In the recent Comprehensive Spending Review (CSR), squirrelled away in one of the minor paragraphs (s.3.109), the Government suggests that it will look at ways to introduce a more standardised approach to viability assessments. In my opinion, and based on my experience over the last 18 months, this would seem to be a very sensible idea.
I should declare my hand upfront. Part of my team works exclusively for London local authorities reviewing viability submissions prepared by developers or their consultants setting out how much affordable housing they believe their site (or scheme) can reasonably afford to provide.
Over the last year and a half I have become increasingly exasperated by what is being presented to me, in particular in relation to benchmark land values. Whilst some advisers (the small minority) provide submissions that summarise an accurate viability position of their scheme, an increasing number run submissions that on the face of it would either have their shareholders running for cover as the losses mount or simply asking why the business just didn't simply trade land and allow others to take the risk of securing planning permission and building the houses.
In 2010, following the recession, you could have some sympathy for a developer trying to bring forward a viable residential development but over the last few years it has become increasingly hard to justify ever lower amounts of affordable housing provision in a market that has seen house prices rise by around 22% since 2011. That doesn't stop viability consultants from arguing that that remains the case.
It is worth reminding ourselves of the purpose of a viability submission. Its main purpose is to determine what the site can viably provide for from an affordable housing and CIL perspective. A viability review assesses whether the submission prepared by the developer or the developer's adviser is fair and reasonable and whether the residual land value produced bears fair reflection alongside the site's benchmark land value, allowing for the provision of affordable housing and a CIL contribution.
Increasingly viability consultants are referring to the RICS guidance note on viability for the calculation of the benchmark land value. On a number of occasions in the cases that I have seen, especially where the purchase price of the site is known, the advisers are arguing that the residual land value is significantly below the comparable land value for the same use. This seems nonsensical to me. In one example last year the adviser estimated that the residual land value for the site for their client's proposed development was £5 million whilst at the same time arguing that the benchmark land value on the basis of comparable evidence for residential development of the same site was £10 million and therefore the site could not afford to provide any affordable housing. Ignoring the opportunity to suggest that the developer therefore sell the site for £10 million, we instead spent months underlining how illogical that assumption seemed to be.
Similarly, another theme that we are increasingly seeing relates to the economic viability of the proposal. Before Christmas I was presented with a submission for an existing mixed-use development where the developer proposed to extend an existing scheme with residential development. The proposal suggested that this would reduce the value of the underlying scheme by £30 million. I suggested to the adviser that this simply prompted the question as why you would do the development in the first place. This leads you to therefore question why the shareholders in that particular business would wish their money to be invested in that scheme or to ask whether the local authority was being presented with the complete picture.
The suggestion of standardising viability in the CSR would therefore seem to make perfect sense despite the obvious impact it will have on this element of my business.
My own view, and I do appreciate that this has already been dismissed in London but may be being revisited, would be to adopt a fixed percentage across all sites with no opportunity to review except in very exceptional circumstances (e.g. listed buildings, contaminated sites). This in my opinion would ensure that the whole process is accelerated as it would give both developers and local authorities far greater certainty. However for this to work it would need political parties of all persuasions to buy into the proposition – but that said what other form of tax varies to such a degree on a case by case basis? The case to simplify seems compelling.
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