Financial Viability for Affordable Housing (AH) is and continues to be a pivotal consideration in relation to the support, and thus the granting of, major residential developments by Local Planning Authorities (LPAs). The matter of viability continues to be one that offers a sticking point to the expectations of delivery of a planning decision within a 13 week window; both in relation to applications being submitted that are not policy compliant (offering a contribution to AH that sits below a policy expectation, often a starting position of 50%) and as such require viability assessment, and the lack of internal resources afforded to LPAs to address the matter. And so the battle begins, Applicant versus an LPA who are ultimately reliant on private sector expertise to underpin their position. The potential conflicts that arise from this duel public/private sector relationship bring forward concerns that are too numerous to list in this word limited blog, however it is the state of play that is currently to hand.
With an emergence of AH becoming a consistent sticking point in applications, and a fundamental under delivery of AH across the UK (for which it is too simplistic an argument to place the blame at the feet of developers) it is no surprise that the issue of viability becomes an independent consultation consideration within the current NPPF consultation process. If it is that the new NPPF is delivered following summer recess, a target that is on track to be met according to Steve Quartermain CBE who advised myself and RICS colleagues this week, the viability update cannot be expected to be too far behind.
The issues surrounding “Existing Use Value plus” (EUV plus) are those that consultants such as myself who address AH await on with interest and/or trepidation. It must be expected that the outcomes of Parkhurst Road Ltd v (1) SoSCLG (2) LB Islington  EWHC 991 (Admin) heavily influence the EUV plus issue, especially considering the Judgment came with the rarity of a Postscript by Mr Justice Holgate which laid out the basis on which Site Value should be assessed going forward. The postscript, however much one can agree with the conclusions, brings forward practical issues that are likely to be faced by developers from Autumn 2018 when addressing viability.
The key issue of Parkhurst was whether the Applicants offer of 10% AH was the “maximum reasonable amount of affordable housing” in the context of policy expectations of 50%. Central was the matter of Benchmark Land Value (BLV), for which neither party was in agreement. Whilst J Holgate ultimately dismissed the case, this was based on the fact that any position taken on BLV ultimately didn’t change the nature of the failed appeal decision. What was important was that J Holgate criticised both parties approach to addressing the issue of circularity in the evidence and failure to accord with the requirements of Para 023 of the NPPG, wherein site value should be assessed on 3 equal principles:
- Reflect policy requirements;
- Provide competitive returns to willing developers and landowners; and
- Be informed by comparable, market-based evidence wherever possible.
The circularity issue is one that is considered to impact on site value principles 1 and 3; developers are basing their EUV on purchase prices which expect to deliver a below target AH contribution and/or an overly optimistic expectation of the amount of development to be delivered. In relation to principle 1; the EUV therefore starts from a position that does not reflect policy requirements. With regard to principle 3, permitting those developments that offer below policy AH based on the “optimistic” EUV artificially inflates market comparables used to support cases, and so the circularity of the issue remains.
J Holgate reiterates that the 3 principles must be met, but also that comparables must be true comparables, reflecting context such as planning policy requirements and circularity influencing the market data and/or transaction price. The concern of such an approach is that when pulling together a viability assessment, where do you gather the true comparables from or what methodology do you take to add context? Whilst the judgment does identify a problematic issue in the market place, where as a developer do you start in seeking to address this, if the value expectations of landowners are heavily influenced by years of viability bringing forward a 20-25% delivery of AH in the marketplace?
If Holgate’s postscript takes hold, and I suspect it might, the likelihood is that addressing matters both in relation to delays in determining applications and the ultimate AH contribution percentage may become more painful for developers before it gets better. Eventually, there would be a realigning of landowner expectations and as such sale prices taking into account a greater delivery of AH on the true comparable principles. But market realignment takes time and what about in the meantime? Well, if Holgate’s words form the basis of updated guidance on viability, this will give the process a jump start, but we await to see if this is the case. My recent advice to developer clients is to be bullish with landowners/agents on sale price expectations given an uplift in AH requirements likely going forward. If this means missing out on sites that would have been attractive 24 months ago, so be it, as they most likely won’t prove attractive in the next 24.
We are in an uncertain period on all matters viability, and only those that are appraising sites with pragmatic forecasting in mind will likely avoid having their fingers burnt on the eventual GDV margins a site will deliver.
MRICS BSc (Hons) RICS Accredited Expert Witness
NextPhase Development Ltd.