Development Valuation Training
For
Cornwall County Council
22 May 2012
Charles Solomon
Head of Development Viability, DVS
Charles.e.solomon@voa.gsi.gov.uk
Tel: 03000 500660/ 07717 301206
Paul Scammell
Development Viability Specialist, DVS
paul.m.scammell@voa.gsi.gov.uk
Tel: 03000505374/ 07717 450909
Development Valuation Training
Cornwall County Council
Programme:
Session title
Subject
Comments
10.0010.45 Residential land valuation: Looking at principles of market evidence
Development
General approach.
and residual valuations. (RICS VIP 12)
land valuation
Technical terms
10.4511.30 Valuation of Market housing
Gross
Valuation
of
Affordable
Development
housing.
Values.
Commercial properties.
11.30- 1145
Break
11.45-12.45
Build costs
Gross
Development
Contingency
Costs
CIL/ S106
Market housing values. Effect of CfSH.
Affordable housing- tenures, approach to
value, DCF. Grant, Valuation issues
Include investment values
BCIS, CfSH costs, Externals, abnormals
Professional costs
Marketing costs
Funding & Finance costs
Profit
Land value & costs
12.45- 13.15
Lunch
13.15- 14.30
Principles
Development
viability
Information required
RICS “Financial Viability in Planning”
Planning appeal decisions.
Valuing Benchmark
Planning uncertainty
Valuation of “hope”
Assessing results
14.30- 15.15
Viability toolkits
Include practical application
Sensitivity testing
Development
approach
15.15-15.30
Break
15.30- 16.30
Exception sites
Review mechanisms
Questions
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programme,
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Development Valuation Training
Cornwall County Council
Part 1: Development land valuation
Residential land valuation:
The Guide for valuing residential development land is the RICS Valuation Information Paper
12 (VIP12). The guidance from this is summarised below.
A valuation of property that is considered to be suitable for development, or redevelopment,
may be required for many reasons. These may include advice on loan security, acquisition,
sale, valuation of options, capital taxes, planning purposes and appraisals.
These notes discuss the approach to the valuation of property where the proposed
development is of a cleared, or greenfield site, or the site is to be redeveloped by removing
all, or substantially all, of the existing buildings and constructing new buildings. These
various scenarios are referred to throughout as ‘development land’.
Development schemes can vary from single or multiple residential schemes to industrial
estates, a shopping centre or a New Town. Although there may be differences between, say,
a valuation prepared for a proposed acquisition or sale and an appraisal by a developer in
connection with its own business model it is considered that the principles are the same.
These notes deal with the principles underlying the valuation approach.
There are two approaches to the valuation of development land:

comparison with the sale price of land for comparable development; or

assessment of the value of the scheme as completed and deduction of the costs of
development (including developer’s profit) to arrive at the underlying land value. This
is known as the residual method.
In practice it is likely that a valuation would utilise both approaches, and the degree to which
either, or both, are relevant depends upon the nature of the development being considered,
and the complexity of the issues.
Valuation by comparison is essentially objective, in that it is based on an analysis of
the price achieved for sites with broadly similar development characteristics. The
residual method relies on an approach that is a combination of comparison and cost
and it requires the valuer to make a number of assumptions – any of which can affect
the outcome in varying degrees.
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Development Valuation Training
Cornwall County Council
Establishing the facts
To judge the certainty of the outcome of the valuation, and the processes involved, it is
essential that the valuer has an awareness of the characteristics of the existing site and an
adequate knowledge of each of the development components. The level of detail that is
appropriate when assessing development potential varies according to the purpose of the
valuation. Judgement is required as to what is appropriate in each case.
The level of information available for a residual valuation is determined by the stage at which
the valuation is being prepared. For example, a valuation in advance of an acquisition is
based on less certain estimates than if the land has been held whilst planning has been
progressed, or the valuation is at a date where the redevelopment has commenced. It may
therefore be necessary to review the valuation as more detailed information becomes
available.
Inspection and site specific information
Physical inspection of the site, and related enquiries, will reveal site specific information.
Such information, either positive or negative, could include the following, which are not
intended to be exhaustive or to apply to every case:

extent of the site – in order to ascertain frontage, width and depth, gross and
developable areas;

shape of the site and ground contours – ideally in the form of a topographical survey;

history of previous, and risk of future, flooding;

sizes of any existing buildings. Where buildings are to be retained it is recommended
that measurements are taken in accordance with the RICS Code of Measuring
Practice, available from www.rics.org.

existing building height and that of adjoining properties;

efficiency of existing building(s) (if to be retained);

any matters that may result in excessive abnormal costs (such as constrained site
conditions, and poor or limited access), from development and occupational
perspectives.
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Development Valuation Training
Cornwall County Council

party wall, boundary and rights of light issues;

geotechnical conditions;

evidence of, or potential for, contamination;

availability and capacity of infrastructure (such as roads, public transport, mains
drainage, water, gas, electricity and telephony);

evidence of other head or occupational interests in the property, whether actual or
implied by law;

physical evidence of the existence of rights of way, easements, encumbrances,
overhead power lines, open water courses, mineral workings, tunnels, filling, tipping,
etc.;

details of easements, restrictive covenants, rights of way, rights to light, drainage or
support, registered charges, etc.;

the presence of archaeological features. These may be evident, or there may be a
high probability of their presence due to the site location (for instance, close to city
centres);

evidence of waste management obligations and whether those obligations have been
fulfilled; and

water or mineral extraction rights that may be available.
Existing planning matters
The following matters may need investigation:

The Local Development Framework (LDF) and the Regional Spatial Strategy. Also,
where a LDF has not been fully implemented the extant Structure Plans, Local Plans
and Supplementary Planning Guidance;

the existence of a current planning permission. This may be outline or full and may
include conditions or reserved matters;

where the permission is time limited it is necessary to establish if it is still valid and, if
close to expiry, if a similar permission would be granted again;
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Development Valuation Training
Cornwall County Council

regulations that specify the extent to which development of the site might be
permissible without the need for a planning application or consent;

the permitted use of existing buildings (if to be retained), or the possibility of
identifying an established use;

legally binding agreements that have been, or are to be, documented, in order to
secure the grant of planning permission;

any special controls that may apply to the site or buildings included (for example,
conservation area designation, green belt, tree preservation orders, listed buildings,
etc.);

requirements to protect or enhance environmentally sensitive features such as SSSIs
or water courses, and to comply with the relevant environmental protection
legislation; and

any requirements for view corridors, sight lines or buffer zones.
Assessing the development potential
Where the current permission(s) is not considered to be the optimum permission for which
there is a reasonable prospect, having regard to the applicable planning regime, it may be
necessary to form a view as to what permission is likely to be obtained and the associated
planning agreements that would be required to obtain that consent. This includes
consideration of published planning policies recognising that they heavily influence future
additions to the supply of particular types of building. Emerging consultative planning policies
may also be relevant, including national or regional guidance that may be taken into account
when deciding planning applications and, in the longer term, may influence the supply of
competing space or otherwise affect the value of the completed scheme.
An accurate assessment of the form and extent of physical development that can be
accommodated on the site is essential having regard to the site characteristics, the
characteristics of the surrounding area, and the likelihood of obtaining permission. In more
complex cases it is recommended that this assessment is undertaken in consultation with
appointed project consultants, such as architects, quantity surveyors, and environmental and
planning consultants.
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Development Valuation Training
Cornwall County Council
Matters that may be considered include:

the period estimated to complete the new buildings;

achieving a high efficiency ratio (net internal area expressed as a percentage of the
gross external area), which may be affected by car parking standards, without
compromising quality;

environmental issues that may have a material bearing on the success of the project
(sufficient enquiries need to be made to establish whether the presence of on-site or
neighbouring environmental features influence the development process, the density
or even the viability of the scheme);

the extent to which the planning system is being used to help deliver climate change
obligations. (Some planning authorities employ policies stipulating the minimum
amount of energy that must either be produced on-site or else obtained from
renewable sources. This may be evidenced by the incorporation of conditions
incorporating renewable and/or low carbon measures as standard requirements.)
Although the valuation is required of the actual site there may be a possibility of increasing
the development potential by acquisition of, or merger with, adjacent land. Conversely it may
be necessary to acquire adjacent land, or rights over adjacent land, before the proposed
development could take place.
The valuer needs to liaise closely with both the appropriate planning authorities and the client
to ensure that the appraisal reflects fully the various aspects of the proposed development.
The development programme
An outline programme may be provided but its achievability needs to be assessed. It might
include the following components:

the pre-construction period;
o site assembly, obtaining vacant possession, negotiations with adjoining
owners, extinguishing easements, or removing restrictive covenants, rights of
light etc, negotiating the planning process, agreeing architectural and
engineering design and/or solutions, soil investigations, the building contract
tender period, etc.; and
o negotiating the form, extent and value of the building contract(s), including
demolition and any necessary site preparation (it may be appropriate to seek
advice from an environmental, quantity or, building surveyor, mechanical
engineer or architect);
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Development Valuation Training
Cornwall County Council

the principal construction period;
o site preparation (certain enabling works may be necessary in complex cases
o these may include an archaeological dig, demolition, de-contamination or the
provision of infrastructure prior to the main works commencing); and
o main build , which may reflect phasing; and

the post-construction period;
o usually understood to be the period from completion of the construction
contract until one of : the full letting , sale or re-finance of the completed
development; and
o any defects liability period.
Analysing the market
In considering the development potential it is necessary to establish the potential demand for
the optimum alternative forms of development that may be possible. Clearly it would not be
appropriate to consider building a high specification office block in an area where there is no,
or limited, demand for such a property. Matters to be considered could include, but not
exclusively:

an owner occupier’s preferences for particular design features, building layouts and
specifications ( that is, the degree of specialisation and its impact on marketability);

investors’ requirements;

the location;

access and the availability of transport routes;

car parking facilities;

amenities attractive to tenants and/or purchasers;

the scale of the development in terms of sale or lettable packages;

the form of the development; and

market supply, including actual or proposed competing developments.
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Development Valuation Training
Cornwall County Council
Valuing by the comparison method
Valuation by comparison is only reliable if evidence of sales can be found and analysed on a
common unit basis, such as site area, developable area or habitable room. Although
comparable sales can be analysed in unit terms there are many other factors that determine
the price paid and unit comparison may not, in a particular case, be the most significant.
Enquiries may also reveal recent marketing, or even transactions, of the site. Even where
reliable information is not available the comparison method can provide a useful check of a
valuation prepared using the residual method.
Typically, comparison may be appropriate where there is an active market and a relatively
straightforward low density form of development is proposed (for example, if the land is
greenfield within a rural economy where infrastructure costs are consistent and not
excessive, or small residential developments, and small industrial estates), and it is likely that
the density, form and unit cost of the development will be similar. Less frequently, it may be
possible to compare larger sites for housing developments on this basis.
In comparing sites the following factors, which are not exclusive, may be relevant:

values may differ considerably within a small geographical area;

the condition of the site and associated remediation costs are very site specific and
could differ significantly between greenfield and brownfield, and between brownfield,
sites;

site and construction costs, for example, in terms of infrastructure and service
requirements differ;

the type of the development will vary and may reflect a requirement to provide
affordable housing. In the case of residential developments the density achieved can
also affect the price;

