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Viability Decisions – Care Needed on ‘Market Value’ Assumptions

The recent Parkhurst Road appeal decision emphasises the importance of understanding how  land value expectation (and so the price for land) should reflect planning policy requirements.

The appeal decision dismissed the 96-home proposals for the disused Territorial Army centre on Parkhurst Road, Holloway on the grounds that it would not provide the “maximum reasonable” level of affordable housing, as required by the council’s core strategy. The appellants offered ten per cent affordable provision, reflecting a purchase price of £13.25 million (which, in light of nearby sales data, was said to be the market value for the site). The Inspector accepted the authority’s approach, starting with the site’s established use value (EUV) and applying a significant premium, to reach an overall benchmark nearly half that put forward (at which 34% provision was feasible).

Caution is needed on whether the decision is really a game-changer or just a reminder of home truths.

Benchmark, not Landmark

The decision is a benchmark, of existing policy, rather than a landmark in terms of a new approach. It shows a willingness to take policy and guidance at its word and treat land value as genuinely residual to policy requirements (even where they are expressed to be ‘subject to viability’).  It does not junk the comparable approach, nor does it undermine the use of either a substantial premium to Existing Use Value  (EUV Plus) or use of Alternative Use Value where appropriate to reflect the need for an incentive to release land.  It is a reminder of the need to critically examine evidence of comparable values to weed out those which failed to comply with policy in the first place (i.e. are not truly comparable).

It also illustrates the role that the Mayor’s Housing Supplementary Planning Guidance (March 2016) will play in London in clarifying that the outcome should rarely be different whether either the EUV Plus or the RICS market value basis is used properly.

Context is everything

The backdrop to this particular decision also matters. In a previous (2015) appeal, the Inspector’s finding that the price paid was broadly reasonable in light of ‘market signals’ (competing bids and comparables) resulted in a letter from the Government responding to the threat of legal proceedings by Islington acknowledging that the PPG’sunambiguous policy position” is “in all cases land or site value … should reflect policy requirements and planning obligations…”.

The 2017 decision adopts a more critical approach to giving effect to that, but is not really that different to other appeal decisions through the years which reflect the same fundamental point already flagged in the PPG (look back, for example, at the 2013 Holsworthy Showground decision) discounting price paid as an overbid against true market value.

Technical Pointers

Both the 2015 and 2017 decisions acknowledge the appropriateness of a viability Review. A 24 month ‘grace period’ was acceptable to avoid a pre-implementation Review but seeking a 22% margin at the Review stage when the effective profit on the 10% AFH offered at appeal was 18% was – sensibly – rejected on the basis that the development risk is already rewarded by the preserved return of 18%.

It is also significant that a requirement not to leave the homes empty for more than 3 months (under its adopted Preventing Wasted Housing Supply SPD, July 2015) was rejected on the basis of doubts about both the justification for, and the enforceability of, the obligation. The latter point should be scrutinised as a proper consideration in judging the reasonableness of the obligation – not least because it would suggest that the kind of obligations required by the St Ives Neighbourhood Plan could never be given effect.

Autumn Statement: mood music?

In the absence of the Housing White Paper, the industry is still left needing to mind the gap.  We have simplified budgets – abolishing the Autumn Statement – but no hint of simplified planning for growth.

The overall commitment to housing is welcome mood music, but the lack of detail on powers and fiscal incentives to support locally-led Garden Towns to deliver at the scale needed leaves a hole.  Expanding grant funding for affordable tenures is great news but at £25,000 per unit is not going to be life changing.

hamThe £2.3bn Housing Infrastructure Fund could be a game changer if it is used to reward areas for proactively planning for growth. Making an up to date housing land supply a condition for at least some of the funding would dangle the right carrot for authorities that currently only have the stick. The lack of fiscal measures for new settlements – incentivising forward funding of major infrastructure that can unlock delivery at real scale – is disappointing though.

