Valuation of land for Affordable Housing
Charles Solomon MRICS
Housekeeping
Course Times
9.30 - Start
11.00 - Break
12.30 - Lunch Break
15.00 - Break
17.00 - Close
INTRODUCTIONS
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Charles Solomon – who am I and why am I here?
You – who are you and why are you here?
Agenda
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When does affordable housing get developed?
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Affordable housing types for new developments
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Methodology for developing development land
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Factors affecting development land values – including GDV,
costs, finance, etc.
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Reporting
Exercise 1: How is affordable housing
provided?
5 minutes: Affordable housing is delivered in a number of different
ways. Identify as many as you can.
What is affordable housing?
Definition provided in England: NPPF: Affordable housing:
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Social rented, affordable rented and intermediate housing,
provided to eligible households whose needs are not met by the market.
Eligibility is determined with regard to local incomes and local house prices.
include provisions to remain at an affordable price for future eligible
households or
for the subsidy to be recycled for alternative affordable housing provision
Removed from previous (PPS3) definition:
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Meets the needs of eligible households including availability at a low cost.
Enough for them to afford.
TENURE TYPES- SOCIAL RENTED
Indexed based from January 1999.
The basis of valuation adopted is EUV as set out in the RICS
Valuation Standards at UKPS 1.3
Aim to reach Target rent by 2012.
Guidance- www.tenantservicesauthority.org.
SOCIAL RENT- GROSS TO NET RENT
Net passing rent is calculated by deducting the following costs from
the gross rent receivable by the registered provider:
• management costs;
• repairs & maintenance costs;
• allowance for voids & bad debts;
• annual sinking fund (including allowance for major repairs); and
• unrecoverable service charge.
TARGET RENT DATA EXTRACT 2009
TENURE TYPES- AFFORDABLE RENT
AFFORDABLE RENT:
New tenure introduced in 2010
Minimum term 2 years
Up to 80% of market rent- but exceptions
Annual increase RPI + 0.5%, but re-assessed at end of tenancy term
Issues:
Local Housing Allowance (LHA) cap
Weak/ fragile market
AFFORDABLE RENT- ASSESSMENT OF RENT
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a)
b)
c)
Assessment by LA and RPs as to what level of rent is affordable:
Research property prices, rent levels & LHA
Analyse current and future benefits allowance
Produce affordability assessments based on household income
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Typically, “affordable” rent is defined as a rent that does not
exceed 1/3 of gross household income.
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Recommended AR example (LBTH):
% of MR
Affordable Weekly rent
1 Bed
2 Bed
3 Bed
4 Bed
5 Bed
65%
£180.70
55%
£203.50
50%
£231.50
50%
£258.00
45%
£289.82
TENURE TYPES- INTERMEDIATE
NEW BUILD HOMEBUY
Part purchase, part rented
Rent element typically averages 2.75% of retained equity.
Staircasing
NEW BUILD HOMEBUY- AFFORDABILITY
PLANNING INFLUENCES IN ENGLAND AND
WALES
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S106 Agreements
Area Action Plans
Viability
VALUATION METHODOLOGY
VIP12- Valuation of Development Land
•Comparable Land Values
•Residual Appraisal
Valuation of Land for Affordable Housing
Financial Viability in Planning
• Assessment of viability
MARKET VALUE OF LAND- VIABILITY
FVIP (Draft) definition of site value is assessing viability:
“Site Value should equate to the Market Value subject to the
following assumption: that the value has regard to development
plan policies and all other material planning considerations and
disregards that which is contrary to the development plan.”
GROSS DEVELOPMENT VALUE
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Rent receipts
Capital receipts
Re-cycling from right to buy transactions
Internal or cross subsidy
Usually calculated by discounted cash flow (DCF) approach- This
estimates the present worth of a property assuming projected future
net income and re-sale value.
Calculated using software such as Pamwin, but also purpose
designed toolkits such as Three Dragons, HCA DAT, or bespoke
models.
Income Method
Advantages
• It focuses directly on the value of the property to the individual
concerned.
• Very detailed and derive specific conclusions (Compare to
general approach practised in the Comparable Sales Method.)
Disadvantages
• More complex and less intuitive than the Comparable Sales
Method. This is one of the reasons why it is often overlooked.
• Ignores the actual market prices for property.
• Highly sensitive to the assumptions made.
