Development land: viability assessments and affordable housing

A sensitive area

11 October 2017

Surveying professionals have come in for criticism for their role in viability assessments of development land and its capacity for affordable housing. Tony Mulhall explains how RICS standards and regulation underpin their work

The delivery of adequate and affordable housing is an important public policy objective, which RICS, as the leading body for the development and regulation of standards in land, property and infrastructure, supports. RICS also recognises that the measures adopted by the government, regional and local authorities have not succeeded in addressing the shortfall in housing of all kinds, particularly in areas of high demand. The organisation has consistently made representations to government concerning the difficulties of addressing the issue through conventional approaches.

Provision of affordable housing through the planning process is a complex and at times contentious area of practice and public policy. It is important to be aware of the legal and planning policy requirements imposed on chartered surveyors when providing objective viability advice.

A chartered surveyor's role in undertaking viability assessments on behalf of applicants, or reviewing them on behalf of public authorities to support planning determination, is just 1 contribution to the decision-making process. Indeed, the negotiation of planning obligations - including those on affordable housing - between an applicant and an authority will often involve other professionals and of course the principal parties themselves, and this may result in an outcome that differs significantly from that of the viability assessment itself.

Nonetheless, surveyors acting in this sensitive area play an important role in informing these negotiations, and as such their work is inevitably subject to increasing levels of public attention.

RICS professionals have come in for criticism about the way they carry out their role in the planning process where issues of development viability have been assessed, and the organisation has had occasion to investigate complaints that have been made about the conduct of regulated firms and practitioners.

Any complaint we receive regarding the conduct or competence of an RICS-regulated professional or firm is considered seriously through the independent regulatory process, described below; however, public criticism of the profession has been made without an explanation of the full context.

Guidance note

In 2012, the government produced the National Planning Policy Framework (NPPF) for England, with the aim of achieving growth by attracting investment and development. While it acknowledges the primacy of the plan-led system, the framework emphasises practical approaches to housing provision in a market context that can enable sustainable development.

RICS professionals provide objective advice to both private developers and public-sector bodies engaged with planning and development in the context of the NPPF. In response to requests from practitioners, it published the Financial viability in planning guidance note in 2012, which advises professionals on how the viability test that the NPPF requires can be satisfied.

Other methods have been adopted, and the government has accepted that there are different approaches. The main one preferred by some local authorities employs a site value that is based on existing use value (EUV), plus a fixed percentage uplift.

The guidance note advocates an approach based on market value, with an assumption that regard will be given to planning policy. Planning application decisions, planning inquiries and court decisions all rely on this guidance.

Many people reading critical comments may not also have read that RICS has published such guidance, and so they will not be aware of the advice provided to practising professionals. But it is under this guidance and other ethical requirements that chartered surveyors are regulated.

Principal criticisms

The principal criticism of the RICS guidance is that starting with market value, subject to certain assumptions, results in a higher land value in the appraisal than if this were entered in the appraisal as EUV plus a percentage uplift. The difficulty with this latter approach is that the percentage uplift is arbitrary unless it is pegged to market conditions - as required by the NPPF and planning practice guidance (PPG) - to encourage the land to be brought forward. There is also concern that without appropriate analysis and interpretation of comparable evidence there is a risk of valuers relying on transactional evidence that may not comply with policy in terms of affordable housing provision. Much of this arises from a lack of understanding of the ordinary competencies of the valuation profession in analysing and disaggregating comparable evidence.

Legal and policy frameworks

The guidance note is grounded in the statutory and regulatory planning regime for England. It is also consistent with government PPG first published in 2014. RICS guidance does not seek to determine policy; rather, it tries to bring clarity to decision-making by enabling evaluation of the critical elements that may have an impact on viability, and therefore on development, in an open and explicit way.

In setting the basis on which viability is to be assessed, the NPPF states that:

'to ensure viability the costs of any requirement likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking account of the normal costs of development and mitigation, provide competitive returns to a willing landowner and willing developer to enable the development to be deliverable.'

This is the basis for RICS advice on viability in a planning context. RICS guidance also recognises the wider role of the planning authority in achieving sustainable development, and acknowledges that the authority may refuse planning permission to achieve its wider objectives.

Reviews

Viability appraisals are mainly used in planning to determine whether an otherwise viable development is made unviable by the extent of planning obligations or other requirements. In accordance with the NPPF, financial viability for planning purposes is defined by RICS guidance as follows:

'An objective financial viability test of the ability of a development project to meet its cost including the cost of planning obligations, while ensuring an appropriate site value for the landowner and a market-risk-adjusted return to the developer in delivering that project.'

Site value is not just market value, as some have misrepresented it, but defined as:

'the market value subject to the following assumption: that the value has regard to development plan policies and all other material planning considerations and disregards that which is contrary to the development plan'.

Judgements are often based on valuation and informed by experience and expertise. The RICS approach satisfies the fundamental requirements of the NPPF and the PPG in relation to viability testing. Objectivity and reasonableness are always advocated in the conduct of initiating viability appraisals and in reviewing them.

Review of RICS guidance

RICS will shortly consult on amendments for a second edition of the Financial viability in planning guidance note.

RICS recognises the difficulty community groups have to understand figures provided in viability appraisals. It is intended that all reports be provided with a non-technical summary and that critical figures are set out with clear definitions for ease of comparison.

RICS will also require that a statement of objectivity and impartiality be included in professionals' terms and conditions of engagement when undertaking viability assessments and reviews. Confirmation must be provided by consultants acting on behalf of parties that no conflict of interest exists either.

Increasingly, the costs of viability consultants undertaking reviews for public authorities are recouped from applicants. The contractual relationship and therefore duty of care, however, is strictly between the public authority and the consultant and should never be affected or influenced by the source of payment, directly or indirectly. In many cases, payment of the authorities' consultant by the applicant is sought before the viability exercise.

RICS recommends transparency and fairness, albeit noting the need for confidentiality in certain circumstances if a scheme is to be successfully completed. Following a review, all third-party inputs on which reports rely will need to comply with the same requirements for objectiveness, impartiality and non-interference as apply to those undertaking and reviewing viability assessments.

Regulation

RICS regulation is governed by an independently led board. Its disciplinary regime always includes at least 1 non-surveyor on its panels and is also independently chaired. Last year, more than 1,200 complaints were considered and in excess of 430 sanctions issued to RICS members and regulated firms.

Tony Mulhall is Associate Director of RICS Land Group

Further information

Download a complete “Development land: viability assessments and affordable housing” PDF