Net-Zero Carbon Development Plan Document: Viability Study Prepared for Warwick District Council June 2021 Contents 1 Summary 3 2 Introduction 5 3 Methodology and appraisal approach 16 4 Appraisal assumptions 20 5 Appraisal outputs 30 6 Assessment of appraisal results 31 7 Conclusions 41 Appendices Appendix 1 - Policy review Appendix 2 - Typology details Appendix 3 - Residential sales values Appendix 4 - Commercial rents and yields Appendix 5 - BCIS costs Appendix 6 - Accessibility standards cost calculations Appendix 7 - Base appraisal results Appendix 8 - Sensitivity analysis – growth Appendix 9 - Sensitivity analysis – downside Anthony Lee MRTPI MRICS Senior Director – Development Consulting BNP Paribas Real Estate 5 Aldermanbury Square EC2V 7BP 020 7338 4061 [email protected] realestate.bnpparibas.com 2 1 Summary 1.1 On 27 June 2019, Warwick District Council declared a climate emergency, as a result of which the Council adopted a Climate Change Emergency Action Programme in February 2020, which included an objective of introducing planning policies aimed at tackling climate change. In response to this, the Council has prepared a Net-Zero Carbon Development Plan Document (‘NZC DPD’), which will enable the District to be as close as possible to net carbon zero by 2030. The DPD defines ‘carbon’ as “all greenhouse gases excluding water vapour… [which] will require the reduction of all greenhouse gases, of which carbon dioxide is the most prominent”. The DPD identifies a suite of policies designed to help the Council meet its objective of tackling climate change and achieving net- zero carbon development by 2030. 1.2 This report tests the ability of developments in Warwick District to accommodate the policies in the consultation version of the NZC DPD, alongside plan policies in the adopted Plan and prevailing rates of Community Infrastructure Levy (‘CIL’) in the Council’s adopted Charging Schedule (subject to indexation). 1.3 The study takes account of the cumulative impact of the Council’s planning requirements, in line with the requirements of the National Planning Policy Framework (‘NPPF’); the National Planning Practice Guidance (‘PPG’) and the Local Housing Delivery Group guidance ‘Viability Testing Local Plans: Advice for planning practitioners’. Methodology 1.4 The study methodology compares the residual land values of a range of development typologies reflecting the types of developments expected to come forward in the District over the life of the Local Plan. The appraisals compare the residual land values generated by those developments (with varying levels of affordable housing and alongside the emerging requirements of the NZC DPD) to a range of benchmark land values to reflect the existing value of land prior to redevelopment. If a development incorporating the Council’s emerging climate change policies, other policy requirements and CIL generates a higher residual land value than the benchmark land value, then it can be judged that the development is viable and deliverable. Following the adoption of policies, developers will need to reflect policy requirements in their bids for sites, in line with requirements set out in the PPG. 1.5 The study utilises the residual land value method of calculating the value of each development. This method is used by developers when determining how much to bid for land and involves calculating the value of the completed scheme and deducting development costs (construction, fees, finance, sustainability requirements and CIL) and developer’s profit. The residual amount is the sum left after these costs have been deducted from the value of the development, and guides a developer in determining an appropriate offer price for the site. 1.6 The housing and commercial property markets are inherently cyclical and the Council is testing the viability of emerging updated policies at a time when commercial markets have experienced a period of growth but residential markets have faced a period of stagnation. Forecasts for future house price growth published in March 2020 following the easing of the third lockdown in England point to growth in mainstream markets in the West Midlands. We have allowed for this medium term growth over the plan period by running a sensitivity analysis which applies growth to sales values and inflation on costs to provide an indication of the extent of improvement to viability that might result. We have also run a ‘downside’ sensitivity analysis which assumes a fall in prices in 2021 followed by slower growth in the subsequent years. The assumed growth rates for this sensitivity analysis are outlined in Section 4. 1.7 These sensitivity analyses are indicative only, but are intended to assist the Council in understanding the impact changes to values may have on the viability of its emerging climate change policies. These analyses underline the need for flexible application of policy requirements, which is already built into the emerging Plan. 3 Key findings 1.8 The key findings from our assessment of the Council’s consultation policies and our recommendations are summarised as follows: ■ In common with other districts, Warwick District has a complex range of development scenarios, with development sites that are in various existing uses; significant variation in the types of developments that come forward; and variability in residential sales values between different settlements. In such circumstances, policies need to be applied with a degree of flexibility so that meaningful policy targets can be set. ■ In bringing forward the NZC DPD, the Council does not propose to change any pre-existing Local Plan policies at this stage. This includes affordable housing policy and we consider that the evidence base endorses this decision. ■ The results of our appraisals indicate that some schemes will not be able to meet the emerging NZC DOD policies alongside meeting the full policy requirement for affordable housing. Existing policy H2 has sufficient flexibility to deal with these situations, either through a departure from the usual tenure mix of 70% social rented housing and 30% shared ownership, or through a reduction in the overall percentage. ■ Alternatively, the NZC DPD seeks to expand existing Policy DM2 (‘Assessing Viability’) to incorporate carbon offsetting. This gives the Council the ability to balance the need to provide affordable housing against NZC objectives, where site-specific viability prevents both objectives being met. ■ In this Study, we tested the potential impact of six scenarios relating to climate change policies. The cost of these scenarios ranges from 3% to 6% of build costs for residential developments and between 4% and 6% for non-residential developments. The impact of these additional costs will vary between schemes and between locations within the District. Where viability is already on the margins, other policy requirements may need to be reduced in order to compensate for these costs. In lower value areas, there may be a need for a trade-off of affordable housing to accommodate the higher climate change costs. However, in higher value areas, the trade-off required is likely to be significantly lower as there will be more ‘surplus’ residual value in excess of existing use values. Where schemes are more viable and residual land values exceed benchmark land values by a greater margin, there would be no need for any reduction in affordable housing. ■ Non-residential developments do not appear to have any difficulty absorbing the additional costs associated with meeting the objectives of the NZC DPD. These schemes do not have as many plan policy requirements as residential and it is therefore to be expected that the modest increase in construction costs can be absorbed. ■ It should also be noted that the costs of achieving NZC is very likely to fall over time, as improvements in technology emerge as a result of research and development by the housebuilding industry. 4 2 Introduction 2.1 Warwick District Council (‘the Council’) has commissioned this study to consider the ability of developments to accommodate emerging policies in the draft ‘Net-Zero Carbon Development Plan Document (Consultation Draft)’ May 2021 (‘NZC DPD’) alongside adopted Local Plan policies and prevailing rates of Community Infrastructure Levy (‘CIL’) in the adopted Charging Schedule, subject to indexation. The aim of the study is to assess at high level the ability of developments in the District to absorb additional policy requirements relating to climate and ecological emergencies. 2.2 In terms of methodology, we adopted standard residual valuation approaches to test the viability of development typologies which are informed by historic applications recently approved by the Council. Our particular focus is on the ability of those development typologies to meet the Council’s emerging climate change policies, alongside existing policy targets for affordable housing and accessibility. However, due to the extent and range of financial variables involved in residual valuations, they can only ever serve as a guide. In some circumstances it may be necessary to apply policies flexibly where costs or other factors emerge that were not known at the plan making stage, in accordance with PPG paragraph 007. 2.3 The study will form part of the Council’s evidence supporting the NZC DPD in a form that meets the requirements set out within the NPPF, the PPG and the CIL regulations. 2.4 As an area wide study, this assessment makes overall judgements as to viability of development