the price may be affected by planning obligations; and

in a rapidly changing market, the date of the sale of the comparable is relevant.
Generally, high density or complex developments, urban sites and existing buildings with
development potential, do not easily lend themselves to valuation by comparison. The
differences from site to site (for example in terms of development potential or construction
cost) may be sufficient to make the analysis of transactions problematical. The higher the
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Development Valuation Training
Cornwall County Council
number of variables and adjustments for assumptions the less useful the comparison.
Comparison is rarely appropriate where construction has begun.
Where the comparative method is used it is assumed that the valuer adopts standard
valuation techniques. However, some of the elements of a residual valuation may also be
relevant to a valuation on this method.
Valuing by the residual method
Where the nature of the development is such that there are no (or limited) transactions to use
for the comparative method, the residual method provides an alternative valuation approach.
However, even limited analysis of comparable sales can provide a useful check as to the
reasonableness of a residual valuation.
The residual method requires the input of a large amount of data, which is rarely absolute or
precise, coupled with making a large number of assumptions. Small changes in any of the
inputs can cumulatively lead to a large change in the land value. Some of these inputs
can be assessed with reasonable objectivity, but others present great difficulty. For example,
the profit margin, or return required, varies dependent upon whether the client is a developer,
a contractor, an owner occupier, an investor or a lender, as well as with the passage of time
and the risks associated with the development.
In practice, whilst the comparison method is a clear indication of the value paid for a
particular site, it is extremely difficult to accurately analyse and apply the assessed
value to another site. There are just too many factors and variables that make this
approach too uncertain. This is particularly the case in development viability
assessments, and is the reason that the residual method is the usual method for
assessing land values in these cases.
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Development Valuation Training
Cornwall County Council
The residual method
Having established the development potential a residual valuation can be expressed as a
simple equation:
(value of completed development) – (development costs + developers profit) = land
value
Each element of this equation is discussed in the following paragraphs.
Value of completed development- Gross
Development Value (GDV)
The value to be adopted is the Market Value of the proposed development assessed on the
special assumption that the development is complete as at the date of valuation in the
market conditions prevailing at that date- current day values. This is widely referred to as
the Gross Development Value (GDV).
For some developments, particularly residential, the approach may be to adopt the total of
the values of the individual properties. In other cases an additional special assumption may
be that the completed development is let and income producing rather than available for sale
or letting- more typical in commercial property developments.
As the GDV does not incorporate an allowance for purchaser’s costs the net proceeds are
more often aligned to the Net Development Value, which reflects the transaction costs that
would be incurred if the completed development was sold, again, on the date of valuation.
The finance costs, notional or actual, are included in the residual value calculation and
therefore there is no need to adjust the GDV to reflect these.
Market housing:
Market housing effectively “cross subsidises” delivery of affordable housing and other
planning policy requirements. It may be included for this purpose under NPPF
recommendations in developments of rural exception sites.
Valuation of market housing usually provides few difficulties. The approach, based on
comparable market sales, is well understood. However, this is a particularly important part of
the residual assessment approach as it has such a major effect on the residual land value. A
10% variation in sales values will typically generate a 30% difference in land value. Valuation
is made more uncertain where there are limited comparable new developments. Second
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Development Valuation Training
Cornwall County Council
hand housing stock may or may not be suitable- usually not as they do not reflect the same
level of fittings, state of repair or design of new housing.
Care also needs to be taken in assessing values of housing stock built to Code of
Sustainable Homes levels 5 and 6. There are a few examples of housing stock built to these
standards, but there is some question as to whether houses built to these standards will have
the same value as those built to levels 3 and 4. The answer will lie in the level of
specification, and market “acceptability” of the housing.
Example of analysis of market sales:
KERRIER WAY, CAMBORNE
Pertinent
Date
CDB
Address
Transferor
Consideration
Type
Area
Est GIA
£/m2 GIA
07-Jul-11
17
HCA
£105,950.00
Flat
44
50.6
£2,094
2
1
31-Oct-11
1, VYVYAN
HOUSE,
HCA
£106,000.00
Flat
48
55.2
£1,920
3
2
22-Dec-11
2
HCA
£177,950.00
Terrace
114
108.3
£1,643
5
4
23-Feb-12
4
LINDEN
£177,950.00
Terrace
114
108.3
£1,643
5
4
24-Jun-11
5
HCA
£160,000.00
Terrace
120
114
£1,404
4
3
28-Jun-11
27
LINDEN
£162,950.00
Terrace
120
114
£1,429
4
3
29-Jun-11
7
MIDAS
£162,950.00
Terrace
120
114
£1,429
4
3
30-Jun-11
15
LINDEN
£105,950.00
Flat
44
50.6
£2,094
2
1
Median
Flats
Terrace
Main Rooms Bedrooms
£2,033
£1,507
Look at Exercise 1 and analyse market sales evidence
Affordable housing:
In England, National Planning Policy Framework (NPPF) contains a definition of affordable
housing:
“Affordable housing: 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. Affordable
housing should include provisions to remain at an affordable price for future
eligible households or for the subsidy to be recycled for alternative affordable
housing provision.”
Social rented housing is owned by local authorities and private registered providers (as
defined in section 80 of the Housing and Regeneration Act 2008), for which guideline target
rents are determined through the national rent regime. It may also be owned by other
persons and provided under equivalent rental arrangements to the above, as agreed with the
local authority or with the Homes and Communities Agency.
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Development Valuation Training
Cornwall County Council
Affordable rented housing is let by local authorities or private registered providers of social
housing to households who are eligible for social rented housing. Affordable Rent is subject
to rent controls that require a rent of no more than 80% of the local market rent (including
service charges, where applicable).
Intermediate housing is homes for sale and rent provided at a cost above social rent, but
below market levels subject to the criteria in the Affordable Housing definition above. These
can include shared equity (shared ownership and equity loans), other low cost homes for
sale and intermediate rent, but not affordable rented housing.
Homes that do not meet the above definition of affordable housing, such as “low cost
market” housing, may not be considered as affordable housing for planning purposes.
Social Rent
In England in 2001, a rent influencing regime was implemented as a result of a government
Housing Green Paper in 2000 that identified marked variations in rental levels being charged
by registered providers to tenants who lived in similar sized properties in similar locations.
The aim was to link rents to local earnings and property values. The Housing Corporation
issued guidance in 2001entitled Rent Influencing Regime: Implementing the rent
restructuring framework. The functions of the Housing Corporation were subsequently
transferred to the Tenant Services Authority (TSA).
The rents that can be charged on social rent units are calculated in accordance with the
guidance at levels below market rents. In order to ensure that they are affordable to those in
housing need who cannot afford to access market or intermediate tenure housing, the levels
vary from one region to another. The rents were indexed based on an assessment of the
value of the property in January 1999. The basis of valuation adopted is EUV as set out in
the RICS Valuation Standards at UKPS 1.3.
In 2002, the government required registered providers to calculate a target rent for each
property so that by 2012 the actual net rent of the property would be adjusted to match this
target rent (in real terms). The target rent is calculated through a formula that uses relative
county earnings, relative property values and number of bedrooms to arrive at the target rent.
In order to arrive at the target rent the net rent is tracked against an annual rate of RPI +
0.5% plus or minus £2 per week. Once the target rent has been reached rents track RPI
movement + 0.5% per annum. The TSA issue guidance on rents, rent differentials and
service charges changes from time to time and the latest guidance is available on
www.tenantservicesauthority.org.
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Development Valuation Training
Cornwall County Council
The target rents are subject to rent caps that are set according to the number of bedrooms.
The rent caps are published annually by the TSA. Rent caps are essential in higher value
areas in order to keep rents affordable for tenants on lower incomes. Rent caps track RPI
movement + 1% per annum.
The 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.
In order to arrive at the GDV the aggregate of the annual net passing rents is capitalised over
the period of the cashflow at an appropriate discount rate reflecting:
 the sustainability of the existing rental income;
 the likely rate of future rental growth;
 the condition of the portfolio;
 the level of outgoing required to maintain the maximum income stream;
 the likely performance of the portfolio in relation to its profile and location;


