Wakefield Strategic Housing Market
Assessment
Economic Viability Appraisal.
October 2008
DTZ
2 The Embankment
Sovereign Street
Leeds
LS1 4BP
For Further Details Please Contact
Philip Roebuck or Jenny Purple
DTZ
2 The Embankment
Sovereign Street
Leeds
LS1 4BP
Philip.roebuck@dtz.com or jenny.purple@dtz.com
0113 2543000
Contents
Page
EXECUTIVE SUMMARY ............................................................................................................................... 1
1.0
ABOUT THIS STUDY .................................................................................................................. 3
2.0
POLICY CONTEXT..................................................................................................................... 7
3.0
STUDY APPROACH AND ASSUMPTIONS ................................................................................... 13
4.0
ECONOMIC VIABILITY CONSULTATION. .................................................................................... 28
5.0
RESULTS OF THE ECONOMIC VIABILITY MODEL ....................................................................... 30
6.0
AFFORDABLE HOUSING POLICY IN RURAL AREAS. .................................................................. 60
7.0
POLICY IMPLICATIONS ............................................................................................................ 70
Appendices – see separate report.
1 – Internal Rate of Return Analysis
2 – Economic Viability Assumptions
3 – Dwelling Mix Assumptions
4 – House Price Assumptions
5 – Economic Viability Appraisal Results
6 – List of Stakeholder Consultees
th
7 - Presentations from Consultation 8 September 2008
Disclaimer and confidentiality clause
This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional
advice. Whilst facts have been rigorously checked, DTZ Debenham Tie Leung can take no responsibility for any damage or
loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or
part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ.
Executive Summary
DTZ was commissioned by Wakefield Metropolitan District Council (WMDC) to study the development
viability of different affordable housing scenarios across the District. At the time of the commission the
Strategic Housing Market Assessment work had recently been finalised and the affordable housing section
of the core strategy had been presented to the Inspector for consideration. This report forms part of the
evidence base for the affordable housing policy and will be a supplement to that already presented for
consideration.
It was agreed that the most appropriate approach would be to test a number of hypothetical sites typical of
sites coming forward across the District. Sites were characterised as falling within one of the five areas
identified in the Housing Demand Study which were;
1. The North West
2. The South East
3. The Five Towns
4. The City of Wakefield
5. Rural Communities
In order to assess different affordable housing options, a number of key variables were selected and
adjusted in isolation to test the impact different levels of affordable housing provision. The key variables
were; location, value area (high medium and low), density (high, medium and low) and tenure split (70/30,
50/50 and 30/70 social rented/intermediate tenure).
The basis for the study was to appraise a range of hypothetical sites using a model which calculates the
cashflow of the hypothetical schemes and the internal rate of return (IRR), similar to that used by most
house builders/developers. The study focused on new build residential developments, as these are the sites
that will deliver affordable housing through Section 106 agreements.
IRR was used as a measure of the sites profitability. Thus it was assumed that sites resulting in an IRR
lower than 20% for small sites (<50 units) and 23% for larger sites (>50 units) would not be brought forward
by the developer given the margins required and risks involved in development.
In all cases the profitability of a site decreased as levels of affordable housing were increased. Sites in high
value areas tended to have the capacity to deliver the highest levels of affordable housing whilst remaining
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profitable. Sites in low value areas experienced the greatest impact on profitability as quotas of affordable
housing were increased.
Generally, profitability (IRR) increased as the tenure split was adjusted to include a greater proportion of
intermediate tenures. However, in real terms, this differential tended not to be significant enough to increase
the level of affordable housing which could be provided.
At the baseline position of August 2008 it was demonstrated that, across the District, there was little scope
to deliver any affordable housing in the prevailing market conditions and further more that the delivery of any
housing development is potentially unviable and unlikely due to extended build periods, uncertainty in the
financial market and a fall in property values. The impact of the unprecedented market conditions at the
baseline date of valuation mean that if the affordable housing policy were formulated based soley on this
analysis, an affordable housing requirement of 0% would be deliverable. However, over the course of the
Core Strategy and the life of any affordable housing policy it is recommended to expect, having regard to the
cyclical nature of the housing market, that the market conditions will vary significantly. WMDC, need to
ensure that any policy they put in place is flexible enough to deal with these changes in market conditions.
In order to assess appropriate affordable housing percentages to reflect changing market positions, analysis
of different scenarios or market conditions was undertaken to determine at what point and level affordable
housing delivery is viable. Scenarios to reflect the height of the recent market in early 2007 show that 30%
affordable housing could be viably delivered at a 50/50 split between social rented and intermediate tenures.
This is the highest level of affordable housing which has been deemed viable in all the modelling work which
has been undertaken.
This report concludes that, in isolation, site density and tenure split have a limited effect on the level of
affordable housing that was sustainable on the hypothetical sites tested. Land value, on the other hand is a
very significant factor in determining affordable housing viability. Changes in build rates also have a
significant positive impact on the viability of schemes as shortening the timeframes for a development derisks and reduces costs.
The Local Authority’s original target of 30% affordable housing is ambitious in the current market and
certainly in the short to medium term until the market recovers. Without social housing grant to contribute,
affordable housing delivery at these levels will make schemes unviable for standard Section 106 sites.
However with grant and additional revenue in these scenarios these levels may be deliverable. The results
of the modelling work has determined that the percentage of affordable housing requested by the Local
Authority over the coming years will have to be flexible and potentially alter to reflect prevailing market
conditions in order to ensure that the optimum level of affordable housing is delivered across the plan
period. The conclusion of this reports provides ranges and indications of what market conditions would have
to be in place to deliver higher percentages of affordable housing.
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1.0 About this Study
1.1
DTZ was commissioned in August 2008 by Wakefield Metropolitan District Council to examine the
likely impact of a range of potential affordable housing policies on development viability.
1.2
This study has been undertaken following the Wakefield Preliminary Strategic Housing Market
4
Assessment (PSHMA), prepared by arc , commissioned by WMDC and covering the same study
areas as the analysis undertaken in this report.
Study Purpose and Objectives
1.3
A growing proportion of affordable housing is delivered via Section 106 Agreements. It is increasingly
important therefore that local authority housing policy is realistic and credible, taking into account the
local housing market, house prices, supply, demand and need issues. Hence this viability study sits
alongside and is informed by the work of the SHMA, and forms part of the evidence base which
informs the affordable housing target requirement for the district.
1.4
The SHMA does not consider the impact of affordable housing policies on development viability. The
purpose of this economic viability assessment work is therefore to ensure that the proposed policy for
affordable housing is not so onerous that it prevents sites from coming forward and stifles
development of, not only affordable, but also open market housing.
1.5
The specific objectives of the economic viability assessment are to assess the impact on viability of
the following variations on the affordable housing policy:
1. On sites capable of achieving 15 or more units, whether a minimum 20% affordable housing
target should be retained or could this be increased to 30% or some intermediate level?
2. In rural areas on sites capable of achieving 6 units or more, what would be the maximum
proportion of affordable housing that could be achieved on site?
3. What should the tenure split between intermediate and social rented units be in order to
maximise affordable housing delivery and ensure a greater overall proportion of affordable
housing?
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Study Approach
1.6
It has been important for the study to test viability of different site types in different locations, in order
to understand how viability varies with site size, different values of the housing developed and
different locations. It has, therefore, been necessary to develop a typology of the different types of
sites what are likely to come forward for housing development in Wakefield and to test the viability of
these hypothetical sites under a set of different development scenarios.
1.7
The typology of sites to be assessed was developed in conjunction with WMDC and stakeholders to
reflect the authority’s current policies and their experience of the range, type of sites and locations
which they would envisage would come forward through the planning system for the future provision
of housing.
1.8
There is nothing in the typology that has allowed viability to be tested on sites that differ in terms of
site values, site size, location and density. This approach allows different policy options to be tested
in a consistent manner across the range of likely development scenarios. This would not be possible
in the same way had the study focused on actual real life sites where the particular features of those
sites would inevitably have made it difficult to generalise about viability.
1.9
Central to the assessment of the viability of housing development is the concept of residual land
1
value. Residual land value is the value that can be attributed to land, when the total cost of
development, including an allowance for profit, is deducted from the sales values of housing built on
site. If there is a residual land value that is higher than the existing use value then the development
can be deemed viable; if it is below then the development will not be considered viable via the market.
1.10 The majority of developers assess the viability of a prospective development by calculating residual
land value.
Having calculated its residual project value, developers use discounted cash flow
2
3
analysis to calculate the Internal Rate of Return (IRR) for the project (see Appendix 1). The IRR
calculation allows different investment options to be compared on a like for like basis. The higher a
project’s IRR, the more desirable it is to undertake.
1
To read this valuation approach is applied for property with development or redevelopment potential. This
equation is: Completed Development Value less Planning and Construction cost less on cost and finance
costs less Developers Profit = Residual Land Value.
2
A Discounted Cash Flow (DCF) valuation approach is used to value a project using the concept of time
value of money. All estimated future cash flows are discounted by a percentage value usually representing
interest on finance to return the future cash flows to a present value.
3
IRR – rate of interest at which future outflows and inflows of money are discounted to return a 0 net
present value.
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1.11 For the purpose of this study, DTZ have assumed, through their experience of working developers,
that a developer will require a minimum IRR of 20% if they are to proceed with the development of a
small scheme, (less than 50 units); and that the developer will require an IRR of 23% when
developing larger sites (more than 50 units). The high level required for larger sites reflects the higher
risks associated with larger developments. Developments that would yield less than these thresholds
are deemed not to be viable since they do not generate the target rate of return.
1.12 In summary, the key questions of the economic viability assessment are whether the level of
affordable housing and the balance of tenures proposed are viable or, whether a particular level of
affordable housing provision will inhibit development and, by implication, what level of affordable
housing provision can be delivered without subsidy.
Report Structure
1.13 The rest of this report is structured as follows:
Section 2 presents information on the policy context for this study, in terms of national policy on
affordable housing provision, focusing on the assessment of viability; and the current affordable
housing policy of the local authority.
Section 3 sets out in more detail the study approach and the assumptions that underpin the viability
analysis.
Section 4 sets out the consultation which has been undertaken as part of the viability appraisal work.
Section 5 presents the results of the analysis and the viability of delivering affordable housing across
the range of scenarios.
Section 6 draws out the implications of the results of the viability testing exercise and makes
recommendations to the Local Authority for their consideration.
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2.0 Policy Context
2.1
This section provides the context for the subsequent assessment of viability. It first examines national
policy guidance on planning for affordable housing provision and the relevance of viability to policy
making. The section then goes on to consider the current affordable housing policy for Wakefield
District, which will be subject to review following this work and the work undertaken as part of the
SHMA as the authority move towards completion and adoption of the Local Development Framework
process.
National Planning Policy and Affordable Housing Provision
2.2
The key statement of the Government’s policies for planning and affordable housing provision is
Planning Policy Statement 3: Housing (PPS3), published in November 2006. PPS3 defines affordable
housing as follows: ‘Affordable housing includes social rented and intermediate housing, provided to
specified eligible households whose needs are not met by the market. Affordable housing should:
-
Meet the needs of eligible households including availability at a cost low enough for them to
afford, determined with regard to local incomes and house prices.
-
Include provision for the home to remain at an affordable price for the future eligible households
or, if these restrictions are lifted, for the subsidy to be recycled for alternative affordable housing
provision.’
2.3
PPS3 makes it clear that the Government aims to ensure that the planning system ensures that
enough land is identified and brought forward for development of new housing in line with targets
established by government and determined through the Regional Spatial Planning process whilst
recognising that, land values must be high enough to encourage landowners to sell land for housing.
2.4
The Government, therefore, requires local authorities not to impose a burden of planning gain and
affordable housing so great as to depress the land value below that which is sufficient to bring land
forward. This is reflected in PPS3, paragraph 29 which places the requirement on local authorities to
set a target for affordable housing provision to be delivered through Section 106 policies that take into
account the need for development to be viable, once allowance is made for factors such as the
availability of grant funding.
2.5
PPS3 indicates that local authority affordable housing policies need to be developed on the basis of
the robust evidence base. Policy must be deliverable, not merely aspirational. However, although
detailed guidance is available on the assessment of housing need and demand, there is no formal
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guidance on how viability should be tested. PPS3 was prepared before the current slowdown in the
housing market and the government has not advised local authorities on how they should respond to
changes in market context as they develop their policies.
2.6
This report was prepared in August to October 2008, during a time of market downturn which is
causing substantial concerns around viability and housing development coming forward. DTZ’s view
is that it is inevitable that viability studies would be undertaken at a particular point in time (in this
instance with a valuation date of August 2008), and reflect a particular set of market circumstances,
but the information they yield on how viable varies by site size, development context, etc. The range
is useful for policy making even in a changed market environment. Planning policies for affordable
housing also need to be set for the long term, and should have sufficient flexibility to cope with short
term changes in the market.
2.7
However, this implies, that authorities need a degree of flexibility in the application of affordable
housing policies. The existing system allows for developers to make the case to authorities where a
policy requirement cannot be delivered on a particular site given the particular circumstances of that
site. Some inherent flexibility into how policy requirements for affordable housing can be met is built
into the system by options to change the tenure mix (between social rented and intermediate housing
for sale) and availability of plans.
