Need to know: New advice for surveyors on viability assessment

What are the main changes in RICS' revised professional guidance on development viability in planning? By Chris Marsh.

Development: new RICS viability guidance issued
Development: new RICS viability guidance issued

Q. What prompted the Royal Institution of Chartered Surveyors’ new draft guidance on viability in planning?

A. Two matters. First, the revisions to the National Planning Policy Framework and Planning Policy Guidance made in 2018-19. Secondly, the comments made by the judge in the landmark Parkhurst High Court ruling, which clarified that existing use value (EUV), plus a premium for the landowner, should be used instead of market value as the basis for viability calculations. In light of this, Mr Justice Holgate advised RICS that it should consider revisiting its 2012 guidance note. RICS did review its professional guidance on development viability in planning, first in May 2019, and then in a further updated draft statement (on which consultation concluded on 9 February), entitled Assessing financial viability in planning under the National Planning Policy Framework for England. The result is the RICS paper (if adopted) and the PPG will be, eventually, broadly compatible.

Q. What does the RICS concentrate on in the draft document?

A. The document focuses on Financial Viability Appraisals (FVAs) in plan-making and decisiontaking. It tells readers that the purpose of an FVA is to estimate "whether planned developments with policycompliant levels of developer contributions are able to provide: a minimum reasonable return to the landowner (that is, EUV plus a premium) and a suitable return to the developer". If the returns are insufficient, the development is unviable, and previous RICS guidance was often interpreted as meaning the plan-maker will have to change requirements by, for example, accepting lower developer contributions or increasing density. RICS now says, like the PPG, that the scheme should maximise the contributions it makes by examining all the FVA variables, including values, costs, EUV and review clauses, while retaining the landowner’s premium and the developer’s profit.

Q. What should the landowner’s premium be?

A. Benchmark land value comprises EUV (which can be difficult to ascertain) plus a premium. The premium is there to give the landowner an incentive to sell, but should be at such a level that still allows planning policies to be achieved. As in 2012, the guidance does not seek to standardise premiums, for the first time specifically leaving them up to the plan-maker or decision-taker, which suggests a flexible approach, but not one that is consistent between authorities.

Q. What should the developer’s profit be?

A. Banks and lending institutions have for some years required a profit margin of 20 per cent of Gross Development Value from schemes in which they invest, based on risk assessment. Volume housebuilders often seek a higher figure. But the PPG (now supported by RICS) suggests a reasonable return is 15-20 per cent. The exception is affordable housing, which is perceived as less risky and has a lower return. RICS now makes clear "it is not the role of an FVA to protect the developer’s return".

Q. Is viability in planning any clearer now?

A. On the face of it, national guidance and the RICS are closer in their outlook, and that is helpful. Converting that into meaningful collaboration between planning authorities and landowner/developers will take some time and is more likely on less complicated greenfield sites, although landowners holding onto allocated sites remains a threat to development delivery and plans being found to be unsound. In contrast, there are still many brownfield sites with a negative residual value and many public sector landowners dependent on capital receipts to finance other important infrastructure. The NHS estate must fund new hospitals, possibly at the cost of affordable housing in schemes developed on its land, and it is not clear how the NPPF/PPG or the RICS will deal with such situations. The RICS is considering a significant response to its draft guidance, and will presumably produce a revised edition.

Chris Marsh FRICS, MRTPI, DipTP, DipCP is director of Christopher Marsh & Co

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