the real cost of borrowing; and
the long-term rate of gilts.
If it is assumed that a Right to Acquire (RTA) will occur and that net receipts will be
reinvested by a registered provider, this capital should be built into the cashflow and
discounted back at an appropriate rate.
Target rents:
Extract on Social rent levels and numbers in Cornwall from information in Cambridge Centre
for Housing and Planning Research- Target Rents 2009
Table A2: Cross-tenure comparison of average rent by local authority area, NUTS3 area and property size
Size
HC Region
Cornwall and Isles of Scilly
Caradon
Carrick
Isles of Scilly
Kerrier
North Cornwall
Penwith
Restormel
Cornwall and IoS av/total
net rent
69.47
69.82
76.51
70.15
67.63
69.66
69.19
69.55
HA-all stock
service
charge gross rent
3.14
4.37
2.52
3.09
3.44
4.00
1.77
2.88
72.20
73.11
77.35
72.98
70.02
70.48
70.64
71.53
HA-new lettings
n
708
988
27
3,958
991
3,235
3,432
13,339
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rent
76.01
77.59
73.05
71.19
73.31
73.23
n
22
5
0
2
41
0
8
78
HA-relettings
LA-stock
rent
n
rent
75.16
73.44
15
26
0
78
32
30
37
218
62.90
59.61
n/a
LSVT
58.02
LSVT
LSVT
60.20
74.40
68.33
71.02
73.05
72.75
HA Target Rent
n
3,533
3,685
n/a
LSVT
3,384
LSVT
LSVT
10,602
rent
67.53
68.28
79.92
71.94
65.58
68.27
64.51
68.18
n
708
988
27
3,958
991
3,235
3,432
13,339
Development Valuation Training
Cornwall County Council
Affordable Rent
The Affordable Homes Programme signals a significant change and heralds the introduction
of a new more flexible form of social housing, Affordable Rent, which will be the main type of
new housing supply. Affordable Rent will allow a more diverse offer for the range of people
accessing social housing. As it is a new product in affordable housing, and appears to be the
Government’s preferred tenure for rented affordable housing, it is appropriate to go in to
some detail on what it is and how it is expected to work.
The Affordable Homes Programme framework - PDF (473KB) explains the Affordable Rent
model in more detail and the Capital Funding Guide provides guidance for Registered
Providers who have received HCA funding for Affordable Rent.
Allocations and nominations processes for AR homes are expected to mirror the existing
frameworks for social rented housing; and RPs will be under the same statutory and
regulatory obligations as they are when allocating properties for social rent.
The minimum term of an Affordable Rent tenancy is 2 years, but providers are also able to
offer longer fixed term or periodic tenancies.
For both new supply and conversions RPs will be required to assess the market rent (using
the definition of the International Valuations Standard Committee as adopted by RICS ) that
the individual property would achieve and set the initial rent at up to 80% of that level
(inclusive of service charges).
Exceptionally rents may exceed 80% of market levels in areas where an Affordable Rent
would otherwise be lower than the target rent for the property. The target rent therefore
constitutes a ‘floor’ for the rent to be charged. However RPs will be required to document
such decisions together with supporting evidence for audit purposes.
In order to maximise their financial capacity HCA expects RPs to set rents at up to 80%
gross market rent. Where in specific circumstances RPs can demonstrate it is appropriate to
set rents at less than 80% of gross local market rents whilst still meeting local needs and
delivering value for money they will be required to discuss such cases with their Agency lead
investor team. Examples where it might be appropriate could include:
 where a rent at 80% of market rent would exceed the relevant Local Housing
Allowance (LHA) cap or place the rent close to the cap,
 or if the local rented market was considered to be particularly weak or fragile.
Homes let on AR terms will not be subject to the rent restructuring policy for social rented
housing as set out in the TSA’s Rent Influencing Regime Guidance (RIRG). For further
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Development Valuation Training
Cornwall County Council
information, please see the TSA tenancy standard. The maximum annual AR increase will be
Retail Price Index + 0.5%. RPI will be taken as at September of the previous year.
RPs will be required to rebase the rent on each occasion that a new AR tenancy is issued (or
renewed) for a particular property; and ensure that the rent remains at no more than 80% of
gross market rent (inclusive of service charges) as of the date the property is re-let – even if
this means the new rent is lower than the rent previously charged.
The type of tenancy which RPs should use when homes are let on Affordable Rent terms is
not prescribed. Therefore, RPs will be able to offer AR on flexible tenancies; retaining the
option to offer Assured/Secure tenancies if they wish to. AR tenancies must be for a
minimum period of no less than two years, but RPs have the flexibility to offer longer
tenancies, including Assured/Secure tenancies. It's likely that in future RPs will be required to
take into account Local Housing Authorities strategic tenancy policies.
Intermediate Housing
There are a number of products that are available, mainly NewBuild HomeBuy, shared
equity, discounted market sales, etc. Intermediate rent and Rent to Home Buy also fall within
this category. The type most usually encountered in new build assessments is NewBuild
HomeBuy (NBHB).
It is housing that is priced below market price and that meet local affordability criteria to
enable people to access housing, when they do not have the capacity to purchase within the
private housing sector.
The affordability criteria are set by the local authorities and typically relate to the amount that
a person can afford as a percentage of their gross income, to spend on housing costs.
Most of these tenures have been available for many years, so a brief resume only is provided
here.
NewBuild HomeBuy
This was formerly known as shared ownership and is an intermediate product where an
occupier purchases an initial percentage (usually a minimum of 25%, and up to 50%) of
equity in their home and then pays an annual rental charge as a percentage of the retained
equity. RPs typically charge this on a sliding rate, but 2.75% is widely adopted. Under
Section 106 Agreement, this charge may be specified at a lower rate- which would affect the
level of offer the RP could then make.This is also considered in view of affordability against
income thresholds.
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Occupiers have future opportunities to purchase additional tranches. This is known as
staircasing from a registered provider. The occupier will also have the opportunity to
staircase up to 100%, although in certain circumstances a maximum of 80% ownership is
only allowed as part of a Section 106 Agreement.
NewBuild HomeBuy has to be affordable for the average person living in the community.
Local authorities assess average incomes as part of their housing policy reviews and require
that properties sold under this tenure should not be in excess of the total average income of
potential purchaser(s). Assessment of affordability has regard to the total costs to a
purchaser. The following table is an example of how this is established:
SHARED OWNERSHIP
1 bed flat
Market Value
Deposit
Initial Share
Value of initial share
Unsold equity
Mortgage
Mortgage period (Years)
Interest Rate
Net income as a % of gross (Assumption)
Monthly repayments
Annual repayments
Policy rent %
Monthly rent
Annual rent
Monthly service charge
£150,000.00
£5,000.00
25%
£37,500.00
£112,500.00
£32,500.00
25
4.5%
70%
£180.65
£2,167.75
2.75%
£257.81
£3,093.75
£87.00
Annual service charge
£1,044.00
Total annual housing cost
£6,305.50
Max % of net income on annual housing cost
40%
Max % of net income as % of gross income
28%
Income multiple
Min gross income required
3.57
£22,519.63
This means that there will be a value cap above which NewBuild HomeBuy is unlikely. In
central London, as an example, £300,000 is considered the maximum affordable value.
Shared Equity
This is distinct to Shared Ownership where for example 75% (and this is not necessarily the
agreed percentage) is held by the occupier and 25% is held by the housebuilder. At some
point in time the balance may be acquired by the owner. The interesting part of this is
whether the 25% has a value for the full 100% of that portion. Evidence is now emerging that
the retained equity is worth 40 to 50% of the 100% retained value.
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Discounted Market Sale
Often this is imposed through a Section 106 Agreement specifying the percentage of market
price that can be charged for certain houses. Under NPPF this may now not be be
considered to be affordable housing
Valuing Affordable Housing
There are three main components that make up the gross development value for affordable
housing which are:
1.
The rent and capital receipts from affordable units.
2.
Proceeds that may be reinvested from staircasing receipts, right to acquire or external
subsidies.
3.
Any internal registered provider subsidy or cross subsidy by including market housing
in the scheme.
Dealing with each in turn, with regards to rents, the gross rents need to be calculated and
from these, costs need to be deducted in order to arrive at the net income. The cost that
might be deducted would include management costs, repair and maintenance, allowance for
voids and bad debts and an annual sinking fund and finally any unrecoverable service
charge.
The next step is to capitalise the net income by the appropriate discount rate, which will
reflect numerous factors such as future rental growth or condition of the portfolio, cost of
borrowing, sustainability of the existing rental income and so on. This is usually assessed by
RPs on a DCF basis. The following notes explain how this is done.
Discounted Cash Flow explained:
Valuation methodology- Income method.
The Income Method estimates the present worth of a property assuming projected future net
income and re-sale value. The method uses the discounted cash flow (DCF) model to
determine the present value of an investment. One underlying assumption of this approach is
the principle of opportunity cost of capital, i.e. that money is of more value today than in the
future. The principle of anticipation is fundamental to this approach. It states that value can
be created today by expected future profits.
Procedure
1. This method relies on making certain key assumptions on:
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a) The prospective income generated by the property
b) The resale value
Example:(For DCF assessment on affordable housing is usually carried over a period
of 30 years plus. For this example I will just look at a 10 year period for simplicity.)
A two bedroom flat is to be acquired by an RP for Affordable Rent. Market data
predicts that the flat will show an average annual increase of 5% in market value for
the next 10 years. Affordable rent levels suggest I can expect to receive £4,000 of
rent each year for the next 10 years.
2. In order to calculate the present value, prospective future income has to be
discounted to reflect the cost of equity capital. This is part of the discounted cash flow
(DCF). The opportunity cost of capital can be interpreted as the income that would
otherwise have been generated had the capital been invested in an asset of similar
risk instead.
Example: Instead of an Affordable Rent flat, the RP could have invested in high-yield
bonds that are assessed as being of similar risk. The highyield bonds generate an 8%
yield, so I will assume my discount rate (cost of equity capital) to be 8%.
3. The difficult part in calculating the DCF is how to estimate the risk involved. In
residential property dealings, these estimates are usually based upon historical data
on house price volatility.
4. The next step involves calculating the present value (PV) of the property based on
selling it for 50% more in ten years' time. The way to calculate present value (PV) is
to divide the future value of a house by the discount rate plus one to the power of the
number of years.
Example: The three-bedroom flat costs £120,000. I expect to be able to sell it for
£180,000 in 10 years. Discount rate= 8%. Calculation:
Sale PV = £180,000 / (1 + 0.08)¹º = £83,375
5. In recognition of the fact that the property will also generate income over the next ten
years we need to calculate the present value of this income stream and add it to the
value calculated above.
Example:
Gross Rent: £4,000 pa.
Deduct annual running costs: £1,600
Net income: £2,400.
Discount rate: 8%.
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The calculation for the net present value for Year1 income is:
Income PV = £2,400 / (1 + 0.08)¹= £2,222
And so on for the period the property will be held until sold. For a 10 year hold, the
calculation is
Income PV = (£2,400 / 1.08¹) + (£2,400 / 1.08²) + (£2,400 / 1.08³) + ... etc ... +
(£2,400 / 1.08¹º)
And results in an income PV = £16,102
Overall assessment is therefore:
PV = Sale PV + Income PV
PV = £83,375 + £16,102
PV = £ 99,477
The RP would therefore in this example not be prepared to pay the current price of
£120,000.
RPs will assess the value of the properties using long term discounted cashflows 30 years
plus, in some cases 45 years historically. Where a S106 agreement requires the affordable
properties to be held in perpetuity a 10 year cashflow followed by a reversion to market value
would not match the approach taken by RPs. The example set out above is more in line with
the approach taken with shared ownership / NewBuild Homebuy where the net income from
the asset is projected forward and a staircasing event modelled in the future for a capital
receipt. However, forecasting future shared ownership staircasing is difficult and should also
be done at a portfolio level so that a variety of scenarios can be tested to assess impact on
overall value. Typically RPs have historically assumed that 70% of the SO units will staircase
out within 7 years. At the time of the property crash they removed all staircasing from their
appraisal but it is now creeping back in. There are no hard and fast rules here but valuers
should understand the approach and have the appropriate market knowledge to support their
assumptions.
It is worth noting that this valuation method generates a result that is highly sensitive to the
variable assumptions
Income Method Advantages


It focuses directly on the value of the property to the individual concerned.
Income analyses are very detailed and derive specific conclusions (in contrast to the
more general approach practised in the Comparable Sales Method.
Income Method Disadvantages

This method is more complex and less intuitive than the Comparable Sales Method.
This is one of the reasons why it is often overlooked.
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

