Increasingly, local planning authorities are relying on larger sites – accommodating 1,000 homes or more – to help meet housing need in their areas. Often, however, the focus of major housebuilders is on smaller schemes of up to 300 homes, which can raise fewer challenges during delivery.
A common question for landowners and promoters, who are seeking or have obtained planning permission for larger schemes, is how to achieve sale and build out without a reduction in value to reflect the difficulties involved in delivering such schemes.
Why are larger schemes more complex to deliver?
The complexities of larger schemes generally include substantial infrastructure requirements that need to be met on site. Depending on the size of the development and the need in the local area, schemes may be required through conditions imposed in the planning permission or associated section 106 agreements to incorporate community infrastructure, such as new schools and other educational facilities, neighbourhood centres with commercial uses and major areas of new open space.
Other physical infrastructure requirements required to unlock development may include new roads, drainage facilities and other services. All such infrastructure requires detailed planning and liaison with third parties, including those who will be responsible for their upkeep.
Local planning authorities are also increasingly requiring larger schemes to provide a range of housing types and tenures, alongside the traditional open market homes built by housebuilders. In addition to affordable housing, there may be specialist accommodation for the elderly, self-build or custom-build housing, and/or travelling show persons’ plots. Again, all of those require careful thought as to how they will be marketed and delivered, which often involves engagement with a specialist developer, registered provider or other party.
The timing of the delivery of the infrastructure can raise issues, as local planning authorities aim to ensure that infrastructure is provided at the point of need. For example, new schools or roads may need to be built and available for use before a certain number of homes can be occupied. The planning conditions and section 106 agreement may secure numerous constraints through the build programme, requiring finely tuned development choreography.
Further, the cost of such public infrastructure can run to many millions of pounds. A cashflow issue arises as those costs may need to be incurred earlier in the development programme, and therefore ahead of substantial income being generated from sales.
Part of the solution often lies in dividing larger schemes into deliverable development phases or parcels.
Setting up development parcels through planning
When seeking planning permission, the phasing of the overall development and the associated infrastructure, and how that infrastructure is secured through conditions and section 106 obligations, requires careful consideration.
As a general rule, the phasing of all conditions and section 106 obligations should be sought, and thought given to the likely sales and delivery phasing and strategy. By way of example, it may be that an estate spine road and associated services, open space and play areas can be constructed in phases alongside housing parcels.
Conditions may require approval of and compliance with a site-wide design code or similar document setting parameters for overall scheme design, which may include character areas or other mechanisms seeking to obtain a balance between distinctiveness and design cohesion. The implications of any such documents on the attractiveness of the site to developer purchasers and the cost of compliance against impact on values need to be considered.
Further, any provisions controlling the management and maintenance of the scheme following its construction should address the likely future approach to phasing of delivery and overall estate management. Many authorities are now reluctant to take on the burden of maintenance of estate roads and open spaces.
Particular care is needed where large schemes incorporate viability review mechanisms. These usually apply where a development does not provide policy-compliant levels of infrastructure. The viability of the scheme is reassessed at agreed points and, if profit levels rise, more affordable housing may need to be provided in later phases, or financial contributions paid.
Delivery of the scheme
For larger schemes, given the above issues, the sale of the entire site to a single purchaser is likely to significantly affect the land return. Landowners and promoters therefore often prefer to sell phases or parcels to different residential developers, which then deliver the infrastructure between them, or by collaborating with a master developer to project manage delivery of the entire scheme.
Delivering infrastructure through more than one developer has the advantage of meaning that the landowner does not have to fund the cost. The key is to seek to ensure that each phase is viable and deliverable, generating a suitable return to the landowner. But this can be difficult for earlier phases in particular bearing a disproportionate share of the infrastructure burden, or later phases where infrastructure triggers are reached. A disadvantage is that it creates a more complex delivery process which the landowner or promoter or their advisers will need to control and coordinate.
The sale and development documentation entered into on disposal of a phase can be complex.
- The purchaser developer is usually required to deliver the relevant part of the infrastructure within a specified timescale. Often, damages will be negotiated and payable for delays in delivery, alongside step-in rights if there is a complete failure to comply.
- The section 106 obligations and planning conditions must be addressed. The landowner or promoter must collect sufficient funds from sales to meet financial obligations, taking into account the likely timing of payment across multiple phases, and act as “banker”. Where there are viability reviews, the landowner may be responsible for collating information on costs and values to enable the viability assessments to be performed.
- A collaboration agreement may be needed between the developers to coordinate practical aspects of the delivery of the scheme, including construction access, use of excavated soil, etc.
- Notwithstanding the planning position, the landowner or promoter may wish to put in place their own branding strategy which purchasers must comply with, to control the desired feel for the whole scheme. This gives each developer purchaser comfort that the value and amenity of their own phases will not be adversely affected by what is happening on adjacent parcels.
- Overall estate management is also important. Where open space is not being adopted, an estate management company to be controlled ultimately by the individual homeowners may be set up. During build out and sales, it will be important to the purchaser developers that the desired level of quality of estate management is maintained.
For the landowner who is prepared to take on the role of controlling and coordinating delivery and the associated risk and cost, this model is one that should secure both the delivery of the scheme and a better return. If the landowner is also willing to absorb further risk by delivering some of the central infrastructure (for example, certain estate roads or services), the model can be adapted through employment of a specialist infrastructure designer and provider.
The alternative for the landowner or promoter is to collaborate with a master developer who will take on the delivery of the entire scheme. The terms of the agreement with the master developer will cover the delivery of infrastructure, securing detailed planning permission for that infrastructure where necessary, site set-up and the mechanism for the sale of serviced phases to other developers.
The master developer will bear the cost of the infrastructure, and typically in return will expect a profit on costs and a management fee. The cost of the works will be covered from the sales of each phase, with the master developer most likely receiving a percentage share of the sales price and having the right to acquire part of the scheme on which to build and sell homes.
For landowners who do not want to be involved in the delivery of the scheme but are looking to secure a better return than would be achieved by disposing of the site as a whole, collaborating with a master developer is a route that should be explored, and there is always the possibility that the landowner could secure a minimum return from the sales underwritten by the master developer.
Whichever model is chosen, finding the right developer partner is key, and the balance of risk and reward and protection for the landowner and promoter needs careful thought in the development documentation.
Ian Brothwood is a partner at Charles Russell Speechlys