2.8
However, it is well known that developers, when acquiring sites in a competitive situation, do not
always fully allow for the costs of affordable housing provision in accordance with policy. Similarly,
developers will not immediately adjust their bid prices to reflect changes in affordable housing and/for
planning policy. It should not be the role of the planning policy to compensate developers who have
overpaid for land or misjudged aspects of development costs or revenues by simply adjusting the
level of affordable housing that should be delivered on sites.
2.9
Local authorities need, therefore, to appreciate how development viability is assessed, in order to be
in a position to negotiate where necessary over affordable housing requirements, whilst seeking to
ensure that policies can be applied for the majority of developments. The balance between being
sufficiently robust to ensure that not every application is the subject of negotiation, whilst being
sufficiently flexible to recognise special circumstances is a difficult balance to strike, but it is in the
interest of both the development industry and local authorities to find the right balance.
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Local Planning Policy and Affordable Housing Provision
2.10
The evidence used in preparing the Wakefield Core Strategy Submission Document in respect of
the affordable housing policy comprises:
Preliminary Strategic Housing Market Assessment undertaken by David Cumberland
Housing and Regeneration Ltd in September 2007 incorporating the findings of the Housing
Need/Demand Study, Northern Housing Consortium 2006
4
Wakefield Housing Market Demand Study, arc March 2008
Mapping Housing Markets in the Yorkshire and Humber Region, DTZ 2006 (part 1 of the
SHMA for Wakefield and regional local authorities below)
SHMA for Wakefield Housing Market, Ecotec June 2008 (Part 2)
2.11
The timeline below sets out the preparation of Wakefield’s evidence base against the context of the
publication of National Guidance:
National Guidance
Location Housing Needs Assessment
Development of Wakefield’s Evidence
2000
Guidance (July 2000)
2001
2002
2003
Housing Market Assessment Manual
2004
(February 2004)
Planning Policy Statement 3 (Nov 2006)
Early Community Consultation (Summer/Autumn
2004)
2005
Issues and Options (Jan-Mar 05)
2006
Preferred Options Consultation (Jan-March 2006)
Housing Need/Demand Study (2006)
Strategic Housing Market Assessment
2007
Guidance (April 2007, Revised August
Preliminary SHMA (Sept 2007)
2007)
2008
Submission Stage Consultation (Jan/Feb 2008)
Housing Demand Study (March 2008)
Regional SHMA Wakefield Housing (June 2008)
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2.12
The combined evidence base including the work set out in this report:
Considers the impact of overlapping housing market areas
Provides a robust assessment of current households in housing need
Provides evidence in respect of future affordable and market housing requirements
Sets out a robust financial assessment of affordable housing target and thresholds
Provides evidence of an appropriate level of stakeholder involvement
Affordable Housing Policy
2.13
The UDP First Alteration included a policy and supporting justification to help deliver affordable
housing (former policy H4). However, as the secretary of state believed the policy to be superseded
th
by the advice contained in national planning policy it was not saved after 27 September 2007. As
such the advice set out in PPS3 is currently used to determine planning applications. This is
4
supported by Supplementary Planning Guidance (SPG) that includes a Housing Needs Statement
which updates the need for affordable housing each year. The SPG will eventually be replaced by
new policies in the LDF and a Supplementary Planning Document (SPD).
2.14
The Core Strategy and Development Policies Submission Reports January 2008 proposed the
following Policy CS6 – Housing Mix, Affordability and Quality, Policy D7 Affordable Housing and
Policy D8 Affordable Housing on Rural Exception sites. Extracts from these are provided below:
Policy CS 6
Housing Mix, Affordability & Quality. All proposals for housing, including those affecting the existing
housing stock, will be of a high quality and design and contribute to creating mixed and balanced
communities. This will be achieved by providing dwellings of the right size, type, affordability and tenure to
meet local needs evidenced in relevant studies such as housing needs surveys and strategic housing
market assessments.
a. All proposals for housing must provide a broad mix of housing suitable for different household types and
will show how they reflect the district’s changing household composition in the types of dwelling they
provide, taking into account the evidence base from housing needs surveys and strategic housing
market assessments. On large strategic sites (60 dwellings or 2 hectares or more) the housing mix
should reflect the proportions of households that require market or affordable housing and achieve a
mix of house size, tenure and price. For smaller sites, the mix of housing should contribute to the
creation of mixed communities having regard to the proportions of households that require market or
affordable housing and the existing mix of housing in the locality.
4
Supplementary Planning Guidance: Affordable Housing (SPG6) WMDC March 2004
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b. All proposals for additional housing, including those for a mix of uses, above identified size thresholds
must make provision for sufficient affordable housing to meet identified needs. At least 30% of new
dwellings on developments across the district which meet the thresholds should be dwellings which can
be defined as affordable, with a split of approximately 80% social rented and 20% intermediate tenure.
Secure arrangements will be required to retain the benefits of affordability for initial and subsequent
occupiers. Different parts of the district have different affordable housing needs:
i. affordable housing is required across the whole district, particularly in settlements in the Five Towns
and settlements to the north and west of Wakefield
ii. there is a particular need for smaller, affordable one and two bedroom dwellings within the Wakefield
urban area and in settlements in the South East of the district.
iii. there is a particular need for larger 3 bedroom affordable dwellings in settlements in the Five Towns.
iv. there is a particular need to provide a broad range of affordable housing accommodation in
settlements to the North and West of Wakefield
c. Actions proposed to improve the quality or make efficient use of the district’s housing stock must
contribute to sustainable development. Proposals which involve the redevelopment of existing housing
must comply with the LDF spatial development strategy, policies and proposals.
Policy D 7
Affordable Housing
All proposals for residential development must provide affordable housing to meet identified need where:
a. the proposal is for 15 or more dwellings, or is on a site of 0.5 hectares or more in area, and is within a
settlement of more than 3,000 people;
b. the proposal is for 6 or more dwellings, or is on a site of 0.2 hectares or more, and is within a settlement
of 3,000 people or fewer.
Unless otherwise agreed with the Council, affordable dwellings should be provided on the application site
and should be of types for which there is a local need, as shown in the latest Housing Needs Statement or
other available information.
Policy D 8
Affordable Housing on Rural Exception Sites
Where a local housing needs assessment has established a need for affordable housing in a rural area
which cannot be met in any other way, sites may be released solely for affordable housing as an exception
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to other LDF policies. The scale of development should not exceed the level of need identified. Priority will
be given to sites located within settlements which make the best use of previously developed land and
buildings. The developer must show that arrangements have been made and put in place to keep the new
dwellings affordable in perpetuity.
2.15
The precise percentage of affordable housing to be provided will be a matter for negotiation at the
time of a planning application, in particular, having regard to any abnormal costs associated with the
development to the total package of requirements associated with the development. It will be
important to ensure that the affordable housing provided in new development is of the right tenure
mix to meet local needs. This too is a matter to be negotiated at the time of a planning application,
taking account of the latest evidence.
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3.0 Study Approach and Assumptions
3.1
The approach adopted in this study to appraise viability uses standard techniques of development
appraisal which are commonplace in the development industry. Theses use Discounted Cash Flow
(DCF) analysis to calculate the Internal Rate of Return (IRR) for developments with particular
characteristics (see Appendix 1 for a more detailed explanation of the IRR calculation and DCF
analysis).
3.2
This work calculates the IRR under a range of different development scenarios in terms of the
location, sales value, density of hypothetical developments designed to be broadly representative of
the type of sites that have come forward for development in the study areas. A scheme is deemed to
be viable if it achieves a certain defined IRR.
3.3
DTZ has opted for a 3 stage process in assessing the financial impact of different affordable housing
options.
•
Stage 1 involved market research to determine land values, unit sizes, unit mix and capital values of
both private and affordable units. The selection of development scenarios to be examined was also
informed by a policy review undertaken in its initial stage.
•
Stage 2 DTZ agreed the assumptions regarding key variables with WMDC and a range of
stakeholders.
•
Stage 3 involved a series of runs of the financial model to test the viability of development on
hypothetical sites, and how this would be affected by the application of different requirements for
affordable housing requirements.
3.4
The study approach is, tailored to the specific requirements and circumstances of the Wakefield
District. It takes account of the range of circumstances applied across the study areas but does not
seek to capture analysis of the specific circumstances of individual housing sites in the study areas.
To do this would have been impossible in practical terms and inappropriate to a strategic study to
designed to inform policy development.
3.5
Indeed, when focussing on the development of a range of hypothetical sites that capture much of the
variety of the range of housing sites likely to come forward across the study areas, it is possible to
analysis different sites on a consistent basis. This allows conclusions to be drawn in answer to the
question such as “how does increasing the affordable housing requirement from 20% to 30% affect
viability?”, and “does allowing higher proportion of shared ownership in the affordable housing mix
improve viability?”, for example.
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3.6
By implication, this study does not analyse viability on specific housing sites that may come forward in
the future.
There will always a wide range of specific circumstances that will affect viability on
particular sites, and developers will assess these in determining whether to proceed. In addition,
developers are not homogenous. They vary in their appetite for risk, and have different requirements
in terms of returns. In addition, those requirements may change in different market contexts. The
development appraisal technique developed for this study could, however, be readily applied to an
individual site if required.
3.7
It is also important to note that the analysis undertaken for this study was prepared during August
2008, and data on land values, sales prices and number of other variables relates to this point of time.
Some of these variables may have changed since the analysis was undertaken. Indeed given the
current instability in the housing market the variables are likely to continue to change over the coming
months and years. The housing market is a dynamic market, always changing and any study can
only provide a snapshot of viability.
This should remain an important consideration throughout
reading this section of the report. The current and unprecedented state of the housing market will
have an impact on the viability of affordable housing, and indeed the agreed valuation date of August
2008, has a significant impact on the variables inputted to the model.
3.8
With this in mind, DTZ have modelled a range of other market scenarios, to enable WMDC’s policy on
affordable housing to react to changing circumstances across the life of the policy.
3.9
The remainder of this section sets out the assumptions on which the analysis is based and the
sources of information that underpin those assumptions.
In a strategic study such as this, it is
necessary to generalise but where appropriate, we comment on how the specific circumstances of
particular sites and the expectations of the developer, or the costs and revenues of the project may
vary from the assumption and hence affect the viability of that particular development. This helps to
eliminate some of the issues that will apply in the application of the policy as we move forward to
changing market cycles.
General Assumptions
3.10 The valuation date for this study is August 2008. The study tests the viability on the basis of costs
and revenues as applicable at the date of valuation. The model tests viability on the assumption that
the sites tested have secured planning permission and there are no abnormal costs associated with
their development. It has been important to use this basis of analysis to allow like for like comparison
of how different policy options affect viability. In reality each site will be different and there are always
elements of costs that are specific to developments of a particular site, but these can only be
assessed on a site by site basis.
Developer returns are also often a composite of the actual
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development of the residential component of the site, and returns on the process of securing land
value enhancements through securing change of use permission on this site.
3.11 The generic assumption has been made that developers on sites generating less than 50 dwellings
will require a minimum return (IRR) of 20% and those developing sites generating 50 or more
dwellings will require a return (IRR) of 23%. These are the typical minimum rates of return, based on
DTZ’s experience that developers of residential schemes will require. Schemes that fall below these
target rates of return are deemed not to be viable, and those that meet or exceed the target rate of
return are deemed to be viable. The higher level of return on large schemes is required because of
the higher risk involved.
3.12 It is important to acknowledge, however, that the returns sought by different developers and how they
secure this through the whole development process, will vary. Developers will take into account a
range of factors relating to the risk profile of the scheme, such as scheme size, time of delivery,
location and other market factors, in determining what is an acceptable rate of return. As noted,
developers may secure their return through a composite process of land assembly, securing
permission for development, and the actual development process; and the target rates of return may
differ as market conditions change. Such complexities cannot be modelled in a strategic study such
as this, this is something that WMDC need to be aware of when analysing the longevity of the
proposed strategy.
3.13 Finally, it has been necessary as part of the appraisal to make assumptions about sales rates and
interest rates. The sales rates and interest rates used in the model are as at August 2008. At this
point in time, sales rates on developments have fallen greatly compared to those seen at the height of
the market 12 months previously. The average time taken to sell a new home has increased in most
areas.
This has had a subsequent effect on development cash flows and developers’ expected
returns. As the focus of this study is an informing policy that must endure through many different
phases of the housing market, the baseline assumptions used in August 2008, have been varied
under a range of scenarios and other market conditions in order to produce a percentage delivery for
affordable housing which allows for different movements in the financial and housing markets across
the term of the policy.
The Key Variables for Scenario Testing
3.14 The baseline assumptions for this study can be seen in Appendix 2. The focus of the study has been
in testing viability for three levels of affordable housing provision (10%, 20% and 30%). These levels
were tested because they incorporate the existing policy and a range either side to determine what
level of affordable housing delivery is realistic.
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3.15 The key variables that have been used for testing the core elements for viability model are as follows:
•
Site size
•
Location
•
Density and dwelling mix
•
Value areas
1. Land values
2. Sales values, revenue, market homes
3. Sales values of new affordable housing units
4. Affordable housing mix
Site Size
3.16 The main analysis has focused on assessing viability on sites of 1 hectare, 3 hectares and 5 hectares.
The number of units that these sites yield depends on the application of appropriate density
assumptions. Density assumptions vary across areas, an analysis of which can be seen in Appendix
2.