This method ignores the actual market prices for property by neglecting the
comparable sales analysis.
The ultimate house price recommendation is highly sensitive to the assumptions
made.
The following is an extract from the GLA Three Dragons Toolkit showing typical deductions
and yield to get from gross rent to net for assessing on a DCF basis. This is data from
research carried out with London RPs and the figures may vary elsewhere
External subsidy- Grant funding
2011-15 Affordable Homes Programme
There is less grant funding available in the current economic climate than in recent years.
The emphasis in providing affordable housing is likely to look to minimise grant funding
where possible, and to ensure that the grant provides as many new affordable homes as is
possible, in locations where there is maximum demand and need.
The Affordable Homes Programme 2011-15 (AHP) aims to increase the supply of new
affordable homes in England. During 2011-15, HCA will invest £4.5bn in affordable housing
through the Affordable Homes Programme and existing commitments from the previous
National Affordable Housing Programme. The majority of the homes built will be made
available as Affordable Renthttp://www.homesandcommunities.co.uk/affordable-rent with
some for affordable home ownership, supported housing and in some circumstances, social
rent. For further information on how the programme works read the Framework document PDF (473 KB).
Qualification
Organisations delivering programmes through the Affordable Homes Programme 2011-15
must be qualified as HCA Investment Partners.
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Availability of grant funding
Given constrained public finances, it is important to make the best use of the range of
sources of funding for new supply. The HCA wishes to see providers consider and maximise
value for money by bearing down on the costs of new supply. Providers will be required to
submit a procurement statement as part of their offers.
Given the uncertainty of the availability and level of grant funding, agreement should be
reached in assessing the land value as to what assumptions should be made for grant
funding. These assumptions should be made clear in the valuation report.
Use of public land
Providers carrying out developments on land owned by the public sector should aim to
minimise other forms of subsidy such as HCA funding. Where a public body is unwilling or
unable to transfer the land for free or for a nominal capital receipt, then it should be willing to
share in the risks of development, with the deferred value to be realised over the lifetime of a
project.
Section 106 schemes
HCA expectation is that s106 schemes can be delivered at nil grant input for both affordable
home ownership and for Affordable Rent. For the latter, the assumption is that the price paid
will be no more than the capitalised value of the net rental stream of the homes. Providers
who are efficient in their operating costs are likely to have a competitive advantage in making
offers. For affordable home ownership, HCA will expect the price paid to include reasonable
assumptions about the likely value of homes and the initial average share to be offered. The
price paid should also be based on reasonable assumptions about the rent to be charged on
the unsold equity in the home. As with Affordable Rent, providers who are efficient in their
operating costs are likely to have a competitive edge in making offers.
Grant bids will move away from scheme by scheme assessment. Scheme specific scrutiny
should be expected where:
a) Any grant is sought;
b) the use of RCGF or DPF;
c) application of a provider’s own resources;
d) funding from conversion is proposed,
e) on s106 sites.
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Open book provision of data about the economics of the scheme will be required from both
the developer and the long term owner of the affordable housing (if they are different). HCA
may test the economics of individual schemes through their development appraisal tool,
particularly where HCA funding is sought on s106 sites. If HCA funding is requested on s106
sites they would expect, as part of the appraisal, to see evidence that this will result in
provision of additional affordable housing which would not otherwise be delivered including
by reference to the local planning authority’s viability assessment.
Design and Quality Standards
Offers must meet the HCA’s Design and Quality standards (April 2007)
http://collections.europarchive.org/tna/20100710184205/http://www.housingcorp.gov.uk/uplo
ad/pdf/Design_quality_standards.pdf and accommodate any changes in Building
Regulations.
Some local authorities may require additional local standards and providers will need to liaise
with local authorities in whose areas they will be developing new homes. Providers whose
offers include proposals in London should also see chapter seven of this Framework.
2008-11 NAHP
This programme has now pretty well run its course, and there will be limited need in the
future to assess land value subject to grant funding on this basis. Funding was primarily
made available for social rented and LCHO tenures. Bids for funding were supported by an
Economic Assessment Toolkit, replaced in April 2011 by a Development Appraisal Toolkit.
Internal subsidy and market housing cross subsidy
Internal subsidy:
RPs are in a competitive market amongst themselves to acquire new affordable housing.
Having gone through the valuation exercise and assessed what the units may be worth
under a DCF approach, considered if additional (external) funds may be available, there is a
further assessment- What are these units worth to the overall business plan?
This is a very difficult area to quantify and currently very uncertain due to the HCAs
Framework agreement. The level of cross subsidy will be dependent on a wide range of
items hinged on whether an association has a contract with HCA under the new Framework.
It is too early to tell where this will end up but it is likely that in order to be competitive in
acquiring sites, RP will need to increase the level of internal subsidy if possible.
Internal subsidy is often revenue based with schemes running at a loss in the early years but
likely to be more capital subsidy focused going forward as funds are used from profits made
elsewhere in the RPs business. RPs will need to become more commercial and move
towards private sales and market rents going forward.
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There is evidence that RPs will bid higher than a standard EUV-SH calculation (by as much
as 40%) where they can demonstrate efficencies in management costs better than other RP
who may not have such a local presence.
Market housing cross subsidy:
Increasingly RPs are seeking to build schemes that include both affordable and market
housing. This has the advantages of:
a) Providing a key planning aim of mixed sustainable communities
b) The capital receipts from the sale of market housing cross subsidises the delivery of
affordable housing.
Surpluses generated from the sale of market housing cross may subsidise delivery of
affordable housing with or without other sources of additional subsidy (ie internal subsidy or
external grant funding). In assessing land value, an understanding of what the development
scheme is likely to comprise is essential, and this should be specified in the valuation report.
Alternative approach to assessing affordable housing values- Comparable evidence
It is essential to carry out a careful comparison check when doing a DCF based valuation of
affordable housing values. There is usually good market evidence available to experienced
affordable housing valuers on what RPs will pay for all usual tenure types. RPs are not just
taking account of the return on capital. They are looking at their overall business
performance, meeting their policy objectives, and seek to meet tenant demand. As such,
they will in many cases exceed the value that a DCF approach may show as the EUV-SH.
Additional finance may be available through internal subsidy.
Exercise 2 looks at a valuation of social housing to illustrate how internal subsidy can be
applied by RPs, and the relevance of comparable market evidence.
Commercial properties
Valuation of commercial properties depends on the type of property. Office, industrial and
retail developments are often valued on an investment value, where the assessment of rent
and investment yield are the main factors. In valuing on this basis, the valuer will also need
to consider if a rent free period (Often agreed on new lettings to allow the tenant to fit out the
property and as an inducement.) is likely, and include an allowance for purchaser’s costs.
These types of commercial use are generally not financially viable in the present market,
except for prime retail developments, and developments with an owner occupier purchaser,
who may be prepared to pay a premium price for the right property. Medical centres are also
usually viable if developed under the Doctors Rent & Rates scheme.
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Commercial properties which have a specific business focus (ie Leisure) will usually be
valued on a turnover basis, and valuation of these uses is usually done by specialist valuers.
Below Is a simple example of the valuation approach for mixed commercial development of
offices, industrial and retail.
COMMERCIAL PROPERTY DEVELOPMENT VALUE.
Property Type
Size
Office bldg A
2000 m2
Office bldg B
2000 m2
Ind bldg C
1000 m2
Retail
3000 m2
Totals
8000 m2
Yield
Rent free
Gross value
Purchasers Costs
Letting fees (Legal & agency)
Advertising & promotion
Developers sale costs
Net development value
£20,987,470
Rent (£/m2t)
£150 m2
£150 m2
£73 m2
£350 m2
(£
215
7%
12 months
m2t)
£300,000
£300,000
£72,500
£1,050,000
£1,722,500
14.28571
0.93603
£23,033,009
5.75 %
15 %
2%
@
.............................
£1,324,398
£258,375
£34,450
2%
£1,617,223
£428,316
£20,987,470
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Development costs
Obtaining planning permissions and associated matters
Where there is no existing planning permission for the project it is necessary to allow for the
costs of obtaining that permission. Where the development may be contentious allowances
may be made for the potential additional costs, including delays caused by appeals and/or
inquiries, (these include fees and additional holding costs and may extend to creating
models, lobbying, etc.). This heading would not normally include any deferment of the
scheme as a whole due to the contentious nature of the development as such matters would
properly be reflected in the final assessment of the land value.
The impact of legally binding agreements linked with the grant of planning permission has to
be considered. With the introduction of Community Infrastructure Levy (CIL) the obligations
usually are deliverable on-site. The requirements might be for a cash payment, the provision
of community facilities and affordable housing. Also the timing of the payments, or the
fulfilling of the obligations, may be relevant in these cases.
There are various matters relating to statutory and regulatory obligations that may have to be
considered. Such matters, which could incur significant costs, could include:

listed building consents and associated negotiations with English Heritage;

the accommodation of archaeological surveys or digs;

environmental protection during demolition and construction;

obtaining necessary approvals under Building Regulations; and

inspections of residential development related to new-build insurance schemes.
Acquisition costs
These include agents’ fees, legal costs and stamp duty land tax that would be incurred on
the acquisition of the land prior to the commencement of the development. Typically,
assuming a site purchase of over £1m, this cost would be taken as 5.76% of the land value.
Site-related costs
It is necessary to consider the costs to be incurred before the main construction activity can
proceed. These include:
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
the cost of meeting any environmental issues. (Whilst this can relate to any remedial
works it can also reflect important conservation or flood protection requirements.
Such costs have to be provided by an appropriate expert);

there may be an obligation to remove contamination, and the consequential waste
management obligations, and special environmental provisions to abate noise or
control emissions;

there may be ground improvement works needed before the main construction period
begins to make the site safe for development (liaison with a civil and/or structural
engineer may be necessary);

any archaeological investigation costs may be borne before the main contract is let
(the time to undertake such work and its cost needs to be understood);

diversion of essential services and highway works and other off-site infrastructure
costs;

creating the site establishment and the erection of hoardings;

the costs of conforming to appropriate health and safety regulations during the course
of the development; and

there may also be issues surrounding sustainability that may have a direct bearing on
the site (in England this can include the provision of Sustainable Urban Drainage
Schemes (SUDS) and site specific transport plans).
If appropriate, it may be necessary to estimate the costs incurred in securing vacant
possession, acquiring necessary interests in the subject site or adjacent property,
extinguishing easements or removing restrictive covenants, rights of light compensation,
party wall agreements, etc. Realistic allowances have to be made, reflecting that the other
parties expect to share in the development value generated.
The letting out of advertising space on hoardings or the securing of short-term tenancies (for
example, surface car parking) can help to offset finance costs before and during the
development phase.
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Phasing of the development
Larger schemes are likely to be phased over time. Phasing of the infrastructure provision or
distinct elements of a complex development site may be as a result of planning
requirements. For example, that the car parking provision and highways improvements are
complete prior to occupancy, or to maximise cost savings in labour or materials. These are
reflected in the developers’ cash flows when formulating their bids and are likewise be
reflected in any valuation of such property. In such cases it would be appropriate to reflect
the deferment of some of costs, listed in the following paragraphs, to a date when it might be
reasonable to expect them to be incurred. Similarly, not all receipts occur simultaneously.
In many cases where individual buildings or units may be sold, particularly where the
development includes residential properties, the sales may be achieved over a period that
may start before the development is completed and be phased over a long period of time. In
these circumstances the income is to be recognised in the cash-flow at the appropriate time
and the incidence of the relevant costs needs to reflect the actual timing of such payments.
In particular this should reflect the sales “profile”- often including forward sales and an initial
high volume of sales followed by a longer but smaller volume of sales seen monthly.
Building costs
A reasonably accurate estimation of the building costs, at the valuation date- Current day
costs, of the development is a major component in a residual valuation. In other than the
most straightforward schemes it is recommended that the costs be estimated with the
assistance of an appropriately qualified expert. Detailed costings are conventionally based
on the Gross Internal Area (GIA) and are usually recorded on this basis in reference books.
The residual method is very sensitive to variations in the estimated costs and the accuracy
with which costs can be assessed may vary greatly according to the specific site
characteristics or the requirement, or plan, to retain specific structures, any unusual building
specifications and the extent to which a new building has to reflect relevant sustainability
policies.
In assessing build costs key issues to consider are:
1) Is the specification proposed commensurate with the likely sales values? This is
sometimes an imposed requirement- for example in Conservation Areas design
considerations may dictate particular external appearance standards.
2) Is the design the most cost effective way of delivering the development? This is
particularly pertinent in meeting Code for Sustainable Homes (CfSH) requirements.
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The use of reference books, and websites, including the BCIS website, are considered to be
only guides and undue reliance on them can compromise the accuracy of the valuation.
However, for early stage valuation assessment these data sources are helpful. An example
of a BCIS extract is shown below. This is an average cost data base for Cornwall as at Q2
2012 for the building only, and does not include external build costs, infrastructure costs or
any abnormal costs.
This data series is based on cost tenders that generally precede CfSH standards. This will
change as more current cost data is included. However, at the moment, additional costs
need to be allowed for in using this data for any CfSH requirements. DCLG have produced a
helpful guide- Cost of building to the Code for Sustainable Homes Updated cost reviewAugust 2011. An extract of this with helpful indicative additional costs is shown below.
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Contingency
In all cases the inclusion of a contingency allowance to cater for the unexpected is essential.
The quantum which is usually reflected as a percentage of the building contract sum is
dependent upon the nature of the development, the procurement method and the perceived
accuracy of the information obtained.
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Typical ranges for contingency are between 0-5% on new build, with Greenfield sites being
at the lower end. For refurbishment schemes, depending on the nature of the scheme,
contingency levels are likely to be higher- typically at between 5-10% of build costs.
In allowing for contingency costs it is important o check that this has not been double
counted- ie within the QS assessed build cost estimate and as a “stand alone” add-on.
Fees and expenses
The incidence of fees and expenses can vary significantly according to the size and
complexity of the development. The following items may need consideration:

professional consultants to design, cost and project manage the development – The
development team normally includes: an environmental and/or planning consultant,
an architect, a quantity surveyor and a civil and/or structural engineer. Additional
specialist services may be supplied as appropriate by mechanical and electrical
engineers, landscape architects, traffic engineers, acoustic consultants, project
managers and other disciplines, depending on the nature of the development. These
fees are typically between 6-12% of build costs but can be higher;

fees may be incurred in negotiating or conforming to statutory (for example Building
Regulations) or planning agreements;

the costs of conforming to the relevant health and safety regulations during the
course of the development;

legal advice and representation at any stage of the project;

lettings and sales expenses – where the development is not pre-sold, or fully pre-let,
as a single unit this item includes incentives, promotion costs and agents
commissions. The costs of creating a show unit in a residential development may
also be appropriate. For market housing sales and marketing costs are typically
between 3-6% of the sales value;

rent free periods, whether as an incentive or recognising the tenants fitting out period.
These may be reflected by either:
o continuing interest charges on the land and development costs until rent
commencement. This approach is usually favoured by the financing
arrangers; or
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o
taking account of the costs in the valuation of the completed development.
This approach is usually favoured by investors because there is an
assumption that market conditions will not change;

costs related to the raising of development finance (these can include the lender’s
monitoring surveyor’s fees and legal fees); and