EXTERNAL SUBSIDY- GRANT FUNDING
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2011-15 Affordable Homes Programme (Now limited grant
remaining)
2008-11 NAHP
Issues:
Use of public land
S106
Cross subsidy
HCA Design & Quality Standards
Assessment toolkit
EXERCISE 2: ASSESSMENT OF INTERNAL
SUBSIDY
Look at the exercise notes. This exercise goes through an analysis
of a real case to establish the level of internal subsidy.
Analyse the data.
Assess values being offered on a £/m2 basis.
What are your conclusions?
(20 minutes)
ESTABLISHING DEVELOPMENT COSTS
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BCIS
Net Sales v Gross Area
Externals
Code for sustainable homes
Inflation
Contingency
Other costs – contamination, off-site works, capital contributions
EXERCISE 3: ESTIMATING BUILD COSTS
Look at the exercise notes. This exercise goes through the estimation of build
costs, looking at base build costs, allowance for Code for Sustainable Homes
and externals.
Assess:
• GIA of the block of flats.
• GIA of the terraced housing.
• Base build costs.
• Costs to CfSH level 4.
• External costs.
• Total build costs.
• What is this as a £/m2 for the GIA of the individual units?
CIL & S106- NPPF
CIL is not charged on Affordable Housing units. It is charged on
other qualifying development, based on the net increase in new
development. Levy rates vary.
S106 is defined in NPPF as:
(i) necessary to make the development acceptable in planning
terms;
(ii) directly related to the development; and
(iii) fairly and reasonably related in scale and kind to the
development.
EXERCISE 3- S106 REVIEW
What costs in this s106 tariff would you recommend should be
questioned?
S106 PAYMENTS
1 bedroom
2 bedrooms
3 bedrooms
4 bedrooms
5 bedrooms
Highway
works
£2,147.00
£2,147.00
£2,147.00
£2,147.00
£2,147.00
Open space
& recreation
£1,000.00
£2,000.00
£2,000.00
£2,000.00
£2,000.00
Built
sports
£335.00
£670.00
£670.00
£670.00
£670.00
Education
£940.00
£940.00
£3,295.00
£8,650.00
£12,785.00
Heritage site
contribution
£1,536.00
£1,536.00
£1,536.00
£1,536.00
£1,536.00
Police
office
£800.00
£1,470.00
£1,765.00
£4,415.00
£6,180.00
Which of these costs would now be covered by CIL?
Area wide
schemes
£0.00
£0.00
£945.00
£945.00
£945.00
Library
£220.00
£220.00
£220.00
£220.00
£220.00
ON COSTS / PROFESSIONAL FEES
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How much
Specialist professional fees
FINANCE
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Current cost of borrowing
Favourable rates
Strength of covenant to borrow
TAX
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SDLT
VAT
Golden brick
RECEIPTS / PAYMENTS
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Timing
Cashflow
Sensitivity
DEVELOPER’S PROFIT
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Private housebuilder position
Market trends
Registered provider position
EXCEPTION SITES
NPPF s54: “In rural areas, ... through rural exception sites ...
consider whether allowing some market housing would facilitate
the provision of significant additional affordable housing to meet
local needs.”
Factors:
• HCA grant not normally available.
• Developer- Assume RP cross subsidising? May need to allow for
market developer with profit requirements.
• Benchmark/ Land value- What is a “competitive return”?
COMMUTED SUM
• NPPF S50 allows a
“...contribution of broadly equivalent value can be robustly justified
(for example to improve or make more effective use of the
existing housing stock).”
APPRAISAL TOOLKITS
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HCA DAT- Example for review
Three Dragons
Argus, ProVal etc
REPORTING THE VALUE
VS 6.1
• the basis of valuation must be clearly stated. Where a basis other
than Market Value is adopted this must be fully explained.
• all the assumptions made must be stated and, where appropriate,
comment made on the effect of those assumptions where they
are material.
• and the statement requiring comment on the valuation approach
is particularly important in these valuations.
Provide a copy of the appraisal and sensitivity analysis?
Negative value reported
Consider higher value alternative uses
Range of values?
NEW DELIVERY METHODS
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Are there any?
Impact?
SUMMARY
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Considered the background
Looked at the role of planning and particularly S106 agreements
Gone through the methodology with reference to VIP 12 and
Guidance note: Valuation of land for affordable housing
Considered the reporting structure
Concluded with a look forwards to potential changes