Overage planning

My colleague, Peter Wyatt, recently came across something odd on the market on the outskirts of Hook, Hampshire.  Neither of us had seen anything like it before.  The planning overage rights were for sale for a five acre greenfield site.

The property lies to the south of the M3 motorway at the junction 5 and to the south of Hook with a commercial centre of Basingstoke lying to the west and Farnborough, Aldershot and Camberley to the east. Reading lies to the north accessed via the A33 which also provides access to the M4 motorway making this location highly accessible for road links. The property itself lies to the west of the A287 with Hook Road to the north and Mill Lane to the south.

But

The land itself is not being sold as part of this lot. The land was sold at our auction in February 2017 and comprises a parcel of 5 acres of land. This lot is the overage rights across this land which entitle the purchaser to 25% of the increase in land value resulting from planning permission being granted within a period of 80 years from 2017. These details show an indicative scheme for a commercial development subject to the necessary consents and of course, as and when planning is granted for this or a similar scheme the purchaser of this lot will be entitle to 25% of the increase in land value resulting from the planning permission being granted. This overage is paid by the registered land owner with the overage registered at Land Registry.

We checked others out and there are quite a few land owners offering such rights.  As far as we can tell, they don’t tend to sell for that much (compared to the land itself).  Prices range from a few thousand to a few tens of thousands.

There was a sale of planning overage rights in10 acres of Land off Cathill Lane in Surrey within period of 50 years and a right to 20% of the land value if a planning permission is obtained.  It sold for £7,000.  I’d assume that it was in the Greenbelt or possibly an Area of Outstanding Natural Beauty.  Who would pay for promoting the sites through planning?  Some of the marketing brochures state that “the beneficiary could make their own planning application”!  At those prices, I can’t imagine that there’s a lot of money left after legal and agent fees.  One of my planning consultant mates was rather scathing, the word ‘cowboys’ was mentioned.

Whilst you’d need to know the detailed terms of the overage agreement in order to value such rights, drawing partially upon standard option pricing theory, theoretically the key determinants of the value of the option would be fairly familiar to anyone from a corporate finance background – value of land currently, value of land with planning permission, volatility of land values, probability of obtaining planning permission, expiry date and risk free rate –  the challenge would be in estimating the some of the model inputs such as volatility of land price change and the probability of obtaining planning permission.

However, as we can see above, these options are actually being traded – so we have trading prices as well.  If you know the other variables including the price and the probability of planning permission is unknown, then you can estimate the implied probability (that the buyer is implicitly assuming) of planning permission with some formula re-arranging.  Land price volatility would probably be the most uncertain (value) determining assumption.

I think that we used to call this “hope value” back in the day.  Well-known jargon busters, Carter Jonas provide a useful definition of hope value as

An element of market value, which reflects the prospect of some more valuable future use or development in excess of the existing use. 

Other versions are broadly the same

Hope value…will reflect an appraisal of the probability that the market places on that higher value use or development being achieved, the costs likely to be incurred in doing so, the time scale and any other associated factors in bringing it about. Fundamentally, it will allow for the possibility that the envisaged use may not be achieved. While descriptive of that uplift, it does not exist as a separate value but helps explain the market value of the property which must be judged from the available evidence just as much as any other part of the valuation. Hope value is not a special value as it represents the market place’s reasonable expectations as to the opportunities offered by the property. (European Valuation Standards 1 (EVS,2012)

I think that it does exist as a separate value and it is in the value of the planning overage rights.  So, in these cases, put more formally the hope value represents the probability weighted present value of the net benefits of potential permission to switch to a higher value land use.  My planning consultant friend called it “pure land speculation” – not necessarily a pejorative term to me.

So who would want to buy such rights?  I’d be interested to know more.  It could be planning risk seekers and/or planning risk hedgers.

Hedgers would be homeowners who are concerned that the open countryside around them will be developed.  They’re exposed to the ‘planning risk’ that they may experience loss of amenity, falls in house value etc. if development is granted planning permission on neighbouring countryside.  I know of some people who’ve actually bought adjoining fields to mitigate such risk.  If I were lucky enough to own a high value house in a rural location, then I’d definitely be tempted to buy such planning overage rights over neighbouring land.  If the worst happened (that’s how it is often perceived), I’d at least get a large lump of cash to compensate me.  I suspect that my house would be a lot more attractive to potential buyers if I had planning overage rights over the nearby land.   Think of it as insurance planning.

Planning risk seekers would be basically a subset of land promoters.  I’ve written about their business model before here.  I suspect that the sellers of planning overage rights will be on owners of sites that cannot attract a housebuilder to take an option on the land or a promoter who won’t offer a promotion agreement because the land has too low a probability of obtaining planning permission.

As researchers often say – more research needed.

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