13.03.2024
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Last year the industry had to navigate a multitude of challenges not limited to an increasingly uncertain planning environment, rising interest rates and inflation, tighter borrowing costs – which forced us to tighten our belts! DHA’s Danielle Lawrence looks at the challenges surrounding Development Viability and how several “planning tools” are available to assist developers and landowners in improving the viability and deliverability of their schemes.
The RICS Build Cost Information Service has reported this month that construction output fell by over 2% in 2023, as a result of a decline in output from the private housing and industrial sector. Whilst a further fall of 3% was forecasted across all sectors, January saw a surprise return to growth, with monthly construction output rising 1.1% - the main contributor being private housing at a monthly increase of 2.6%.
Developers will be acutely aware that the financial viability of residential developments is dependent on the prices buyers are prepared to pay, which has been hampered by high inflation and interest rates. Meanwhile, construction costs have also risen as a result inflation, rising wages and the introduction of new Regulations.
Whilst we’re not out completely of the woods, 2024 is showing some early signs of improvement, with indicators suggesting that the sources of financial disturbance are set to ease. However, it is still a delicate balance, meaning that it is more crucial than ever to consider development viability as early as possible.
Although often criticised, viability is key to ensuring the delivery of housing sites, community facilities and infrastructure and its significance increases in the wake of economic uncertainty, resulting in a requirement to review policy requirements and planning obligations.
The PPG (Reference ID: 10-007-20190509) states that it is down to the Applicant to demonstrate whether particular circumstances justify the need for a viability assessment at the application stage and outlines the following circumstances in which it might be appropriate to revisit viability:
The submission of a Financial Viability Assessment (FVA) at the application stage is perhaps the most common approach to improving viability. However, there are a number of alternative approaches which could apply to your site and be used to maximise your returns.
Vacant Building Credits
Vacant Building Credits (VBC) was first introduced by a written ministerial statement in 2014, as an incentive to support the re-use of brownfield land.
Paragraph 65 of the NPPF (2023) states that “where vacant buildings are being reused or redevelopment, any affordable housing contribution should be reduced by a proportionate amount”.
If you have an existing building on site which has not been abandoned, then VBC could be used to offset the existing floorspace against the proposed, to reduce the affordable housing requirement.
For example:
If VBC were applied, then the affordable housing requirement would therefore be 11.1% of the standard requirement.
A number of local planning authorities have adopted their own policies or guidance towards VBC, which sets out their interpretation of what is considered vacant or abandoned. The PPG (Reference ID: 23b-028-20190315) outlines that it may be appropriate to consider (1) whether the building has been made vacant for the sole purposes of redevelopment; and (2) whether the building is covered by an extant or recently expired planning permission.
If looking to apply VBC, we would strongly advise that this is discussed with the local planning authority as early as possible in the planning process.
Community Infrastructure Levy – ‘In-use’ credits and Phasing
Unlike affordable housing, the Community Infrastructure Levy (CIL) is non-negotiable. However, the CIL Regulations make a number of provisions for local planning authorities to give relief and exemptions from the levy, including:
‘In-use’ Credits:
The Regulations also allow you to offset any existing buildings, provided that they have been in lawful use for a continuous period of at least six months, within the three years ending on the day planning permission first permits the chargeable development.
This is a particularly effective way of reducing CIL contributions on sites where there is existing built form. Although be aware, that you may be required to provide evidence such as utility bills, photographs, etc. to confirm that the buildings have been in use!
CIL Phasing:
Whilst some local planning authorities operate a CIL instalment policy for major developments, the submission of a CIL Phasing plan will mean that each separate phase of a development, is treated as a separate chargeable development. This can assist with cash flow by introducing separate commencement dates. Just be aware, that this needs to be submitted at the application stage and the appropriate CIL procedures followed for each individual phase!
Our in-house viability team have extensive experience in providing a range of services to assist in improving development viability, whether this be at the plan-making or application stages of a development. If you think that you may be eligible to apply for any of the above, then please get in touch.
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