Viability - Garden Villages

Autumn 2021

Andrew Morgan, Planning Partner at international law firm DAC Beachcroft asks Thomas Hegan, Partner at real estate consultants Turner Morum to comment on how current viability guidelines are fit for purpose, in relation to Garden Villages. 

Viability Guidance

The principal guidance for practitioners when assessing viability is contained within the NPPF and the PPG. However, this guidance is certainly not perfect when it comes to assessing viability for Garden Village schemes.

A key component of the PPG viability guidance is that - generally speaking - viability for proposed allocations should be carried-out at the plan making stage, and the onus is therefore placed upon the site promoters (landowners and/or developers) to say whether the proposed schemes can viably meet policy expectations when the Local Planning Authorities are considering their strategic allocations.

Quite simply, sites are more likely to secure an allocation where LPAs believe that the schemes should be able to meet policy requirements. This often provides promoters with difficult decisions because there will usually be other development sites competing for the same strategic allocations, where the promoters will be prepared to commit to delivering the LPA’s policy aspirations.

The PPG viability guidance indicates that developer should generally not need to consider viability when they get to application stage – but where viability is an issue, it will be necessary to evidence “what has changed” since the allocation stage assessment. A problem with allocation stage viability analysis is that the information required for detailed viability analysis is generally not available until the schemes start to ‘take shape’.

The PPG guidance means it is important to assess viability at the allocation stage, firstly to establish whether the schemes appear able to meet the LPA planning gain policy aspirations at the time of the assessment. It is also crucial to identify the assumptions made that underpin any planning gain commitments – just in case viability becomes a major issue prejudicing delivery in due course, and it becomes necessary to illustrate “what has changed” since the allocation stage assessment.

Further viability advice for Chartered Surveyors is also contained within the RICS Professional Statement “Financial viability in planning: conduct and reporting” (1st edition, May 2019) and the RICS Guidance Note “Assessing Viability in Planning under the NPPF 2019 for England” (March 2021). These documents reaffirm a need to carry-out sensitivity testing when assessing viability. In my view, the RICS guidance is long, somewhat overly-complicated and can be interpreted in different ways. As a result, the PPG viability guidance appears to be preferred by the industry.

Key Issues – Garden Village Viability

Needless to say, Garden Village schemes can be incredibly difficult to deliver – mainly as a result of the up-front cost expenditure that is required including the land costs, strategic infrastructure works, abnormal development costs and the s106 requirements. The level of peak debt and associated compound finance costs also tends to provide major barriers to delivery, and these issues often require developers to take ‘leaps of faith’.

This can provide something of a problem and a conflict with PPG viability guidance because “in the viability world” you may have Garden Village developments that may look extremely sick, with low projected IRRs which make these schemes appear substantially non-viable.

However, “in the real world” you sometimes have promoters that are prepared to take these “leaps of faith” in order to see the schemes delivered, usually provided that early planning gain requirements are reduced to improve viability - with review mechanisms put in-place to allow for future “planning gain recovery”, should the scheme performance and viability improve over time.

In my view, this existing viability guidance does not really provide the flexibility that is required for developments of this scale, which invariably have enormous up-front development costs and therefore viability/delivery issues. It will be interesting to see whether changes are made to the guidance to allow the required flexibility for Garden Villages.

For example, paragraph 22 of the NPPF states that local plan strategic policies "should look ahead over a minimum 15-year period from adoption, to anticipate and respond to long-term requirements and opportunities, such as those arising from major improvements in infrastructure". However, in April, a revision was proposed, adding a further sentence that says: "Where larger-scale development such as new settlements form part of the strategy for the area, policies should be set within a vision that looks further ahead (at least 30 years), to take into account the likely timescale for delivery".

It is believed that this proposed addition is intended to address problems that some local plans have experienced when trying to bring forward major new settlements with planning inspectors questioning whether such proposals meet national policy requirements to be viable and deliverable. The question remains whether this amendment will be enough and/or whether additional guidance for Garden Villages and other schemes of scale is required.

The Role of the Master Developer

Garden Village schemes tend to be delivered by master-developers, large institutional investor organisations and/or major housing associations – often working alongside organisations such as Homes England. Major plc housebuilders are more likely to be involved as part of a consortium group and/or alongside delivery partners, where the cost burden and the development risks are shared.

This is an important consideration when assessing viability because the PPG and the RICS Guidance are largely silent on ‘the role of the master developer’. That doesn’t mean to say that it is not accepted practice that viability modelling should reflect the role of a master-developer, far from it. There are various examples of Garden Villages schemes that have been assessed on this basis, which include separate returns to the master developer – that are often expressed on an internal rate of return (IRR) basis.

Other considerations

Other considerations when assessing Garden Village viability include reflecting sales premiums associated with ‘place making’ – which in my opinion is similar to forecasting and should only be used to ascertain “what might happen, if things go to plan”. Needless to say, where place making occurs, there are associated costs to the scheme which also impacts on viability.

Similarly, I believe there is a place for forecasting revenue and cost growth within Garden Village viability assessments, most effectively used as secondary sensitivity analysis, to establish what might (and will hopefully) happen over the course of these long-term schemes.

Another key consideration for Garden villages schemes is the role of the viability review mechanism. Where policy aspirations may not be met at the start of these developments (which is often the case where initial planning gain requirements are required to be reduced to off-set up-front scheme costs), it is generally appropriate for review mechanisms to be agreed within the s106 agreements.

Overall recommendation:

Local planning authorities should be encouraged to take a flexible approach to their planning gain requirements and the associated timings, alongside these types of review mechanisms. Importantly, where up-front planning gain concessions are necessary, review mechanisms will help ensure scheme delivery with the potential for overall policy compliance subject to the performance of the scheme in question.

Sensible further amendments to the existing guidance would assist developers and planning authorities in delivering these incredibly complex schemes, which would in-turn assist the Government in meeting their housing delivery targets.