Development Viability – a postscript

10 May 2018

A week or so back, I wrote a piece on the draft revised Planning Practice Guidance (PPG) on viability. This noted the emphasis on viability being assessed at the stage of constructing planning policy rather than when planning applications are being considered, but centred on the newly explicit proposal for land values in viability assessments to be based on existing use value plus an appropriate premium to the landowner.

In arriving at an appropriate landowner premium, the guidance proposes that account can be taken of, amongst other things, comparable examples that have recently be granted planning permission in ‘accordance with relevant policies’. It seems clear that the guidance is seeking to address the issue of inappropriately high land values producing a viability case for not fully delivering on planning policy requirements, usually through a reduced proportion of affordable housing. However, example land deals on other sites of the same type may have been related to permissions that provided substantially below the level of affordable housing set out in policy, but are still said to accord with policy if that policy, as most do, allows for such reductions on the basis of viability. Where this is so, the viability case justifying a reduction in affordable housing may have incorporated a range of particular circumstances and assumptions, potentially including an inflated land value by reference to the current guidance on taking account of ‘comparable market evidence’. In these circumstances, using such examples as comparable evidence would embed within the new approach an inherent degree of inflated land value. It appears clear that this is not the intention.

So the issue here is one of clarity. This is important because developers need to acquire sites and the inherently competitive nature of the process inevitably puts upward pressure on land value. Without clarity there is a likelihood of protracted negotiation, possibly a planning refusal and the delays and costs that are attendant upon this.

If the intention is that ‘accordance with relevant policy’ means that comparable examples should be ones that provide the proportion of affordable housing and other requirements as set out in policy, without dilution of the policy requirement on viability grounds, the new PPG should say so plainly. It would of course be necessary to allow some flexibility but this could be on the grounds of factors specific to the site that impact on viability, excluding land value. In this respect the draft PPG is already clear in stating ‘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.’

A Significant High Court Decision

As it happens, a recent High Court decision has reached conclusions that are of great relevance to this issue.

The case between the London Borough of Islington (LBI) and Parkhurst Road Limited (PRL) centred on the question of land value in a viability case for a proposal to provide a 10% level of affordable housing. This was against a policy requirement to provide the maximum reasonable amount of affordable housing, with a strategic target of 50% setting the starting point. The development proposal went through two planning appeal inquiries and ended up at the High Court on the basis of a challenge to the dismissal of the second appeal. In terms of land value, LBI put forward a value of £6.75m against PRL’s value of £11.9m.

The Inspector in the second appeal had concluded that the duties of the public sector organisation selling the land (the MoD) to maximise its return on the site ‘…do not, in my mind, support the appellant’s position that the purchase price was appropriate; simply that it was the highest bid.’ And, ‘ Whilst I attach limited weight to the Red Book exercise, which is required in accordance with professional standards, it is a market valuation which does not, in my view, adequately demonstrate proper consideration of, or give adequate effect to, the guidance in PPG or the requirements of the development plan. I do not accept the appellant’s position that the level of affordable housing provision is not relevant to determining land value, as any notional land owner is required to have regard to the requirements of planning policy and obligations in their expectations of land value.’

The Inspector dismissed the appeal, finding that the development ‘…would not provide the maximum reasonable level of affordable housing….’

Subsequently, the High Court rejected the challenge to the appeal decision.

An Opportunity for Clarity

Unusually, the High Court decision included a postscript related to clarity in relevant professional guidance and the nature of decision-making. This stated ‘One of the key objectives in our planning system is efficiency in decision-making, in order to avoid delay in bringing about necessary or beneficial development’. In this context the present case strikingly illustrates the importance of seeking to overcome uncertainty on how viability assessment should properly be carried out. It went on to say that when estimating a base land value for a site, the application of current PPG requirements on a competitive landowner return and use of comparable market evidence, should ‘ ‘’reflect’’ and not ‘’buck’’ relevant planning policies (including those for the delivery of affordable housing).’ This postscript referred to the RICS guidance commonly used when carrying out viability assessments and concluded ‘It might be that an opportune moment has arrived for RICS to consider revisiting the 2012 Guidance Note ……in order to address any misunderstandings about market valuation concepts and techniques, the ‘’circularity’’ issue and any other problems encountered in practice over the last 6 years, so as to help avoid protracted disputes of the kind we have seen in the present case and achieve more efficient decision-making.’

It would seem also that the proposed revised PPG on viability is an opportunity to contribute to the clarity suggested in the High Court postscript. The appeal outcome and High Court are themselves also likely to stiffen the resolve of local planning authorities when faced with development proposals that don’t fully reflect policy requirements, particularly for affordable housing. Both the appeal and High Court decisions therefore clearly point to the importance of a thorough consideration of policy requirements and how these might influence land value when acquiring sites.