Affordable Housing is heading towards life support – delivery in 2015-16 was 52% lower than last year.  The announcement in the Autumn Statement of a funding injection to deliver 40,000 affordable homes is welcome. It is a clear recognition that addressing the housing shortage is not simply about building more homes.  Yes, we need more but they must meet a variety of needs. There are further signals of a softening of the Government’s stance on Starter Homes – tenure flexibility replacing David Cameron’s commitment to a single tenure.

Without the Housing White Paper, there is also still a wait to see how the NPPF is going to be reshaped and in particular how housing land supply and Local Plan duties will be re-set following expert advice on accelerating delivery. If the Community Infrastructure Levy is to be replaced by a simplified flat national charge, the effect on infrastructure funding and the transitional arrangements need to be understood now, so that schemes in the pipeline do not get put into suspended animation.

The statement gives some clues about the Government’s direction of travel but, funding commitments aside, offers little substance.  We still await the detail in the Housing White Paper which we are told will be published “soon”.  Reasons for the delay are unclear. Have responses to leaks on more radical measures, such as penalising developers for slow delivery, prompted a re-think?

Vacant Building Credit – an own goal?

Vacant Building Credit (VBC) was re-introduced into the NPPG in May 2016 to less vocal opposition than it faced when originally introduced following a Ministerial Statement in November 2014.  The Statement remains intact following the Court of Appeal’s ruling that it should stand.

The broad premise of  VBC is that is acts as a credit which can be offset against the affordable housing requirement of new development.  The credit is equivalent to the existing gross floorspace of a vacant building brought back into use or demolished for redevelopment purposes.  However, neither ‘abandoned’ buildings or those vacated for the sole purpose of redevelopment are able to benefit from VBC.

Unhelpfully, the NPPG gives no guidance on how VBC is intended to be applied.  Two immediate issues arise:

  • buildWhat is meant by “vacant”?  There is a concern that VBC will incentivise landlords to force the vacation of offices, industrial buildings or even houses to benefit from VBC.  There is also little assistance on where the line can be drawn to assess whether a building is “vacant” or “abandoned”.
  • What is meant by the “gross floorspace” of the vacant building – GIA over GEA?  Once that has been confirmed, how that floorspace should be applied to calculate the off-set?

As a consequence, local authorities are left to make sense of how to apply VBC, and inevitably are creating methods and policies for approaching VBC in a way which will minimise its impact on affordable housing delivery.  Emerging practice includes:

(i)         interpreting “vacant” as being opposite to the “in use” building test set out in the CIL Regulations.  This ensures that a development is unable to benefit from both VBC and the demolition credit which can reduce the amount of CIL payable;

(ii)         requiring the entire building to be vacant, not just part of it;

(iii)        requiring the building for which VBC has been sought to have been actively marketed for a specified period (and for the method and details of marketing to be provided);

(iv)        requiring details of existing floorspace to be provided on a GIA basis when a planning application is submitted.

Of those local authorities that are putting in place policies for calculating VBC, it is clear that there is no standard approach; others will be reviewing whether they apply VBC at all.  The West Berkshire appeal confirmed that the VBC policy is a material consideration and is not capable of being applied in a “blanket” manner; many local authorities will be taking comfort from this, possibly even reviewing how Local Plan policies can be formulated to disapply VBC altogether.

VBC was introduced on the basis it would assist smaller developers deliver viable schemes, however the Government has failed again to build the necessary clarity into the guidance to ensure that it is only small developments which benefit from VBC.

Left to local authorities to put in place their own mechanisms provides no guarantee that VBC will assist those it was intended to; as a consequence VBC’s long-term impact on affordable housing remains potentially damaging at a time when the need for affordable homes remains critical, while the ability to rely on it to bring forward otherwise uneconomic schemes remains unclear.

Homes for London

London is falling lamentably short of delivering the number of homes that the city needs.  The mayoral election campaign was dominated by the housing crisis – and rightly so.  The chronic under-supply is a crippling social issue and a threat to London’s economic competitiveness.  London must double its rate of house building if it is to adequately house a growing population and maintain the city’s global competitiveness.  There is no silver bullet – increasing supply requires action on multiple fronts.

