Development Viability – proposed changes to planning guidance with big consequences?

Proposed changes to the National Planning Policy Framework (NPPF), which is out for consultation until 10 May, have received a good deal of coverage and comment. However, surprisingly little has been said about the accompanying Draft Planning Practice Guidance (Draft PPG) and within this the draft guidance on viability in particular. This may be because the draft PPG is published alongside the NPPF consultation documents for reference purposes and comments on the draft PPG itself are not invited by the consultation response form.

The low profile of the Draft PPG chapter on viability is surprising because it suggests some significant changes to the use of – and methodology for – viability assessments. The key PPG changes reflect proposed changes to the NPPF.

The Draft Revised NPPF

Currently the NPPF (at paragraph 173) sets out the need for local plan policies to ensure that the cost of any requirements, after taking account of normal development costs and mitigation, provide competitive returns to a willing land owner and willing developer, to enable development to be deliverable. The draft revised NPPF is more succinct in stating (paragraph 34) that policy requirements on development contributions ‘…..should not make development unviable and should be supported by evidence to demonstrate this.’  The draft also more clearly states that it is primarily at the plan making stage that viability should be assessed, requiring that local policies ‘…..should set out any circumstances where further viability assessment may be required in determining individual applications.’

Current and Proposed Viability Guidance

Guidance set out in PPG sits alongside the NPPF and articulates in more detail how some of the national policies should be applied. An important difference in the draft PPG compared to the existing is that it more forthrightly sets out the need for viability assessment to be at the plan making stage, stating that ‘The role for viability assessment is primarily at the plan making stage’ and ‘the use of viability assessment at the decision-making stage should not be necessary.’

However, it is the guidance on the methodology for assessing viability that is most significant, especially in relation to land value. The current guidance requires land value to reflect policy requirements, provide a competitive return to the landowner and be informed by comparable market evidence. It is the latter that has tended to be the bone of contention, in circumstances where applicants have sought a relaxation in planning obligations, usually a lower proportion of affordable housing, and where planning authorities contend that such a relaxation is not justified because issues over viability result from a land value that is too high.

The draft guidance proposes a significant change in approach, with land price to be based on the existing use value plus a premium for the landowner. The latter is to ‘…reflect the minimum price at which it is considered a rational landowner would be willing to sell their land.’ This is the nub of the matter, involving a degree of judgement. However, further guidance is provided on this and – importantly – it states that an ‘….appropriate premium to the landowner can be established by looking at data from comparable sites of the same site type that have recently been granted planning consent in accordance with relevant policies.’ It goes on to say ‘Where a viability assessment does accompany a planning application the price paid for land is not relevant justification for failing to accord with relevant policies in the plan.’

Potential Issues

Assuming it becomes ‘adopted’ over the coming months, it seems that this draft guidance raises a number of potential issues.

Plan-making

Whilst it is already necessary to ensure that local policy does not render development unviable, the draft PPG puts a sharper focus on assessing viability at the plan making stage to ensure that policies and requirements do not present a barrier to the delivery of good quality sustainable development. This may place an additional burden on already stretched local planning authorities. Policies on affordable housing for example are likely to require particular attention and setting a blanket requirement for a proportion of affordable housing across an area may not be appropriate, particularly where evidence shows average levels previously achieved to be much lower.

Flexibility

There is an obvious need for a flexible approach on sites that have already been purchased on the basis of current policy and guidance, including the existing advice on taking account of comparable market evidence. There is also the question of how the guidance should be treated when considering site acquisitions in the period when it remains in draft form. In this respect, there might, of course, be changes to the draft, but it clearly sets out the Government’s direction of travel and anything other than giving it due consideration when buying land would seem unwise.

Landowner Premium

The most tricky element will perhaps be interpretation of the guidance on using evidence from comparable sites when establishing an appropriate landowner premium and the requirement that these should be sites that have recently been granted planning permission ‘in accordance with relevant policies’. On the face of things, this looks like clear and straightforward advice – only use as comparable evidence examples where the price paid for a site has been on the basis of delivering a policy compliant development. So, if policy requires 30% affordable housing, a comparable site should be one that provides this level and the price of the site should reflect this fact. That seems very clear and straightforward. However, it is not necessarily so.

Development proposals are frequently required to address a range of policy requirements, but staying with affordable housing, it is common for local policies to incorporate flexibility to allow lower levels of affordable housing provision, or none at all, if viability evidence shows this to be necessary. So, there will be circumstances where previous site purchases have led to permissions that do not provide the policy level of affordable housing. Such examples are however in accordance with relevant policies if those policies themselves allow for deviation from the target level of affordable housing on viability grounds. As such it would seem that they can therefore be used as comparable examples for helping to determine a landowner premium under the approach now proposed in the draft PPG. This is despite the fact that such examples may incorporate a degree of inflated land value as a result of using comparable market evidence under the current guidance, an issue that the draft new PPG seeks to address.

The statement in the revised guidance, to the effect that the price paid for land is not a justification for failing to meet policy requirements, would suggest this is not the intention.

Some Conclusions on the Revised PPG

Two important conclusions emerge. The first is that local planning authorities need to give very careful thought to construction of policies on development contributions and in what circumstances consideration of site specific viability assessment will be needed. The second is that the final version of the revised PPG needs to be clear on how use of evidence from permissions on comparable sites ‘in accordance with relevant policies’ is to be interpreted. This latter point is important because it is obviously the case that to deliver the homes and other facilities required developers need to acquire sites and they do so in a very competitive environment, which has a natural tendency towards upward pressure on prices to maximise landowner returns. If guidance on viability assessment in the planning system is to moderate this tendency and provide an ‘appropriate’ premium to landowners, in the interests of helping to enable developments to deliver policy requirements and avoid costly delay, clarity is vital.

Construction Costs and Public Investment

Finally, two other points. The first is to note that whilst often the focus of attention, land isn’t the only significant factor in relation to viability issues that constrain the ability of development to meet the requirements of planning policy. It is a major component of development costs but another of increasing importance is rising construction costs. This is difficult to control because there are a number of causes. One however is rising labour costs, at least in part arising from a shortage of skilled construction workers, something that may be exacerbated by the UK’s exit from the EU. It is an issue that the Government recognises and the Sector Deal with the construction industry announced late last year is evidence of this. This is good news but it remains an issue that is going to require sustained focus and investment. Within viability assessments, it will also be important to ensure, using for example BCIS data, sufficient allowance for rising costs.

The second issue relates to public investment in housing. Whilst the issue of viability is not only related to affordable housing, that is almost always where the focus falls if something needs to give. It is right that appropriate levels of affordable housing should be delivered as part of viable development schemes. However, given the scale of need, there is a case, in addition to ensuring delivery through the planning system, to review priorities for national spending on housing delivery. The Chartered Institute of Housing’s UK Housing Review 2017 provides a summary of the current public investment programme for housing. This shows 71% (£32.5bn) allocated to support for private market housing, through Help to Buy and other schemes, and 21% (£8.6bn) for affordable housing. The housing crisis of course cuts across all tenures but with analysis by Morgan Stanley, for example, showing that Help to Buy has had the effect of pushing up the premium charged on new-build homes, there would appear to be a case for rebalancing national spending priorities on housing to provide more support for delivering affordable homes, to complement provision achieved through the planning system. A higher proportion of the public budget for housing spent on delivering affordable homes could continue to assist market delivery by easing the burden on development projects without risking further upward pressure on prices for buyers.