There’s been a lot of chatter about planning reforms. How effective they may or may not be and what more can be done. Many opine that without addressing viability, developers still won’t put spades in the ground.
What we mean by viability varies. Some refer to viability as associated with profitability. The challenge of finding willing buyers for new homes out there is inhibiting, even destroying the viability schemes. This is indeed one way of describing viability and a pretty important one too.
Others are referring to viability in a more technical sense. The way the planning system interacts with testing viability of a proposed scheme. In a sense, planning viability has become a subsidiary arm of process around determining an application, particularly in London development.
Last month, I asked some 20 investors and developers their views on the viability testing process.
General views
The general sentiment is as follows:
- Residential viability testing is out of step with financial realities.
- Applicants find viability testing oppositional and it undermines collaboration.
- Residential viability testing is a barrier to investment capital entering the development sector.
The main concerns
- There is no effective dispute resolution unless you go to an appeal.
- Assumptions used by viability consultants are at variance with market reality.
- Investors today will not fund schemes which include late-stage reviews.
- Viability decisions are undertaken too late in the determination cycle.
Steve Reed, if you’re listening, here are some solutions:
- Let’s try to agree, but if we can’t there is a way through
There is no mechanism to get to an agreement currently and elected Members who once had sway have been disempowered.
The overall planning system has a statutory timetable, the viability testing process does not.
Several developers strongly advocated an expert determination process if after a certain number of weeks, a consensus could not be reached. This seems really sensible, otherwise you just end up stuck.
2. Land
The land market has slowed down in London because no one can achieve the affordable thresholds and therefore everything is viability tested and because viability testing is so flawed, no one is prepared to invest.
One way to resolve this is a clearer approach to Benchmark Land Value. Currently in a viability appraisal you are not allowed to include what you have paid for the land or the market value of the land i.e. what someone might pay for it. You are only allowed to value off existing use value with a premium. However, the premium ranges from 0 – 30% and is discretionary. Lots of strong feelings around this.
How can you price land if you don’t know until later down the line what you can agree? One suggestion, the premium should be fixed at 30% – landowners are liable for CGT after all and need an incentive to sell. Alternative Use Value should be allowed and flexibility applied. Ultimately, getting land into the planning system for residential cannot be done solely through public land disposals and the Government needs to accept that general supply needs some support or land will go to other uses. That is what is happening.
3. Late Stage Reviews
Everyone says it: late stage reviews are not investable. They are a double profits tax (we already have corporation tax) and confuse the tax system with a local vs national tension. I think everyone, including the Government agrees and I hear reform is due.
4. Profit
Profit rates are being manipulated at the discretion of viability consultants. Viability consultants have become the judge of what reward and risk should translate to. But profit is a contingency against risk and it pays for third party capital. Brownfield costs are huge and it’s rare thing that one site, has one source of capital.
Setting ranges on profit of 12 – 20% and then not distinguishing between a high-density development or a low-rise housing scheme is unhelpful.
There is a simple solution to this: going forward there should be no discretionary range. Instead, the minimum should always be 17.5% and the maximum should be 20% for any building over 6 storeys. Things should be kept simple.
5. Viability – who is doing the negotiating
Too many chefs spoil the broth so the saying goes. The decision to include a mayoral viability team over and above the Boroughs means we are in a world of tripartite negotiations. The Boroughs and the Mayoral team sometimes take different views. The result is confusion and developers sailing under 30 metres to avoid the GLA if they can. We should have one team and then as written earlier, a simple dispute resolution if we cant all sensibly agree on the assumptions.
Postscript
I have left out lots of suggestions and thoughts. I had a really interesting one on grey and green belt. I may write another viability piece over the next few weeks. Thanks for all the suggestions.
