I recently took part in a lively round table hosted by Trowers & Hamlins looking at the true and full value created by development. Yes I know, Red Book, mark-to-market, income multiple and developments with hope value; this is not really what it was about.
The round table discussion got me thinking about whether the actual “value” of what we create is ever really understood or acknowledged.
“Economic value” is shorthand for what the market is willing to pay. As such, it does a good job in establishing a quantifiable version of value. However, it fails to really get under the skin of the contribution that new developments can – and I stress “can” – make to the quality of the urban fabric.
In affordable housing, there is even an attempt to quantify “social value” through the Social Value Act, which seeks to gauge the value of the public good that is gifted to the occupier.
More fundamentally, the value that development provides to future occupiers and society at large matters and it is something that needs to be recognised more openly. Not just at the planning stage and in the community engagement period, but as a part of the site acquisition process.
Good development makes a real contribution to the quality of life for future occupiers and users of the space. Developers should be incentivised to do more than the bare minimum as obligated by planning.
This is clearly easier said than done, but not impossible by any stretch.
Let’s just suppose that there was an accepted mechanism to quantify the additional merits of a scheme – sustainable design, high-quality public realm, relationship to adjacent urban fabric, addressing local community needs – this would put the quality of the scheme ahead of commercial value. And it would encourage better schemes instead of more valuable ones.
The development industry is often at best begrudgingly accepted and rarely celebrated for providing one of life’s most basic needs: shelter. In part, that race to the highest value through residual land value appraisals means we spend a lot more time worrying about the economics rather than the quality of the scheme. Wouldn’t it be nice if the system encouraged good behaviour?
As was noted at the round table debate, we are on the cusp of a new wave of public land disposal. Generally, public land disposals are weighted heavily towards maximising commercial value and no politician ever wants to be seen to be giving value away to a greedy developer.
If instead public bodies can engage in an accepted methodology for extracting best quality from a scheme, there may just be a chance that better developments come out of the ground.
To be clear, there are fantastic exemplar schemes all around us. Most were constructed on the basis of a sound commercial principle, alongside recognition that better quality would attract better occupiers and create value.
The thing is, I doubt any have a confident appraisal of the value of that better quality, far less having had the opportunity to drive this through the site bidding process. In short, we are lucky to have them and they are a testament to the skill of the industry that the UK is creating world-class schemes at all; the system doesn’t exactly support it.
In the hardnosed world of development and investment returns, the benefits of development rarely extend beyond the P&L, except perhaps where it is in servitude of planning obligations.
Imposition of requirements through section 106 negotiations pare back to a discussion of viability for a set of giveaways from the developer. It’s not exactly creative or fulfilling stuff.
Public bodies have an opportunity to set scheme priorities that stretch beyond simply high land values. Of course, they all attempt to extract more than just money from a scheme, but can we honestly say it is a case of the best scheme wins?
Personally, I am hopeful that the academic work that Trowers & Hamlins is supporting goes some way to unpacking this challenge and provides a useable framework to evaluate the true value of development. It is difficult, but if it encourages creativity and quality to be baked into the opportunity for transforming our built environment, it is well worth it.
One thing you can guarantee, enjoying the benefits of the best schemes our industry has to offer, you won’t be looking for who you need to pay.
Adam Challis is head of residential research at JLL
