land suitable for housing development.

In its recent housing white paper, the government effectively admitted to a housing crisis that has become acute in the South East of England. Yet an earlier report by the Audit Commission on the sale of public land found no evidence of that priority being incorporated into public land transactions. Central and local government have by their actions signalled the discretionary nature of providing affordable housing through the planning process where public land is being sold.

In selling its development site at Lawn Road, NW3, over which it had complete control, the London Borough of Camden required a contribution of 22% affordable housing against its target requirement of 50%. Elsewhere, local authorities typically dispose of land without a covenant for meeting their target for 50% affordable housing, a measure that would remove any doubt about the priority of affordable housing supply. Housing provision on the Olympic development site, which is entirely under the Mayor of London’s control, was originally set at 50% before being reduced to 35%, and it is now around 33%.

These cases are cited not so as to criticise the decisions – which, in the end, are about the application rather than the formulation of policy – but to recognise that policy is not prescriptive in the way that the law is. Development plans will sometimes have mutually irreconcilable polices, some of which will have to give way to others, and where there will be different priorities at different points in time. Planning policy is just one of the many areas of risk that has to be considered when purchasing development land.

Transaction evidence is key

Experience from a number of planning appeals suggests that some planning authorities are not producing market evidence to justify their positions on viability assessments. This was specifically mentioned by the inspector in the Shinfield, Reading, planning appeal, APP/X0360/A/12/2179141, and in the first Parkhurst Road, Islington planning appeal, APP/V5570/A/14/2227656, and was all the more surprising because the local planning authority called valuers as expert witnesses in both cases.

The importance of market evidence is reinforced by the decisions of the courts, particularly the refusal of the application for judicial review made by the London Boroughs of Camden and Islington against the decision of the Mayor of London to grant planning permission on the Royal Mail site. In the case of Meyrick v Bournemouth Borough Council [2015] EWHC 4045 (Admin), the judge stated that viability depends not just on the value generated by a development, but also 'whether it provides an incentive for the development to occur'.

Planning administration operates in a discretionary system where there is a dynamic interplay between planning policy, market conditions and political priorities

 It is important to note that, in building a case for the local planning authority, it will not be sufficient for the valuer to apply pro forma planning policy levels of affordable housing to the applicant’s valuation as the equivalent of evidence. Valuers advising in such circumstances need to rely on the appropriate valuation methods to provide their client with reliable advice on property market conditions. Practitioners ignoring this are failing to understand the requirements of government guidance to reflect market conditions and enable development.

Planning administration operates in a discretionary system where there is a dynamic interplay between planning policy, market conditions and political priorities. It is in this contested and competitive context that land transactions take place; it is also the context for viability appraisals, which require a professional objective valuation informed by planning expertise about the application of policy.

Simon Radford is Chair of the RICS Financial Viability in Planning Working Group

Further information

• Related competencies include: Development appraisals, Housing strategy and provision, Planning
• This feature is taken from the RICS Land journal (May/June 2017)