Affordability, viability and clarity – the impact of valuation on supply of affordable housing

Author: Fiona Sawyer, Professional Support Lawyer, Planning, London

Viability is at the heart of the extent to which private developers can be expected to bridge the gap between demand for and supply of affordable housing. In April this year, in a postscript to his judgment in the case of Parkhurst Road Ltd v Secretary of State for Communities and Local Government and another [2018] EWHC 991 (Admin), Mr Justice Holgate said that “uncertainty on how viability assessment should properly be carried out” is leading to “a proliferation of litigation” and called on the Royal Institution of Chartered Surveyors (RICS) to revisit its 2012 Financial Viability in Planning Guidance. Since then, the revised National Planning Policy Framework (NPPF) has been published together with revised Planning Practice Guidance (PPG) on viability, but a review of the RICS guidance is still ongoing. On 5 October, the Deputy Mayor of London and the Executive Member for Housing & Development at Islington Council wrote a joint open letter to the President of the RICS regarding affordable housing and the 2012 RICS Financial Viability in Planning Guidance. Their letter asks RICS to revisit its guidance, as called for by Holgate J.

Joint open letter

The joint open letter claims that “some RICS members have misapplied the guidance to inflate benchmark values in planning viability in order to reduce the levels of affordable housing”. It also highlights the issue of ‘circularity’, discussed both in Parkhurst and in the 2017 report Viability and the Planning System: The Relationship between Economic Viability Testing, Land Values and Affordable Housing in London, which noted that:

“Testing whether or not a development is viable involves establishing a threshold land value. … If market evidence of comparable transactions is relied on, … a lack of viability can – and has been – argued. Potentially, the more a developer pays, the less the contribution can be argued to be supportable. This circularity leads to a reduction of affordable housing and what is, in effect, a transfer of risk from the developer to the community”.

Revised NPPF and Viability PPG

Under the revised NPPF, the role for viability assessment is now primarily at the plan making stage. Updated viability planning practice guidance makes it clear that development plans should set out what contributions should be expected from a development, including the levels and types of affordable housing provision and other infrastructure. A starting assumption of 15-20% of gross development value is to be considered a suitable return to developers in order to establish the viability of development plan policies. Paragraph 57 of the revised NPPF provides that “where up-to-date policies have set out the contributions expected from development, planning applications that comply with them should be assumed to be viable”. The guidance makes clear that:

“It is the responsibility of site promoters to engage in plan making, take into account any costs including their own profit expectations and risks, and ensure that proposals for development are policy compliant. It is important for developers and other parties buying (or interested in buying) land to have regard to the total cumulative cost of all relevant policies when agreeing a price for the land. Under no circumstances will the price paid for land be a relevant justification for failing to accord with relevant policies in the plan”.

Perhaps this will help reduce the amount of litigation to which Holgate J refers, at the application stage at least. Paragraph 57 of the NPPF states that it is up to the applicant to demonstrate whether particular circumstances justify the need for a viability assessment at the application stage and that the weight to be given to such an assessment is a matter for the decision-maker. Developers will therefore find it more difficult to argue viability issues at the application stage and instead need to be actively involved in area-wide viability assessments (AWVAs) at the plan making stage. However, bearing in mind the lead-in times for plan making, this may not be easy or possible.

The update to the RICS guidance note will have to grapple with some difficult issues, including how to settle AWVAs across a dynamic market cycle over the plan period; the relationship between policy formation and the underlying AWVA; the approach to benchmark land values; and the need to incentivise development to help solve the housing crisis.

It will be interesting to see how RICS responds to these challenges, and how the changes in NPPF policy and viability guidance will in practice impact on the fine balance between scheme viability and affordable housing delivery.

For more information please contact:

Matthew White
Matthew White
Partner and Head of UK planning, London
Email | Profile
+44 20 7466 2461
Fiona Sawyer
Fiona Sawyer
Professional Support Lawyer, Planning, London
Email
+44 20 7466 2674

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