Critical examination of the changes to the viability assessment regimen and a discussion of its impacts on our client’s ability to manage the delivery of residential schemes.
The NFFP now expects local planning authorities (LPAs) to accommodate at least 10% of their housing requirements on ‘small and medium sites’ (up to one hectare) through their development plans and brownfield land registers. A critical discussion of the practical aspects that this requirement will have on residential developers’ forward planning.
The NPPF calls for a refocus on the quality and design in development proposals and the new rules are intended to make it easier for councils to challenge poor quality and unattractive development. A critique of this revised policy and discussion of how our clients could exploit these limitations.
This report synthesises the challenges and opportunities faced by developers following the significant overhaul of the National Planning Policy Framework (NPPF) (Gov.uk.,2012b). The report will refer to NPPF 2019 and associated Planning Practice Guidance 2018 (PPG) to provide a detailed examination and consideration of the potential impacts both positive and negative the amended NPPF will have on our business and our client’s future development objectives.
The report will be limited to three areas of NPPF revision namely financial viability assessment (FVA), housing requirements on small and medium sized sites (up to one hectare) and the refocus require by Local Planning Authorities (LPAs) on quality and design requirements in development proposals.
Table of Contents
1.0 Section A 4
Background – The Viability Loophole. 4
Closing the loophole 5
A new approach to viability 5
1.3.1 Viability and plan making 5
1.3.2 Viability and decision making 6
1.3.3. Standardised viability inputs 7
1.3.4 Accountability 7
Thoughts and reflections 7
2.0 Section B 8
2.1 Background 8
2.2 Policy support for SME 9
1.0 Section A
Background – The Viability Loophole.
Following the Financial Crisis in 2008, it became the express intent of government to raise the economy from its financial malaise through promoting development. Part of government’s efforts to achieve these aims included the acknowledgement of the importance of FVA to alleviate the relative burden of planning obligations and other policy requirements that could potentially threaten new development. The NPPF2012 recognised the significance of viability when delivering new development, enshrining the notion of viability and deliverability within the planning process,
…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 into account of the normal cost of development and mitigation, provide competitive returns to a willing land owner and willing developer to enable the development to be deliverable. (para 173).
At times of economic uncertainly where risk is elevated, such tests seemed appropriate to ensure growth through development, while maintaining levels of affordable housing and infrastructure investment. However, a crucial preceding clause stating that, plans
…should not be subject to such a scale of obligations and policy burdens that their ability to be developed viably is threatened,
gave the concept of a competitive return material weight creating tension at the heart of planning, exacerbating Britain’s broken housing market.
Private sectors developers are relied upon to deliver a large proportion of affordable homes through s106 agreements. Yet as Reed et al. reminds us, “they are profit seeking and aim to maximise financial return to shareholders, to whom they are accountable.” The impulse to maximise yield led to wide scale abuse as developers used FVAs to argue that building affordable homes could reduce their profits below competitive levels. This FVA regimen effectively allowed developers to effect substantive change to local policy which may have interfered with their development profit, often hidden from public scrutiny behind a cloak of commercial sensitivity. At a time of chronic under supply in the UK housing market this led to a radical rethinking of the application of FVA recording and reporting.
Closing the loophole
Soon after the release of the NPPF2012, calls for its reform within sections of the press and various stakeholders, resulted in a fresh round of consultations and white papers. In March 2018 Prime Minister May’s ‘Planning Speech’ heralded the launch of the draft revised NPPF. She pulled no punches in her assessment of FVA and their use by developers,
…and, by ending abuse of the “viability assessment” process, we’re going to make it much harder for unscrupulous developers to dodge their obligation to build homes local people can afford.
Government acknowledged that the previous viability regimen was too open to interpretation and that guidance was insufficiently robust to protect the public interest. Furthermore, it had turned its attention to the role developers, land promoters and landowners have played in amplifying the current housing crisis.
