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24/04/2015

Career development: Understanding viability

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Viability calculation sample

Viability assessments forms one of the most important – and difficult – elements of a planner’s job. Simon Wicks looks at some of the key issues to keep in mind

Viability – the determination whether development is economically worthwhile – has become a central plank of planning under the NPPF.

The criteria by which viability is measured will vary according to the purpose of undertaking the assessment; and different actors within the property industry use different models for assessing viability.

It can be complex. What looks viable to a local authority may not be considered so by a developer. Sometimes viability may be contingent on public sector action, such as preparing former industrial sites for development. At times viability assessments can seem little better than guesswork, and they can provoke debate and delay. But they do give all parties something with which to negotiate, so planners must understand how they work, the language that surrounds them, and how to commission an assessment.

Gillian McInnes, principal consultant for the Planning Advisory service (PAS), has helped to guide The Planner through issues surrounding viability.

What do we mean by ‘viability’?

Gillian McInnes of PASGilllian McInnes (left): “The basic definition is that when you take account of all the costs of undertaking development and all the value of the development, it’s viable if the value is greater than the costs.

“There are several places where you can get a definition of viability, not least in the NPPF [Paragraph 173] and the Planning Practice Guidance. But the definition in Sir John Harman’s 2012 Viability Testing Local Plans report for the Local Housing Delivery Group is the one that I would pick.”

 

 

From Viability Testing Local Plans – Advice for planning practitioners:

“An individual development can be said to be viable if, after taking account of all costs, including central and local government policy and regulatory costs and the cost and availability of development finance, the scheme provides a competitive return to the developer to ensure that development takes place and generates a land value sufficient to persuade the land owner to sell the land for the development proposed.”


2. Why do viability calculations matter?

Viability assessments underpin local plans, as well as specific site plans. They also determine the level of community contributions associated with development.

GM: “The one thing that everybody working in planning or development shares is the purpose of considering viability. You are writing a plan that will achieve your aims. Or you are producing a development that will achieve the aims of your plan.
“Developers do not undertake development for the public good. There may be a spin-off to the public good. But actually they are doing it to make a profit for their shareholders. Profit is directly related to taking a risk. A viability assessment helps you to understand at what point there is enough potential profit to make the risk worthwhile.

“A scheme such as affordable housing that’s been bought up as one block by a registered provider is not as risky as building for sale on the open market. In this case, there are other costs and risks to be borne by the developer, such as marketing and the cost of finance. The profit margin in a pre-sold affordable housing development would be less, but it’s guaranteed.”

From the NPPF, paragraph 173:

“Pursuing sustainable development requires careful attention to viability and costs in plan-making and decision-taking. Plans should be deliverable.

"Therefore, the sites and the scale of development identified in the plan should not be subject to such a scale of obligations and policy burdens that their ability to be developed viably is threatened.”


3. What are the major considerations for planners?

GM: “Every developer and house builder has a different model – and local authorities can’t take into account every one.

“For example, some developers build fully on cash, and their calculations reflect that. Others are borrowing heftily. You have to build in finance costs, too.

“It’s incredibly important that local authorities actually look at what’s required in the NPPF in terms of whether it is site-specific planning, plan-making or CIL to make sure what they are looking at is going to give a competitive return. Use the wording in the guidance and have consultants that use the Harman approach to viability.

“You must take into account the full costs of the development, such as affordable housing, design and the impact of national policy requirements. You must also work out the value of the land. The land owner must be given a competitive return, but without the planning permission the land has limited value – particularly greenfield. If it’s not greenfield, look at existing use value to make your calculation and add a portion. It’s not an exact model. But it’s important to focus on today’s costs and today’s values. Try not to guess the market.”

From RICS Professional Guidance – Financial viability in planning:

“Any uplift from current use value to residual land value that arises when planning permission is granted should be able to meet the cost of planning obligations while ensuring an appropriate site value for the land owner and a market risk adjusted return to the developer in delivering that project. The return to the land owner will be in the form of a land value in excess of current use value, but it would be inappropriate to assume an uplift based on set percentages.”


4. What are the key concepts that planners need to get to grips with?

GM: “Planners don’t need to be able to do a viability assessment themselves, but they do need to understand the issues related to it.

“It’s a language. Are you talking net or are you talking gross? Are you talking gross value? Is it cost or is it value? So it is the language and what that language means.

“You need to be able to understand all the inputs. The arguments are about those inputs. The best thing to do is try to come to agreement on as many of these as you can, so you can then identify the areas where you still disagree.”

From the PAS guidance:

"It is important for planners to understand:

- The language and approach of developers;

- The criteria that developers use to assess proposals;

- Risk and return for different types of developer and investors;

- Capital and revenue appraisals;=

- ‘Yield’;

- Financing development – working capital, investment finance and gearing;

- Residual valuations;

- Viability appraisals and models;

- The impact of planning interventions on viability; and

- How to commission more appropriate and useful viability assessments."


5. What are the areas where planners commonly fall down?

GM: “Confidence. The nature of the planner is that they would want more certainty than a developer. It’s that feeling of ‘Yes, I’m confident that I can argue my case’.

“There’s a view that viability is a science. But it’s a set of assumptions on assumptions on assumptions. A local authority’s viability assessment and a developer’s could be hundreds of thousands of pounds apart. That’s why you then go into each individual input.

“It’s about getting that knowledge so that you have the confidence to discuss viability on a level with the development industry.”

6. What’s the consequence of more planners understanding viability better?

GM: “It would make submissions better. It would make planners able to explain to councillors and communities better what’s happened with certain proposals. It would potentially result in more delivery of associated infrastructure – or if it didn’t, people would understand why. Overall, it would lead to better decisions.”


Where to learn about viability

- PAS viability guidance

- PAS free viability training for local authorities

- Planning Practice Guidance – viability

- Viability Testing Local Plans – Advice for planning practitioners (PDF)

- NPPF (PDF)

- RICS Professional Guidance – Financial viability in planning (PDF - RICS membership required)

Image taken from viabilioty assessment sample provided to PAS by Roger Tym and Partners

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