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18/01/2019

NPPF 2.0 and viability: Problem solved?

The revised NPPF’s efforts to address problems around viability calculations are well-intended but flawed, argues Oliver Salisbury

Revisions to National Planning Policy Framework (NPPF) and Planning Practice Guidance (PPG) in July 2018 ushered in significant changes to planning policy and notably viability, an esoteric and much debated area of planning.

There was a perception the 2012 NPPF presented opportunities for landowners and developers to exploit viability arguments to maximise land value and drive profits at the expense of planning gain. The reincarnated NPPF seeks to close such perceived loopholes by focussing on viability testing at plan-making, using a ‘typology approach’ to inputs and limiting the ability to challenge at application stage.

The absence of a transition period has created challenges in the short term as stakeholders work through its implementation. To ensure a smooth ride, it is important its application is balanced with a cohesive and holistic approach from local planning authorities, developers and landowners alike.

Plan-making

Viability at plan-making stage relies on a ‘typology approach’ using average value and cost assumptions based on site characteristic groupings – for example, greenfield or brownfield, size and use.

Viability assessments at plan-making stage are an important milestone and the updated NPPF encourages landowners, developers, affordable housing providers and other stakeholders to engage with local authorities early in the planning process. This input is essential in ensuring policy requirements do not undermine deliverability and compromise sustainable development.

Planning applications will subsequently be measured against the viability assessment which informed the plan and will be required to comply with adopted policies by utilising standardised appraisal inputs, as defined in the PPG. Site viability at application stage will only be possible where the applicant can demonstrate that the assumptions adopted at plan-making stage were unrealistic.

However well-intended, the approach is flawed; site-specific inputs, such as abnormal development costs, are unknown at plan-making stage. Therefore, high-level value and cost assumptions adopting the ‘typology approach’ will inevitably fluctuate and may no longer be appropriate.

Thus, sites that are deemed viable at plan stage may prove unviable at application stage. As such, the necessity for viability assessments at application stage is likely to continue.

Decision-making

Where application schemes are deemed unviable, the NPPF emphasises that it is a ‘matter for the decision maker’. In this context, the ‘decision maker’ is the local planning authority.

In considering viability arguments at application stage (when robust cost information is available), it is vital that ‘decision makers’ adopt a sensible and considered approach by judging each site on its own merits and acknowledging that assumptions that were adopted to inform the plan may have changed.

If not, the reality is that development sites that were previously considered viable may fail to be released if landowners are not appropriately incentivised to sell.

Developer's profit

The updated NPPF indicates a suitable developer’s profit margin of between 15 and 20 per cent of GDV, though it recognises that different levels of profit may be appropriate.

When considering viability at plan-making or application stage, local planning authorities and advisors must be careful not to adopt a ‘one size fits all’ approach when it comes to developer’s profit by recognising that every site is different.

Site-specific risks such as significant infrastructure or abnormal development costs are an unknown quantum at plan-making stage, and there is a danger that local planning authorities may seek to fix profit at the lower end of the range without fully acknowledging the risks.

Consideration must also be given to cost increases against the backdrop of Brexit and ongoing economic uncertainty. Such cost pressures can only be expected to intensify over the coming months.

EUV nonplussed

The introduction of EUV+ supersedes the ‘competitive landowner return’ approach to assessing benchmark land value and represents perhaps the most significant change to viability guidance.

In simple terms, having first assessed the site’s existing use value (‘EUV’), a premium should be applied which reasonably incentivises a landowner to sell (‘+’). The NPPF wording states EUV+ “should provide a reasonable incentive for a landowner to bring forward land for development while allowing a sufficient contribution to comply with policy requirements”.

The guidance states that EUV+ should be supported by market evidence which must comply with policy or be otherwise adjusted. At first glance it appears a sensible approach but look a little closer and the lines become blurred.

This approach relies on a collaborative and transparent market. In reality, site-specific detail is difficult to obtain and therefore identifying and adjusting transactional evidence to support a landowner premium over and above EUV will be a subjective exercise open for debate and interpretation.

As supporting EUV+ with market evidence relies on full transparency of information, it is not a perfect solution, but does present the most robust and market-facing approach in determining a reasonable landowner incentive whilst accounting for site-specific fundamentals.

It has been suggested that EUV+ be assessed by adopting an arbitrary multiplier to EUV, a broad-brush approach which cannot account for site-specific factors and reasonably support an appropriate incentive. As the NPPF states that agreed benchmark land values can be used to support future applications, this approach is not sustainable and should be resisted.

If landowners are not suitably incentivised to sell, there is a risk sites won’t be released for development. This will impact on delivery, which is surely contrary to what the revised NPPF aims to achieve.

In summary

The NPPF update introduces significant changes to viability. It recognises that plan-making will be an iterative approach and encourages early stakeholder engagement between local planning authorities, developers and consultants to help inform and shape the process.

Given that full knowledge of individual sites is rarely known at plan-making stage, the requirement for viability assessments at application stage will continue. Of all the changes, EUV+ will perhaps be the most contentious issue.

It is therefore vitally important that robust and market-facing specialist advice is obtained to inform viability discussions at the earliest opportunity to ensure the deliverability of sites is not compromised.

Oliver Salisbury is a senior surveyor in Cushman and Wakefield’s residential team

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