A new approach to viability
The revised NPPF, presented to parliament in February 2019, has done away with para 173 and its emphasis on viability and deliverability, and there are no provisions for the concept of competitive return. Although NPPF2019 alludes to contributions and FVA, details of the reconstructed regimen are to be found in the PPG2018. Guidance has been arranged in four parts:
Viability and plan making
Viability and decision making
Standardised viability inputs
1.3.1 Viability and plan making
A fundamental shift in the role of viability testing from the developer led decision-making stage to the plan-making stage will now require LPAs to bear the burden of assessing viability when drawing up their local plan. Front loading of viability testing changes the question from ‘is this scheme viable’ to one that asks ‘is a viable scheme able to be built on this site?’ With this change in emphasis it is now of critical importance developers and land promoters engage with LPAs at the earliest possible juncture to ensure obligations and policy requirements do not undermine deliverability. Guidance on viability stresses this point,
It is the responsibility of site promoters to engage in plan making, take into account any costs including their own profit expectations and risks, and ensure that proposals for development are policy compliant.
Developers wanting to promote their sites for allocation may seek to challenge viability assumptions LPAs use to inform their plans. In the advent of a challenge this may create unforeseen delays and unwanted complexity. However, as Colenutt et al. attests, local authorities want to do deals with developers where they can seek partnerships which can deliver a range of outcomes over the long term. Early engagement may lead to outcomes that are less adversarial in nature and look more like a shared vision or agenda. Following the approval of the local plan any planning application will be measured against the viability testing which informed the plan.
1.3.2 Viability and decision making
Where an application is submitted that meets the necessary thresholds as set out in an up-to-date local plan, no FVA will be required as the development should be assumed viable. Only if an applicate can demonstrate, with evidence, that assumptions adopted at the plan-making stage are unrealistic, will an FVA be allowed at the application stage, and only at the discretion of the decision-maker (the LPA).
It is well understood that the financial cost of risk is highest before planning permission is granted. Philip Barnes, land and planning director at Barratt Developments’ group agrees, “Speed is our biggest planning issue…”
By front loading viability and removing it as a material concern in planning the intention is to speed up the application process by pursuing a fast track approach, rather than the far more onerous approach of negotiating FVAs at the application stage. Developers will know from the initiation of any new scheme whether or not that scheme will be policy compliant and therefore more likely to achieve planning permission, bring greater clarity and certainty to the planning process.
1.3.3. Standardised viability inputs
FVA efficacy is determined by its inputs. To this end the NPPF2019 and associated guidance appears to be aiming for a more fact based visible and accountable reporting system. The intention is to use site typologies to guide FVA for sites with shared characteristics. Where a FVA is deemed necessary, usually at plan making stage or if certain criteria are met at the decision making stage, they should follow a prescribed format with standardized variables, be provided with a non-technical summary and made public except in ‘exceptional circumstances.’
There has always been a fierce debate about how to best capture land value. The NPPF2019 and guidance, in concert with a simultaneous but unrelated High Court ruling in favour of the London Borough of Islington against the developer Parkhurst Road Ltd., has attempted to draw a line under the debate. They stipulate an Existing Use Value plus (EUV+) methodology be used to value land. To ensure the availability of land a premium of the, “…minimum return at which it is considered a reasonable landowner would be willing to sell their land” should be applied. The perceived loophole used by developers to exploit viability agreements by inflating the value for land to achieve greater profits at the expense of planning gain, has been robustly dealt with. In guidance – stated no less than 4 times – it is unequivocal,
Under no circumstances will the price paid for land be relevant justification for failing to accord with relevant policies in the plan.
As touched on above FVAs made either at the plan or decision-making stage are required to be made publicly available. Developers are therefore instructed to prepare their plans on the understanding that information supplied will be in the public realm.
1.4 Thoughts and reflections
The new iterative process requires collaboration and transparency. Early engagement with LPAs will be vital to shape and inform process. The retooling of FVA will place greater burdens on already stretched LPAs. However, a publicly accountable, defined approach may reduce appeals and speed up the planning process freeing up planning case load. Indeed, it will be difficult for developers to re-open negotiations on FVA at a later stage.
Some flexibility will be required from LPAs in drawing up area-wide FVAs as site specific abnormalities or abnormal development costs must surely impact specific schemes. A dogmatic approach will surely open the way for greater legal recourse.
A standardized approached to land valuation and a plan-making role for FVA is suggestive of the first tentative steps towards a more zonal approach to planning. This approach may provide benefits to developers who move away from opportunity led development and employ a more strategic view across multiple sites allowing greater profitability no longer at the expense of affordable housing.