Homes-for-Londoners-212x300During the campaign the new Mayor, Sadiq Khan, made it clear that he wanted to see more homes built, particularly affordable homes.  The Mayor proposed the setting up of “Homes for Londoners” to bring together the Mayor’s housing, planning, funding and land powers.  Working together, London First and Dentons today launched “Homes for Londoners – A blueprint for how the Mayor can deliver the homes London needs”.  The report sets out the first steps that we believe the Mayor should take to deliver on his manifesto promise and to deliver much-needed housing in London.

We support the creation of Homes for Londoners – a body with the simple objective of ensuring that all of London government plays an effective part in increasing housing in London to 50,000 homes a year.

We believe that the initial focus of Homes for Londoners should be to bring public land forward for development.  The main pipeline of land under the Mayor’s control is owned by Transport for London (TfL).  Homes for Londoners should help to advise the Mayor in establishing a strategy to identify and release TfL sites for development from the perspective of maximising housing supply.  As part of the wider agenda of securing an effective pipeline of public land, Homes for Londoners should support the work of the London Land Commission by putting in place a strategy to ensure the disposal of land on the brownfield register.  A key focus should be on assembling sites around core public land-holdings by acquiring adjacent privately owned land.  Those sites should be released to the market with clearly prescribed density, quantum and mix (including affordable housing) requirements.

The recommendations in the report are predicated on the GLA evolving from being an organisation that sets policies and distributes funds, into an organisation that pushes, and where necessary, directly intervenes to support the delivery of more homes.  As part of this, we suggest a bolder approach to the use of compulsory acquisition powers is needed.  This should be supported by a loan fund for acquisition and compensation costs to de-risk the process for boroughs and other public bodies.

Delivering the steps set out in the report will need energy, conviction and muscle on the part of the Mayor.  This can be done.  It should be done and we ask the Mayor to step up and ensure that it is done.

Affordable snakes and ladders on small sites

The judgment in the battle of wills over the Government’s small sites affordable housing and Vacant Building Credit policies has concluded, for now, with the Government victorious in the Court of Appeal. This blog considers the practical impact of the Vacant Building Credit.  What are the wider implications of the judgment for affordable housing decisions and policies?

Policy on the hoof

cartoonThe process by which the policies were introduced was surprising, but not unlawful.  However, two elements of the judgment may prove controversial:

  • firstly, the acceptance of a retrospective Equalities Impact Assessment where complying with the Public Sector Equalities Duty when taking the decision where the assessment was ‘adequate and in good faith’ and original decision “would not have led to a different conclusion“;
  • secondly, that Ministers are not required to have regard to material considerations when making national planning policy given that it relies on the exercise of crown prerogative powers. This will seem obscure to those living outside the legal bubble.

Common sense still allowed

Policy is just policy. The judgment confirms that:

  • government, whether central or local, may state policy ‘rules’ absolutely, but
  • decision takers must consider them without treating them as absolute – their discretion to weigh things in the balance and do something different cannot be fettered by policy.

For applications, that means:

  • complying with the duties to consider all relevant issues and determine in accordance with the development plan unless there are reasons not to (Section 70(2) of the Town and Country Planning Act 1990 and Section 38(6) of the Planning & Compulsory Purchase Act 2004);
  • local authorities are entitled to weigh the Government’s policy against their own plan policies, the demographic evidence on which they are based and any economic evidence on the viability of specific ‘small sites’.  There will inevitably be an upsurge in appeals as they do so, since applicants will generally expect the Government to follow its own policy on appeal;
  • where there are perfectly sound reasons for a Localist decision, there should be little scope for adverse costs awards.  The difference in weight to the national policy is simply a matter of planning judgment – which the Court of Appeal decision emphasises must be carried out diligently.