in some cases the prospective tenant/purchaser may incur fees on monitoring the
development (these may have to be reflected as an expense where they would
normally be incurred by the developer).
CIL and S106 costs
Nearly all residential developments will be subject to planning policy obligations. These may
be under emerging Community Infrastructure Levy (CIL) or S106 Town & Country Planning
Act 1990 arrangements.
CIL: CIL is charged on the net increase in the gross internal area of development on the site.
Affordable housing is exempt. The levy on the qualifying net increase varies for each local
authority, often with separate rates applied for different use classes.
S106: NPPF explains what the tests are for planning authorities to seek s106 obligations. A
planning obligation must be:
(i)
(ii)
(iii)
necessary to make the development acceptable in planning terms;
directly related to the development; and
fairly and reasonably related in scale and kind to the development.
The use of planning obligations must be governed by the fundamental principle that
planning permission may not be bought or sold. It is therefore not legitimate for
unacceptable development to be permitted because of benefits or inducements offered by a
developer which are not necessary to make the development acceptable in planning terms.
Similarly, planning obligations should never be used purely as a means of securing for
the local community a share in the profits of development, i.e. as a means of securing a
"betterment levy".
Interest or financing costs
Interest is incurred on land and development costs. It is either paid when due or deferred
(rolled up) throughout the projected programme during the pre-contract, contract, and postcontract stages. An allowance is to be made to reflect the opportunity cost of the monies,
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even if the developer is funding the project internally, on the assumption that the completed
fully let and income producing development is to be sold, or long-term finance obtained on its
transfer to the developer’s investment portfolio. This allowance is also included where the
development is to be owner occupied.
It is usual for interest to be treated as a development cost up to the assumed letting date of
the last unit, unless a forward sale agreement dictates otherwise. In the case of residential
developments the sales of individual units may occur at various stages during the
development and appropriate assumptions have to be made regarding cash flow, both
inward and outward. The rate of interest adopted reflects the levels adopted in the market for
the type of scheme involved.
The approximate timings for the pre-construction, principal construction and post
construction periods have to be determined. The valuer is recommended to liaise with the
client, such professionals as might be appointed, or colleagues with relevant experience, to
assess an appropriate, realistic time frame for each of the phases.
Conventionally the chosen interest rate is usually compounded, either quarterly or annually in
line with the current market practice.
In applying interest two approaches are commonly used:

Straight line: This assumes that the preliminary costs are incurred at the valuation
date and the principal development costs are incurred in equal tranches and at
regular and equal intervals throughout the development. The post development costs
are assumed to be incurred at the start of that period.

S-curve: The weighting of the build costs be may be incurred early in a scheme, (for
instance in industrial development), or at a later stage, (for instance hotels and high
value residential development). The purpose of an s-curve is to reflect more
accurately the incidence of the costs in a particular scheme. This approach is
sophisticated and specialised, and, if used without the necessary expertise, is as
likely to produce less accurate values as it is to produce accurate assessments.
Holding costs
The attendant costs (excluding interest) in holding the completed building up to the assumed
date of the final letting or sale, including such items as insurance, security, cleaning and fuel.
A proportion of the service charge on partially let properties may have to be included
together with any potential liability for empty rates.
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Tax relief and grants
In some areas and on some properties special allowances, or grants, may be available to the
developer. These may relate to the cost of remediation of contaminated land (NB Finance
Act 2001, s70- just extended), promotion of job creation, or assistance to ensure that a
scheme proceeds. The availability of such funds needs to be established with the relevant
government office and the possibility of their availability being changed, or withdrawn at short
notice, is to be recognised.
Capital allowances might be available on the cost of plant and equipment and certain
buildings. They are available as an expense of the business being carried on by the property
owner, whether that is as an owner occupier or an investor. They are not available to
developers, unless the property is to be retained as an investment.
The worth of capital allowances is not assessable by way of a formula as they are dependent
on the particular circumstances of the property owner. They are not usually explicitly included
in development appraisals, but their potential availability may be reflected in the price offered
by certain clients.
Developer’s profit
The nature of the development, and the prevailing practice in the market for the sector, helps
to determine the selection of the profit margin, or rate of return, and the percentage to be
adopted varies for each case.
It is usual to assume that the developer seeks either a capital profit expressed as a
percentage of the total development cost (including interest) or of GDV. The former
approach is more common for commercial developments, but profit on GDV is usual on
residential led developments.
There are, however, other criteria that are sometimes adopted. These include:

Initial yield on cost – The net rental return calculated as the initial full annual rental
on completion of letting expressed as a percentage of the total development cost.
This criterion may be significant in establishing whether the developer could service a
long-term mortgage loan, or for evaluating the effect of the development scheme on
the profit and loss account of the company. It is typically used for commercial
property and affordable housing developments;

Discounted Cash Flow (DCF) methods – The income stream is projected with
explicit assumptions about rental growth and discounted back to a net present value
(NPV) using an appropriate discount rate; the scheme is deemed viable if NPV
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exceeds the total development costs. The discount rate includes an allowance (profit
margin) for the management requirements and risk of investing in a development
project rather than an existing fully let property.;

Equated yield (or Internal Rate of Return (IRR)) – A variant of DCF in which the
yield is defined as the discount rate which equates NPV with total development cost.
This approach is particularly appropriate for large, phased schemes, particularly for
an “enabling” developer who provides the infrastructure to allow development plots to
be developed. For further information on the DCF method see the RICS Information
Paper Commercial property valuation methods available from www.rics.org;
The appropriate level of profit to be assumed in the appraisal is dependant on market
requirements, which vary from project to project and from time to time. Evidence may be
deduced (with difficulty) by analysing transactions, but it is better obtained from the valuer’s
knowledge of the market or of developers’ requirements.
Typical profit levels in the current market are 15-20% of GDV on market housing
developments, 6% of build costs on affordable housing (ie in effect, a contractor’s return) and
20% of GDC on commercial developments. These profit levels are sometimes considered
“globally”, and a blended average of 12-17% of GDV might be typical on this basis.
In any event, the appropriate profit to be expected from a particular development may be
influenced by a number of factors which might lead to the departure from the market ‘norm’.
High amongst these is the certainty of the information available to the valuer, and the general
risk profile (for example, whether the interest rate is fixed, whether the scheme is pre-let or
pre-sold) but the scale of development, the amount of financial exposure and the timescale
are also relevant.
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Part 2: Financial viability in planning.
Introduction:
Financial viability has become an increasingly important material consideration in the
planning system. While the fundamental purpose of good planning extends well beyond
financial viability, the capacity to deliver essential development and associated infrastructure
is inextricably linked to the delivery of land and viable development.
The Government’s recent National Planning Policy Framework (NPPF) emphasises
deliverability and the provision of competitive returns to willing land owners and developers
to enable sustainable development to come forward. RICS are in the process of releasing a
Guidance Note: “Financial Viability in Planning (Due for release in June 2012). This guidance
note seeks to elaborate on how this can be achieved. It recognises that development for
which there is no plausible business case, on viability grounds or for other reasons, will not
take place.
The purpose of the guidance note is to enable all participants in the planning process to have
a more objective and transparent basis for understanding and evaluating financial viability in
a planning context. Arriving at an outcome which is satisfactory for all should be much easier
where there is an agreed framework and basis for evaluation. It is acknowledged that the
market is constantly moving, however the principles set out in the guidance should be
applicable in all states of the economy and property sector.
The guidance note:

defines financial viability for planning purposes;

separates the key functions of development, being land delivery and viable
development (in accordance with the NPPF).

It highlights the residual appraisal methodology;

defines Site Value for both scheme-specific and area-wide testing in a market rather
than hypothetical context;

indicates what to include in viability assessments;

defines terminology and suggested protocols;
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
and explains the uses of financial viability assessments in planning.
Principles:
The guidance note provides all those involved in financial viability in planning and related
matters with a definitive and objective methodology framework and set of principles that can
be applied mainly to development management. The principles are however applicable to the
plan making and CIL (area-wide) viability testing.
The most common uses for financial viability assessments are for development management
(including affordable housing, enabling development, land use, Section 106 Agreement
planning obligations) and plan making (policy and CIL viability testing). The guidance note
has a particular focus on development management (scheme specific assessments),
although the principles set out are equally applicable to plan making and CIL (area-wide)
viability testing.
Financial viability for planning purposes is defined by this guidance as follows:
An objective financial viability test of the ability of a development project to meet its costs
including the cost of planning obligations, while ensuring an appropriate Site Value for the
landowner and a market risk adjusted return to the developer in delivering that project.
(Where viability is being used to test and inform planning policy it will be necessary to
substitute “a development project” into the wider context)
In the context of achieving sustainable development the Draft National Planning Policy
Framework refers to ensuring viability and deliverability at sections 173-177.
…. To ensure viability, the costs of any requirement likely to be applied to development,
such as requirements for affordable housing, standards, infrastructure contributions or
other requirements should, when taking into account of the normal cost of development
and mitigation, provide competitive returns to a willing land owner and willing developer
to enable the development to be deliverable
The guidance note separates the two key components of development: land delivery and
viable development. This is in accordance with the NPPF. Fundability is also an intrinsic
element of both. The residual appraisal methodology for financial viability testing is
highlighted where either the level of return or residual Site Value can be an input and the
consequential output (either a residual Site Value or return respectively) can be compared to
a benchmark to assess the impact of planning obligations or policy implications on viability.
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The guidance note does not recommend any particular financial model (bespoke or
otherwise) or provide indications as to inputs or outputs commonly used. It is up to the
practitioner in each case to adopt and justify as appropriate.
Site Value, either as an input into a scheme-specific appraisal or as a benchmark, is defined
in the guidance note as follows:
Site Value should equate to the market value (1) 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.
(1): The estimated amount for which an asset or liability should exchange on the valuation
date between a willing buyer and a willing seller in an arm’s-length transaction after properly
marketing and where the parties had each acted knowledgeably, prudently and without
compulsion.
When undertaking Local Plan or CIL (area-wide) viability testing, a second assumption needs
to be applied to the Site Value definition:
The Site Value (as defined above) may need to be further adjusted to reflect the
emerging policy/CIL charging level. The level of the adjustment assumes that site
delivery would not be prejudiced. Where an adjustment is made, the practitioner should
set out their professional opinion underlying the assumptions adopted. These include, as
a minimum, comments on the state of the market and delivery targets as at the date of
assessment.
In undertaking scheme-specific viability assessments, the nature of the applicant
should normally be disregarded, as should benefits or disbenefits that are unique to
the applicant. The aim should be to reflect industry benchmarks in both development
management and plan making viability testing.
Viability assessments will usually be dated when an application is submitted, or when a CIL
charging schedule or local plan is published in draft; exceptions to this may be preapplication submissions and appeals. Viability assessments may occasionally need to be
updated due to market movements during the planning process.
The guidance note highlights where re-appraisals, i.e. viability reviews prior to scheme or
phase implementation interpretation, or projection (growth) models may be appropriate as an
alternative to current day methodologies. It is assumed that for CIL charging schedules and
local plan testing this will be undertaken on a current day basis, subject to suitable
margins/buffers.
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It is strongly recommended that financial appraisals are sensitivity tested as a minimum, and
with more complex schemes further scenario/simulation analysis should also be undertaken.
This is to ensure that a sound judgment can be formulated on viability.
The guidance note sets out what should usually be included in viability assessments,
common terminology and definitions, together with additional technical guidance for
practitioners. Confidentiality protocols and suggested non-binding mediation/arbitration
mechanisms for resolving disputes are set out in the guidance note.
The fundamental issue in considering viability assessments in a town planning context is
whether an otherwise viable development is made unviable by the extent of planning
obligations or other requirements. This is illustrated below in terms of comparative
development viability.
Information required in support of a viability appraisal:
Summarised at Appendix 1 is a list of information that should be included with a viability
appraisal.
Planning appeal decisions:
Planning appeals decisions have, prior to the release of the RICS GN been the main
“authority” for how viability should be assessed. They are still important in showing how
inspectors, Secretary of State and the Courts have considered the issues, but it needs to be
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recognised that these decisions were made in the absence of an authoritative guidance.
NPPF and the RICS GN are now likely to be considered the best guide. However, attached
at Appendix 2 is a schedule of important planning appeal decisions which can support these
guides. The lead decisions are considered to be:
•
•
•
•
•
Flambard Way: Methodology & Expert Witness
Flemingate, Beverley: Phased dev assessed as they come forward
Lydney B: Long term developments- Reasonable market conditions
Jericho Canalside: Special circumstances
Church/ Glebe Farm, Cambs: Current land value not historic purchase price.
Benchmark:
For a development to be financially viable, any uplift from current use value to residual land
value that arises when planning permission is granted should be able to meet the cost of
planning obligations while ensuring an appropriate Site Value for the landowner and a market
risk adjusted return to the developer in delivering that project (the NPPF refers to this as
‘competitive returns’ respectively). The return to the landowner will be in the form of a land
value in excess of current use value but it would be inappropriate to assume an uplift based
on set percentages as detailed above and in Appendix E, given the heterogeneity of
individual development sites. The land value will be based on market value, which will be
risk-adjusted, so it will normally be less than current market prices for development land for
which planning permission has been secured and planning obligation requirements are
known. The assessment of market value in these circumstances is not straightforward, but it
will be, by definition, at a level at which a landowner would be willing to sell which is
recognised by the NPPF.
Sale prices of comparable development sites may provide an indication of the land value that
a landowner might expect, but it is important to note that, depending on the planning status
of the land, the market price will include risk-adjusted expectations of the nature of the
permission and associated planning obligations. If these market prices are used in the
negotiation of planning obligations then account should be taken of any expectation of
planning obligations that is embedded in the market price, or valuation in the absence of a
price. In many cases, relevant and up-to-date comparable evidence may not be available, or
the heterogeneity of development sites requires an approach not based on direct
comparison. The importance, however, of comparable evidence cannot be over-emphasised,
even if the supporting evidence is very limited, as evidenced in court and land tribunal
decisions.
This guidance has sought to reflect more appropriately the workings of the market. With a
definition of viability established it has been considered appropriate to look at terms the
industry is familiar with, rather than invent new ones. Accordingly, the guidance adopts the
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well understood definition of market value as the appropriate basis to assess Site Value,
subject to a number of assumption(s) as set out above.
It has become very common for practitioners to look at alternative use value (AUV) as a land
value benchmark. This will come with its own set of planning obligations and requirements.
Reviewing alternative uses is very much part of the process of assessing the market value of
land and it is not unusual to considera range of scenarios for certain properties. Where an
alternative use can be readily identified as generating a higher value, the value for this
alternative use would be the market value. Again, comparable evidence mayprovide
information to assist in arriving at an AUV. The points raised in 3.15 would again apply.
Accordingly, in assessing the market value of the land there may well be a range of possible
market values for different uses, which could be applicable to the land and buildings, from
current use through to a number of alternative use options, each having its own planning
obligation requirements. These will be used to derive the ‘market value with assumption’ (the
option with highest value being the Site Value) for input into a viability assessment.
Actual purchase price
Site purchase price may or may not be material in arriving at a Site Value for the assessment
of financial viability. In some circumstances the use of actual purchase price should be
treated as a special case. The following points should be considered.

