Session 3: The Mechanics of viability testing

A simple development viability appraisal Data Collection Calculation (Residual Value, Cashflow) Reality Check Interpretation Use of data Note: Will discuss consultation later – it is vital and required!

Data Collection Rubbish in = Rubbish out All inputs MUST be sourced!

Income Data

Basic Prices by £/m 2 Residential Prices – House v flats Commercial / non-residential Affordable Prices New v existing Incentives and discounts Variance by location or situation? Grants, subsidies

Gross internal area? BCIS (the costs) as ‘Rate per m 2 gross internal floor area for the building’ Direct from developers Calculate – it will be an estimate

Income Data - Residential Land Registry Hometrack Rightmove / Zoopla / Mouseprice Halifax / Nationwide CORE Developers and RPs

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Income Data – Non-Residential EGi Data / EGI Property Link Agents Valuation Office Agency Developers

EGI – Propertydata

EGI Property Link

Costs

Construction BCIS Site Costs Abnormals Contingency

BCIS

Construction BCIS Site Costs – 10% to 20% Abnormals – site by site Highways, flooding demolition, design, decontamination etc. Contingency – 2.5% Greenfield 5% Brownfield +7% on horrible sites

Phasing and Build Rate Size of site Size of developer Availability of mortgages Pre to 50 per year Now?30 to 35 per year Multiple developers

Variables Small Changes of cost or income can have a huge difference in result – the bigger the numbers the more sensitive. – =1 but =2 –1% change in price results in a 100% change in outcome Scenarios – cost and price change policy requirements

Gross Development Value All income from a Scheme Construction Site Remediation Abnormals S106 Etc. Fees Design Engineer Sales Etc. Profit Landowner Developers Builders Land Existing / Alternative Use Value + premium (TLV/EUV+) Policies/CIL CIL, affordable housing, CfSH, open space etc.

Building the model up and scenario testing Discounted Cash Flow –NPV –IRR Return On Capital Employed (ROCE)

Assumptions and testing “make some very cautious and transparent assumptions with sensitivity testing of the robustness of those assumptions it is important that variations against baseline costs, as well as values, are tested.” (page 27 – Harman)

Viability over time 5 year supply should not be prejudiced by unrealistic forecasting assumptions Sensitivity testing should inform policy context for years 5-15, forecasts for latter part of the period are unlikely to be accurate and will need review LPAs may wish to incorporate target-based policies for years 6-15

Carveth Read: “It is better to be vaguely right than exactly wrong” Logic, deductive and inductive (1898), p. 351

Monitoring Viability By reference to indices: CostsBCIS GDVLand Reg Halifax / Nationwide CompositeAcademetrics Hometrack Rightmove / Zoopla / BUT – have new build followed wider market?

Consultation Why Who with When So what and what do you do with the results?

Consultations Engagement A fundamental part of plan making and a requirement of NPPF, CIL Regs, Harman Guidance Don’t be afraid to ask the developers –For some evidence to support figures –To explain / for detail Record process and comments METICULOUSLY What have you actually asked and is it in the context of delivering the development plan

Engagement Phases Delay at your peril Two or three stages

Stage 1 Engagement Background and why –Methodology –Viability test –Appraisal assumptions Not results Certainly not policy Stage 1 includes establishing agreement on methodology and assumptions (build costs, sale prices etc.) Does not include workings.

Stage 2 Engagement Changes made from first consultation (or not) –Methodology –Viability test –Appraisal assumptions Draft Results Emerging conclusions Still not policy

Stage 3 Engagement Results Factors other than viability to consider Emerging and developing policy Changes to existing policy Approve now or hang on?

Case study: South Worcestershire

Case Study – South Worcestershire Local Plan

No additional requirements No affordable housing Built to Building Regulations (Part L) Density informed by consultation with officers and developers – lower than policy to reflect current delivery (targets assume high content of flats etc) Greenfield sites over 1 hectare have 40% open space No CIL or s106 All other requirements over high quality and locally distinctive design and safe design remain

No additional requirements

Build Standards Code for Sustainable Homes Level 4 from April 2013 –Add 6% to cost of house SWLP 26 Renewable and Low Carbon Energy (a)All new developments will be required to incorporate the generation of energy…by at least 10%. (b)All new development (as part of the major developments) will be required to incorporate the generation of energy…by at least 20%. –Add 2.5% to cost of house (+/- £2,500 /dwelling) NOT JUST REDUCING USE – ACTUALLY ABOUT GENERATION NO EVIDENCE OF ANY PRICE BENEFIT FROM REDUCED ENERGY BILLS

CfSH Level 4 + Onsite Generation

Affordable Housing 15 or more40% 10 – 14 30% 5 – 920% As social rented, affordable rented and intermediate tenure and provided on site NOT TESTEDLess than 5, a financial contribution will be required.

Affordable Housing

Density Density informed by consultation – lower than policy Greenfield sites over 1 hectare have 40% open space Brownfield sites NO Public Open Space Greenfield sites less than 1ha but more than 5 units 20% open space

Affordable Housing, Density, CfSH4, Onsite Generation, ‘No’ CIL

Uncertain Market Average Prices

Uncertain Market Indexed turn over (from January 2006)

5% fall in prices

Cumulative Impact of Policies Affordable Housing, Density, CfSH4, Onsite Generation

Exercise: Acronym bingo

Acronym Bingo! a)The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction b)A measure of the level of profit relative to level of capital employed/required to deliver a project. The average level of developer overhead and profit. c)Where an alternative use can be readily identified as generating a higher value for a site, the value for this alternative use would be the market value with an assumption. d)All income from the scheme. e)The value at which a typical willing landowner is likely to release land for development. f)An excess of abbreviations formed from the initial components in a phrase/word. GDV TLV TMA EUV AUV ROCE