Planning Nutshells: Benchmark Land Values - Buyer Beware

The provision of affordable housing, and how it affects a scheme's viability, has long been a cause of controversy between developers and local planning authorities (LPAs) and at the centre of many disputes is how the viability assessment should be conducted.  

Whilst a number of the variables that go into such assessments can cause disagreement, the principal problem is often how the benchmark land value (BLV) should be calculated, developers often advocating a Market Value (MV) or Alternative Use Value (AUV) approach and LPAs preferring to use Existing Use Value (EUV) or Existing Use Value Plus (EUV Plus) (the 'Plus'' element representing the uplift on the EUV required to incentivise the release of land).

LPAs are increasingly looking to strengthen their hand by incorporating the EUV Plus approach into planning policy or guidance, on the basis that the use of MV encourages developers to overbid for sites (the argument being that developers assume they can use their viability assessments to demonstrate that affordable housing requirements cannot be met).

In a much anticipated appeal decision (APP/V5570/W/16/3151698), the Planning Inspectorate has considered these conflicting views and provided clarity on its preferred approach.

The Facts

Parkhurst Road Limited (the developer) acquired a former Territorial Army centre in Islington in May 2013 for £13.25m for residential development.  In 2014, an application for 112 residential units (including 14% as affordable housing) was refused by the London Borough of Islington (the LPA) and, in 2015, the appeal against that refusal was dismissed by the Planning Inspector (although not on the basis of the affordable housing offer).

A further application for 96 residential units (including 10% as affordable housing which the developer claimed was itself unviable) was submitted in 2016 to address the concerns with the previous scheme identified by the Planning Inspector and this was also refused by the LPA.  A further appeal followed.

The main issue at the 2017 appeal related to the affordable housing offer, the Council's position being that the site should provide 34%.  Therefore it was necessary to scrutinise the viability assessment and in particular how the BLV should be calculated - the developer arguing for a MV approach and the LPA arguing for an EUV Plus approach.

The Decision

On 19 June 2017, the Planning Inspector dismissed the appeal on the basis that the proposal was in conflict with the development plan in that it did not provide the maximum reasonable level of affordable housing.
In reaching that conclusion, the Inspector determined that EUV Plus was the appropriate BLV and set out a number of overarching principles that he took into account and which will be of general application to viability assessments going forward:

• The Inspector emphasised the importance of the Planning Practice Guidance (PPG) (Ref ID: 10-023-20140306) which requires that in all cases site value should:

• reflect policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy charge;
• provide a competitive return to willing developers and land owners; and
• be informed by comparable, market-based evidence whenever possible. Where transacted bids are significantly above the market norm, they should not be used as part of this exercise.

• Limited weight should be attached to the purchase price – the price the developer chooses to pay is part of the developer's risk. 
• It is not correct to say that the level of affordable housing provision is not relevant to determining land value, as any notional willing land owner is required to have regard to the requirements of planning policy and obligations in their expectation of land value.
• The need for comparable market based evidence is of crucial importance but finding truly comparable sites is extremely difficult.  Without comparable sites, the evidential value would be extremely limited.
• There is more than one way to carry out a viability assessment and reference to EUV is not always appropriate.  However, in line with the PPG and the Mayor of London's Housing Supplementary Planning Guidance (March 2016) (the Mayor's SPG) a MV approach should only be accepted where it reflects policy requirements and takes into account the site specific circumstances.

In relation to the particular scheme, he found that:

• The EUV was negligible and therefore would not generate a competitive return to a willing landowner, so was not an appropriate BLV in this case.
• The proposed scheme represented a good indication of the site's likely potential, therefore there was no AUV that would justify inflation above a site valuation.
• In terms of MV, the correct approach was to compare the site with others which were reflective of the circumstances here.  This meant that comparable sites would need to have met Islington's affordable housing requirement of 50% and have had no abnormal costs or other factors identified that needed to be built into any viability assessment.  Comparing transacted bids on sites that were not similar in terms of EUV, available AUV or that were not similarly unencumbered was of little value.  Furthermore, in the absence of the detailed assumptions that underpinned the various comparable schemes, it is extremely difficult to assess whether they are truly comparable or not for the purposes of a viability assessment.
• In these circumstances and in line with the strong endorsement contained in both the Mayor's SPG and Islington's Development Viability Supplementary Planning Document (January 2016) (Islington's SDP), an EUV Plus approach was preferred.

Utilising this approach, the Council's BLV of £6.75m was appropriate, some £6.5m short of the price paid by the developer.

In forming this view the Planning Inspector stated that he had had regard to the need to encourage rather than restrain development and the need for flexibility in the application of planning policy, but that this should not be at the expense of delivering much needed affordable housing, nor should an inflated land value be subsidised by a reduction in affordable housing.

Concluding Thoughts

Whilst not setting a binding precedent, this decision reflects a sea-change in thinking when it comes to BLV and signals a very strong move away from the MV approach in all bar the most exceptional of circumstances.  In 2015, the Inspector had accepted the developer's arguments on affordable housing but, as the Inspector in the 2017 decision notes, there Islington had provided limited evidence to counter the developer's evidence and the decision was made prior to the adoption of the Mayor's SPG and Islington's SPD.

The inclusion of EUV Plus policies in documents such as the Mayor's SPG is giving further credibility to the approach and following this decision we anticipate that more LPAs will be emboldened to include similar policies in their own policy documents or planning guidance.  The position of LPAs in London in particular is likely to be strengthened even further following the anticipated adoption in a few weeks' of the Mayor's Affordable Housing and Viability Supplementary Planning Guidance (published in draft in November 2016) which strongly advocates for EUV Plus in all but the most exceptional circumstances.  

Developers will need to factor this change in approach into their bids and will increasing look to share any planning risk with the land owner.  It remains to be seen whether this new approach may actually have a chilling effect on the supply of affordable housing, as increasing numbers of landowners choose to hold onto their land rather than sell for less than they might have obtained previously.  Expect an increased use of overage arrangements, a requirement to clearly define the planning parameters when making bids and potential price chips should the resultant planning permission not be as expected.  

But does this mean the end of drawn out arguments over BLV?  We think not.  Rather, we anticipate that the new battleground will be how the 'Plus' element is calculated, rather than which BLV is most appropriate.  

Indeed, the Parkhurst Inspector noted that the 'Plus' element "represents a premium above the EUV to be paid to the landowner to incentivise release of land for development in comparison with the other options available". 

The appeal decision can be read in full on the Planning Inspectorate website.