Parkhurst: a recap
PropViews has detailed through three posts how the Parkhurst High Court Case was rigidly interpreted by City Hall officers. It’s also had an outing on Fifty Shades of Planning!
The case revolved around a former Territorial Army Barracks which was sold by the Ministry of Defense. It was acquired by a developer on a market value basis and the planning proposal, which did not meet the spectrum of Islington Council’s policy requirements, was disputed by the LPA.
After two failed appeals, one which supported the developer on the market value approach but not on the density, and a second which supported the Council’s insistence on an existing use value plus methodology, the developer went to the High Court.
The Judge presiding over the case eventually sided with Islington Council and recommended that RICS provide guidance to improve the approach taken to land valuations. He preferred an EUV+ approach but recognized the importance of flexibility and observed that land is not normally owned by the developer and a premium is needed to draw said land into housing supply and delivery.
The age of enforcement
The GLA went further and faster than the Judge’s conclusions and before the RICS could provide guidance. It applied a rigid EUV+ approach to development land in its 2017 SPG.
Other forms of land valuation such as market comparables and alternative use value were either discouraged or extinguished from consideration. At the same time, under the previous Deputy Mayor for Housing, a new viability team was created in City Hall. It would become known as the enforcement unit. It began implementing late stage reviews, a Mayoral flagship policy, and profit squashing measures across the Capital’s development pipeline.
Methodological warfare erupts across London
The Judge at Parkhurst had sought a reset. He called for a better way. But instead, valuations remained highly contested. One kind of methodological warfare – market comparables vs existing use valuation was displaced by another.
Investors and promoters sweated over the premiums they might be able to justify, far lower than the land price they could actually pay. A period of significant conflict had erupted across the London developer sector. It resulted in an elongation in planning negotiations.
There was a sharp fall in SME promoted applications and a material reduction of the housing land supply system into a global city market. Many of the London Boroughs also found themselves sucked into the conflict as deadlocks spread across their pipe lines. They began to lose agency over the benefits they sought and the compromises they would be prepared to make to unlock new homes. Local politicians and senior officers were disempowered from major decisions as viability negotiations decoupled and took on a life of their own.
London moves into regulatory capture
A number of major City Hall decisions caused a wave of concern with global capital providers seeking to invest into London or seeking to protect significant financial positions. PropViews has detailed two but there are many.
The Stag Brewery became a decade long battle. The major Aberfeldy Village application saw its profits capped at just 13%.
It became apparent that senior politicians did not understand what was happening underneath the bonnet. City Hall had captured itself.
With no one capable of finding an unlock, capital markets exercised discretion. They began a stage withdrawal from London or flipped their sites to more productive uses. The Honey Monster site in Ealing – a case in point.
At the same time, landowners began to shut off residential development proposals and focus on other uses. Those that perservered had their land consideration flattened to create “planning gain” which didn’t actually exist. Financial viability numbers decoupled from real world actuals. The results benefited the public sector side of the negotiation, but only at the expense of real delivery which began to drop off a cliff as early as 2023.
The affects will be generational but the learnings are now there to explore. London cannot rely on public land and contractor + deals. There isn’t the land or the resources to power the Capital this way. A solution must be found and political trade offs are now required.
Beyond enforcement
Throughout this series, PropViews has argued that the EUV+ approach is fundamentally correct but the application and its use is not. The series has generated much debate, plenty from the valuation community that came forward on social media either directly or through messages.
The first problem with EUV+ with a rigid banding premium is that it means lower value sites in high value areas cannot come forward for residential development. These are normally the sites that offer the most potential for new homes.
For example, a car park or the good old TA centre is now worth more as something else than residential. It also creates problems for open land typologies. This land has to either now be compulsory purchased or it will go to another less political use.
The simplest way to course correct is to flex the EUV premium with a reasonable minimum but with discretion to apply a multiple to the use value to enable it to come forward. At the same time, Alternative Use Value should also be considered and it should not require a planning permission to enable this.
