Discussions over development viability assessments are becoming fractious, with commentators questioning the integrity of developers and the valuers that carry out appraisals.
But it is national policy and the planning inspectors have, unwittingly I hope, been the major contributors to the distortion of land markets and prices from which many stakeholders, especially landholders, have benefited.
We, the community, are the loser, and pay the price through reduced planning obligations in the form of affordable housing provision. But the situation is retrievable if policy guidance is amended.
Examples of system manipulation exist. For instance, developers have used the system to argue before the planning inspectors that the residual land value [how much is left minus the cost of development] is less than existing use value, and so affordable contributions should be waived. Sites have then been either sold with that revised planning consent, or developed.
One example is in East Dulwich, SE22. In July 2015 the existing-use value of the property was £1.4m. The appellant’s residual land value was just over £383,000. Accepting those two valuations, the inspector agreed that the site was not viable and removed the affordable housing.
But by February 2016, the Land Registry recorded a price of £5.1m for the sale of the site. Why would anybody bother to get permission if the development value is just over 20% of existing-use value? The answer may be that the additional development value is not £383,000 and the site could have delivered the full affordable housing provision.
It is futile to blame landowners for taking advantage of a system that has delivered such a windfall and for developers protecting their position as best they can. Government has set the process in place and given policy directives that are contradictory.
The National Planning Policy Framework says site values in viability assessments should “reflect policy requirements and planning obligations and, where applicable, any CIL charges”, “provide a competitive return to willing developers and landowners”; and “be informed by comparable market-based evidence wherever possible. Where transacted bids are significantly above the market norm, they should not be used as part of the exercise.”
This implies that where transacted bids are at the market norm, they should be used.
It also implies that this ensures they are policy compliant. But what if all market evidence is not policy compliant and what does policy compliant mean anyway? It should mean a fixed-target affordable housing provision.
The inspectors have rejected actual price as the threshold land value if they feel it is not at a policy compliant level. But some decisions have replaced that price with market value proved by transactional evidence – which often shows the price is not above the market norm.
Despite inspector decisions not being precedents, the market follows the tide. Now landowners know that developers who pay “too much” can use market evidence to prove that they have not paid too much. In other words, they can use increased market level to prove it is the norm and therefore policy compliant.
The circle is now complete.
Landowners are advised to hold out for higher prices that will make affordable housing targets “unviable”. Developers squeal, but know that they have to pay them to get any land, and also that they can use these prices, as long as everybody else also pays these prices, to prove that affordable housing policy targets are unaffordable and the inspectors reduce its provision to mitigate their pain.
The interpretation of the guidance is in the hands of the inspectors, who do not seem to have noticed that market prices are probably not at levels that make policy targets of affordable housing viable; they are compliant with a market process that at its heart allows market prices to be used to distort markets.
There is a long history in real estate and other markets of third-party dispute resolution affecting behaviour. This is one of them. As soon as the inspectors rejected the above circularity arguments around the use of market evidence in processes, they opened the gates to landowners holding out for higher land values than those that would be achievable if policy levels of affordable housing were to be provided.
The Parkhurst Road appeal in Islington put the final nail in the coffin of affordable housing provision, with the inspector deciding that policy compliant meant what was being delivered rather than what the policy wanted to be delivered.
Throw in the well-known valuation variation within residual valuations and you have the potential to use the system to divert resources away from the community in higher land values.
I know we have a housing delivery problem but that is not an excuse for a flawed system of sharing gains from development equitably. It is time for a major inquiry into the workings of the development viability system.
I see no evidence that policy makers or the planning inspectors understand what is happening and, until they do, and appraisal techniques are applied to development viability more rationally, we will continue to transfer value to the landowners and take risk away from the developers.
Neil Crosby, PhD, MRICS Professor of real estate, Universityof Reading