Location
3.17 Key variables which affect viability, such as price paid for land, the sales value of new homes, unit
mix, density and Section 106 costs vary with locations. In order to make a model as streamlined with
the SHMA as possible, DTZ have used the 5 areas identified in the Housing Demand Assessment.
These are:
1. South East
2. Five Towns
3. North West
4. City of Wakefield
5. Rural Communities
3.18 A map of these sub market areas is shown overleaf.
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Map 3.1 Wakefield Housing Market Sub-Areas
Source: Preliminary Strategic Housing Market Assessment 2007
3.19 Site testing has been undertaken in all of these areas on a range of sites varying in both size and
density. This categorisation ensured that the economic viability testing encompassed the systematic
differences in key variables by location.
Density and Dwelling Mix
3.20 The density of development affects the overall number of units provided on a given land area and
hence is a key factor determining the sales value to be derived from a particular plot of land. The
overall number of affordable units provided, whatever the quota, is also determined by the overall
number of units to be built, and hence is also affected by the density of development.
3.21 The density of development varies systematically with site location and DTZ have, therefore, identified
the development densities that should be applied to sites in each of the five locations. The figures
used are based on typical densities of recent developments in each type of location, with high,
medium and low density figures identified so as to enable testing of the degree to which changes in
density affect viability. The density assumptions were tested with the Local Authority and
Stakeholders.
Page | 17
3.22 The density assumptions, expressed as dwellings per hectare (dph), are as follows:
South East
Five Towns
North West
–
-
-
City of Wakefield
Rural Communities
high density
50 dph
medium density
40 dph
low density
30 dph
high density
60 dph
medium density
45 dph
low density
30 dph
high density
50 dph
medium density
40 dph
low density
30 dph
high density
70 dph
medium density
60 dph
low density
50 dph
high density
40 dph
medium density
35 dph
low density
30 dph
3.23 Within each location and density, DTZ have made assumptions of unit mix based on experiences
within the market and consultation with the Authority and key stakeholders.
As the affordable
provision stems directly from the overall mix of units, this has a significant effect on viability. These
assumptions are included in Appendix 3.
Value Area
3.24 The study area is extensive covering the whole of the District. Values, in terms of both sales values of
new homes and land values vary across the study area, and this will have a significant effect on the
viability of new housing developments in these areas. It was decided to identify 3 “value areas”
defined simply as high, medium and low value areas, and for these identify the relevant sales values
and land values that should be applied in the viability testing (see below under headings land values
and sales values of private and affordable housing).
Page | 18
3.25 Broadly, these value areas are aligned with the pattern of average house prices across the District.
These are described in detail in the Strategic Housing Market Assessment. The table in Appendix 4
shows how house prices have been identified in higher, medium and low value areas by using key
settlements within these areas in order to undertake market research. However, it should be noted
that new development, particularly on larger schemes, can, under some circumstances, establish new
value premiums that are not constrained by existing second hand house prices. The likelihood of this
in the marketplace as at August 2008 is low, however, this should be an important consideration
moving forward for the Local Authority in order to create a policy which is flexible with changing
market cycles.
3.26 Data on land values and sales values was collected from actual, current developments and second
hand sales and through contact with local agents. Information relates to August 2008, a recognised
period of significant slowdown in the housing market. This has caused DTZ to be conservative in the
attribution of values and will have an effect on viability.
However, depending on the depth and
duration of the housing market slowdown, these may worsen or, indeed, improve in future years.
Land Value
3.27 The study has worked on the basis that the cost of land used in the viability appraisal should be an
input to the viability assessment. The cost of land has, therefore, been based on the actual price
being paid for land by developers. Information on the value of residential building land has been
sourced from the Valuation Office Agency Property Market Report (July 2008), and this has been
checked with local agents and reviewed to incorporate different values across the areas and the
downturn in the market during this time.
3.28 A developer buying residential land will have to take into account development costs, including
affordable housing, when preparing their residual valuation of the land.
This valuation will have
informed them the bid price for the land. Land prices therefore, incorporate a discount based on the
developer’s expectation of how much affordable housing they will have to provide.
DTZ have
assumed land values in the study areas to be discounted to reflect current policy requirements for
affordable housing provision equivalent to 20% of the units being built for affordable housing.
3.29 In reality, a developer may not have fully allowed for the provision of the level of affordable housing
required in the current policy, believing that they can negotiate a lower level of provision on the basis
of viability. Where land has been acquired historically and policy has moved on, often this will be
compensated for by rising land values. Where a developer has acquired land, perhaps because of
intense competition for land, and not made full allowance for provision of affordable housing in the
price they have paid, policy should not seek to compensate for this miscalculation. Nevertheless this
might result in reluctance on behalf of the developer to bring forward the site for development until
land values have increased significantly to offset their miscalculation.
Page | 19
3.30 The land values used as inputs to the baseline position for the modelling are as follows:
The South East
Five Towns
The North West
City of Wakefield
The Rural Communities
High value
£1,872,000 per hectare
Mid value
£1,480,000 per hectare
Low value
£992,000 per hectare
High value
£1,872,000 per hectare
Mid value
£1,584,000 per hectare
Low value
£1,280,000 per hectare
High value
£1,872,000 per hectare
Mid value
£1,680,000 per hectare
Low value
£1,384,000 per hectare
High Value
£1,872,000 per hectare
Mid value
£1,680,000 per hectare
Low value
£1,384,000 per hectare
High value
£2,400,000 per hectare
Mid value
£1,680,000 per hectare
Low value
£1,080,000 per hectare
3.31 These values have been altered for various modelling scenarios to reflect the fact that in reality land
prices change in accordance with the level of cost in a development, of which affordable housing is a
cost to reflect a fair price paid for the land. At the baseline position of August 2008, land values are at
an all time market low for residential developments and we have ensured that the residential land
prices used have been above that of an alternative use value at which time the land would not be
delivered for residential development.
Sales Values of New Market Homes
3.32 Average sales values of new market homes (expressed on a £s per sqft basis) are based on data for
new housing developments across the study area. The sales values assumed are set out in table 3.1
below for different size units, in high, medium and low value areas across the five study areas.
Page | 20
Table 3.1 Private Revenue Assumptions
Unit Type
1 Bed Flat
2 Bed Flat
2 Bed THouse
3 Bed House
4 Bed House
5 Bed THouse
Value
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
Area sq ft
500
650
700
950
1100
1450
The South East
Values
£ psf
£85,000
£170
£85,000
£170
£70,000
£140
£110,000
£169
£98,000
£151
£90,000
£138
£145,000
£207
£105,000
£150
£95,000
£136
£200,000
£211
£173,000
£182
£132,000
£139
£250,000
£227
£190,000
£173
£160,000
£145
£285,000
£197
£210,000
£145
£170,000
£117
The Five Towns
Values
£psf
£110,000
£220
£90,000
£180
£80,000
£160
£140,000
£215
£110,000
£169
£100,000
£154
£150,000
£214
£135,000
£193
£120,000
£171
£180,000
£189
£150,000
£158
£130,000
£137
£190,000
£173
£170,000
£155
£145,000
£132
£210,000
£145
£190,000
£131
£170,000
£117
The North West
Values
£psf
£115,000
£230
£95,000
£190
£86,000
£172
£125,000
£192
£120,000
£185
£112,000
£172
£135,000
£193
£125,000
£179
£115,000
£164
£180,000
£189
£175,000
£184
£150,000
£158
£225,000
£205
£210,000
£191
£175,000
£159
£310,000
£214
£290,000
£200
£260,000
£179
City of Wakefield
Values
£psf
£110,000
£220
£102,000
£204
£95,000
£190
£132,000
£203
£125,000
£192
£102,000
£157
£200,000
£286
£185,000
£264
£160,000
£229
£210,000
£221
£195,000
£205
£178,000
£187
£220,000
£200
£205,000
£186
£188,000
£171
£320,000
£221
£290,000
£200
£250,000
£172
Rural Communities
Values
£psf
£120,000
£240
£90,000
£180
£80,000
£160
£160,000
£246
£118,000
£182
£100,000
£154
£160,000
£229
£135,000
£193
£115,000
£164
£180,000
£189
£150,000
£158
£135,000
£142
£210,000
£191
£170,000
£155
£150,000
£136
£250,000
£172
£200,000
£138
£165,000
£114
Revenues for Affordable Housing Provision
3.33 A developer also generates revenues from the sale of affordable housing units to housing associations. DTZ have derived estimates of these
revenues from both talking to housing associations, and liaising with the Authority’s Strategic Housing Team.
3.34 The revenues generated from sales of affordable housing differ depending on whether the unit is for social rented or intermediate tenure. Table
3.2 below sets out the assumed revenues generated from the development of new social rented housing, estimated for different value areas, as
well as location and dwelling types. Table 3.3 below sets out the same information regarding revenues generated from the sale of intermediate
housing units.
Page | 21
3.35 It has been assumed that all affordable homes will be bought by a housing association. It is worth noting, however, that housing associations may
be disinclined by buy (or be party to development of) small numbers of units, where these would be inefficient for them to manage. This would be
most likely to be an issue where the scheme only produces a very small number of affordable housing units. This issue needs to be taken into
account in thinking about the practicality of applying affordable housing targets to very small schemes and sites, although it is not an
insurmountable difficulty. For the purpose of the viability assessment, DTZ have assumed all the units are built on site, however where required,
the Council may wish to consider commuted sums on small schemes or off site provision and this could be incorporated into a revised policy.
3.36 Evidence provide by the Local Authority and Housing Associations has determined that on average between £35,000 at £40,000 is paid for social
rented units and in the region of 60% of market value paid for intermediate tenure properties in all areas across the Wakefield District.
Table 3.2 Revenues Generated from New Social Rented Homes
Unit Type
1 Bed Flat
2 Bed Flat
2 Bed House
3 Bed House
4 Bed House
5 Bed House
Value
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
Area sq ft
500
650
800
1000
1250
1450
The South East
Values
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£ psf
£70
£70
£70
£54
£54
£54
£44
£44
£44
£40
£40
£40
£32
£32
£32
£28
£28
£28
The Five Towns
Values
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£psf
£70
£70
£70
£54
£54
£54
£44
£44
£44
£40
£40
£40
£32
£32
£32
£28
£28
£28
The North West
Values
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£psf
£70
£70
£70
£54
£54
£54
£44
£44
£44
£40
£40
£40
£32
£32
£32
£28
£28
£28
City of Wakefield
Values
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£psf
£70
£70
£70
£54
£54
£54
£44
£44
£44
£40
£40
£40
£32
£32
£32
£28
£28
£28
Rural Communities
Values
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£35,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
£40,000
Page | 22
£psf
£70
£70
£70
£54
£54
£54
£44
£44
£44
£40
£40
£40
£32
£32
£32
£28
£28
£28
Table 3.3 Revenues Generated from New Intermediate Homes
Unit Type
1 Bed Flat
2 Bed Flat
2 Bed House
3 Bed House
4 Bed House
5 Bed House
Value
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
High
Mid
Low
Area sq ft
500
650
800
1000
1250
1450
The South East
Values
£51,000
£51,000
£42,000
£66,000
£58,800
£54,000
£87,000
£63,000
£57,000
£120,000
£103,800
£79,200
£150,000
£114,000
£96,000
£171,000
£126,000
£102,000
£ psf
£102
£102
£84
£102
£90
£83
£109
£79
£71
£120
£104
£79
£120
£91
£77
£118
£87
£70
The Five Towns
Values
£66,000
£54,000
£48,000
£84,000
£66,000
£60,000
£90,000
£81,000
£72,000
£108,000
£90,000
£78,000
£114,000
£102,000
£87,000
£126,000
£114,000
£102,000
£psf
£132
£108
£96
£129
£102
£92
£113
£101
£90
£108
£90
£78
£91
£82
£70
£87
£79
£70
The North West
Values
£69,000
£57,000
£51,600
£75,000
£72,000
£67,200
£81,000
£75,000
£69,000
£108,000
£105,000
£90,000
£135,000
£126,000
£105,000
£186,000
£174,000
£156,000
£psf
£138
£114
£103
£115
£111
£103
£101
£94
£86
£108
£105
£90
£108
£101
£84
£128
£120
£108
City of Wakefield
Values
£66,000
£61,200
£57,000
£79,200
£75,000
£61,200
£120,000
£111,000
£96,000
£126,000
£117,000
£106,800
£132,000
£123,000
£112,800
£192,000
£174,000
£150,000
£psf
£132
£122
£114
£122
£115
£94
£150
£139
£120
£126
£117
£107
£106
£98
£90
£132
£120
£103
Rural Communities
Values
£72,000
£54,000
£48,000
£96,000
£70,800
£60,000
£96,000
£81,000
£69,000
£108,000
£90,000
£81,000
£126,000
£102,000
£90,000
£150,000
£120,000
£99,000
Page | 23
£psf
£144
£108
£96
£148
£109
£92
£120
£101
£86
£108
£90
£81
£101
£82
£72
£103
£83
£68
Affordable Housing Mix
3.37 The base assumption for the modelling exercise has been that 30% of the affordable housing built will
be for social renting and 70% will be intermediate tenure. However, consideration has been given to
the impact on viability of changing this proportion with options of 50% social rented/50% intermediate
and 70% social rented/30% intermediate being tested.
