As an unpredictable market and growing demand for affordable housing conflict with pleas for sustainable development, Vail Williams associate Russell Miller weighs up the central planning issue of financial viability and questions whether the balance is right.
I’ve witnessed considerable volatility in the residential development market in recent years as, in many parts of the country, the property market has followed the economy into a severe downturn. Only now are we starting to see green shoots in certain parts of the county, driven by continued low interest rates, the Help to Buy Scheme and generally more confidence.
At the same time, and as a consequence of the wider economic problems, local government has found itself under pressure to increase the availability of affordable housing units at a time when demand for low cost housing is arguably at an all-time high.
It also has to encourage residential development due to the collapse in house-building numbers, while promoting sustainable development to meet national carbon emission reduction targets – and all of this with less money.
A recipe for disaster? Well, certainly the potential for costly altercation.
These conflicting policies and current market conditions have manifested themselves in a flurry of arguments over financial viability as planning applications are presented to local authorities with the aim of mitigating the extra cost of complying with policy, which includes contributions towards open space, highways improvements, as well as providing affordable housing and meeting certain criteria for energy efficiency.
The balance is intrinsic in the definition of ‘financial viability’ which weighs up four main outputs: development costs; the developer’s profit margin; a competitive return for the landowner; and the cost of planning obligations. All of which must be paid out of the sales revenue.
Although subject to extensive debate, the end values making up the sales revenue and development costs are often the most straightforward elements to agree. It is also well understood that the developer’s profit margin is a range benchmarked against either total costs or sales revenue depending upon the scale, complexity and risk of the particular scheme.
The contentious area is often agreeing the value of the site, which should reflect a competitive return for the landowner having regard to existing planning policies, but not necessarily in full compliance with them. A competitive return suggests the value should exceed existing use value in order to persuade the landowner to release the land for development.
Yet what if the local authority is content with its land supply and has no need for further development; does the landowner need to be persuaded in this situation and if not why should they expect more than it existing value?
Local planning authorities argue that the introduction of both national and local policies in respect of planning obligations are essential to ensure affordable housing is provided, associated costs as a result of development are met by those who profit from it, and the wider environmental impact is mitigated specifically through “greener” buildings.
But the effect of such policies is to reduce either the underlying value of the site or to reduce the developer’s profit; which may lead to schemes being abandoned with consequentially lower levels of house building and therefore lower levels of the provision of affordable housing.
Considering this more widely reduced development activity will result in less revenue for local authorities which is likely to be put more pressure on their already squeezed purse-strings.
The ability of developers to challenge the cost of complying with planning policy on viability grounds as least improves the chances of schemes progressing, if the various elements of a development can be carefully considered by all parties.
The political pressure to build new homes cannot be underestimated; all political parties are coming up with new ideas to encourage more house building, while policies such as the Help to Buy scheme have already been introduced to stimulate demand. In fact, the Bank of England has recently reported that it is expecting the improved housing market to have a positive impact on economic growth. I question however whether this is sustainable growth.
If 200,000 new houses are to be built each year, which is certainly an aspirational target based on current numbers, local authorities will have a difficult task: balancing the prevention of inappropriate development with securing maximum planning obligations and the pressure to expedite matters in the midst of pro-development rhetoric.
However, there is an acknowledgement that some degree of negotiation on the issue of financial viability must be allowed because of the highly sensitive – and subjective – nature of valuing land and undertaking development appraisals.
At Vail Williams, we think that this is the only way for landowners, developers and local authorities to amicably and cost-effectively fulfill their respective objectives in this contentious arena.
I predict going forward that the current improvement in demand, whether sustainable or not, will exacerbate the imbalance with lagging levels of supply, and in certain areas we may well see a larger available ‘pot’ in which to appease the various stakeholders facilitating an increase in financial obligations that can be met and importantly help to increase the delivery of much needed affordable housing.
Equally there needs to be a review of government priorities and a recognition that not all political objectives can be met while simultaneously encouraging a profitable and sustainable residential development market.
