Jamie Purvis Viability appraisals 2 Agenda Basic principles and viability issues What are the key drivers in the market? Introduction to appraisal models Example of a review Why arent we getting more affordable housing? Basic principles and issues 1 3 4 Presentation Footer Text Why has Viability become so Important? Pre-2008 assumption that values would keep going up Developers and banks were getting lazy taking a view on viability Viability and deliverability of schemes is under pressure Sales values have fallen and recovered to some extent Selling homes became more difficult (choice; mortgages) Potential planning obligations pot got smaller Development finance more difficult to secure Grant funding for affordable housing drastically reduced Landowners have not yet adjusted to new market reality Moving away from negotiated S106 to fixed CIL viability impact 5 Presentation Footer Text Why are Planners interested in scheme finance? Securing affordable housing without public subsidy Enable RPs to purchase stock from developer at a discount Planning Obligations such as the Community Infrastructure Levy (CIL) 6 Presentation Footer Text Policy and Viability RBK Core Strategy policy 50% AH subject to viability In the event that a development cannot support affordable housing policy the developer is required to submit a viability assessment demonstrating how much affordable housing (if any) that the scheme can support Onus on developer to fully evidence their viability assessment Independent analysis of the developers viability assessment is required to robustly scrutinise the developers departure from planning policy. 7 Presentation Footer Text Viability Methodology The proposed scheme is considered on the basis of CURRENT day costs and values and considers the scheme viability at a snapshot in time A residual valuation is undertaken of the proposed scheme in order to derive the scheme land value In summary: Gross Development Value Less Total Development Costs Less Developer Profit = Residual Land Value 8 Presentation Footer Text To determine viability, the land value of the proposed scheme is compared to a benchmark land value Best practice directs that the benchmark comprises the CURRENT USE VALUE of the site or an ALTERNATIVE USE if acceptable to planning policy For the purpose of this presentation, well look at a current use value 9 Presentation Footer Text Current Use Value So in this case, the land value of the proposed scheme needs to be at least 600,000 to be viable, if the land value is below 600,000 it is not viable 10 Viability and sharing in land value uplift Value created by grant of planning 11 Presentation Footer Text NPPF and NPPG place viability at centre stage Developers and landowners entitled to competitive returns NPPF does not mean that: Developers returns should be protected against falling values If the commercial risk does not pay off, profits may have to fall Developers are protected if they over-pay for land Land values are fixed in stone Planning obligations are not the only factor that should take a hit! Higher land value = less AH Lower land value = more AH 12 What information does an appraisal generate? RESIDUAL LAND VALUE 13 A basic residual appraisal 14 A basic residual appraisal 15 A basic residual appraisal 16 Policy and viability RBK Core Strategy Policy 50% AH subject to viability Schemes providing less than 40% can be policy compliant Viability caveat essential to convince Inspector to accept policy Onus on developer to prove why policy target cannot be met Independent analysis to scrutinise case put forward 17 Issues to consider Evidence Sales values (unit by unit pricing; average for development) Affordable housing values (tenure mix; affordability criteria) Commercial rents and yields Build costs Fees Benchmark land values Rent levels Demand Yield Premium Timing Sales and sales rates; off-plan sales Affordable housing payments from RP CIL fixed and no scope for varying timing on individual developments Section 106 payments and delivery of other obligations Example scheme appraisal review 2 18 19 Example scheme review Planning permission granted in 2010 31% affordable housing (by HR) secured through legal agreement Grant funding of 5.63m, commensurate with other schemes Re-appraisal clause in the event that grant funding not available Coalition government CSR cuts grant funding January 2013 submission of appraisal pursuant to S106 review Applicant proposed reduction to zero affordable on viability grounds BNPPRE reviewed Applicants viability submission 20 The Applicants appraisal in (m) Private sales values (6,865 psm)71.50 Car parking0.36 Affordable housing of which grant5.63 Ground rents0.87 Office and retail8.39 Total income93.39 Build costs - residential50.82 Build costs - commercial10.41 Infrastructure0.00 Fees5.10 Marketing2.26 Profit15.98 Finance6.51 Section 1061.70 Total costs92.77 Gross residual land value0.62 Stamp duty and acquisition fees0.14 Net residual land value0.48 Benchmark0.90 Surplus/Deficit against benchmark-0.42 21 The Applicants appraisal in (m)2013 (m) Private sales values (7,185 psm)71.50 Car parking0.360.45 Affordable housing12.27 of which grant5.630.00 Ground rents0.871.28 Office and retail8.399.85 Total income93.39 Build costs - residential50.8258.85 Build costs - commercial10.4112.47 Infrastructure0.00 Fees5.107.36 Marketing2.263.80 Profit15.9822.98 Finance6.517.58 Section 1061.703.22 Total costs92.77 Gross residual land value0.620.36 Stamp duty and acquisition fees0.140.02 Net residual land value0.480.34 Benchmark0.900.45 Surplus/Deficit against benchmark-0.42-0.11 22 BNPPRE review of inputs Private sales values Not best location but values low for a high quality tower Will be opposite new Nine Elms Underground Station Comparable evidence taking account of river and non-river views St George - non river views 2 nd hand: 1 bed 420k (7,648 per sqm) Scheme - non river views: 1 bed 345k (6,997 per sqm) Early values from Riverlight scheme (river and non-river views) Values understated by 10% based on position Specification Type and mix of units proposed 23 BNPPRE review of inputs Car parking revenue Low ratio of spaces to units Revenue increased from 25,000 to 50,000 per space Commercial values Retail rents increased from 15 to 17.50 psf Yield decreased from 8% to 7.5% Void and rent free periods: reduced from 24 to 6 months Build costs Increased between 2010 and 2013 In line with costs on other schemes in the area 24 BNPPRE assessment Applicant (m)BNPPRE (m) Private sales values (7,185 psm)105.03 Car parking0.450.72 Affordable housing of which grant0.00 Ground rents1.281.19 Office and retail9.8510.59 Total income116.61 Build costs - residential58.8558.09 Build costs - commercial12.4712.48 Infrastructure0.00 Fees7.367.26 Marketing3.804.17 Profit22.9825.25 Finance7.587.93 Section 1063.22 Total costs116.26 Gross residual land value0.369.75 Stamp duty and acquisition fees0.020.53 Net residual land value0.349.22 Benchmark0.45 Surplus/Deficit against benchmark-0.118.77 25 Outcome of negotiations with Applicant Applicant deficit of 0.11 million BNPPRE assessment: 8.92 million surplus above benchmark Surplus used to maintain rented housing element Amended scheme: 35 rented units, 6 shared ownership units Units preserved at target rents Why arent we getting more affordable housing? 3 26 27 Scheme viability: market crash and recovery 28 Scheme viability: market crash and recovery 29 Scheme viability: market crash and recovery 30 Scheme viability: market crash and recovery 31 Scheme viability: market crash and recovery Risk Margin Grant funding Affordable Rent Mayoral CIL 35 Borough CIL 210 Jamie Purvis Viability appraisals and planning decisions