Housing Corporation Grant Funding
3.38 The base assumption for the modelling has been social housing grant is not available for affordable
housing provision through Section 106 Agreements. However, it is important to understand the extent
to which grant can enhance viability where there is a problem with viabiltiy. In order to justify a higher
percentage of affordable housing, WMDC may have to approach the Housing Corporation to request
additional grant funding for Section 106 Agreements. However, this has not been taken into account
during the process of this modelling.
Build Costs
3.39 The build costs used in the viability model are taken from the average residential costs from BCIS5, re
based using the local index for the Wakefield area. The assessment uses the build costs per square
foot of gross internal area excluding external works and contingencies and with preliminaries is
proportioned by cost.
These were correct as at August 2008, and have been tested through
stakeholder consultation to ensure they are in line with the current market expectations. Ordinarily,
build costs for affordable housing would be presumed to be higher than those for market sale unit in
order for them to meet the current design and space standards required by the Housing Corporation
including the Code for Sustainable Homes Level 3 and Lifetime Homes Standards. However, as this
modelling assumes no grant is provided to the Section 106, and in line with evidence provided by the
Local Authority, standard build products have been accepted on all Section 106 sites. As at August
2008, any application for a Section 106 site would not have incured additional costs associated to the
standards above as no grant would have been provided for these schemes. Therefore, for the basis
of this valuation, the build costs are uniform across both private and affordable dwellings.
3.40 On the basis set out above, build costs in the model are as follows:
Flat - £100 psf
House - £90 psf
3.41 It is acknowledged that for any particular scheme, build costs will be affected by site conditions, the
configuration of the scheme and the target market at which it is aimed. Large schemes may be able
Page | 24
to achieve significant economies of scale. Building costs will also be affected by costs of materials
and fuel and are also likely to reflect the level of the activity in the construction sector. However, for
the purposes of this strategic study, it is necessary to use typical build costs.
Other Assumptions
3.42 The model incorporates a number of other assumptions which have been held constant for all aspects
of the viability, these are as follows:
3.43 Section 106 costs other than affordable housing: most residential developments are not only
expected to provide affordable housing as part of the Section 106 Agreement but to also contribute to
other costs imposed by the public sector on the development, such as highway works, provision of
community facilities, education payments, etc.
These represent an additional development cost
imposed on the development and, therefore, need to be taken into account.
3.44 Based on consultation with the Local Authority and Stakeholders and an analysis of planning
applications granted in the three month period around August 2008, additional costs occurred in
connection with Section 106 Agreements, are estimated to be in the region of £2,000 per unit.
3.45 Demolition costs and site preparation costs: an allowance of £1 psf (£16 psm) has been made for
demolition and site preparation costs. Site preparation costs on a site with contamination would be
significantly higher and would affect viability on any site being considered for residential development.
However, the extent of such costs and the effect on viability would need to be assessed on a site
specific basis, which is not the purpose of the viability appraisal.
3.46 Other costs: other standard balances and costs made in the modelling exercise are as follows
•
Cost of finance of 7% per annum has been assumed
•
Professional fees assumed at 8% of construction cost
•
Disposal costs including marketing and sales expenses for private units assumed at 3% of gross
development value
•
Site acquisition costs of 5.75% of land value (to include stamp duty)
•
Inflation of 3.5% on costs and 2.5% on revenue.
The Scope of the Study
5
The Building Cost Information Services (BCIS) is the UK property market’s leading provider of construction
cost and price information. Costs are quoted on a square metre of gross internal floor area basis and are
Page | 25
3.47 It is important to appreciate that a strategic viability model such as that developed is not designed to
test the viability of specific sites. One of the features of residential development is that character of
sites is varied and the level of costs and revenues that apply to development on a specific site will
vary. This should, however, be reflected in the price that is paid for the land. Even so, costs and
revenues are often not predictable, and of course assumptions about the future change in costs and
revenues may be proved wrong, delivering either above expected returns or below expected returns.
3.48 This study cannot seek to encompass all the potential differences in individual site circumstances that
affect viability. What it can and does do, is provide a broad assessment of viability in the study areas.
This is what is needed to inform the setting of affordable housing and other policies. Those policies
will, however, need to be sufficiently flexible to take into consideration changes in market context,
especially if they are long lived; but also changes in national policy relating to planning and affordable
housing provision.
3.49 The agreed valuation date of August 2008 is significant to the viability assessment. The property
market is currently experiencing unprecedented decline and turmoil due to difficulties with financial
liquidity and a down turn in global economies due to the effects of the credit crunch. As a result,
residual land values have fallen significantly from their peak in mid 2007 which places substantial
pressure on the viability of residential developments. There is an expectation that the market will
recover in the longer term but the timescale for any recovery remains uncertain. This downturn in
residual land value will obviously have a considerable impact on the viability of the proposed
affordable housing policy. Therefore as part of the viability modelling, different scenarios have been
modelled around the baseline position to take account of peaks and troughs in the market which will
occur over the life of the policy and core strategy.
3.50 The scenarios tested are as follows:
1. Baseline Position – valuation date August 2008
2. Varying levels of Section 106 payments
3. Changes in build costs
4. Changes in revenues
5. Changes in development timescales
6. Concurrent changes in scenarios 4, 5 and 6.
Page | 26
3.51 For each of these scenarios, various percentages of affordable housing and a range of tenure splits
were tested. Separate analysis was undertaken for rural areas and the rest of the district in order to
determine an appropriate threshold for affordable housing.
3.52 The results of each scenario can be seen in Section 4. The tables presented in the main body of this
report take the average values from the analysis of sites in high, medium and low density areas.
Analysis of the individual areas across the densities can be seen in Appendix 5. These average
values demonstrate the viability of delivering varying percentages of affordable housing across each
of the seven development scenarios.
Page | 27
4.0 Economic Viability Consultation.
4.1
Consultation has been a core element of this commission. A list of consultees is provided in
th
Appendix 6. This consultation involved a workshop held on the 8
September 2008, to consult
stakeholders on the Economic Viability Testing methodology and core assumptions for the baseline
position.
4.2
Approximately 70 stakeholders were invited to attend this event and 25 consultees were present at
the event. The attendees included representatives from housebuilders, developers, RSLs, WMDC
and other local authorities. We had hoped that the Homebuilders Federation (HBF) would provide a
central view from house builders in the region, however, due to the downturn in the housing market,
the local office of the HBF is closing and they were unavailable for comment.
4.3
The session included a presentation on the methodology and a workshop to discuss the approach
set out to consider the assumptions and methodology for the economic viability assessment. A copy
of the presentations given can be found at Appendix 7. At the same event further consultation was
undertaken on the SHMA work which has been carried out during the previous months to finalise the
SHMA.
4.4
The results of the workshop on the economic viability appraisal work showed that overall, there was
broad agreement with the approach and methodology, however, the feedback in the session itself
was relatively limited. The opportunity was offered to all attendees and invitees to feedback
individually to DTZ on this element. This took the form of an email notification, including a copy of
th
the presentation, followed up by individual telephone calls on 11 September 2008.
4.5
The feedback from stakeholders was used to develop a final set of assumptions for the viability
modelling. The main areas of change between the presentation and the final set of assumptions
were focussed on:
Density
Scheme mix
The levels of Section 106 contributions (outside Affordable Housing)
Page | 28
4.6
This saw a shift in the approach to density and scheme mix. Prior to the consultation, densities in
the majority of areas were higher than those decided upon at the final baseline position presented in
Section 3. Many consultees and WMDC’s Planning Officers felt that the densities presented were
undeliverable at the upper levels and therefore the higher density figures were scaled back
narrowing the difference between high density and low density schemes. Market evidence was
provided from both the private and public sector as to their recent experience in this area and DTZ
adjusted the densities to reflect market norms and WMDC’s existing policy on housing density.
4.7
Following consultation, the scheme mix was also adjusted slightly. This saw the removal of
bungalows and three bedroom apartments from the proposed development mixes as evidence
showed that both recent development and identified need were unlikely to see the delivery of these
unit types.
4.8
The level of Section 106 contributions (excluding affordable housing) allowed in the model was
modified from £1,500 per unit in our original presentation to £2,000 per unit based on consultee
feedback and evidence provided from recent developments in the District.
4.9
DTZ and WMDC have taken on board all the comments of all stakeholders both at the meeting on
th
the 8 September and in subsequent correspondence by email and letter and feel that the final set
of assumptions provided in Section 3 are reflective of the market position at the date of valuation in
August 2008 and in line with stakeholder expectations and market evidence.
Page | 29
5.0 Results of the Economic Viability Model
5.1
This section focuses on the results of the viability modelling. The findings are presented for a number
of different scenarios and designed to test a number of different market scenarios.
Scenario One: The Baseline Position
5.2
Scenario 1 focuses on what the viability of delivering affordable housing will be at the baseline
position of August 2008. This scenario tests how changing the affordable housing requirement and
tenure split effects viability. The results for all of the percentages tested can be seen in Appendix 5.
Through the analysis, a series of ‘traffic light’ colour codes are used to indicate if schemes are clearly
viable, clearly not viable or close to the viability target. These colour codes are as follows:
-
Green, the scheme is comfortably viable – where the IRR meets or exceeds the target IRR
figures and rates of return.
-
Amber, the scheme is marginally viable – where the IRR is within 2.5% of the IRR target. These
schemes are close to the margins of viability and hence particular features of an individual site
and scheme are likely to be important in determining whether the scheme is progressed.
-
Red, the scheme is clearly not viable – where the IRR is more than 2.5% below the target rate
of return
Results of Scenario One.
5.3
The baseline position as at August 2008, shows that the delivery of any affordable housing is not
viable. This is a direct consequence of the market conditions prevailing as at the valuation date. The
effects of the current market downturn are not restricted to the delivery of affordable housing. There
has also been a sharp decline in the delivery of private market housing with many consented
schemes remaining undeveloped and existing developments mothballed on the grounds of viability.
Page | 30
Scenario One: Baseline Position 5% Affordable Housing – 50% social rented /50% intermediate
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
5.4
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
23.63%
13.77%
7.30%
3
120
20.60%
11.47%
6.10%
5
200
17.23%
10.37%
5.73%
1
43
23.90%
11.13%
2.07%
3
130
19.33%
9.23%
6.10%
5
217
18.90%
8.37%
1.70%
1
45
12.10%
7.13%
1.73%
3
135
10.10%
5.83%
1.13%
5
225
9.57%
5.77%
1.37%
1
60
13.50%
14.27%
10.67%
3
180
7.17%
7.60%
3.17%
5
300
11.00%
11.83%
8.47%
1
35
6.80%
3.63%
3.37%
3
105
7.23%
4.30%
3.77%
5
175
5.47%
3.10%
2.73%
The results of this analysis show that in the current market conditions the delivery of 5% affordable
housing across the district is unviable with the exception of high value areas in the South East and
North West. The reason for this is as explained above; the pressure on the development cashflow
through the lengthening of the development period is making delivery financially unviable based on
the agreed criteria.
5.5
In order to test the impact of housing tenure on the cash flow the model has also been run at 30%
social rented / 70% intermediate tenure and the results of this appraisal can be seen in Appendix 5.
The results mirror those shown above with 5% only deliverable in high value areas in the South East
and North West. However, under this scenario 5% is also viable in high value areas in the City of
Wakefield.
Page | 31
5.6
Given the importance of demonstrating that the baseline valuation date adopted significantly affects
development viability generally, analysis was undertaken on the viability of 0% affordable housing.
The table below shows that in the current market, delivery of housing schemes generally is unviable
and until such time that the property market returns to historically normal levels of transactional
activity, the delivery of any housing scheme (with or without) including affordable housing is unlikely.
DTZ would comment that this experience is not unique to WMDC and is something with many areas
and councils are experiencing with the current down turn in the market. The current economic crisis
will undoubtedly have a significant impact upon housing delivery and the Local Authority’s statutory
obligation to deliver additional housing.
Scenario One: Baseline Position – 0% affordable housing
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
High
Mid
Low
% IRR
% IRR
% IRR
Site
Size in
ha
No of
Dwellings
1
40
24.9%
15.0%
8.43%
3
120
21.1%
13.2%
7.9%
5
200
18.7%
12.0%
7.3%
1
43
24.9%
12.3%
3.1%
3
130
21.3%
11.0%
3.2%
5
217
18.93%
9.8%
3.1%
1
45
13.5%
9.6%
5.7%
3
135
10.5%
7.4%
4.3%
5
225
8.4%
5.6%
2.9%
1
60
14.7%
15.6%
11.8%
3
180
12.8%
13.4%
10%
5
300
7.23%
13.7%
10.2%
1
35
9.9%
4.0%
3.8%
3
105
6.9%
7.2%
6.6%
5
175
5.2%
4.7%
4.5%
Page | 32
5.7
The current position is a concern but given the cyclical nature of the property market it is one which is
unlikely to remain during the lifetime of WMDC policy. Indeed, it is anticipated that a number of
property cycles will occur throughout the life time of the core strategy and therefore in order to ensure
a policy which is flexible enough to adapt to changing market conditions, a range of development
alternatives modelled using the baseline position above and changing variables has been produced in
order to determine under what market conditions affordable housing will be delivered in the future.
