ALL IN A WORD: WHAT IS ‘VIABLE’ DEVELOPMENT?


Guy Emmerson


It has become vital in recent years to assess development land’s viability in planning applications. Presently there is no formal definition of the term, but this scenario is set to change with the publication of new guidance from RICS. In the first of a two-part article on the subject, Guy Emmerson, development partner at property consultants Bruton Knowles, explores the concept of viability and how the new guidance might effect the appraisal of development land.


In a word, development must be ‘viable’ if that development is


to be delivered. But development land, particularly


residential, is under extreme pressure. Pressure to contribute to a wide range of physical and community infrastructure and to deliver affordable housing. These are all costs a scheme must shoulder; yet the project must also be financially viable.


While everyone has a general notion of what viability


means, or can reach for a dictionary, there has to date been no authoritative guidance on what constitutes a viable development. This has lead to a general lack of understanding and inconsistency of approach and methodology across the country. It is therefore welcome news that RICS is to publish a Guidance Note on evaluating the impact of planning obligations on the financial viability of development proposals. Local authorities need to ensure they are prepared for its publication and review its implications by way of best practice. So, what might this guidance contain, and why is the notion of viability so tricky to pin down?


Some background


The cost burdens on development land were already becoming an issue at the height of the property market boom in early 2007, and the effects of the recession that followed later that year only exacerbated the situation. Landowner aspirations for high returns were meeting politician’s expectations for large- scale contributions head on. The ability for development land to meet that cost burden has been hit by a double whammy; the sharp collapse of the market in autumn 2007 (from which we are all still reeling) with the upshot that there is less land value to draw from; and a substantial reduction in the amount of public funding available, which means that development land is expected to meet an increasing share of those costs. As a result, viability concerns are a common thread to virtually all planning applications and all planning authorities, and their property colleagues, have to deal with viability issues relating to planning applications in one way or another.


THE TERRIER - Autumn 2011


The problem is usually worse in lower value parts of the country – sometimes fundamentally so where developments are unable to viably consume their own smoke in terms of required planning obligations as substantially negative land values arise. That trend can be expected to continue for the foreseeable future and viability is now a central consideration to the majority of applications.


There are a number of viability models in circulation to calculate Residual Land Values, but the interpretation of these results is where problems tend to arise and this is the area where RICS’ guidance, due to be published in late October 2011, should come into play.


Bruton Knowles’ approach


Up until now we have defined viability as the point at which the Residual Land Value (RLV) is equal to or in excess of the Threshold Land Value (TLV). The extent of planning obligations in the RLV is varied until this equation is balanced. TLV is the minimum sum a notional and reasonable landowner would require in order to release land for development. It goes without saying that the TLV is a higher figure than the value of the land or buildings in their current use because if the landowner is not going to gain financially from putting land forward for development, he/she will retain it. How much the landowner should gain is often at the very heart of a fall out between the parties.


The principle of this pretty succinct equation will be familiar to many local authorities and will be used to carry out appraisals on brownfield land where the TLV is a premium over and above the current use value of the site. In greenfield situations, practitioner convention has tended towards ensuring the landowner received a fixed amount per gross, or net, acre within the planning application, which is often, for example, a significant multiple of agricultural value. The RICS’ new Guidance Note appears to follow a slightly different approach.


The new Guidance Note


A summary published by RICS ahead of the full guidance proposes the following definition of financial viability: ‘An objective financial viability test of the ability of a development project to meet its costs, including the costs of planning obligations, while ensuring an appropriate site value for the landowner and a market risk adjusted return for the developer in delivering that project.’


This is consistent with the approach taken to date and holds no surprises. But when it comes to the question of TLV, there is a danger of further confusion being introduced because the Guidance seems to be favouring a market value based approach.


This is qualified by saying the market value


assessment of the land should ‘have regard to development plan policies and all other material planning considerations and disregard what is contrary to the development plan’. The text states that the return to the landowner will be ‘based on market value after risk adjustment, so it will normally be less than the current market value of development land where planning permission has been secured and planning obligation requirements are unknown.’


Until the Guidance Note is published in full it is difficult to comment in detail, but this seems to be introducing circular


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