A viability appraisal is taken at a point in time, taking account of costs and values at
that date. A site may be purchased some time before a viability assessment takes
place and circumstances might change. This is part of the developer’s risk. Site
Values can go up or down between the date of purchase and a viability assessment
taking place; in a rising market developers benefit, in a falling market they may lose
out.

A developer may make unreasonable/over-optimistic assumptions regarding the type
and density of development or the extent of planning obligations, which means that it
has overpaid for the site.

Where plots have been acquired to form the site of the proposed development,
without the benefit of a compulsory purchase order, this should be reflected either in
the level of Site Value incorporated in the appraisal or in the development return. In
some instances, site assembly may result in synergistic value arising.

The market value of the site should always be reviewed at the date of assessment
and compared with the purchase price and associated holding costs and the specific
circumstances in each case.
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It is for the practitioner to consider the relevance or otherwise of the actual purchase price,
and whether any weight should be attached to it, having regard to the date of assessment
and the Site Value definition set out in this guidance.
Holding costs
The site will be valued at the date of assessment. Holding costs attributable to the purchase
of the site should, therefore, not normally be allowed, as the Site Value will be updated. In
phased schemes where land is valued at the beginning of the development and land is
drawn down for each phase, it may be appropriate to apply holding costs. Also, where plots
of land have been assembled and subject to assessment it may also be appropriate to
include related holding costs. Where holding costs are applicable they should be offset by
any income received from the property.
Other relevant costs subsequent to purchase, including professional fees and other costs
incurred in bringing the application forward, and holding the site including remediation
measures, should be reflected in the development appraisal as appropriate and reasonable.
Third party interests, vacant possession and relocation costs
Often, in the case of development and site assembly, various interests need to be acquired
or negotiated in order to be able to implement a project. These may include: buying in leases
of existing occupiers or paying compensation; negotiating rights of light claims and
payments; party wall agreements, oversailing rights, ransom strips/rights, agreeing
arrangements with utility companies; temporary/facilitating works, etc. These are all relevant
development costs that should be taken into account in viability assessments. For example it
is appropriate to include rights of light payments as it is a real cost to the developer in terms
of compensation for loss of rights of light to neighbouring properties. This is often not
reflected in Site Value given the different views on how a site can be developed.
Re-appraisals (viability reviews)
The re-appraisal approach, which may be more applicable to certain schemes, allows for
planning applications to be determined but leaving, for example, the level of affordable
housing to be fixed prior to implementation of the scheme. Such re-appraisals are generally
suited to phased schemes over the longer term rather than a single phase scheme to be
implemented immediately, which requires certainty. Where long life planning permissions are
granted (5 years plus) reappraisals may also be appropriate. As such reappraisal
mechanisms should only be considered in exceptional cases. These appraisals would
usually be undertaken during the reserved matters application stage. Careful consideration
would need to be given as to how this is set out in a section 106 agreement, although it will
be important to the LPA and applicant to express a range for the assessment, i.e. for the
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applicant to state the level of obligation above which they would not be expected to exceed
and for the LPA to state the level of obligation below which the development will be
unacceptable, regardless of the benefits that arise from it. The methodology may include, for
example, specifying: the process involved, the basis of model, inputs, basis of return, and
Site Value. It is stressed that the re-appraisal should always be undertaken prior to the
implementation of a scheme or phase in order to fully account at the time for the risk the
developer is undertaking, and, therefore, the appropriate return. So-called ‘overage’
arrangements (post-development appraisals) are not considered appropriate, as
development risk at the time of implementation cannot be accounted in respect of the
inevitable uncertainty of undertaking a development or individual phase.
It is important to ensure that the drafting of re-appraisal provisions do not result in the earlier
phases becoming uncertain as to the quantum of development to be provided on site. This
would have the unfortunate effect of stifling development. Each phase requires sufficient
certainty to be able to provide the required returns and secure development funding.
Validity of projection models for capturing future market growth
An alternative approach to the re-appraisal approach (and current day appraisals) is the use
of projection models. In more volatile market conditions, many planning applications may not
be viable for the schemes proposed using present-day values and costs. This reflects a
variety of factors that would include the relationship of likely end values to the costs of
building the scheme. Inevitably, when such schemes go forward for discussion with the LPA,
applicants may look at growth models (see Appendix B) and the likelihood of the proposed
development becoming viable over the short to medium term, with the acceptance that it may
not be currently viable. This is normally more relevant to large schemes to be built over the
medium to longer term than for short term projects.
Current day methodologies, for large schemes of a medium to longer term build out duration
at times, may give the LPA cause for concern as the case is made that the site is not
currently viable. As a result they may not achieve the desired outturn in terms of planning
obligations, etc. The principle and application of projection models is for sites that are nonviable today but where the likelihood is that development would occur at some future date in
the life of a planning permission, or where the development is likely to be over a sufficiently
long period of time during which the market conditions may vary.
It is important to distinguish in cases where projection modelling is used between market
value growth and site regenerative growth when preparing appraisals. Larger schemes may
be subject to intrinsic/internal value growth as a result of development, achieving a critical
mass that may or may not be reflected in the broader market.
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Projection models are valid in terms of assessing the viability of the site. Advisers for both
applicant and local authority should put themselves in the position of looking at the potential
of the site in the future and assess the likely obligations and commitments that a particular
site can make based on those forecasts, rather than on current-day assessments. Such an
approach might enable the LPA to achieve a number of its objectives by adopting the
‘looking forward’ approach, and for both the LPA and applicant to achieve certainty over the
level of planning obligations attached to the planning permission.
Definitions:
Attached at Appendix 3 is a glossary of terms prepared by RICS and widely used by valuers
in assessing development viability appraisals.
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Appendix 1
Indicative outline of what to include in a viability assessment
Proposed scheme details


Floor areas:
o commercial: gross internal area (GIA) and net internal area (NIA)
o residential: GIA and NSA
Residential unit numbers and habitable rooms including the split between private and
affordable tenures
Gross development value (GDV)

Any existing income that will continue to be received over the development period

Anticipated residential sales values and ground rents (and supporting evidence
including deductions for incentives)




Anticipated rental values and supporting evidence
Yields for the commercial elements of the scheme and supporting evidence
Details of likely incentives, rent-free periods, voids
Anticipated sales rates (per month)


Anticipated grant funding for affordable housing
Anticipated value of affordable units (with supporting evidence/explanation of how
these have been valued and assumptions)

Deductions from commercial GDV to reach NDC (Stamp Duty Land Tax (SDLT),
agents, legal + VAT).
Costs


Expected build cost (a full QS cost report also showing how costs have been
estimated)
Demolition costs

Historic costs (as reasonable and appropriate)



Site preparation costs
Vacant possession costs
Planning costs

Construction timescales, programme and phasing



Any anticipated abnormal costs
Rights of light payments / party walls / oversailing rights
Details of expected finance rates

Professional fees, including:
o Architect
o Planning consultant
o quantity surveyor
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
o structural engineer
o mechanical/electrical engineer
o project manager
o letting agent fee
o letting legal fee
Site Value

Other costs
Additional details for future phases

Expected sales growth

Expected rental growth


Expected cost inflation
Credit rate
Development programme
 Pre-build
 Construction period
 Marketing period
Viability cashflow


Income / value / capital receipt
Costs

Phasing (where appropriate)
Benchmark viability proxies

Profit on cost



Profit on value
Development yield
Internal rate of return (IRR)
Planning application details

Plans/sections/elevations (as relevant)

Design and access statement
Sensitivity Analysis



Two way sensitivity analysis
Scenario analysis
Simulation analysis
Accompanying Report (basic outline)

