Viability goes mad?

There’s an interesting appeal decision that starts to illustrate what a mad can of worms the viability testing world is becoming. It involves the development of some luxury flats in the City of London by the Candy Bros.  You can read it here starting on Page 23.

I know that I keep harping on about how uncertain lots of the inputs into viability appraisals are. It provides the opportunity for developers – who don’t need much encouragement but have been getting it anyway – to appeal for a reduction in a relatively small affordable housing contribution.  This from a c£280 million project that could create profits in excess of £40 million with professional fees alone of over £13 million.  The fact that it’s not even an issue that the landowner should get at least £60 million is not even really questioned. The developer’s claim that it isn’t viable to pay one of two payments of £7.5 million for affordable housing (in lieu of on-site provision).

Here are some of the numbers from the Candy Bros’ consultants’ report. All the figures are spuriously precise and wrong – because it’s practically impossible to get them right.

Residential revenue £269,593,604

Commercial revenue £4,059,719

Other revenue £3,406,000

Benchmark Land Value £60,000,000

Core construction costs £81,749,806

Contingency £8,615,242

Demolition £2,173,200

CIL / S106 costs £8,733,208

Other construction £23,768,158

Professional Fees £13,956,769

Marketing, Letting &Disposal Fees £10,911,542

Finance £30,598,116

Developer’s required profit (20% of all these costs) £42m

The consultants, the Candy Bros, the local authorities’ consultants – anyone who has experience of development appraisals – knows that you can’t calculate these figures to such a fine degree of accuracy. They’re rough estimates and the developers are trying it on.  I don’t really blame them, they’re playing within very badly made rules.  Somehow the system has been designed to encourage them to behave this way.  This may be a fairly extreme example but it typifies what is happening.

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