Our Thoughts

Viability matters: National Planning Policy Framework reforms risk turning communities against new development

The tool for determining the extent of community benefits that can be sought from development is the much-maligned viability assessment, unfairly characterised as a ‘loophole’ that – in the view of some commentators – enables developers to ‘evade’ policy requirements that have been set in the plan.

In reality, the planning system sets policy requirements at an aspirational level, with explicit acknowledgement that not every scheme (or indeed many schemes) will achieve the upper end of policy targets. The by-product of this approach is that almost every planning application above policy thresholds for affordable housing has to be accompanied by a viability assessment.

In its new NPPF and accompanying replacement PPG, the government has indicated its aim of reducing the role of viability assessments by front-loading viability testing at the plan-making stage. If developers and landowners are clear on planning requirements from the outset, then the land market will adjust. Or so the theory goes…

This should work in areas where the bulk of housing will be developed on greenfield sites or other previously undeveloped land; the uplift in value from agricultural land value is of such a significant scale that policy requirements can, normally, be readily absorbed.

However, for planning authorities where the bulk of housing will be on previously-developed sites, the range of development scenarios is so varied that it will be impossible for them reliably to test their plan policies to cover the range of scenarios. Inevitably, in these areas, planning authorities will need to continue to test the ability of developments to meet policy requirements at the development management stage.

So, there is a clear choice to be made: to reduce the use of viability testing, it would be necessary for planning authorities to tailor policy requirements to the least viable site or type of development. Consequently, policy would be determined by the lowest common denominator and developments that could have contributed more would not do so. The benefit of the current approach is that levels of affordable housing are optimised on a site-by-site basis up to the local plan target. The risk of the government’s proposed approach is that the target level of affordable housing and other policy requirements would be lower, with a potential race to the bottom.

How should incentives to landowners be determined?

The PPG indicates that government has two main concerns. First, that public confidence in the planning system should be restored and that for this to happen, almost all schemes should comply with policy requirements; and second, that planning authorities should not take too much of the uplift in land value resulting from the grant of planning permission, leaving too little for landowners.

There is a difficult balance to strike here. Set policies at too low a level, and the pressing need for affordable housing and supporting community infrastructure may be left unmet. As a consequence, communities may resist new development in their areas. Conversely, if planning requirements are set too high, with resulting reductions in land values, landowners may not bring their sites forward and wait in the hope of a change in policy.

This conundrum brings into sharp focus the difficulty that planning and valuation professionals have been grappling with for many years: does the market determine the extent of planning policies, or is the role of the plan to influence the market? In its current form, the government’s guidance comes down very firmly on the supremacy of the market. When testing the viability of a local plan, it is necessary to determine a benchmark land value against which the residual values of the tested schemes can be compared.

The RICS has promoted ‘market value’ as the appropriate benchmark land value, but that has proved problematic, not least because of the tendency of those buying land not to take full account of existing planning policies. The approach advocated in the PPG is that benchmark land values should be determined by the ‘existing use value’ of sites, which mirrors the approach adopted by many councils when testing plan policies. As a principle, this is more appropriate than market value, as it enables planning authorities to identify the full uplift in land value upon grant of planning permission. The issue then is how to divide the uplift between commercial and public interests.

The PPG also recognises that landowners will normally require a ‘premium’ or ‘incentive’ above existing use value to release their sites for development. The document proposes that this premium should be based on market transactions, adjusted where necessary to take account of policy requirements.

This leads to several difficulties for authorities. Even when market transactions take account of planning policy requirements (and this is by no means always the case), they will reflect adopted policies only. Basing benchmark land values for testing new local plans on historic transactions will place a cap on the contributions that planning authorities can seek in new plan policies. Even if increased contributions towards essential community infrastructure are needed, the proposed approach would prevent planning authorities from securing them.

More importantly, there is often a significant disparity between the residual value of a scheme using ‘standardised’ viability inputs and the price that developers pay for sites. We reviewed the viability of four schemes in a London borough and compared the existing use values, the residual values of the application schemes, and the price the applicants paid to acquire the sites (see Figure 1). The first point to note is that the applicants paid significantly more to acquire the sites than the residual value of their proposed developments in their viability assessments. This calls into question the extent to which market transactions are reliable as a means of testing the value of development.

Figure 1: Comparison of existing use values, residual value of development proposal and price paid for site – 4 London developments Source: BNP Paribas Real Estate

The second and more critical issue is the extent to which the transactions exceeded the existing use values of the four sites. If these transactions are used to inform the ‘premium’ above existing use value, as the PPG suggests, benchmark land values would be so high that viability tests would result in no capacity for any planning policy requirements on these sites.

The way forward

The government’s PPG clearly needs to ensure that plan policies are set at a level that is realistic, to ensure that land supply is maintained and enhanced in areas of particular pressure on housing delivery. However, communities often remain unconvinced that new developments mitigate their own infrastructure requirements and want to see more community infrastructure provided by major schemes.

In its present form, the PPG appears to be weighted more in favour of commercial interests, with the market fully controlling the package of community benefits that the planning system can seek, albeit with wording added since the draft PPG seeking to temper this. The approach risks undermining local support for development. To deliver the affordable homes that our communities need, future versions of the PPG need to provide planning authorities with greater scope to influence market behaviour so that commercial and community interests can be more appropriately balanced.

Anthony Lee
Head of UK Development Consultancy
+44 (0) 207 338 4061