Making plans

Local Plan policies could still be promoted on the basis of evidence base and local circumstances which justify the LPA’s proposed thresholds. That will run the gauntlet at Examination in Public given the wider powers to intervene in the Plan-making process now available under the Housing and Planning Act 2016.

The reasoning given for the small sites policy in Government’s evidence (extracted at paragraph 53 of the judgment) provides clear scope for authorities to use evidence to show that their affordable housing policy thresholds are in line with the intended policy objective as long as requirements are:

  • viable, and
  • that contributions will be required at a time when they could not sensibly stall schemes (i.e. pre-occupation).

If local policies are supported by evidence that shows they would deliver Government’s stated intended outcome then they should survive Examination.

Planning for the future – the new Housing and Planning Act 2016

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Following a lengthy period of debate, the Housing and Planning Act 2016 (HPA 2016) has received Royal Assent and was recently published. We consider the main planning aspects of the new legislation and the implications for local authorities.

The starter homes duties are a challenge for the development and government sectors as a whole. The government is considering the responses to its technical consultation on the starter homes regulations and the development industry needs much more certainty about the product and the process, in particular how open market value and viability exceptions will work. The new product will be accompanied by changes to the National Planning Policy Framework policy on affordable housing so that it will essentially replace existing provision. As well as providing commercial opportunities, this new form of tenure brings its own uncertainties.

See the full article here: Planning for the future the new Housing and Planning Act 2016 – this article was first published on Lexis®PSL Planning on 9 June 2016. Click for a free trial of Lexis®PSL

 

 

The Mayoral Planning Manifesto – who will you be voting for? part 2

In London’s mayoral race, Labour’s Sadiq Khan and the Tories’ Zac Goldsmith are the main contenders, with a substantial lead over the rest of the field. We have explored their planning promises in an earlier blog. However, there are another 10 candidates in race:

Party Candidate
Liberal Democrats Caroline Pidgeon
UK Independence Party Peter Whittle
Green Party of England and Wales Sian Berry
Independent Prince Zylinski
British National Party David Furness
Respect Party George Galloway
Britain First Paul Golding
Cannabis is Safer than Alcohol Lee Harris
One Love Party Ankit Love
Women’s Equality Party Sophie Walker
UK Independence Party Peter Whittle

 

Here is our summary of the key planning promises made by the other 3 key contenders:

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Mind the gap – if Starter Homes survive, there will be blood

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The Starter Homes initiative now faces an uphill struggle onto the statute books following setbacks in the House of Lords. Critics should be careful not to write them off, though, because the Government is adopting a twin track approach that is likely to deliver changes this year either way which will disrupt and reshape planning debates.

Even if the radical Starter Homes Duty is unravelled successfully by the House of Lords, it seems very likely that the Government will modify the NPPF  to make Starter Homes a qualifying affordable housing tenure and, potentially, attempt to give it the primacy that the Housing and Planning Bill 2015/16 was aimed at until the Lords rebelled.

Either way, the changes will undoubtedly have a radical effect on Local Plan and application processes:

  • Local Plan snakes and ladders. Again.  More complication, more fuss and evidence base changes. Government is likely to change guidance on Housing Needs assessment, to identify first time buyers as in housing need. This will overturn the apple cart on existing SHMAs and Local Plans, which will immediately become out of date.
  • Starter Homes will be exempt from CIL. There is no detail in the Technical Consultation on how or when this will come into effect or how the clawback will work where homes are sold in breach of the protected period restrictions. Care is needed in swapping tenures ahead of the changes coming into effect.
  • Transitional measures. The current Starter Homes Technical Consultation is not clear how any Starter Homes requirement would be phased in.  The industry must have some headroom so that the changes do not delay schemes submitted before a sensible transitional date.
  • There will be winners – the new price caps should deliver better returns where there is a straight swap for Shared Ownership.  Authorities will seek an increase in overall affordable provision.  The changes may end up bolstering the case for a fixed percentage of affordable housing in London.  At Lower Graylingwell, the 30% affordable provision has increased to 50% Starter Homes, for example. Developers will need to plan for the demise of ‘golden brick’ payments by Registered Providers, though, and assess the cashflow implications of another 20% of product as sale tenure. Marginal sites, including previously developed green belt will be sold heavily on the back of Starter Home delivery and should expect kinder words on appeal as a result.
  • The allowance for commuted sums in ‘high value areas’ will perpetuate the existing difficulty of policies that surrender to landowner expectations and muddy the waters for developers bidding for land.
  • There will be blood. The changes will bypass conventional housing need. Reluctant and resistant authorities with backlogs of vulnerable and excluded people on the housing register who cannot access a £450k home will point to the fundamental jurisdiction in the Town and Country Planning Act 1990 to take local, democratic decisions in the interest of good planning.