2.0 Section B
Historically, most of the UK’s housing stock has been supplied by small and medium-sized house builders (SME). However, over the past few decades and in particular since 2008, their share of housing output has dropped off substantially. In the late 1980’s SMEs built two thirds of new homes, just before the Financial Crisis in 2008 their share dropped to 44%. In 2016 they were responsible for just 26% of new houses. For small house builders, their decline in output has been even more dramatic, from 28% in 2008 to just 12% in 2015. As the decline in SME output has gathered pace market distortions and uncompetitive behavours have led to lower capacity, intensifying the housing crisis. It is no coincidence that during the late 1980’s when Britain was building more houses year on year then it has done at any point in the last 30 years, SME output was the most significant contributor.
Three barriers to enabling small and medium sized developments have been identified:
The problems and cost of obtaining land.
The time and costs of navigating the planning system.
The availability of finance.
For the purpose of this report attention will be given to the first two and how government, though NPPF2019, hopes to improve housing provision through diversifying the UK house building industry.
At a time of chronic under supply and with a government seemingly highly motivated to achieve its goal of 300,000 new builds a year, opportunities in the SME sector are starting to look up.
2.2 Policy support for SME
UK’s housing market is dominated by just six high volume multi-billion pound developers, who build to tight margins with little scope for modern methods of construction, innovation or design quality. Much of the planning for house provision over the past decade has been focused on supporting larger sites. These are often less difficult and less time consuming to process than an equivalency of smaller sites.
In the forward from the Prime Minister to the Housing White Paper of 2017 Theresa May recognized the importance of rejuvenating and supporting SME house builders,
“…we will diversify the housing market, opening it up to smaller builders and those who embrace innovative and efficient methods.”
The creeping realisation that the UK will not build the homes it needs on large sites alone has led the government to initiate policy to assist SMEs. Paragraph 68 of the NPPF2019 instructs LPAs to,
“…identify, through the development plan and brownfield registers, land to
accommodate at least 10% of their housing requirement on sites no larger than one hectare.”
Although a watered-down version of the 20% on 0.5ha this provision for SME developers will provide a new route to securing planning permission on small sites and will open up land that may otherwise be considered unsuitable for development.
Para 68 further supports SMEs by highlighting the need to support development of windfall sites and the sub-division of larger sites where housing delivery could be sped up.
2.3 Opportunities and challenges
Unlocking smaller sites and the policy provision to sub divide larger sites should be welcomed by SME developers, planners and government alike. Unable to employ their standard economies of scale volume builders – with their deep pockets – are unlikely to bid on small and medium sized sites where their profit models are incapable of providing yield. This leveling of the playing field removes a significant barrier to entry to the smaller developer.
artificially pessimistic viability assessments
Viability assessment is a process of assessing whether a site is financially viable, by looking at whether the value generated by a development is more than the cost of developing it.
4.1 Parkhurst Road Ltd v Secretary of State for Communities and Local Government and London Borough of Islington
In April 2018, at more or less the same time as the draft revised NPPF was released, a Planning Court judge found in favour of the London Borough of Islington in a long and drawn out dispute which it said will provide insufficient affordable homes.
The appellant had hoped to overturn an inspector’s refusal of an appeal against the decision the council took to refuse planning consent on a former territorial army base which the developer claimed could only viably support 10% affordable housing.
Developer Parkhurst Road Ltd. had paid the Department for Defence £13.25m, a sum justified on the purchase price of land and comparable transactions on other schemes in the area. Parkhurst argued that a provision greater than 10% affordable housing would render the scheme unviable. The council, using the EUV+ model, argued Parkhurst Road Ltd., grossly over inflated land value and that benchmark land value was much lower.
Although he found some fault with the council’s calculations, in his ruling Justice Holgate stated,
“It might be thought that an opportune moment has arrived for the RICS to consider revisiting the 2012 Guidance Note…to address any misunderstandings about market valuation concepts and techniques, the ‘circularity’ issue and any other problems…so as to help avoid protracted disputes of the kind we have seen in the present case and achieve more efficient decision-making.”
In coming to this verdict the judge ruled that the applicant had failed to adjust the market evidence in order to better reflect local policy requirements. Relevant policy making bodies should address the way by which developers sought to recover excess purchase prices by reducing affordable housing provision.
Viewed as a landmark decision on land valuation, viability and the provision of affordable house it brings case law in line with policies as set out in the NPPF2019 and associated guidance.