Valuation for affordable housing

24 August 2016

Charles Solomon explains why and how RICS' guidance on the valuation of land for affordable housing has been updated

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In 2010, RICS published the first edition of the Valuation of land for affordable housing guidance note. Since then, there have been significant changes to the way in which affordable housing is developed, and in particular how grants and other subsidies are applied.

We recently completed our review of the first edition, and the revised note was published in April. The aim is to help practitioners in valuing such land, because housing and planning policy is in a constant state of flux and they will need to take account of both recent changes and emerging policies.

The guidance applies to England and Wales, where affordable housing provision is governed through the planning system; in Scotland and Northern Ireland, it falls under housing policy.

Although the means of provision may differ in terms of their detail, the valuation approach is essentially the same and the guidance note may be adapted as necessary. The guidance is recommended best practice and describes the standard of work that is expected of a reasonable, competent valuer experienced in this area. What is affordable housing?

In England, the National Planning Policy Framework (NPPF) defines such housing as:

'Social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market. Eligibility is determined with regard to local incomes and local house prices.

'Affordable housing should include provisions to remain at an affordable price for future eligible households or for the subsidy to be recycled for alternative affordable housing provision.'

Wales

In Wales the definition is contained in Technical Advice Note 2: Planning and Affordable Housing:

'housing provided to those whose needs are not met by the open market'.

The note goes on to say that affordable housing in Wales should:

• meet the needs of eligible households, including availability at low enough cost for them to afford, determined with regard to local incomes and house prices
  
• include provision for the home to remain affordable for future eligible households, or, if a home ceases to be affordable or staircasing to full ownership takes place, any subsidy should generally be recycled to provide affordable housing to replace it.

Affordable Housing in Wales can be considered to fall into 2 categories:

• social rented housing – provided by local authorities and registered social landlords, the latter also referred to more commonly as housing associations
• intermediate housing – where prices or rents are above those of social rented housing but below market housing prices or rents. This can include equity sharing schemes; for example, HomeBuy. Intermediate housing differs from low-cost market housing, which the Welsh government does not consider to be affordable for the purpose of the land-use planning system.

Tenure types

To identify eligible households, studies are undertaken at a local level to assess housing needs, as well as the relationship between incomes and house prices. There are several different tenure types that qualify as affordable housing. Figure 1 shows the 3 main tenures and types.

Figure 1

Approach

The approach to the valuation of land for affordable housing and the methodology adopted have much in common with a conventional valuation of development land; therefore the guidance needs to be understood in the context of RICS Valuation Information Paper (VIP) 12: Valuation of Development Land, which is currently being revised.

Valuation of affordable housing land is a special basis for a special purpose. Assumptions such as the inclusion of grants, subsidies and so on should be clearly stated where they have been taken into account as part of the valuation.

Any planning application for new development will need to comply with the relevant national and local planning policies, which may affect development viability. The NPPF explains the government’s advice on delivering sustainable housing development, with general principles on assessing viability provided in Planning Practice Guidance (PPG). The RICS guidance note Financial viability in planning responds to these documents and gives detailed advice on area-wide and scheme-specific viability assessments.

The guidance is recommended best practice and describes the standard of work that is expected of a reasonable, competent valuer

The valuation of affordable housing land can be very complex and relates to specialised markets. It requires a high level of expertise, and practitioners should be aware that assistance may be needed from other professionals.

A development scheme may range from one that is 100% affordable to one where affordable housing is an element of a larger mixed-tenure residential or mixed-use development, that is market-housing-led developments with provision for affordable housing through section 106 agreements.

The guidance note only gives advice on how to value land for the affordable housing element of a development scheme on a cleared or greenfield site, or where the site is to be redeveloped by removing  all or most of the existing buildings and constructing new ones. The other elements are valued as discussed in VIP 12. The guidance also does not apply to redevelopment based on refurbishment of existing buildings with limited demolition, although many of the principles will apply.

Pepperpotting

Some planning authorities favour distribution of the affordable housing elements throughout a scheme for social or other reasons, a practice known as 'pepperpotting'.

Such a distribution of accommodation in blocks of flats or throughout a housing or mixed-use development precludes the identification of a separate land value that can be attributed specifically to the affordable housing element, however.

While an apportionment of the value for the whole site can be made between that used for affordable and open-market accommodation, pepperpotting is not generally favoured by registered providers because of management issues and is becoming less widely used.

The opportunity to develop starter homes on exception sites should be taken into account as a potential alternative to both market  housing-led development and affordable housing schemes.
Exception sites include:

• commercial and industrial sites not currently identified as residential development sites
• rural exception sites.

Starter homes have prescribed maximum sale values: in 2016, these were £450,000 in London and £250,000 elsewhere in the country, inclusive of a minimum 20% discount.

PPG recommends that local planning authorities should require no Community Infrastructure Levy (CIL) or affordable housing provision in relation to these dwellings. Any market housing included in these schemes to make them financially viable would, however, incur CIL.

Methods

There are 2 approaches to the valuation of development land for affordable housing:

• comparison method: comparison with the sale price of land for similar kinds of development
• residual method: assessment of the value of the completed scheme and deduction of the costs of development, including the developer’s profit, to arrive at the underlying land value.

In practice, a valuation would typically rely on both techniques, with the comparable method normally being used more as a reality check. The degree to which either, or both, are used depends on the nature of the development being considered, the certainty about the costs and factors that relate to affordable housing and the complexity of the issues involved.

Charles Solomon, MRICS, is the author of the RICS Valuation of Land for Affordable Housing guidance note, 2nd edition

Further information

• Related competencies include Valuation, Planning, Housing strategy and provision
• This feature is taken from the RICS Land journal (July/August 2016)