Planning Nutshells: London local authorities renew defence against the "dark arts" of viability

Development viability is set to remain one of the most controversial issues in planning in 2016, with new policy being introduced in London. In this edition of Planning Nutshells, we look briefly at some of the perceived issues surrounding what the Mayor of London has called the "dark art" of financial viability assessments (FVAs) and how authorities are striking back.

Transparency

The issue:
An alleged lack of transparency surrounding FVAs is by far the most contentious issue, having received significant mainstream press coverage.

The response:
Southwark and Islington have published draft supplementary planning documents (SPDs) that, if adopted, will require FVAs to be submitted and made fully public in certain cases: in Southwark, where the application does not comply with affordable housing policy requirements and in Islington, for all major residential applications. Hounslow already requires a fully public FVA for certain applications and Greenwich is proposing to do the same.

Land value

The issue:
The common approach of using "market value" to assess benchmark land value has been criticised for circularity: developers allegedly overbid for land on the assumption of low policy compliance (e.g. not meeting affordable housing targets), allowing them to argue during section 106 negotiations that meeting policy requirements would be unviable.

The response:
Islington Council recently reported correspondence from the Government stating that the Government's "unambiguous policy position" is that land or site value should "reflect" policy requirements. This echoes the National Planning Policy Guidance. However, the word "reflect" does leave room for argument in relation to the weight to be given to policy requirements. Islington has indicated that it will strongly defend its position on future applications, the outcome of which will be closely watched.

An alternative approach is to assess land value by reference to the current use value of the site plus an incentive. This is supported by the Mayor of London and is the preferred approach in Islington's draft Development Viability SPD. Southwark's draft SPD goes even further by appearing to dismiss the market value approach altogether.

"Competitive returns"

The issue:
In relation to the concept of competitive returns for a developer, there is now a growing awareness that a single benchmark or, for that matter, any benchmark at all may not be appropriate.

The response:
Critics of the current market practice, which seems to assume a benchmark of a 20 per cent profit margin on gross development value, argue that every scheme is different and that a justification should be provided on a scheme-by-scheme basis. It is said that a single benchmark is unable to take into account the vagaries of the economic cycle.

Pooling of resources

The issue:
Viability is perceived as a complicated subject and not all local authorities are equipped with resources or experience to engage with the issues.

The response:
A small number of local authorities in England already have planning partnerships and, given the effect of governmental cuts to departmental budgets, the trend of co-operation is likely to continue. In London, local authorities have been pooling knowledge, experience and resources on viability issues.

For example, there is reportedly a "London Borough Viability Group" which meets to discuss viability issues, and there is a suggestion that it may be working up a joint protocol in relation to addressing viability issues in a consistent manner, as well as gathering feedback on the quality of service provided by consultants.

GLA

The issue:
Although the Mayor has been perceived as fairly pro-development, he has queried whether the GLA is being "short-changed by developers". He also labelled viability assessments as a "dark art" during Mayor's Question Time in July 2015.

The response:The London Assembly Planning Committee held a meeting on 17 November 2015 to seek views from consultants and academics about viability and to lay the groundwork for dedicated supplementary planning guidance on viability, which the Mayor said he would consider. Developers should therefore prepare to be required to shed more light on viability.

The future

We anticipate that as authorities become more savvy in dealing with viability assessments, there will be an increasing use of overage in sale and purchase agreements, so the developer is not exposed to the risk of sacrificing its profit to provide a policy-compliant scheme and the landowner is able to benefit should the developer secure a better-than-expected planning permission.