They may weigh the breach of the Starter Homes duty against the duty to meet needs. The extent to which the Regulations can oust that, or any breach creates a ground for legal challenge, will come to the fore. Great care will also be needed on reporting the effects of the affordability sacrifice.

Non-starter? New homes proposals are going to shake things up, if they survive

The Government’s Starter Homes proposals have been around for a while – consultation in 2014 led to new policies in March 2015, backing the commitment to deliver 200,000 by 2020, freeing Starter Homes ‘exceptions sites’ from affordable housing requirements and encouraging authorities to search for sites. The Housing and Planning Bill 2015-16 measures intended to realise that commitment will go well beyond the existing policy, if they survive the House of Lords Report stage.

Big picture

cakeStarter Homes will be new homes [1] for purchase only (and only by first time buyers under 40) to be sold at the lesser of 80% of market value or £450,000 in London (and £250,000 elsewhere).

  • Authorities will be under a statutory ‘general duty’ to promote Starter Homes when considering planning applications
  • A power for the Government to specify the proportion of Starter Homes on specific types of sites, nationally
  • A power for the Secretary of State to issue ‘compliance directions’ requiring Local Plan policies to be disregarded. This is a hitherto unknown command power by central Government and is possible casualty of the House of Lords’ scrutiny.

The Government has already made clear that tenure changes should be accepted without changes to the overall amounts of provision in S106 renegotiations.  The HCA is already putting this into practice, tenure swapping a policy compliant affordable split to Starter Homes on its Lower Graylingwell scheme in West Sussex.

All is (nearly) revealed

The NPPF Review has not been clear about the extent to which Starter Homes will actually be treated as affordable housing (albeit that they will be exempt from providing it).  We understand that the significance of the Starter Homes Technical Consultation on the Regulations which will shape the regime is that:

  • There will be a fixed 20% requirement for most schemes of 10 units or above.  Viability testing will be permitted, but the threshold for exceptions is likely to be a higher bar than hitherto accepted in viability appeals.
  • Starter Homes will be affordable housing in policy terms. In re-opening the NPPF consultation on changes to the definition of affordable housing, the Government is signalling its intention to modify the NPPF to allow Starter Homes to qualify. We understand that they are meant to be a ‘top slice’ of viability, which is intended to ensure that Starter Homes always float to the top of the affordable tenure pile in appraisals.
  • The 8 year ‘restricted period’ during which first time buyers will have restricted selling rights will allow the percentage of market value to taper up (like staircasing Shared Ownership equity).  This responds to concerns by lenders about the effect of sudden pulses of de-restricted units hitting the market at the same time.  These periods are controversial and likely to be significantly amended following the cross-party rebellion in the House of Lords.
  • Units will not be able to be let. The attractiveness of this, alongside a period where the market for re-sales is narrowed to first time buyers under 40 remains to be seen.
  • PRS is likely to benefit from a blanket exemption but will be expected to yield a commuted sum. The Government is likely to require such sums to be calculated based on the gain in value to the developer (and to require authorities to deliver Starter Homes with it). How it will factor in the costs of assembling land to do so is moot.
  • Standard S106 wording is being prepared.