Executive summary
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

Contents outline
Introduction and background


Description of site location
Planning policy context

Description of scheme


Market information summary
Build cost and programme


Methodology and approach
Outputs and results


Sensitivity analysis
Concluding Statement
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Appendix 2
1. Planning Appeal & Public Inquiry decisions
Appeal
date
Appeal
no
case Address
Application
Issue
Decision
Remarks
07/06/05 APP/G2625/A/
04/1154768
St
Anne’s AH
viability: Purchase
price EUV rejected as being inappropriate Lead case on requirement for
Wharf, Norwich Mixed
use reflecting s106 & in this case. Purchase price should land value to reflect known
dev.
437 AH obligations
reflect known obligations.
policy obligations.
dwlgs
13/12/05 APP/E5900/A/
04/1168750
10-20 Dock St, AH
viability: Suitability of 3 Toolkit considered suitable as an This decision is unlikely now to
London E1
Mixed
use Dragons Toolkit
appraisal toolkit without cross be upheld in view of the
dev. 95 dwlgs.
checking other toolkits.
number of criticisms of the
toolkit.
26/10/06 APP/Y3615/A/
06/2016787
Hayward
AH
viability:
depot, Dorking Appropriate
Rd, Chilworth
value
at
purchase
Applicant
did Accepted developer
viability based on more substantiated.
purchase price,
including
EUV.
LA
evidence
weak- no comps.
12/12/07 APP/P0119/A/
07/20508675
Southmead Rd Sheltered
& Gloucester housing.
Rd, Filton
Commuted
sum viability.
Methodology for Assessed based on perceived LA argument that land value
assessing
market evidence of land values.
evidence reflected obligation
commuted sum.
for AH provision and so should
be inflated to allow 100%
market housing value was
rejected.
23/04/08 APP/U5360/A/
07/2059530
Lesney factory, Mixed
Homerton Rd, with
London E9
dwlgs.
01/08/08 APP/R3650/A/
08/2063055
Flambard Way, Mixed
Godalming
commercial
dev Purchase price.
222
approach- High EUV affected decision,
but no comment on whether
sale
value
disregarded
planning
requirements.
Contrasts St Annes Wharf
Norwich decision.
Too much paid for land knowing Important decision: Confirms
planning obligations.
that purchase price can be
disregarded if too high a price
paid.
decision:
Current viability- Inspector allowed, SoS dismissed. Important
future
growth SoS confirmed approach of present Confirmed
current
values/
considered
for
costs as being appropriate.
Development Valuation Training
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and res dev
viability.
54 dwlg res AH
viability:
dev with canal Relevance
of
facilities.
purchase price in
assessment.
market values
Question mark about whether
an out turn approach is
suitable.
Price paid 9 months before appeal
taken in to account in assessing
affordability (Therefore considered
sufficiently recent for comparison
approach. Earlier appeal (2005)
concluded lower AH provision was
reasonable- taken in to account.
Widely quoted: Sold by
tender, and other bidders close
to purchase price. Appeal
dismissed so no judicial review
possible. DVS expert for OCC.
Superceded by Clay/ Glebe
Farm & Gun Wharf, Bow
cases.
12/08/08 APP/G3110/A/
08/2070447
Jericho
Canalside,
Oxford
19/08/08 APP/P0119/A/
08/2069226
67-73 Bath Rd, Sheltered
Longwell
housing.
Green, Bristol
Commuted
sum viability.
27/08/08 APP/F5540/A/
08/2073381
1 Ivy Lane, AH
viability: Emerging AH & Because of incorrect advice given, Purchaser misled by LA on
Hounslow
Res dev 18 S106
policy impact of this should be taken in to policy requirement, resulting in
flats
affecting viability. account in assessing viability.
over-payment for site. Limited
impact because of unusual
circumstances.
11/02/09 APP/C3810/A/
08/2086867
Fitzalan Rd, & Sheltered
Church
St, housing.
Littlehampton
Commuted
sum viability.
Date of viability Taken as June/ Aug 2008- after
review.
original planning application and
purchase date, but not at date of
appeal.
Neither party updated appraisal
to appeal date, and not
commented
by
inspector.
Limited application.
26/02/09 APP/G1580/A/
08/2084559
Maunsell
New
House, 154 - residential
160 Croydon development
Road,
Beckenham
Uplift in site value Inspector accepted the principle of
above MV in uplift in MV over existing (Offices)
existing use.
use to incentivise land owner to
bring site forward.
Important decision: Inspector
considered 20% uplift on a site
value of ~£2m was reasonable
in this case.
02/03/09 APP/T5720/A/
189 Streatham Mixed
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Purchase price v Explicitly approves methodology of Toolkit used was HC/ Grimley
current
values/ current sales, costs and land values model. Purchase price not
costs
using appraisal toolkit.
considered.
deve Date
of Taken as being current use value, Decision considers need to be
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Cornwall County Council
08/2087666
Rd, Mitcham
with 14 dwlgs.
assessment
using values at date of appeal.
pragmatic in current depressed
market conditions to get
development underway.
Important
decision:
SoS
review. Multi-phase scheme.
Viability on schemes in the
future should be addressed at
that
time
when
market
conditions prevailing may differ
to the current market.
30/04/09 APP/E2001/V/
08/1203215
Land
N
of Multi
phase Viability approach Assessment of viability on multiFlemingate,
mixed
on
multi-phase phases should be made as they
Beverley
development
schemes
come forward for detailed planning,
not at the initial overall outline
stage.
19/07/09 APP/J4423/E/0
9/2096569
Norton Church New
res New LA SPD to Inspector accepted that new SPD SPD
related
Hall, Sheffield
development
be taken in to adopted after planning application requirement.
account
at should be taken in to account in
appeal.
appeal consideration.
05/08/09 APP/K5600/A/
09/2097458
41-43 Beaufort Conversion of Build costs- day Build costs specifically identified as Appeal
allowed.
Inspector
Gardens,
hotel to 9 flats 1.
being assessed at day 1, not mid reluctant to agree whose
London SW1
point. Insp preferred Savills house evidence he preferred.
sales evidence as based on Estate
Agency knowledge
06/10/09 APP/P165/A/0
8/2082407
Land at Lydney Large
Bypass,
strategic
Lydney
site
11/12/09 High
hearing
Court Wakefield DC
25/02/10 APP/Q0505/A/
09/2103599
Whether an outdev turn approach is
the
correct
method
LDP viability Viability approach
assessment
Clay Farm & Multi
phase Viability
Glebe
Farm, strategic res methodology.
Page 50
Confirms that in multi-phase
strategic sites developable over
many years an out-turn approach is
reasonable
to
AH
Important
decision:
Specifically
contrasted
approach at Flambards Way,
Godalming. Supported by SoS,
Ct of Appeal & High Court.
Barratts challenged report as being Case dismissed. The policy
too optimistic based on current adopted did pay due regard to
viability, showing 30% AH viability national policy
over the cycle of LDP period.
Land price paid is irrelevant, as is Important decision: dealing
developer’s accountancy method. with viability approach, use of
Development Valuation Training
Cornwall County Council
Shelford
Rd, dev site
Cambridge
Use of price paid Risk reflects market uncertainty and
for land.
AH should not be the “flex”. Insp
took account of economic cycle
argument even though this was not
raised by either expert.
land price paid etc. SoS
decision- differed from PINS re
use of Supplementary Planning
Obligation to deal with delivery
mechanics for AH. Considers
delivery a short term problem
and can be ignored in this
case.
26/05/10 APP/N1215/A/
09/2117195
Former Royal Viability
Hotel,
Newbury,
Gillingham
Methodology
LA argued discounts of defaults
because of “in house” services
available to developer. Arguments
rejected by insp, who preferred
HCA EAT & BCIS data.
LA sought discount of build
cost, prof fees, profit & interest
cost. Insp preferred industry
“standards” in the absence of
good alternative evidence.
10/03/10 APP/C1950/A/
09/2113786
Roche
Viability
buildings,
Broadwater
Road, Welwyn
Garden City
Land
valuation Appellant argued land value as
date & escalator purchase price to ensure delivery,
mechanism
and proposed escalator mechanism
for commuted sum in lieu of
AH/s106. Insp rejected both- LA
should not carry the risk.
Insp reiterated the existing land
value is correct approach.
Developer carries risk not
LA.
30/06/10 APP/G1630/A/
09/2097181
West
of Multi
phase
Innsworth Lane strategic res
& North of A40, dev site
Innsworth,
Gloucester
Viability reviews
deferred if AH
amount
is
inadequate.
Case supports the Beverley,
lydney and HCA documents
requirement to revisit viability in
long phased schemes
03/11/10 APP/E5900/A/
10/2127467
Gun
Wharf, Viability
241 Old Ford
Road, London
Methodology
site value
03/12/10 APP/G2713/A/
1
Market evidence P
Leeming Viability
Page 51
Similar arguments as Lydney. Insp
did not appear to understand IRR
approach
on
multi-phase
developments
for Appellant sought to adopt write Insp confirmed Clay Farm &
down from 2007 purchase price. LA Welwyn Garden City appeals
argued policy compliant RLV basis
approach was correct- RLV.
Regard only to purchase price
in contextual information.
Lee
(DVS)
housing
sales Appeal
dismissed.
Worth
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Cornwall County Council
10/2127485
Lane, Leeming
Bar,
Northallerton
& profit levels
12/04/11 APP/V5570/E/
10/2127802
Carlton
Enabling
Cinema, 161 development.
Essex, London
Approach
assessing
viability
28/02/12 APP/C2741/A/
11/2160459
Water
York
11/05/12 APP/V5570/A/
11/2162902
Bunhill
Row, Viability
Islington
way, Viability
Page 52
evidence felt to be more robust than
that of Savills. Profit level at 15%
based
on
market
evidence
accepted. PL used a % of GDV for
interest
noting the preference of our
evidence over Savills- in
contrast to appeal inspector at
41-45 Beaufort Gardens
to Requirement for the appellant to
demonstrate:
1. A business case for works.
2. That alternative options had been
fully considered.
3. That the works proposed should
not aim to recover original purchase
price, but be sufficient to pay for the
restoration works.
4. Use of the building will ensure
future sustainability of the building.
5. That the development would be
deliverable.
Appeal dismissed. Appellant’s
expert adopted a future growth
approach- No comment made
about this. Main concern was
that the enabling works would
not be done ‘til after the
funding development had been
completed- Lack of certainty
and risk of enabling works
being done because of this.
BenchmarkInspector preferred the detailed
adoption
of build cost approach of the appellant.
purchase price
Accepted appellant overall profit
level of 20% of GDC, which
reflected risk. Applicant level of 15%
of GDV.
Appeal dismissed. Considered
property had originally been
purchased as an investment.
Fall in value reflected in profit
level. Benchmark taken as MVexisting use, not historic
purchase price.
BenchmarkInspector considered purchase James Brown/ Savills usual
adoption
of price
wrong
as
benchmark- argument used by appellant
purchase price
Developer risk.
and not considered correct
Appendix 3
Glossary of terms
Affordable housing
All housing provided at below market value or market rental value. May include various forms
of tenure, including: social rent, affordable rent, target rent, intermediate housing, shared
equity, etc.
Acquisition/Disposal Costs
Cost associated with the acquisition or disposal of property usually including legal, agent and
stamp duty land (SDLT) costs.
Alternative Use Value
Where an alternative use can be readily identified as generating a higher value for a site, the
value for this alternative use would be the market value with an assumption as defined for
Site Value for financial viability assessments for scheme specific planning applications
Benchmark
A comparator for either the outputs or inputs into the appraisal, i.e. Site Value or developer’s
return, etc.
Building Cost Information Services (BCIS)
A subscriber service set up in 1962 under the aegis of RICS to facilitate the exchange of
detailed building construction costs. The service is available from an independent body to
those of any discipline who are willing and able to contribute and receive data on a reciprocal
basis.
Building costs indices
A series of indices published by the Building Cost Information Service (BCIS) relating to the
cost of building work. They are based on cost models of ‘average building’, which measure
the changes in costs of labour, materials and plant which collectively cover the basic cost to
a contractor.
Capital value
The value of a building or land as distinct from its rental value.
Cash flow
The movement of money by way of income, expenditure and capital receipts and payments
during the course of the development.
CIL
Community Infrastructure Levy
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Clawback
See overage
Comparable evidence
A property used in the valuation process as evidence to support the valuation of another
property. It may be necessary to analyse and adjust in order to put it in a suitable form to be
used as evidence for comparison purposes.
Competitive Returns
A term used in para 173 of the NPPF and applied to “a willing land owner and willing
developer to enable development to be deliverable”. A “Competitive Return” in the context of
property transactions is usually acknowledged as the highest overall offer accepted for land
or premises, at that time, and should be construed in accordance with the definitions of Site
Value in this guidance. A “Competitive Return” in the context of a developer bringing forward
development should be in accordance with a “market risk adjusted return”, as defined in this
guidance, to the developer in viably delivering a project.
Contingent liabilities
See Re-appraisal
Counterfactual scenario
A scheme that is not that which is being proposed by a developer, but reflects alternative
interpretation of planning policy, which can then be financially appraised and compared with
the proposed scheme.
Current use value
Market value for the continuing existing use of the site or property assuming all hope value is
excluded including value arising from any planning permission or alternative use. This also
differs from the Existing Use Value. It is hypothetical in a market context as property
generally does not transact on a CUV basis.
Current Use Value (plus a premium)
Used by some practitioners for establishing Site Value. The basis is as with CUV but then
adds a premium (usually 10% to 40%) as an incentive for the landowner to sell. It however
does not reflect the market and is both arbitrary and inconsistent in practical application.
Deferred payments
See overage
Depreciation
The rate of decline in rental / capital value of an asset over time relative to the asset valued
as new with a contemporary specification. See also obsolescence
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Discounted cash flow (DCF)
Discounted cash flow. See internal rate of return or net present value.
Development appraisal
A financial appraisal of a development to calculate either:
 the residual Site Value (deducting all development costs, including an allowance for
the developer’s profit/return, from the scheme’s total capital value); or