5.8
We have tested these scenarios by changing a range of variables including
1. Varying levels of Section 106 payments
2. Changes in build costs
3. Changes in revenues
4. Changes in development timescales
5. Concurrent changes in 3, 4 and 5.
Page | 33
Scenario Two: Varying levels of Section 106 payments
5.9
The levels of Section 106 payments are calculated on a per unit basis. This can be a significant cost
and therefore, in order to reflect the fact that in a number of development scenarios the delivery of
affordable housing is often prioritised over other Section 106 requirements the baseline position was
remodelled with the removal of the Section 106 payments in order to determine their impact on
viability.
Scenario Two: Baseline Position – 5% affordable housing – no additional Section 106 costs.
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
24.90%
14.97%
34.83%
3
120
19.63%
11.70%
6.37%
5
200
17.23%
10.40%
5.77%
1
43
25.07%
12.30%
3.13%
3
130
19.63%
9.47%
1.67%
5
217
17.20%
8.40%
1.77%
1
45
13.07%
8.03%
2.57%
3
135
10.20%
5.90%
1.17%
5
225
9.63%
5.80%
1.40%
1
60
12.93%
13.67%
9.77%
3
180
10.80%
11.53%
8.07%
5
300
10.93%
11.63%
8.17%
1
35
7.20%
4.03%
3.77%
3
105
7.30%
4.27%
3.73%
5
200
5.60%
3.17%
2.80%
Page | 34
5.10 Despite our initial thoughts that Section 106 requirements have an impact on project viability, it is
clear that the removal of these costs at £2000 per unit, whilst increasing the percentages of IRR
overall and making the schemes more viable, does not raise the IRR% over a threshold that would be
deemed acceptable for the development to proceed (i.e. 20% or higher).
5.11 This illustrates that in the present market there are stronger variables effecting the baseline position
which are making delivery of housing unviable across the District.
Scenario Three: Varying Build Costs
5.12 Development costs are one of the key drivers in determining the viability of a scheme. A reduction in
costs can increase the potential for development return and reduce the risk of the scheme. Again, in
order to determine the impact of build costs on viability, all other variables as at the baseline position
of August 2008 have remained constant and only build costs have altered.
5.13 The first change in the variable (Scenario 4a) sees build costs reduced by 5%, with the following
results:
Scenario 3a - 5% Decrease in Build Costs – 5% affordable housing 50/50 Split
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
26.77%
17.23%
11.25%
3
120
21.13%
13.57%
8.81%
5
200
18.48%
12.01%
7.91%
1
43
26.77%
14.38%
5.49%
3
130
21.13%
11.20%
3.91%
5
217
18.48%
9.92%
3.57%
1
45
14.90%
10.15%
5.00%
3
135
11.73%
7.74%
3.31%
5
225
11.03%
7.43%
3.40%
1
60
14.60%
15.66%
12.05%
3
180
12.24%
13.26%
10.11%
5
300
12.41%
13.44%
10.18%
Page | 35
Rural Areas
1
35
8.72%
5.95%
6.23%
3
105
8.59%
6.03%
6.00%
5
175
6.63%
4.62%
4.69%
5.14 The results show that decreasing the build costs by 5% from the baseline position does result in the
IRR percentages increasing overall, however these percentages increases do not exceed the IRR
targets for viability and the delivery of 5% affordable housing at a tenure split of 50% social rented
50% shared ownership remains unviable.
5.15 In order to determine the impact of the tenure split on the viability, an assessment was also run at an
alternative split in tenure of 30% social rented and 70% intermediate housing (see below). Again this
had little impact on the overall viability of delivering affordable housing at 5% although it has raised
the percentages to levels closer to that which may be deemed viable.
Scenario 3a - 5% Decrease in Build Costs – 5% affordable housing 30/70 Split
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
24.80%
15.45%
9.56%
3
120
20.66%
13.18%
8.42%
5
200
18.46%
12.02%
7.98%
1
43
24.80%
12.65%
3.91%
3
130
20.66%
10.81%
3.54%
5
217
18.46%
9.93%
3.62%
1
45
14.01%
9.28%
4.21%
3
135
11.72%
7.75%
3.36%
5
225
11.01%
7.44%
3.43%
1
60
15.34%
16.49%
12.98%
3
180
12.33%
13.39%
10.25%
5
300
12.61%
13.68%
10.45%
1
35
8.03%
5.28%
5.56%
3
105
8.28%
5.74%
5.72%
5
175
6.78%
4.82%
4.94%
Page | 36
5.16 The results have shown that again, decreasing the build costs by 5% from the baseline position
results in the IRR percentages increasing overall, however these percentages do not exceed the IRR
targets for viability and the delivery of 5% affordable housing at a tenure split of 30% social rented
70% shared ownership is unviable.
5.17 Given that delivery of affordable housing at 5% has been deemed unviable at the baseline valuation
date of August 2008, despite decreases in build costs, the we have assessed viability for delivery on
0% affordable housing. Again, based on a decrease in build cost this has resulted in no residential
development being viable in the current market conditions, indicating that as at the date of valuation
no development will take place (with the exception of schemes on sites which are extremely low value
or gifted – e.g. Local Authority owned land).
Scenario 3a - 5% Decrease in Build Costs – 0% affordable housing
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
26.77%
17.23%
11.25%
3
120
22.55%
15.01%
10.27%
5
200
19.93%
13.44%
9.41%
1
43
26.77%
14.38%
5.49%
3
130
22.55%
12.58%
5.24%
5
217
19.93%
11.29%
4.93%
1
45
15.32%
10.55%
5.40%
3
135
13.22%
9.26%
4.85%
5
225
12.40%
8.84%
4.84%
1
60
16.53%
17.55%
14.03%
3
180
13.88%
15.04%
11.92%
5
300
14.25%
15.44%
12.22%
1
35
8.72%
5.95%
6.23%
3
105
9.92%
7.43%
7.50%
5
175
7.96%
6.05%
6.24%
Page | 37
5.18 Given that the delivery of any type of residential development is still unviable in present market
conditions, we have further tested a change in 10% and 15% build cost on 0% affordable housing
delivery. This will enable us to accurately assess the impact of build cost on the current market
position.
5.19 The results of each can be seen in the tables below:
Scenario 3b - 10% Decrease in Build Costs – 0% affordable housing
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
28.66%
19.49%
14.12%
3
120
24.00%
16.82%
12.69%
5
200
21.17%
15.01%
11.53%
1
43
28.66%
16.48%
7.91%
3
130
24.00%
14.27%
7.28%
5
217
21.17%
12.75%
6.71%
1
45
17.15%
12.65%
7.84%
3
135
14.73%
11.03%
6.96%
5
225
13.75%
10.43%
6.77%
1
60
17.99%
19.50%
16.29%
3
180
15.29%
16.72%
13.88%
5
300
15.71%
17.18%
14.24%
1
35
10.24%
7.89%
8.74%
3
105
11.21%
9.12%
9.72%
5
175
8.97%
7.41%
8.07%
Page | 38
Scenario 3c - 15% Decrease in Build Costs – 0% affordable housing
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
30.55%
21.78%
17.05%
3
120
25.45%
18.64%
15.21%
5
200
22.41%
16.57%
13.66%
1
43
30.55%
18.61%
10.37%
3
130
25.45%
15.97%
9.32%
5
217
22.41%
14.20%
8.49%
1
45
19.00%
14.77%
10.31%
3
135
16.25%
12.80%
9.08%
5
225
15.09%
12.01%
8.70%
1
60
19.63%
21.46%
18.56%
3
180
16.69%
18.39%
15.85%
5
300
17.17%
18.94%
16.28%
1
35
11.76%
9.86%
11.30%
3
105
12.49%
10.82%
11.96%
5
175
9.97%
8.76%
9.88%
5.20 It is clear that in isolation a fall in build costs will not make residential development viable in the
current market. As build costs decrease IRR percentages do increase (especially in high value areas)
but these increase are still not at a strong enough rate to make schemes viable.
Page | 39
Scenario Four: Varying Revenues
5.21 Revenue values are another key driver in determining the viability of a scheme. An increase in
revenue can increase the potential for development return and reduce the risk of the scheme. Again,
in order to determine the impact of revenue values on viability, all other variables as at the baseline
position of August 2008 have remained constant and only the revenues have altered upwards.
Scenario 4a - 5% Increase in Revenue – 5% affordable housing 50/50 Split
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
28.10%
18.26%
11.99%
3
120
22.22%
14.44%
9.46%
5
200
19.45%
12.78%
8.49%
1
43
28.10%
15.42%
6.28%
3
130
22.22%
12.06%
4.57%
5
217
19.45%
10.68%
4.15%
1
45
15.89%
10.98%
5.66%
3
135
12.57%
8.46%
3.88%
5
225
11.80%
8.09%
3.93%
1
60
15.50%
16.50%
12.75%
3
180
13.05%
14.02%
10.75%
5
300
13.23%
14.21%
10.82%
1
35
9.90%
6.92%
7.03%
3
105
9.54%
6.83%
6.65%
5
175
7.40%
5.29%
5.25%
5.22 To date this is the most dramatic impact we have seen on increasing IRR percentages, however this
is not a strong enough change to make 5% affordable housing viable at an equal split of social rented
and intermediate tenures.
5.23 In order to determine the impact of the tenure split on the viability, an assessment was also run at an
alternative split in tenure of 30% social rented and 70% intermediate housing (see below) again this
Page | 40
had little impact on the overall viability of delivering affordable housing at 5% although it has raised
the percentages to levels closer to that which may be deemed viable.
Scenario 4a - 5% Increase in Revenue – 5% affordable housing 30/70 Split
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
26.11%
16.47%
10.29%
3
120
21.75%
14.04%
9.06%
5
200
19.43%
12.79%
8.55%
1
43
26.11%
13.67%
4.68%
3
130
21.75%
11.67%
4.20%
5
217
19.43%
10.69%
4.20%
1
45
14.99%
10.10%
4.86%
3
135
12.56%
8.47%
3.93%
5
225
11.77%
8.09%
3.95%
1
60
16.26%
17.34%
13.70%
3
180
13.14%
14.15%
10.89%
5
300
13.43%
14.46%
11.10%
1
35
9.19%
6.25%
6.35%
3
105
9.23%
6.54%
6.38%
5
175
7.56%
5.49%
5.50%
5.24 The results show that again, increasing revenues by 5% from the baseline position does result in IRR
percentages increasing overall. Given that delivery of affordable housing at 5% has been deemed
unviable at the baseline valuation date of August 2008, despite increases in revenues an evaluation of
the delivery of 0% affordable housing at a range of revenue increases has been assessed.
5.25 Again, this has resulted in no residential development being deliverable in the current market
conditions, indicating that at this time no development will take place (with the exception of schemes
on sites which are extremely low value or gifted – e.g. Local Authority owned land) in.
Page | 41
Scenario 4a - 5% Increase in Revenue – 0% affordable housing
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
28.10%
18.26%
11.99%
3
120
23.67%
15.90%
10.94%
5
200
20.93%
14.24%
10.01%
1
43
28.10%
16.47%
6.28%
3
130
23.67%
14.22%
5.93%
5
217
20.93%
12.78%
5.53%
1
45
16.31%
11.39%
6.06%
3
135
14.09%
10.00%
5.44%
5
225
13.19%
9.51%
5.38%
1
60
17.29%
18.42%
14.76%
3
180
14.71%
15.83%
12.58%
5
300
15.11%
16.25%
12.90%
1
35
9.90%
6.92%
7.03%
3
105
10.90%
8.25%
8.17%
5
175
8.76%
6.74%
6.83%
Page | 42
Scenario 4b-10% Increase in Revenue – 0% affordable housing
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
31.19%
21.42%
15.42%
3
120
26.14%
18.50%
13.87%
5
200
23.09%
16.50%
12.61%
1
43
31.19%
18.43%
9.34%
3
130
26.14%
15.94%
8.52%
5
217
23.09%
14.22%
7.81%
1
45
19.03%
14.20%
9.02%
3
135
16.37%
12.41%
8.02%
5
225
15.23%
11.68%
7.74%
1
60
19.76%
21.13%
17.61%
3
180
16.86%
18.19%
15.10%
5
300
17.34%
18.72%
15.50%
1
35
12.48%
9.72%
10.17%
3
105
13.07%
10.66%
10.94%
5
175
10.50%
8.70%
9.13%
Page | 43
Scenario 4c-15% Increase in Revenue – 0% affordable housing
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
34.19%
24.48%
18.75%
3
120
28.52%
20.99%
16.68%
5
200
25.18%
18.69%
15.11%
1
43
34.19%
21.34%
12.30%
3
130
28.52%
18.31%
11.01%
5
217
25.18%
16.29%
10.00%
1
45
21.65%
16.92%
11.86%
3
135
18.57%
14.71%
10.49%
5
225
17.19%
13.76%
10.00%
1
60
22.14%
23.73%
20.36%
3
180
18.93%
20.46%
17.51%
5
300
19.51%
21.11%
18.02%
1
35
14.18%
12.43%
13.22%
3
105
14.50%
12.98%
13.60%
5
175
11.63%
10.58%
11.32%
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
5.26 As the results above show, as revenues increase more sites become viable. With a 15% increase in
revenues, a third of schemes are viable with 0% affordable housing. Therefore an increase in
revenues may begin to make developments more viable in the current market conditions however, this
scenario still does not cater for the delivery of any affordable housing.