The second problem with EUV+ is that the landowner is not necessarily going to sell the site for a small premium on what its already worth. It ignores tax leakage, closing down costs and fees. Again this is not an argument to scrap EUV+ but the premium should also allow these costs to be added either on top of the + or the + should be flexed higher.
Who wins, who loses?
Everyone loses in the current system. Land is not coming forward. A tight banded premium on existing use value that is blanket applied across London is completely detached from how the real world behaves.
The planning authority is disempowered. The system fails to deliver. Late stage reviews work off numbers that don’t correlate to actuals and that deters investment due to the uncertainty and ambiguity.
The counter argument made by advocates of the enforcement era will be that developers are overpaying for land and that reduces community benefits. I will show you later this is a category error. However, Shelter and other anti development groups have made much of this.
The debate is divisive and destroys confidence in the system. It’s really easy to argue that everyone overpays if your metric is a tight EUV banding.
Indeed, against an EUV+ approach with a premium of 10-20% its very difficult not to be seen as over paying. The reason – because it is unrealistic to expect a landowner to sell at such a low level. So the promoter has to take the risk. And it is a risk because none of the overpayment gets to count in the financial viability assessment so you are already down.
The interpretation and approach therefore left the development community with a hopeless choice. To overpay on a method it can’t meet or to switch off the lights or exit London. Since 2017 more and more have given up trying to find land in London, Taylor Wimpy was the latest to announce a full withdrawal last week. They even cited late stage reviews but they are a mechanism, the source is the method that that mechanism is used to capture. This is a problem.
The public sector doesn’t really lose by flexing EUV+
Despite all the misrepresentations from anti-development organisations and local politicians who have chosen to misrepresent or misunderstand land economics, it can be demonstrated that more flexibility doesn’t actually hurt community benefits. Indeed there is a solution that everyone can live. Well everyone who isn’t ideological or anti-development.
Lets look at the Draft London Plan. It uses a tight EUV+ approach to appraise its policies. This, as already stated is unrealistic because the land will not come forward unless owned by the public sector. It means that even the half a million homes planned over the next period is unrealistic but we won’t relitigate that point in this article.
PropViews has taken the 900+ viability tested scenarios GLA has used. City Hall’s base case is 20%. So what if we loosen it up? Does Plan viability collaspse?
We modelled a loosening of EUV+ to 30% and 50% against City Hall’s own viability scenarios. What is shows might be rather surprising to some.
In simple terms, a relaxation of EUV+ will not result in a material reduction in the planning gain available to City Hall and the Boroughs. A 10% uplift as the EUV premium barely makes any difference. A move to a 50% premium reduces plan viability from 23.3% to 20.5%. Only circa 3%.
Such a policy approach therefore doesn’t make much difference for in system sites. The reason? Because land value is a small component of the cost stack. Actually what really matters is construction cost. See the yellow column which shows that cost inflation hurts, not land value. You add more cost inflation in – we modelled 3.5% per annum – and viability collaspes. We should all worry about build costs and inflation.
But getting the premium level to a place where we can get more land into housing supply is a good outcome as it means more homes are likely to come forward. It means more sites in the system and more chance that some of those sites get built. It doesn’t make much difference to what the community actually gets.
The forgotten point is this. Land doesn’t actually need to come forward for housing. It can do lots of different things. It is an error of policy makers to confuse buoyant land values with high land values. If you flatten entirely without distinguishing between the two, you don’t create more affordable housing, you just don’t create any housing at all.
The Parkhurst series will return but if you missed it, I was very pleased to be invited onto Fifty Shades of Planning to discussion viability in the summer. Thank you to my chum Sam Stafford and to Dr Anthony Lee, Gillian Maciness and Jamie Ratcliff for participating.
If you can’t wait for more, then have a listen to this interesting discussion. None of this is easy!
Viable Options – 50 Shades of Planning – Podcast.co
Parkhurst Part 2: Before and After, Land Strikes and Practical vs Theory – PropViews
Parkhurst Part 3: The Age of Enforcement – PropViews
