Viability guidance: the premium question

There has been more viability guidance emerging from local government that seems to be trying to set new norms on viability testing especially on the issue of Threshold or Benchmark Land Value. As I keep harping on about, this is the key issue in terms of how the financial uplifts from new development are distributed between the land owner, the developer and the community.

The London Borough Viability Group issued its London Borough Development Viability Protocol last week.  I missed the consultation period for it.  It seems to provide good, sensible guidance on many issues – justification of costs, revenues, transparency etc. Although I’m not quite sure what it means by

A standardised approach will generally be adopted to finance costs which should be justified according to the specific proposal, reflecting varying interest costs (if applicable) throughout the development period.

What’s a “standardised approach”? Largely reflecting the Islington SPD, unfortunately it is suspicious of using a target rate of return as a basis for appraisal.  So, like most guidance, it accepts the standard development appraisal approach – cash profit margin, no projection of costs and revenues, contingency, inclusion finance etc. that are anathema in mainstream project appraisal.

Although the document is short, it rightly allocates most space to Benchmark Land Value. There is quite a lot of good discussion on the various merits of ‘EUV plus premium’ v ‘Market Value’ approaches.  However, it is too vague on the calculation of the premium.

Premiums above Existing Use Value should be justified, reflecting the circumstances of the site and landowner12. The actual percentage will be determined on a site by site basis depending on the use of the site.

The admittedly difficult question of how to do a premium estimation is largely glossed over.

The Mayor of London has also just issued Draft Affordable Housing and Viability Supplementary Planning Guidance (SPG) for consultation. It has much in common with LBVG’s protocol – sometimes the text is identical.  It seems to be more explicit on a number of points – not least what constitutes a competitive return to developers.

  The appropriate level of profit is scheme specific; evidence should be provided from applicants to justify proposed rates of profit taking account of the individual characteristics of the scheme, the risks related to the scheme and comparable schemes.

So – no standard of 20%. It’s also seems more open to projections of costs and values.  Turning to the vexed issue of Benchmark Land Value.  It has some interesting things to say on the use of market evidence.

Reliance on land transactions for sites that are not genuinely comparable or that are based on assumptions of low affordable housing delivery…may lead to inflated site values. This undermines the implementation of Development Plan policies and the ability of planning authorities to deliver sustainable development.

I suspect that the key phrase here is going to be “based on assumptions of low affordable housing delivery”. The document is pretty strong on the use of EUV+…

The Mayor considers that the ‘Existing Use Value plus’ (EUV+) approach is usually the most appropriate approach for planning purposes…An alternative approach will only be considered in exceptional circumstances which must be robustly justified by the applicant.

I’m still none the wiser about what the premium should be.

I know that a group at the RICS currently have produced a draft update of their existing viability guidance. I suspect that the tone will be dramatically different on Benchmark Land Value or whatever they choose to label it as.





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