Careers Advice: Understanding development viability

Written by: Matt Spilsbury
Published On: 2 Jul 2018

Birmingham

Development viability is currently a ‘hot topic’ within the planning industry.

The government is consulting on proposed revisions to national planning policy and practice guidance which advocate an overhaul to viability assessment in planning, as well as (more) proposed refinements to CIL. Meanwhile, the Greater London Authority (GLA) has recently adopted a new Affordable Housing supplementary planning guidance (with  a subsequent High Court challenge to the guidance), and the Commons Select Committee is conducting an ongoing inquiry into land value capture (LVC).

Why is development viability such a hot topic? Well, it is important to understand that the vast majority of development (for which planning permission is necessary) is brought forward for commercial gain. To ensure a supply of development land, planning policies (either adopted or proposed) should not overburden proposed development to the point that it becomes non-commercial and, hence, undeliverable. The assessment of financial viability tests this at both plan-making and decision taking stages.

Put simply viability assessment represents an appraisal of whether the value generated by a proposed development exceeds its costs of delivery (e.g. construction, fees, planning policy and regulatory costs, CIL, finance, developer’s profit etc.). If not, the scheme is loss-making and outright commercially unviable.

If, on the other hand, values do exceed costs, there is ‘residual value’ in the scheme. This value is the sum available for compensating the landowner for release of the site.

However, for a scheme to be viable the residual land value must be sufficiently competitive to incentivise a rational landowner to sell for the development proposed, when viewed against other available options. If the prospective land receipt is insufficient, the land will not be released.

The government’s stated intention is for matters of financial viability to predominantly be resolved via the plan-making process going forward. This means far greater scrutiny and debate in the setting of financially realistic plan policies in drafting and at examination. Viability evidence supporting draft local plans will need to be more thorough and defensible. Equally, promoters will need to demonstrate that their allocations are deliverable and viable, allowing for policy compliant provision of enabling infrastructure, planning obligations (including affordable housing) and CIL.

Planners will still also be expected to instruct site-specific viability assessments (and expert reviews) and provide advice on the terms of Section 106 Agreements governing planning obligations during the determination process. On larger multi-phase permissions this can include review, clawback and overage mechanisms. Moreover, where proposals represent departure from adopted policy, the duty to explain this to councillors will likely fall to the case officer.

This all means that, increasingly, development viability is an area of practice that planners will benefit from understanding. So what help is out there?

Well, there is no panacea. Some research is required. I would recommend that those interested start by reading the government’s (draft) planning practice guidance on viability and Build to Rent, published for consultation in spring 2018. It provides a straightforward grounding in the Government’s expectations for practitioners acting within the planning system. It is, however, intentionally light on detail.

To delve further I recommend subsequently reading Financial Planning in Viability, which forms the RICS’ professional guidance for practitioners. Whilst now overdue an update itself, this provides far greater detail regarding terminology, methodology, inputs and process.

Equally, the GLA’s Affordable Housing SPG, adopted in August 2017, forms essential reading for practitioners acting in a London context.

For those seeking guidance on viability testing in the plan-making process, I recommend turning to the Viability Testing Local Plans report prepared by the Local Housing Delivery Group. It is also now in line for an update, having been published back in 2012.

The RTPI and RICS also run regular regional CPD sessions on the topic, which provide greater detail on topical issues in practice, as well as further insight from practitioners, case studies and legal judgements.

Matt Spilsbury is a director at consultancy Turley and head of the firm’s national Development Viability service.