5.27 The biggest constraint on development viability in the current market is the lack of available mortgage
finance. The worldwide financial instability has seen the mortgage market slow dramatically with
national providers reporting 95% less mortgages taken out in September 2008 compared to the same
point two years ago. The lack of finance liquidity makes buying and selling homes extremely difficult,
especially when the majority of those in the market are reliant upon varying levels of mortgage finance
to facilitate the move.
Page | 44
5.28 The inability of purchasers to secure mortgage finance and the resulting dramatic slowdown in
transactions has caused many national housebuilders to slow down or mothball developments.
Typically, developers are now completing and selling units before committing to the construction of
another. Consequently sales rates have fallen dramatically from the peak of the market in 2007 and
development timescales have increase substantially.
5.29 This increase in development timescales and consequent impact on cashflow is having the largest
impact on scheme viability. Therefore, DTZ has undertaken analysis on the impact development
timescales are having on scheme viability.
Scenario Five: Varying Development Timescales
5.30 This scenario again keeps all other impacts in the baseline position as a constant and changes only
the development timescales. At the baseline position, a rate of between 12 and 24 completions per
year is being assumed dependent upon property size. In this scenario the following build rates have
been tested:
•
Development at 30 dwellings per annum
•
Development at 50 dwellings per annum
•
Development at 70 dwellings per annum
5.31 Each of these scenarios have been tested in percentage changes of 5% until the higher percentage
increase of the scheme means it becomes unviable to determine what level of affordable housing
would be deliverable if the build rates could be increase in the current market conditions (constant
values and costs as at Baseline Position August 2008).
Page | 45
Scenario 5a: Development rate of 30 dpa – 5% affordable housing 50/50 split
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
36.44%
18.69%
8.25%
3
120
22.48%
12.77%
6.37%
5
200
17.77%
10.63%
5.76%
1
43
34.59%
14.24%
1.16%
3
130
24.94%
11.72%
2.31%
5
217
18.16%
8.73%
1.60%
1
45
14.05%
5.81%
-1.88%
3
135
10.85%
5.69%
0.18%
5
225
9.55%
5.46%
0.87%
1
60
21.35%
21.84%
14.90%
3
180
12.84%
13.62%
9.68%
5
300
10.94%
11.70%
8.23%
1
35
12.82%
6.51%
5.40%
3
105
7.87%
4.18%
3.51%
5
175
6.30%
3.55%
3.12%
5.32 The results for this scenario show that again most sites are undeliverable at 5% affordable housing
with a build rate of 30dph. This is not unexpected given that this is not a large increase in build rate
from the existing position. At 30 dpa only 15% of schemes were viable.
5.33 Increasing the development timescales to 50 dwellings per annum has the following effect on
affordable housing delivery.
Page | 46
Scenario 5b: Development rate of 50 dpa – 5% affordable housing 50/50 split
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
41.97%
22.37%
10.95%
3
120
26.56%
14.79%
7.34%
5
200
22.71%
12.94%
6.47%
1
43
41.97%
18.43%
3.63%
3
130
37.95%
17.97%
4.84%
5
217
28.25%
13.56%
3.23%
1
45
21.63%
11.84%
2.77%
3
135
16.16%
8.29%
0.69%
5
225
12.66%
7.08%
1.10%
1
60
22.86%
22.90%
14.81%
3
180
15.00%
15.70%
10.80%
5
300
12.55%
13.28%
9.29%
1
35
14.06%
7.59%
6.41%
3
105
9.93%
5.06%
4.16%
5
175
7.12%
3.56%
2.95%
5.34 At a build rate of 50 dpa, 22% of sites are viable with the delivery of 5% affordable housing. This
percentage is not enough to determine that 5% is viable across the district and therefore a
development rate of 70 dwellings per annum was tested.
Page | 47
Scenario 5c: Development rate of 70 dpa – 5% affordable housing 50/50 split
IRR Viability Target 20% on sites <50 units, 23% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
41.97%
22.44%
10.98%
3
120
31.87%
16.08%
7.85%
5
200
24.02%
12.79%
5.71%
1
43
41.97%
18.43%
3.63%
3
130
52.28%
27.11%
10.75%
5
217
32.35%
14.92%
3.09%
1
45
21.63%
11.84%
2.77%
3
135
20.15%
10.97%
2.27%
5
225
16.55%
9.68%
12.57%
1
60
22.89%
22.94%
14.83%
3
180
13.29%
14.22%
10.80%
5
300
12.73%
13.258%
9.29%
1
35
14.06%
7.59%
6.41%
3
105
11.14%
5.37%
4.13%
5
175
7.12%
3.56%
2.95%
5.35 At build levels of 70 dwellings per annum, almost 30% of schemes are viable at 5% affordable
housing and indeed in the South East and North West high IRR’s were calculated in high value areas
which demonstrates that in these areas even higher levels of affordable housing could potentially be
delivered.
5.36 It is clear from all the evidence presented for scenarios 1 to 6, the current state of the property market
is taking its toll on the viability of development across the residential market. In these uncertain and
risky times, development of most schemes has slowed down or ceased and developers are not
committing to starting new schemes. This is inevitably having a significant impact on the economic
viability assessment as the date of valuation is at a time of unprecedented market lows. In order to
reflect the fact that the property market is cyclical and that any affordable housing policy adopted
Page | 48
needs to reflect market changes, analysis has been undertaken as to what levels of affordable
housing would have been viable in more ‘normal’ market conditions.
5.37 This work has been undertaken using scenario 7 which undertakes analysis on a range of variables
through altering build periods, development costs and revenues at the same time in a number of
different scenarios in order to mirror varying market conditions. The results of all the separate
circumstances tested can be seen in Appendix 5. This period represents the highest point in the
market over the last ten years and will allow for an analysis of the range of affordable housing
percentages that could be delivered across the Wakefield district during a typical property cycle.
Scenario Six.
5.38 The conditions assumed for this market are as follows:
•
Construction costs – apartments £90psf, houses £80psf
•
20% increase in revenues from baseline
•
Sales Rate 50 units per annum (medium to low density) 60 units per annum (high density)
•
Professional Fees 6%
•
Contingency 3%
•
IRR Targets 20% on larger schemes 18% on smaller schemes
Page | 49
Scenario 6 - 5% Affordable housing with 50% social rented 50 intermediate tenures
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
86.7%
53.7%
51.8%
3
120
64.6%
49.0%
41.8%
5
200
37.0%
30.2%
27.8%
1
43
86.7%
57.4%
40.0%
3
130
61.0%
41.4%
29.8%
5
217
37.0%
26.8%
20.4%
1
45
61.2%
50.0%
39.0%
3
135
41.9%
35.3%
28.3%
5
225
27.6%
24.2%
20.4%
1
60
59.3%
61.8%
52.9%
3
180
40.6%
43.9%
39.0%
5
300
25.1%
27.6%
25.4%
1
35
47.2%
42.2%
44.0%
3
105
35.6%
32.8%
35.5%
5
175
20.9%
20.2%
23.1%
5.39 Using this development scenario 5% affordable housing is deliverable across all value areas for the
whole district.
Page | 50
Scenario 6 - 10% Affordable housing with 50% social rented 50 intermediate
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
74.5%
53.0%
42.7%
3
120
54.8%
40.3%
33.8%
5
200
32.3%
25.6%
23.2%
1
43
76.3%
48.6%
32.5%
3
130
56.4%
37.4%
26.2%
5
217
34.7%
24.6%
18.3%
1
45
54.5%
43.7%
33.4%
3
135
38.6%
32.0%
25.4%
5
225
25.5%
22.0%
18.3%
1
60
54.9%
57.4%
49.3%
3
180
37.0%
40.0%
35.3%
5
300
23.5%
25.8%
23.6%
1
35
37.4%
33.1%
35.4%
3
105
32.8%
30.1%
32.9%
5
175
18.9%
18.2%
21.0%
5.40 Using this development scenario 10% affordable housing is deliverable across all value areas for the
whole district.
Page | 51
Scenario 6 - 15% Affordable housing with 50% social rented 50 intermediate
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
74.5%
53.0%
42.7%
3
120
54.8%
40.3%
33.8%
5
200
32.3%
25.6%
23.2%
1
43
74.5%
46.9%
31.1%
3
130
51.9%
33.4%
22.7%
5
217
32.3%
22.4%
16.2%
1
45
49.7%
39.3%
29.4%
3
135
34.5%
28.1%
21.6%
5
225
23.4%
19.9%
16.2%
1
60
49.2%
51.5%
43.6%
3
180
34.4%
37.3%
32.6%
5
300
21.3%
23.5%
21.2%
1
35
35.9%
31.6%
33.9%
3
105
27.6%
25.0%
27.8%
5
175
17.1%
16.4%
19.0%
5.41 Using this development scenario 15% affordable housing is deliverable across 91% of all of the
schemes tested – this is therefore deemed to be a viable figure for affordable housing across the
district.
Page | 52
Scenario 6 - 20% Affordable housing with 50% social rented 50% intermediate
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
61.9%
42.4%
33.1%
3
120
50.5%
36.5%
30.2%
5
200
29.7%
23.0%
20.7%
1
43
61.9%
36.5%
22.0%
3
130
47.8%
30.0%
19.5%
5
217
29.7%
19.9%
13.8%
1
45
42.9%
32.9%
23.7%
3
135
31.7%
25.5%
19.2%
5
225
21.0%
17.6%
13.9%
1
60
42.7%
45.0%
37.3%
3
180
30.0%
32.6%
28.1%
5
300
19.3%
21.4%
19.0%
1
35
30.7%
26.7%
29.2%
3
105
23.8%
21.3%
24.0%
5
175
14.7%
13.9%
16.4%
5.42 Using this development scenario 20% affordable housing is deliverable across 87% of all of the
schemes tested – this is therefore deemed to be a viable figure for affordable housing across the
district, however developers may have more difficulty delivering to this level of affordable housing
in rural areas.
Page | 53
Scenario 6 - 25% Affordable housing with 50% social rented 50% intermediate
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
61.9%
42.4%
33.1%
3
120
46.0%
32.4%
26.5%
5
200
27.5%
20.9%
18.4%
1
43
61.9%
36.5%
22.0%
3
130
43.6%
26.2%
16.2%
5
217
27.5%
17.8%
11.8%
1
45
40.0%
30.5%
21.5%
3
135
27.6%
21.5%
15.5%
5
225
19.0%
15.5%
11.8%
1
60
36.0%
38.2%
30.9%
3
180
26.2%
28.7%
24.3%
5
300
17.4%
19.3%
16.7%
1
35
23.5%
20.0%
22.8%
3
105
21.0%
18.7%
21.4%
5
175
12.6%
11.6%
14.0%
5.43 Using this development scenario 25% affordable housing is deliverable across 78% of all of the
schemes tested – this is therefore deemed to be a viable figure for affordable housing across the
district, however developers may have more difficulty delivering to this level of affordable housing
in the Rural areas and this figure begins to become marginal in lower value areas.
Page | 54
Scenario 6 - 30% Affordable housing with 50% social rented 50% intermediate
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
56.0%
37.0%
28.7%
3
120
41.0%
28.0%
22.4%
5
200
25.0%
18.4%
15.9%
1
43
56.0%
31.3%
17.8%
3
130
38.9%
22.1%
12.5%
5
217
25.0%
15.4%
9.5%
1
45
36.5%
27.0%
18.5%
3
135
24.1%
18.1%
12.3%
5
225
16.5%
13.0%
9.4%
1
60
31.3%
33.4%
26.6%
3
180
23.2%
25.4%
21.1%
5
300
15.0%
16.7%
14.2%
1
35
23.5%
20.0%
22.8%
3
105
17.8%
15.5%
18.1%
5
175
10.3%
9.3%
11.5%
5.44 Using this development scenario, 30% affordable housing is deliverable across 67% of all of the
schemes tested. It is recommended that 70% of sites should be viable prior to a policy begin classed
as robust therefore at 67% viability overall the above falls slightly below the acceptable threshold. In
this scenario the Local Authority may wish to alter the affordable housing tenure splits in order to
maximise the number of affordable dwellings which area delivered. If we run this development model
again with a split of 30% social rented and 70% intermediate tenure, 78% of hypothetical sites tested
deliver 30% affordable housing indicating a robust approach.
Page | 55
Scenario 6- 30% Affordable housing with 30% social rented 70% intermediate
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
51.4%
33.6%
25.9%
3
120
39.9%
27.3%
22.0%
5
200
24.3%
18.0%
15.6%
1
43
55.3%
31.2%
17.9%
3
130
39.9%
23.5%
14.0%
5
217
25.7%
16.4%
10.6%
1
45
36.2%
27.0%
18.7%
3
135
25.0%
19.3%
13.7%
5
225
17.4%
14.2%
10.7%
1
60
35.9%
38.4%
31.6%
3
180
24.6%
27.2%
23.0%
5
300
15.7%
17.6%
15.3%
1
35
23.7%
20.8%
24.2%
3
105
18.2%
16.4%
19.5%
5
175
11.2%
10.5%
13.0%
5.45 This scenario has demonstrated that at the peak of the market in early 2007, the Wakefield District
could have delivered 30% affordable housing across 67% of its sites at a tenure split of 50% social
rented to 50% intermediate tenure. The results of the SHMA work have demonstrated a likely
requirement for 80% social rented and 20% intermediate housing, If we assume a development
scenario with that split of affordable housing the following results are produced.
