A site must have a deliverable planning consent before it can be developed. This is self evident, but the question of what constitutes a deliverable consent has become increasingly contentious since the downturn in the market.
The issue is whether or not a scheme is economically viable with the planning obligations that are a condition of a planning consent. Viability assessments now matter more than ever. Critically, they must be based on realistic assumptions if housing delivery is to increase.
Planning obligations rise
Planning obligations grew in scale during the buoyant markets leading up to 2007. Graph 3.1 illustrates the volume of affordable housing delivered via Section 106 agreements. This was a time of rapidly rising land values, so much so that the increase in value between the grant of planning consent and housing completions created a financial cushion to absorb the cost of obligations.
Consequently, the volume of affordable housing delivered by Section 106 agreements rose to 60% of affordable supply in 2006-07.
The 2008-10 period was very different. Generous grant funding became a significant contributor to the financing of mixed tenure development, effectively supporting the delivery of market housing.
This period, however, is fast coming to an end. The average grant rate for allocations of grant under the new Affordable Rent system has fallen to £22,000 per unit, compared with an average allocation of £54,000 per unit in 2010.
Viability assessments
This will be offset partially by higher rent on new and re-let social housing, at up to 80% of market rent (subject to agreement with the local planning authority if a Section 106 agreement applies).
Housing associations will be borrowing more, against this increased rental income flow, but it remains to be seen how this impacts on bids for Section 106 units as the market settles down.
Not surprisingly, initial indications are that the new system has widened the range of bids among providers as the approach they have taken has become less uniform and tailored much more to their individual circumstances.
Therefore, viability assessments will need to include affordable housing at values supported by robust evidence that is relevant to the local market, rather than the more generic assumptions that have often been used in the past.
Current market capacity
There is considerable variation in the strength of local markets across the country, with transactions and rates of sale being the biggest variable.
The significance of rate of sale and cash flow to project viability is highlighted in an earlier article in this report. It is the single biggest constraint to viability in the current market.
Zero carbon
The squeeze on viability is likely to intensify as we move towards zero carbon in 2016. Recognition of this has pushed viability up the Government’s agenda and it is behind the new flexibility on the definition of zero carbon, which is now likely to be nearer to Level 5 than Level 6 of the Code for Sustainable Homes. The proposed use of ‘allowable solutions’ may reduce costs further, but from a high base.
A report by Element Energy and Davis Langdon to CLG in March 2010 estimated that the cost of reaching Code Level 5 for a three-bedroom semi detached house was likely to be in the region of £25,000 and £29,000 higher than constructing to 2006 Building Regulations.
CIL and policy testing
The emerging use of Community Infrastructure Levy (CIL) by local authorities will be a major change to the way in which planning obligations work. Generally, Section 106 obligations that do not mitigate the direct impact of a development are no longer permitted, apart from affordable housing.
The only mechanism for developer funding of all other infrastructure is CIL. This levy is charged at standard rates. Those can either be a flat rate across a local authority, or rates that vary by either type of development or defined market area. However, once the rate has been set by the local authority, it cannot be negotiated other than in exceptional circumstances.
Therefore, it is crucial that CIL charging schedules are tested with a robust viability assessment, before the rates are set in stone. The charging schedules are being drafted now, in early adopting authorities. A second wave of 20+ authorities will be following soon.
Developer returns
CIL is going to drive the importance of testing of policy for viability. The assessment must be based on a robust view of the types of site that make up the supply pipeline and the economics of delivery of these sites.
Foremost among these assumptions on viability are land value and developer margin. In the past, both of these have often tested with crude rules of thumb that bear little relationship to market experience.
In reality, however, development will only happen if a landowner can see a sufficient uplift in land value to release the land. Likewise, developers have to see sufficient return on scarce capital to cover the variable risk of development.
Capture of planning gain for the public benefit can work, most successfully at times of super profit, but it works only if there is sufficient incentive for landowners to release land and for developers to put scarce capital at risk.
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