Rebel Alliance

The defeats suffered by the Government at the Third Reading stage in the House of Lords on 11 April 2016 now cast a shadow over how radical this new tenure is likely to be. Amendments backed by a cross-party alliance of peers would:

  • Extend the protected period to 20 years and force starter homes owners to repay any discount (tapering by 1/20 each year) where selling earlier
  • Return control to local authorities on how many starter homes should be delivered locally, and was backed by a majority of 86 peers.

Both amendments were back by majorities of at least 85 peers and the likelihood of the radical changes envisaged by the flagship policy announcements last year coming into effect in 2016 look limited.

[1] including those constructed but not yet occupied

Sun will go down on section 106BA/BC numbers game appeals

We have commented on the initial impact of the changes to the Section 106 regime made by the Growth and Infrastructure Act 2013 to allow developers to challenge affordable housing obligations on viability grounds.  The new Section 106BA gave developers a right to ask councils to review housing obligations.  Section 106BC gave a right to appeal against review outcomes.  Both came into force on 25 April 2013, subject to a ‘sunset clause’ killing off the changes after 30 April 2016 unless otherwise extended.  They will now die on 30 April but uncertainties remain about the transitional picture.

sunGovernment About Turn

The Spending Review and Autumn Statement 2015 committed to extending the sunset clause. The anticipated Order has not materialised and we understand that the Government has now decided not to do so.  This may simply be a reflection of the fact that we are no longer in recession and stalled schemes should be seen as bad planning rather than bad luck. It may also reflect the odd outcomes that have crept into the process.

Odd Outcomes

The appeal route has been widely used for schemes granted consent in the current market, on the basis of a policy compliant affordable offer or viability assumptions that have then been changed on appeal.  The ability to use the appeal route for schemes that are complete has also begun to be tested.   The recent Chatham Quays case concerned a large multi-phase mixed use scheme approved in 2007 and subject to S106 variations to push back affordable housing contributions to better times. The housing element of the scheme came forward and the commercial phase remained, as accepted by the Council, ‘largely complete’ but not fully complete.  The developer successfully stripped out the remaining payments on appeal and the Inspector’s approach was upheld in the High Court.

The judgment confirms that:

  • developments which are largely complete can take advantage of the S106BA/BC process to eliminate affordable housing requirements even though the time for delivery or payment has long passed and there is no real relationship between the obligation and whether the scheme would be completed;
  • completion should be judged by looking at the whole of a mixed use scheme, not just the housing part. The Inspector failed to consider the Council’s argument that only the housing part should be considered in a mixed use scheme, not the whole. The Judge simply held that the argument was so poor that he could never have properly accepted it if he had considered it though.  It should also be considered on the basis of whether the development is in a state which could generate receipts or return, from the point of view of the developer. Wider claims about its significance should be taken with a pinch of salt;
  • the correct route of challenge to an Inspector’s S106BC decision is by Judicial Review, not S288 statutory challenge.   This point is less novel than assumed in the judgment – it arose in 2014 in the failed Mast Pond Wharf challenge.

The judgment leaves open the question of whether a viability appeal can be entertained after a scheme has been fully completed.  Common sense would suggest not, but the judgment notes that the Act is silent on the point.

Eye of the Needle for New Challenges

We understand that the Government will allow S106BC appeals made before the sun sets on 30 April to proceed. It is hard to see how there would be any jurisdiction to deal with ongoing applications or appeals without express transitional provisions in an order (which the Act allows for).  They are needed either way, not least to be clear about the effect of the sunset clause on modified obligations where the development as a whole has not yet been fully completed, to avoid  successes like Chatham becoming pyrrhic.

It will be interesting to see whether the Government’s viability test for Starter Homes, trailing in the consultation, sets a more rigorous test than that which local authorities have faced under the Sunshine Regime.

Authorities are increasingly using planning conditions as a work around, which are outside the S106BA regime. It would be nice if this willingness to slim down bloated planning agreements survived the sunset.