Out-Law / Your Daily Need-To-Know

Affordable housing and the future of viability assessments

Out-Law Analysis | 06 Jun 2018 | 4:54 pm | 5 min. read

ANALYSIS: A recent High Court judgment gives important guidance on valuation evidence for the purposes of viability assessments in planning applications and appeals. It said that the developer must demonstrate that the maximum reasonable amount of affordable housing has been met when that amount is below the borough-wide affordable housing target.

The court's decision against developer Parkhurst Road Ltd (PRL) indicates that market value or alternative use value (AUV) will not, in most circumstances, be appropriate methods to determine the benchmark land value (BLV) for a site, referring to the land value at or above which it is assumed a landowner would be prepared to sell. Instead, the 'EUV+' (existing use value plus) valuation method should be adopted. This takes as its starting point the value of a property with its existing use, plus a percentage uplift to reflect the need to incentivise a sale.

Market evidence should be used to calculate the 'plus' part of the assessment. However, this evidence should reflect the context and reality of the transaction, and should use information about truly comparable land. Therefore, applying a simple, arbitrary percentage uplift to an EUV+ assessment will not be appropriate, because this will not reflect the workings of the market or value of the new land use for which the site is to be sold. Adjustment to market information will be required in each individual scheme to ensure that 'circularity' is avoided and the market comparables reflect the proper application of planning policy and are truly comparable to the land to be valued.

As a result of the decision, local planning authorities (LPAs) are likely to become more scrupulous when scrutinising viability assessments and the comparables used. The decision could also embolden authorities to refuse planning permission if a developer uses unadjusted purchase price or market information to justify affordable housing provision which is incompliant with planning policy.

This approach is also firmly endorsed in the mayor of London's Affordable Housing and Viability Supplementary Planning Guidance, published in August 2017; and is carried over into the draft London Plan. This recognises the need to rely on "genuinely comparable" market information. The mayor considers that the EUV+ approach is "usually the most appropriate approach for planning purposes", and states that an alternative approach "will only be considered in exceptional circumstances which must be robustly justified by the applicant".

What was behind the dispute?

The dispute arose out of the redevelopment of the former Territorial Army Centre on Parkhurst Road, Islington, north London. The site, which has been vacant for several years, was purchased by PRL for £13.25 million in May 2013, following a competitive bidding process.

The main issue in the High Court appeal was whether PRL's offer of 10% affordable housing was the "maximum reasonable amount of affordable housing" in the context of the LPA, the London Borough of Islington's (LBI's), overall affordable housing target of 50% of all new housing across the borough. Central to that issue was the question of what was the correct BLV for the site.

When calculating BLV, PRL adopted an approach based on the 2012 RICS Financial Viability in Planning guidance note. PRL based its calculations purely on market information including purchase price, bid process, unsolicited offer for site and comparable market information. PRL calculated BLV for the site at between £11.9m and £13.6m. LBI contended that PRL's approach was circular, and ran counter to policy contained in paragraph 023 of the Planning Practice Guidance (PPG) as it failed to sufficiently reflect the expectation for affordable housing in the development plan.

The 'circularity' concern raised by LBI stemmed from basing BLV on market information, particularly using the purchase price for land sales. It argued that involving purchase price in the calculation is problematic, because it uses information about land sales at prices which may assume little or no affordable housing provision. If viability assessments use market prices that are artificially inflated by bidders ignoring requirements in development plan policies, this may undermine compliance with those policies and if those high purchase prices are used to justify lower levels of affordable housing provision then developers will, in effect, be recovering the excess paid for the site through a lower affordable housing provision.

LBI provided evidence to support a BLV of £6.75m for the site. It adopted a multi-factor approach to its calculation: taking account of the negligible EUV of the site, as the site was cleared; and acknowledging the lack of any realistic AUV other than the appeal scheme, given the site's Local Plan allocation. It also reflected the fact that value on the site arose from the prospect of planning permission. LBI required that BLV be assessed with affordable housing policies in mind and took account of market comparators in the specific context of this development, recognising that unadjusted market data would not necessarily reflect policy-compliant assumptions on affordable housing provision.

What did the judge decide?

PRL's appeal was dismissed. Mr Justice Holgate ruled that "where an applicant seeking planning permission for residential development in Islington proposes that the 'maximum reasonable amount of affordable housing' is lower than the borough-wide 50% target on viability grounds, it is his responsibility to demonstrate that it is so".

It was established that PRL's purely market-based approach did not comply with paragraph 023 of the PPG, and it also failed to include any adjustment of market evidence to ensure it was policy-compliant. The judge found that PRL had therefore failed to demonstrate that its affordable housing offer of 10% was the maximum reasonable amount of affordable housing.

The judge added a postscript to his judgment in which he recognised the tension that has arisen in the application of paragraph 023 of the PPG, threatening efficiency and certainty in planning decisions. He suggested that a nuanced approach be taken, applying all three principles of paragraph 023 of the PPG in harmony and recognising that "realism" is needed in applying the guidance to each scheme in its own context. Market evidence used in viability assessments should be adjusted to reflect planning policies, so that market comparables are 'true comparables' which adequately reflect the requirements of relevant planning policies and, if not, the adequacy of the steps taken, if any, to adjust that information to overcome the problem.

The postscript also calls on RICS and the government to revisit their guidance on viability to address misunderstandings about market valuation concepts, techniques and the circularity issue.

It is important to note that the postscript does not form part of the binding judgment. It is therefore suggested to be persuasive guidance.

Are there any additional implications for developers?

The Parkhurst case is likely to increase pressure on developers for an open book approach to viability assessments, requiring them to be more transparent. It may also lead to fewer sites being put forward in the long term for residential uses and impact the prices that developers are willing to pay for land for residential development, as any premium paid on the price may not be recoverable through the value of the development.

The case could also have implications for existing development sites if a high market driven price was paid meaning policy compliant affordable housing provision is not viable.  Developers may look at commercial driven schemes to avoid the affordable housing provision, particularly in the current softened high value residential market. Purchase price assumptions will change but that takes time to work through the system.

For those developments already granted permission, there may be downsides also. Depending on the wording of existing S106 viability review mechanisms, developers could have to apply the Parkhurst approach to their viability assessments if land values have not been fixed for the purposes of the review and this could result in surpluses and additional affordable housing provision. In reality and given other current political and economic considerations including high construction costs and construction labour shortages, this is likely to result in fewer developments coming forward and less houses being delivered.

Victoria Lindsay is a planning law expert at Pinsent Masons, the law firm behind Out-Law.com.