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Viability Assessment under the Government’s new ‘Planning Rule Book’

Fostering shared responsibility, accountability and transparency?

Stepping back, my synopsis of the Government’s objectives for overhauling the ‘rules’ on viability assessment within the refreshed NPPF and National Planning Practice Guidance (PPG) is as follows:

  • remove perceptions of industry ‘gaming’ by increasing transparency and simplicity;
  • abolish the circular practice of setting landowner’s expectations (i.e. ‘benchmark land values’) on transactions that fail to reflect planning policy compliance (and hence ‘squeeze’ S106 obligations); and
  • ensure developers are held accountable to commitments made during plan-making (regarding infrastructure, affordable housing and other obligations) at the application stage.

Now published, will the ‘Rule Book’ achieve these objectives?

The Government’s expectation for all viability assessments to be published in full, with redaction restricted to exceptional circumstances, should increase understanding amongst local politicians and residents. Those parties guilty of producing inconsistent or inadequate viability advice will quickly be weeded out, which over time will hopefully restore lost faith in the development industry.

In order to avoid circularity, the Government has overhauled the methodology for determining the benchmark land value (BLV) against which the viability of development (and its propensity to contribute to S106 planning obligations) is assessed. The shift to an existing use value ‘plus’ premium (EUV+) methodology brings national PPG broadly into alignment with the GLA’s Affordable Housing SPG in London.

Whilst the final PPG introduces greater flexibility to the process of determining the ‘premium’, circularity is likely to give way to conjecture and professional disagreement regarding what represents a ‘reasonable premium’ and simultaneously a ‘minimum return’ to a ‘reasonable’ landowner – particularly with respect to greenfield land and strategic brownfield regeneration sites.

What is clear, and has in parallel been endorsed by Holgate J’s judgment in Parkhurst Road Ltd v. Secretary of State for Communities and Local Government and Anor [2018] EWHC 991 (Admin), is that simply applying an arbitrary percentage uplift over EUV is insufficient to determine the ‘premium’ in viability to underpin plan-making or decision-taking.

Reinstatement to PPG, and detail upon the ability to apply analysis of alternative uses (i.e. an ‘alternative use value’/AUV) in establishing the BLV is welcomed, for it may frequently resolve challenges over determining the ‘premium’ over EUV if properly assessed.

With respect to developer’s expectations, the recommended developer’s profit margin has been adjusted down from 20% on GDV stated in draft guidance to 15-20% on GDV in the published PPG. This represents a sting in the tail for the development industry, and is another area at risk of conjecture and misinterpretation. For residential development a blended margin of 15%-20% on GDV could be considered reasonable on a national basis, where accounting for affordable housing, but the range is unreasonable as a margin based solely on open market development. Unfortunately, I don’t foresee all Local Authorities interpreting this in the same manner.

Turning to accountability, the published PPG retains the frontloaded viability process, with plan-making centre-stage. A responsibility is placed on all parties to engage in ensuring that Local Plan policies (governing affordable housing and other obligations) are ‘iterative’ in drafting, ‘realistic’ and ultimately ‘deliverable’ upon adoption with affordable housing requirements to form fixed positions in plans. Promoters must ensure that policy costs are reflected in their proposals and that development proposals are compliant.

Hence, Government has followed through on its promise that it will no longer tolerate promoters and developers offering to meet full policy costs, plus other community infrastructure, in order to secure allocation, only to return shortly after at the application stage seeking to reduce such commitments.

Well, not without having robust and evidenced justification. Viability assessments accompanying applications must be able to demonstrate how circumstances (i.e. infrastructure/abnormal cost escalation – or revenues in a downturn) have altered to render a scheme unviable since the plan was adopted. This will entail demonstrating such circumstances were unforeseeable during the plan-making process and that the evidence underpinning the plan is out-dated or otherwise flawed.

This reiterates the importance of both landowners/promoters and developers fully engaging in plan-making during its ‘iterative’ process. Care must be taken by all parties to ensure that plan-makers, and viability advisors preparing evidence on their behalf, are balanced in their interpretation and application of the NPPF and PPG from the outset.

Reviewing the viability evidence underpinning draft policies to determine whether it is sufficiently robust, transparent, and market facing will be essential. Failure to do so will risk allocations being unviable, landowner’s withholding land due to insufficient incentive to release, restricted supply of housing and employment land, and ultimately risk the failure of the adopted plan as delivery rates falter.

It will necessitate aligned industry engagement and response, with the setting aside of site-specific interests in favour of achieving a realistic and deliverable Local Plan. It will be a delicate balance for the industry to perform – straddling a fine line between promoting land for allocation whilst simultaneously challenging the deliverability of unrealistic and unsound draft plan policies.

For further information on Development Viability at Turley please contact Matthew Spilsbury.

 

25 July 2018

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