Page | 56
Scenario 6 - 30% Affordable housing with 80% social rented 20% intermediate
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
50.6%
31.69%
23.06%
3
120
39.64%
25.97%
19.83%
5
200
23.79%
16.82%
13.83%
1
43
50.60%
26.36%
12.97%
3
130
37.63%
20.52%
10.65%
5
217
23.79%
13.96%
7.77%
1
45
50.60%
26.36%
12.97%
3
135
37.63%
20.52%
10.65%
5
225
23.79%
13.69%
7.77%
1
60
31.59%
32.85%
25.98%
3
180
21.64%
23.40%
18.90%
5
300
14.32%
15.76%
13.12%
1
35
18.32%
14.31%
16.59%
3
105
15.41%
12.47%
14.62%
5
175
9.48%
8.03%
9.87%
5.46 These results show that with this tenure split, 50% of the sites can viably deliver 30% affordable
housing and in low value areas the viability is the most marginal. In order to meet the SHMA’s
identified split of affordable housing tenure, a maximum affordable housing threshold of 20% is
possible under this development scenario (representative of the peak of the market) and this is an
area in which the Local Authority’s affordable housing policy will have to be flexible in order to
maximise the delivery of affordable housing numbers and meet the tenure needs of those identified as
in housing need.
5.47 The results of this development scenario: 20% affordable housing with 80% social rented and 20%
intermediate tenure can be seen below. This produces a viability result of 75% of hypothetical sites
being viable at this level. Low value areas will struggle to deliver 20% affordable housing at this tenure
split.
Page | 57
Scenario 6 - 20% Affordable housing with 80% social rented 20% intermediate
IRR Viability Target 15% <50 units, 18% on sites of 50 & over units.
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Location
The South East
The North West
The Five Towns
City of Wakefield
Rural Areas
Site
Size in
ha
High
Mid
Low
No of
Dwellings
% IRR
% IRR
% IRR
1
40
62.00%
41.91%
32.31%
3
120
49.87%
35.42%
28.83%
5
200
29.53%
22.59%
19.86%
1
43
62.00%
36.21%
21.57%
3
130
47.30%
29.13%
18.52%
5
217
29.53%
19.50%
13.23%
1
45
42.90%
32.85%
23.66%
3
135
31.71%
25.47%
19.21%
5
225
21.04%
17.57%
13.89%
1
60
43.38%
45.08%
37.38%
3
180
29.78%
32.14%
27.47%
5
300
19.06%
20.96%
18.50%
1
35
28.32%
24.04%
26.20%
3
105
23.10%
20.18%
22.54%
5
175
14.54%
13.44%
15.73%
5.48 In summary, the key questions addressed by the economic viability assessment are whether the level
of affordable housing and the balance of tenure proposed are deliverable, whether a particular level of
affordable housing provision will inhibit development generally, and by implication what level of
affordable housing provision can be delivered without subsidy.
5.49 Determining the appropriate affordable housing percentage is difficult in the current market conditions.
The economic viability assessment undertaken has demonstrated that a range of between 0% and
30% affordable housing can be delivered across the district depending on market variables and
affordable housing tenure splits.
Page | 58
Page | 59
6.0 Affordable Housing Policy in Rural Areas.
6.1
Following completion of the Economic Viability Appraisal above, Wakefield MDC instructed DTZ to
undertake some additional research and economic viability testing of the proposed threshold of
affordable housing in rural areas.
6.2
The additional element to be tested against economic viability thresholds is the viability of delivering
affordable housing on small sites in rural areas, delivering 6-8 units (0.2ha sites varying densities) and
therefore triggering the need for affordable housing delivery in line with Policy D7 of the submitted
Development Policies development plan document.
Policy D 7
Affordable Housing
All proposals for residential development must provide affordable housing to meet
identified need where:
a. the proposal is for 15 or more dwellings, or is on a site of 0.5 hectares or more in area, and is
within a settlement of more than 3,000 people;
b. the proposal is for 6 or more dwellings, or is on a site of 0.2 hectares or more, and is
within a settlement of 3,000 people or fewer.
6.3
The basis for this additional work (following the same methodology as above) was to appraise a range
of scenarios in respect of hypothetical sites using a model which calculates the cashflow of the
hypothetical schemes and the internal rate of return (IRR), similar to the approach used by most
house builders/developers.
6.4
The testing focused on new build residential developments, as these are the sites that will deliver
affordable housing through Section 106 agreements. IRR was used as a measure of the sites
profitability. Thus it was assumed that sites resulting in an IRR lower than 18% for small sites in rural
areas (6-8 units) would not be brought forward by the developer given the margins required and risks
involved in development. The IRR target of 18% is lower than that used in the previous modelling
work as it represents the reduced risk in delivery of a smaller scale scheme.
6.5
The general assumptions which informed each scenario are set out in the appendix 1 and were
agreed with a range of stakeholders through a consultation event in July 2008. Assumptions relating
to rural areas in Wakefield are as follows:
Page | 60
Land Values in Rural Communities
High value
£2,400,000 per hectare
Mid value
£1,680,000 per hectare
Low value
£1,080,000 per hectare
Densities in Rural Communities
6.6
High
40 dph
Medium
35 dph
Low
30 dph
The base assumption for this scenario is that social rented units will be prioritised in these areas and
therefore when affordable housing is to be delivered, it is assumed to be one unit of social rented
accommodation. Where more than one unit of affordable housing is to be delivered, the split is
assumed to be equal across the social rented and intermediate (shared ownership) tenures.
6.7
The scenarios tested in the main modelling results were as follows:
1. Baseline Position – valuation date August 2008
2. Varying levels of Section 106 payments
3. Changes in build costs
4. Changes in revenues
5. Changes in development timescales
6. Concurrent changes in scenarios 4, 5 and 6.
6.8
For the purpose of this additional work Scenario 5 – changes in development timescales has not been
tested as this is not relevant given the small number of units to be developed on these hypothetical
sites. For each of these scenarios, various percentages of affordable housing and a range of tenure
splits were tested.
6.9
As part of our modelling, we have already tested three different site sizes in rural areas, namely sites
of 1 ha, 3 ha and 5 ha. The purpose of this element of the work was to test sites delivering units
around the threshold requirement for affordable housing in rural areas (6 units). This work assumes a
site size of 0.2 ha.
Page | 61
6.10 Density and unit split are as follows:
Density
High
Medium
Low
No. of
Dwellings
8
7
6
% 2 Bed
Bungalows
10
15
15
% 2 Bed
Houses
5
30
25
% 3 Bed
Houses
30
40
35
% 4 Bed
Houses
45
10
15
% 5 Bed
Houses
10
5
10
6.11 Housing Mix was taken as follows:
Density
High
Medium
Low
2 Bed
House
1
3
2
3 Bed
House
2
3
2
4 Bed
House
4
1
1
5 Bed
House
1
0
1
6.12 Appraisals were carried for all scenarios, for high, medium and low value areas within the Rural
Communities and the results were recorded adopting the ‘traffic light’ system used in the main results
of this report. In all cases, the profitability of a site decreased as levels of affordable housing were
increased. Sites in high value areas tended to have the capacity to deliver the highest levels of
affordable housing whilst remaining profitable. Sites in low value areas experienced the greatest
impact on profitability as quotas of affordable housing were increased.
6.13 Generally, profitability (IRR) increased as the tenure split was adjusted to include a greater proportion
of intermediate tenures. However, in real terms, this differential tended not to be significant enough to
increase the level of affordable housing which could be provided.
6.14 At the baseline position of August 2008, the modelling of small sites in the rural communities
demonstrated that there was little scope to deliver any affordable housing in the prevailing market
conditions and furthermore, that the delivery of any housing development is potentially unviable and
unlikely due to uncertainty in the financial market and a fall in property values. The impact of the
unprecedented market conditions at the baseline date of valuation mean that if, the affordable housing
policy were formulated based solely on this analysis, an affordable housing requirement of 0% would
be deliverable. However, over the course of the Core Strategy and the life of any affordable housing
policy it is recommended to expect, having regard to the cyclical nature of the housing market, that
the market conditions will vary significantly. WMDC, need to ensure that any policy they put in place is
flexible enough to deal with these changes in market conditions.
Page | 62
6.15 In order to assess appropriate affordable housing percentages to reflect changing market positions,
analysis of different scenarios or market conditions was undertaken to determine at what point and
level affordable housing delivery is viable. Scenarios to reflect the height of the recent market in early
2007 show that 30% affordable housing could be viably delivered at a 50/50 split between social
rented and intermediate tenures where development is to high and medium densities. This is the
highest level of affordable housing which has been deemed viable in all the modelling work which has
been undertaken.
6.16 This chapter concludes that, in isolation, site density and tenure split have a limited effect on the level
of affordable housing that was sustainable on the hypothetical sites tested. Land value, on the other
hand is a very significant factor in determining affordable housing viability. Changes in build rates also
have a significant positive impact on the viability of schemes as shortening the timeframes for a
development de-risks and reduces costs.
6.17 In reality, the development dynamics for infill sites is unlikely to follow the same model as larger sites.
Infill sites are generally undertaken by smaller developers/housebuilders and overheads and time
frames are likely to be different to a site being developed by a major housebuilder. Further, there may
be unforeseen or abnormal costs that are disproportionate to the value of the site and a flexible
approach to the affordable requirements may therefore be required.
6.18 The Local Authority’s original target of 30% affordable housing is ambitious in the current market and
certainly in the short to medium term until the market recovers. Without social housing grant to
contribute, affordable housing delivery at these levels will make schemes unviable for standard
Section 106 sites. However, with grant and additional revenue in these scenarios, these levels may be
deliverable. The results of the modelling work have determined that the percentage of affordable
housing requested by the Local Authority over the coming years will have to be flexible and potentially
alter to reflect prevailing market conditions in order to ensure that the optimum level of affordable
housing is delivered across the plan period. The conclusion of this chapter provides ranges and
indications of what market conditions would have to be in place to deliver higher percentages of
affordable housing on small sites in rural areas. These results are presented below.