the residual development profit/return (deducting all development costs, including the
Site Value/cost, from the scheme’s total capital value).
Developer’s profit
The amount by which, on completion or partial completion of a development, the estimated
value or the price realised on sale of a developer's interest exceeds (or is less than) the total
outlay, including such figure for the land as is considered appropriate in the circumstances
(including accrued interest).
Developer’s return for risk and profit
This return is commonly expressed as profit on cost; profit on value; development yield;
and internal rate of return (see individual definitions). There are other, less used, proxies
which may be referred to in certain circumstances. Each is appropriate as a method of
interpreting viability. In an appraisal the return incorporates the amount that is allowed to
cover both:
 an estimate of the sum needed to reflect the risk element between the appraisal date
and the completion of the development programme; and

an amount to meet the developer's requirement for profit on the venture, including an
allowance for overheads.
Development risk
The risk associated with the implementation and completion of a development including postconstruction letting and sales.
Development yield
Rental income divided by actual cost incurred in realising the development.
Discount rate
The rate, or rates, of interest selected when calculating the present value of some future cost
or benefit.
Estimated rental value (ERV)
An estimate of the likely rental income to be generated from the scheme when fully let.
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Existing use value
The estimated amount for which an asset or liability should exchange on the valuation date
between a willing buyer and a willing seller in an arm’s-length transaction after properly
marketing and where the parties had each acted knowledgeably, prudently and without
compulsion assuming that the buyer is granted vacant possession of all parts of the property
required by the business and disregarding potential alternative uses and any other
characteristics of the property that would cause market value to differ from that needed to
replace the remaining service potential at least cost. It is an accounting definition of value for
business use and as such, hypothetical in a market context as property generally does not
transact on an EUV basis.
Existing use value (plus a premium)
Used by some practitioners for establishing Site Value. The basis is as with EUV but then
adds a premium (usually 10% to 40%) as an incentive for the landowner to sell. It however
does not reflect the market and is both arbitrary and inconsistent in practical application.
Gross development value (GDV)
The aggregate market value of the proposed development, assessed on the special
assumption that the development is complete as at the date of valuation in the market
conditions prevailing at that date.
Gross development cost (GDC)
The cost of undertaking a development, which normally includes the following:
• acquisition costs;
• site-specific related costs;
• build costs;
• fees and expenses;
• interest or financing costs;
• holding costs during the development period.
A full list of typical costs is contained in VIP 12. See also Appendices C and E.
Gross external area (GEA)
The aggregate superficial area of a building, taking each floor into account. As per the RICS
Code of Measuring Practice this includes: external walls and projections, columns, piers,
chimney breasts, stairwells and lift wells, tank and plant rooms, fuel stores whether or not
above main roof level (except for Scotland, where for rating purposes these are excluded);
and open-side covered areas and enclosed car parking areas;
but excludes: open balconies; open fire escapes, open covered ways or minor canopies;
open vehicle parking areas, terraces, etc.; domestic outside WCs and coalhouses.
In calculating GEA, party walls are measured to their centre line, while areas with a
headroom of less than 1.5m are excluded and quoted separately.
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Gross internal area (GIA)
Measurement of a building on the same basis as gross external area, but excluding external
wall thicknesses.
Holding cost
The cost involved in owning a site or property, which may include such items as interest on
finance used to acquire the asset, maintenance costs, empty rates, etc.
Hope value
Any element of open market value of a property in excess of the current use value, reflecting
the prospect of some more valuable future use or development. It takes account of the
uncertain nature or extent of such prospects, including the time which would elapse before
one could expect planning permission to be obtained or any relevant constraints overcome,
so as to enable the more valuable use to be implemented.
Inflation
As measured by the consumer or retail price index or property related index, including BCIS
index.
Interest rate
The rate of finance applied in a development appraisal. As most appraisals assume 100 per
cent financing, it is usual for the interest rate to reflect the total cost of finance and funding of
a project, i.e. the combination of both equity and debt in applying a single rate.
Internal rate of return (IRR)
The rate of interest (expressed as a percentage) at which all future cash flows (positive and
negative) must be discounted in order that the net present value of those cash flows,
including the initial investment, should be equal to zero. It is found by trial and error by
applying present values at different rates of interest in turn to the net cash flow. It is
sometimes called the discounted cash flow rate of return. In development financial viability
appraisals the IRR is commonly, although not always, calculated on a without-finance basis
as a total project IRR.
Local planning authority (LPA)
The determining authority of a given development project.
Market risk
The uncertainty resulting from the movement of the property market, irrespective of the
property being developed.
Market risk adjusted return
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The discount rate as varied so as to reflect the perceived risk of the development in the
market.
Market value (MV)
The estimated amount for which an asset should exchange on the date of valuation between
a willing buyer and a willing seller in an arm’s length transaction after proper marketing
wherein the parties had each acted knowledgeably, prudently and without compulsion.
Market value growth
The forecast growth of the capital value of the scheme.
NPPF
National Planning Policy Framework produced by the Department of Communities and Local
Government on 27 March 2012
Net development value (NDV)
The GDV less acquisition costs.
Net cash flows
The free cash flows of the scheme after costs and taxes.
Net internal area (NIA)
The usable space within a building measured to the internal finish of structural, external or
party walls, but excluding toilets, lift and plant rooms, stairs and lift wells, common entrance
halls, lobbies and corridors, internal structural walls and columns and car parking areas.
Net present value (NPV)
The sum of the discounted values of a prospective cash flow, where each receipt/payment is
discounted to its present value at a discount rate equal to a target rate of return or cost of
capital. In the case of an investment the formal definition of NPV is net of the initial
investment, but the term is more commonly used colloquially to describe the NPV of the
future cash flows (net income) and terminal value, which figure is compared with the
purchase price in order to reach an invest-or-not decision. In the case of a development the
term is more commonly used colloquially to describe the NPV of the future cash flows (costs
less income, i.e. net income) and terminal (i.e. sale) value, which figure is compared with the
purchase price of the site in order to reach an invest-or-not decision.
Net present value method
A method used in discounted cash flow analysis to find the sum of money representing the
difference between the present value of all inflows and all outflows of cash associated with
the project by discounting each at the criterion rate, e.g. the cost of capital.
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Opportunity cost
The return or benefit of the next best choice foregone by pursuing an alternative action.
Outturn (growth) model
A development appraisal that has been adapted to forecast various inputs, usually both in
respect of values and costs.
Overage (clawback)
A practice referred to as overage, clawback or deferred payments, and employed as a post
development appraisal of the scheme in question.
Oversailing licences
Where a crane, for example, is required to use air space over neighbouring properties.
Party wall costs
The practice is not considered appropriate as it cannot take account of risk, uncertainty and
funding at the point of implementation. If re-appraisals are to take place, the guidance
recommends this is undertaken prior to implementation (see Re-appraisal)
Planning obligation
Provided for under section 106 of the Town and Country Planning Act 1990, usually in
connection with the grant of planning permission for a private development project; a benefit
to the community, either generally or in a particular locality, to offset the impact of
development, e.g. the provision of open space, a transport improvement or affordable
housing. The term is usually applied when a developer agrees to incur some expenditure,
surrender some right or grant some concession which could not be embodied in a valid
planning condition.
Pre-lets and pre-sales
Where a developer of a scheme, usually prior to implementation, has agreed lettings with
occupiers or sales of part of the whole of the development.
Profit on cost
The profit of the scheme expressed as a percentage of cost. This has a direct relationship to
profit on value.
Profit on value
The profit of the scheme expressed as a percentage of the scheme’s value. This has a direct
relationship to profit on cost.
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Property specific risk
The uncertainty attached to the intrinsic development of a site or property in addition to the
general market risk.
Rateable value
The figure upon which the uniform business rate is charged.
Rental value
The income that can be derived under a lease or tenancy for use of land or a building.
Red Book
The RICS Valuation – Professional Standards 2012 (Formerly RICS Valuation Standards).
Re-appraisals
Appraisals undertaken prior to implementation of a development in order to assess viability
before actual development.
Residual appraisals
See development appraisals.
Residual Site Value or residual land value
The amount remaining once the GDC of a scheme is deducted from its GDV and an
appropriate return has been deducted.
Residual valuation
A valuation/appraisal of land using a development appraisal.
Return (on capital)
The ratio of annual net income to capital derived from analysis of a transaction and
expressed as a percentage.
Review mechanisms
See Re-appraisals.
Rights to light
An easement which entitles the owner of the dominant tenement to adequate natural light to
a window from the adjoining land. It is appropriate to include as a development cost,
compensation for loss of rights of light to neighbouring properties in respect of the particular
scheme being appraised.
RSL/RP
Registered social landlord/registered provider.
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Sensitivity analysis
A series of calculations resulting from the residual appraisal involving one or more variables,
i.e. rent, sales values, build costs, which are varied in turn to show the differing results.
Sensitivity simulation
A simulation analysis considers the probability of outcomes given certain variances applied
to key inputs within the financial appraisal through a stochastic process. It can quantify the
robustness of a development in terms of various outputs including risk and return.
Site Value (for financial viability assessments for scheme specific planning
applications)
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.
Site Value (for area wide financial viability assessments)
Site Value (as defined above) may need to be further adjusted to reflect the emerging
policy/CIL charging level. The level of the adjustment assumes that site delivery would not be
prejudiced. Where an adjustment is made, the practitioner should set out their professional
opinion underlying the assumptions adopted. These include, as a minimum, comments on
the state of the market and delivery targets as at the date of assessment. (For first
assumption of Site Value for financial viability assessments for scheme specific planning
applications.)
Social and intermediate housing
As defined by government guidance or in statute.
Speculative developments
Developments which are commenced prior to any agreed sales or lettings.
Standing investments
Properties which are income producing, usually with a tenant in occupation.
Target profit
The level of return considered to be the minimum acceptable.
Tender price indices
A series of indices, published by the Building Cost Information Service (BCIS), relating to the
level of prices likely to be quoted at a given time by contractors tendering for building work,
i.e. it reflects the impact of market conditions on the tenderer's decision whether to bid at a
high, low or average level relative to building costs.
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Threshold land value
A term developed by the Homes and Communities Agency (HCA) being essentially a land
value at or above that which it is assumed a landowner would be prepared to sell. It is not a
recognised valuation definition or approach.
‘Toolkit’ appraisal
A generic term often used when undertaking financial viability testing in planning. Sometimes
applied to financial models that have been developed to try and standardise the exercise
when presenting to local authorities, e.g. the HCA Economic Assessment Toolkit (EAT).
Vacant possession
The attribute of an empty property, which can legally be exclusively occupied and used by
the owner or, on a sale or letting, by the new owner or tenant.
Viability assessments/financial viability
A report including a financial appraisal to establish the profit or loss arising from a proposed
development. It will usually provide an analysis of both the figures inputted and output
results, together with other matters of relevance. An assessment will normally provide a
judgment as to the profitability (or loss) of a development.
Weighted average cost of capital (WACC)
The minimum return a company should earn in respect of an asset by reference to relative
weight of equity and debt within its capital structure.
Yield
As applied to different commercial elements of a scheme, i.e. office, retail, etc. Yield is
usually calculated as a year’s rental income as a percentage of the value of the property.
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