Page | 63
IRR Viability Target 18% 6-8 units
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Scenario
1 Baseline (0% AH)
2
No
Section
106
Contribution (0% AH)
3a Build Costs less 5%
(0% AH)
3b Build Costs less 10%
No of
Dwellings
High
Mid
Low
Density
% IRR
% IRR
% IRR
High
8
12.5%
4.4%
1.5%
Med
7
5.8%
2.3%
2.6%
Low
6
0.7%
-3.4%
-4.0%
High
8
12.5%
4.4%
1.3%
Med
7
5.8%
2.3%
2.4%
Low
6
0.7%
-3.4%
-4.3%
High
8
15.7%
7.9%
5.2%
Med
7
8.4%
5.3%
5.9%
Low
6
3.1%
-0.6%
-1%
High
8
19.1%
11.6%
5.2%
Med
7
11.1%
5.3%
5.9%
Low
6
5.7%
-0.6%
-1%
High
8
22.7%
15.5%
13.9%
Med
7
13.9%
11.8%
13.8%
Low
6
8.3%
5.5%
6.3%
High
8
17.4%
9.1%
6.0%
Med
7
10.3%
6.8%
7.0%
Low
6
5.0%
0.9%
0.1%
High
8
22.4%
13.8%
10.7%
Med
7
14.8%
11.3%
11.7%
Low
6
9.3%
5.0%
4.4%
High
8
27.2%
18.4%
15.3%
Med
7
19.2%
15.7%
16.3%
Low
6
13.5%
9.3%
8.7%
(0% AH)
3c Build Costs less 10%
(0% AH)
4a Revenue plus 5%
(0% AH)
4b Revenue plus 10%
(0% AH)
4c Revenue plus 15%
(0% AH)
Page | 64
IRR Viability Target 18% 6-8 units
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Scenario
6a Build cost less 5%
revenue plus 5% (0%
affordable)
6a Build cost less 5%
revenue plus 5% (10%
affordable – 1 SR unit)
6b Build cost less 5%
revenue plus 10% (0%
affordable)
6b Build cost less 5%
revenue plus 10% (10%
affordable – 1 SR unit)
6c Build cost less 5%
revenue plus 15% (0%
affordable)
6c Build cost less 5%
revenue plus 15% (10%
affordable – 1SR unit)
6d Build cost less 10%
revenue plus 5% (0%
affordable)
6d Build cost less 10%
revenue plus 5% (10%
affordable – 1 SR unit)
No of
Dwellings
High
Mid
Low
Density
% IRR
% IRR
% IRR
High
8
20.8%
12.7%
10.0%
Med
7
13.0%
10.0%
10.7%
Low
6
7.5%
3.8%
3.5%
High
8
11.7%
3.8%
1.0%
Med
7
1.8%
-1.2%
-0.7%
Low
6
-2.5%
-6.4%
-6.2%
High
8
25.8%
17.5%
14.9%
Med
7
17.6%
14.5%
15.5%
Low
6
11.8%
8.0%
8%
High
8
16.5%
8.7%
6.1%
Med
7
6.1%
3.5%
4.3%
Low
6
0.9%
-2.6%
-2.3%
High
8
30.1%
22.3%
19.8%
Med
7
22.1%
19.0%
20.2%
Low
6
16.2%
12.4%
12.4%
High
8
21.2%
13.3%
10.7%
Med
7
10.3%
7.8%
8.8%
Low
6
4.9%
1.4%
1.9%
High
8
24.3%
16.7%
14.4%
Med
7
15.8%
13.2%
14.7%
Low
6
10.1%
6.8%
7.2%
High
8
15.0%
7.9%
5.7%
Med
7
4.5%
2.4%
3.6%
Low
6
-0.6%
-3.7%
-3.0%
Page | 65
IRR Viability Target 18% 6-8 units
IRR above target
IRR equal to or -2.5% from target
IRR < 2.5% below target
Value Zone
Scenario
6e Build cost less 10%
revenue plus 10% (0%
affordable)
6e Build cost less 10%
revenue plus 10% (10%
affordable – 1SR unit)
6f Build cost less 10%
revenue plus 15% (0%
affordable)
6f Build cost less 10%
revenue plus 15% (10%
affordable – 1SR unit)
6f Build cost less 10%
revenue plus 15% (20%
affordable – 1SR unit, 1
intermediate tenure)
6g Build cost less 15%
revenue plus 5% (0%
affordable)
6g Build cost less 15%
revenue plus 5% (10%
affordable-1SR unit)
6h Build cost less 15%
revenue plus 10% (0%
affordable)
No of
Dwellings
High
Mid
Low
Density
% IRR
% IRR
% IRR
High
8
29.4%
21.5%
19.4%
Med
7
20.5%
17.9%
19.6%
Low
6
14.6%
11.2%
11.8%
High
8
20.0%
12.6%
10.5%
Med
7
8.8%
6.7%
8.2%
Low
6
3.5%
0.4%
1.3%
High
8
34.5%
26.5%
24.5%
Med
7
25.1%
22.6%
24.5%
Low
6
19.0%
15.7%
16.3%
High
8
24.8%
17.3%
15.3%
Med
7
13.2%
11.2%
12.9%
Low
6
7.6%
4.5%
5.7%
High
8
18.8%
10.9%
8.6%
Med
7
13.2%
11.2%
12.9%
Low
6
7.6%
4.5%
5.6%
High
8
28.0%
20.7%
19.1%
Med
7
18.7%
16.6%
18.9%
Low
6
12.9%
10.1%
11.1%
High
8
18.6%
11.8%
10.2%
Med
7
7.2%
5.6%
7.6%
Low
6
2.0%
-0.6%
0.7%
High
8
33.3%
25.8%
24.3%
Med
7
23.5%
21.5%
24.0%
Low
6
17.4%
14.6%
15.8%
Page | 66
Scenario
6h Build cost less 15%
revenue plus 10% (10%
affordable-1SR Unit)
6h Build cost less 15%
revenue plus 10% (10%
affordable-1SR Unit, 1
intermediate unit)
6i Build cost less 15%
revenue plus 15% (0%
affordable)
6i Build cost less 15%
revenue plus 15% (10%
affordable-1SR Unit)
6i Build cost less 15%
revenue plus 15% (10%
affordable-1SR Unit, 1
intermediate unit)
6j Strong Market
Conditions (0%
affordable)
6j Strong Market
Conditions (10%
affordable- 1SR unit)
6j Strong Market
Conditions (20%
affordable- 1SR unit. 1
intermediate)
6j Strong Market
Conditions (30%
affordable- 2SR unit. 1
intermediate)
No of
Dwellings
High
Mid
Low
Density
% IRR
% IRR
% IRR
High
8
23.7%
16.7%
15.2%
Med
7
11.7%
10.2%
12.4%
Low
6
6.2%
3.6%
5.2%
High
8
17.6%
10.3%
8.5%
Med
7
11.7%
10.2%
12.4%
Low
6
6.2%
3.6%
5.2%
High
8
38.5%
30.9%
29.5%
Med
7
28.2%
26.3%
29.0%
Low
6
21.9%
19.1%
20.5%
High
8
28.7%
21.6%
20.25%
Med
7
16.1%
14.7%
17.2%
Low
6
10.4%
7.8%
9.7%
High
8
22.9%
15.4%
13.7%
Med
7
9.8%
8.1%
10.3%
Low
6
3.3%
-10.6%
-9.0%
High
8
47.0%
38.7%
38.0%
Med
7
35.5%
31.0%
34.6%
Low
6
28.7%
24.4%
26.5%
High
8
38.8%
29.1%
28.5%
Med
7
23.0%
18.9%
22.3%
Low
6
16.8%
13.6%
16.4%
High
8
31.4%
29.1%
28.5%
Med
7
23.0%
18.9%
22.3%
Low
6
16.8%
13.6%
16.4%
High
8
26.3%
17.5%
15.6%
Med
7
21.2%
17.2%
21.8%
Low
6
10.0%
6.3%
8.6%
Page | 67
6.19 In conclusion, we would comment that this supplementary work has been done undertaking the
baseline data collected for the rural communities. The work has been completed in response to
queries raised by the Inspector regarding the threshold requirements in rural areas. This work
provides further results to supplement that provided in the main economic viability report to identify
what impact the proposed affordable housing policy has on the viability of development on small sites.
The results of this work are broadly in line with the results of the main report.
Page | 68
Page | 69
7.0 Policy Implications
7.1
The purpose of this study is to inform the development of the affordable housing policy for Wakefeild
District Council. The study addressed the following key issues:
•
On sites capable of achieving 15 or more units, should a minimum 20% affordable housing
targets be retained or could this be increased to 30% or some intermediate point?
•
In Rural areas on sites capable of achieving 6 units or more, what would be the maximum
proportion of affordable housing that could be achieved on site?
•
What should the tenure split between intermediate and social rented units be in order to
maximise affordable housing delivery and ensure a greater overall proportion of affordable
housing?
7.2
The final section of the report addresses these issues in turn. In doing so, DTZ draw upon the
findings of the study, the analysis contained in the Strategic Housing Market Assessment, and wider
experience of the operation of affordable housing policies.
Policy Implication for Affordable Housing Quotas
7.3
Until the point of this assessment, WMDC were generally securing quotas of between 10-15% of
affordable housing on site in residential developments of more than 15 units. The results of the SHMA
are showing that this should be moved to seek a 30% affordable housing quota to meet the current
demand across the district.
7.4
The results of the economic viability assessment show that increasing the quota of affordable housing
by 10% will decrease profitability (IRR) on a scheme considerably. The results also highlight that the
key variables affecting viability with different levels of affordable housing quota are the values
(revenues) in the area in which the scheme is located and the development timescales involved with
construction and sale of residential units in the current market.
7.5
The viability testing indicates that a 30% affordable housing target would be deliverable without grant
in high to mid value areas in the market conditions which were previously at the time of the SHMA
was undertaken (early 2007), but that grant would probably be needed to support this level of
provision in low value and low density areas.
Page | 70
7.6
At the scenario which assumes early 2007, the split of affordable housing tenure is an important
consideration for the delivery of an increased quota of affordable housing on site. A tenure split of
50/50 social rented and shared ownership is deliverable at 30% affordable housing, however any split
which has a greater proportion of social rented units has an impact on the profitability and viability of
the scheme at 30% affordable housing.
7.7
The economic viability assessment undertaken has demonstrated that a range of between 0% and
30% affordable housing can be delivered across the district depending on market cycles/variables
and affordable housing tenure splits. The following provide examples of when different levels of
affordable housing will be viable with varying market condition. Determining the appropriate
affordable housing percentage is difficult in the current market conditions.
•
Baseline Position – 0% to 5% affordable housing viable.
In the current market conditions the analysis has shown that delivery of 5% affordable
housing is viable, in high density, high value areas, however in the more mid market and
lower market areas of the district, 0% affordable housing is deliverable in the current market.
Indeed, many sites will struggle to bring forward any residential development in the current
market conditions.
•
Baseline Position – Build Rate increase to 70 dwellings per annum – 5% affordable
housing viable.
If all other variables at the baseline position remain constant and build rates are increased
to more market norms, 10% affordable housing is deliverable across most parts of the
district, lower value and lower density schemes are marginally unviable under this scenario.
•
Baseline Position – Build Costs decrease by 15% and Revenues increase by 15% 10% affordable housing viable.
If all other variables at the baseline position remain constant and build costs decrease by
15% and revenues increase by 15% then in most areas 10% affordable housing is viable in
across the District.
•
Baseline Position - Build Costs decrease by 15% and Revenues increase by 15% and
build rate increased to 70 dph – 15 - 20% affordable housing viable
If the variables are altered as above than 15% affordable housing becomes viable in most
areas of the district and 20% affordable is viable in high value areas.
Page | 71
•
Baseline Position – concurrent change in Build costs, revenues and build rates – 2530% affordable housing viable
If the baseline position is altered to mirror a development process as the height of the
market in late 2006 then delivery of 25% affordable housing is viable in all areas and 30% is
viable in high to mid value areas which have high to mid densities. The movement from the
baseline position to generate these results is as follows;
Revenue 20% increase
Construction costs :
Apartments £90 / Sq Ft
Houses£80 / Sq Ft
IRR requirement of viability: 18% -20% - to reflect more stable market conditions
Sales/Build Rates: Approx 50 unit sales/completions per year (60 unit sales/completions per
year on high density sites due to limitations on model)
7.8
The results of the Economic Viability testing show that any policy put in place by WMDC for the
delivery of affordable housing needs to be flexible and have built in trigger points which enable more
affordable housing to be delivered as the market improves to more normal market conditions.
7.9
Clearly, setting a policy at 5% based on the results of the baseline analysis is unsustainable across
the course of the plan period and will not meet the identified housing need of people across the
Wakefield District. In order to ensure that any future developments are viable and not stifled by an
onerous affordable housing requirement, the policy should be flexible and allow sites to be considered
on an individual site specific basis having regard to prevailing market conditions. This method will
allow both for the maximisation of affordable housing on site and the viability of schemes aiding
delivery in the long term. The Local Authority’s statutory requirement is to maximise the number of
affordable homes delivered across the district regardless of market conditions and having a policy
which builds in flexibility and allows for the establishment of viability on a scheme by scheme basis is
the best way of meeting this requirement.
Establishing Viability on a Scheme by Scheme Basis
7.10 This study has, as previously explained, examined the viability at a strategic level looking at viability
on hypothetical sites across the district using a consistent basis of assumptions tailored to different
site and locational characteristics. It does not seek to establish viability on particular sites. WMDC can
expect developers to seek reductions in the affordable housing they are expected to provide, arguing
that their schemes is not viable with the level of affordable housing implied by policy. It is important
that authorities are equipped to handle the resultant negotiations.
Page | 72
7.11
As part of this study DTZ were asked to review and comment on existing models of individual site
appraisals. In essence there are two tools available to assist in appraising the impact of affordable
housing provision on site viability:
1.
Argus Circle Developer - This is the industry standard development appraisal software. It
allows for multi-phasing and in depth analysis of project make up. The output is a residual
land value with a detailed cash flow and a resultant IRR. This method of calculation is the
same as that used by the majority of housebuilders when undertaking financial appraisals
2.
The Housing Corporation Economic Appraisal Tool - For more marginal sites, this uses an
economic assessment of the site to predict and agree the viability of proposed levels of
affordable housing and to demonstrate the additionality the grant investment will deliver over
and above on-site developer contributions
7.12 The two tool kits above have very similar outputs. The Local Authority will need to make a decision as
to where they wish to undertake a viability appraisal of each scheme submitted for a planning
application which deviates away from the required policy position at the time of application. This
approach does have its advantages in that in ensures all developments maximise the delivery of
affordable housing by providing detail on what is deliverable but also has cost implications to the
Local Authority due to the time involved in completing and negotiating appraisals on each
development scheme. If it is decided that individual scheme analysis is a requirement where an
application does not apply with the policy, then WMDC will have to decide which method of appraisal
best suites their needs and specific objectives.
7.13 The most accurate and widely used tool in the market is Argus Circle Developer. This however is
costly to buy and requires a degree of specialist expertise to use it. At present software also lacks a
user guide which is overcome by a helpline, but often this is difficult to access so organisations rely on
in house expertise. It may be that WMDC wish to employ a consultant to undertake the viability
appraisals on their behalf to overcome these concerns.
Conclusion
7.14
In summary, the key questions addressed by the economic viability assessment are whether the
level of affordable housing and the balance of tenure proposed are deliverable, whether a particular
level of affordable housing provision will inhibit development generally and, by implication, what level
of affordable housing provision can be delivered without subsidy. Determining the appropriate
affordable housing percentage is difficult in the current market conditions. The economic viability
assessment undertaken has demonstrated that a range of between 0% and 30% affordable housing
can be delivered across the district depending on market cycles/variables and affordable housing
tenure splits.
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