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Issues and Options – Viability Assessments in County Durham

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Issues and Options – Viability Assessments in County Durham ISSUES AND OPTIONS – VIABILITY ASSESSMENTS IN COUNTY DURHAM Completed on behalf of Durham County Council by District Valuer Services (DVS) May 2016 EXECUTIVE SUMMARY 1. Durham County Council (“the Council”) is seeking a high level assessment of viability across Durham County, which identifies particular issues and options likely to be faced in a future Whole Plan and Community Infrastructure Levy (“CIL”) Viability assessment. We have been instructed to specifically consider the following: (i) Proposed methodology for a future Whole Plan and CIL Viability Assessment, clearly stating the recommended approach to be adopted. (ii) Draft assumptions for a future Whole Plan and CIL Viability Assessment. (iii) How any future study will derive affordable housing targets. (iv) What types of development could be tested when assessing appropriate CIL charges to ensure that any future assessment identifies all possible uses and sets out the proposed assumptions to be applied for each. (v) Which locations across the County are likely to be considered the most viable and therefore offer the greatest opportunity of site delivery. 2. This is a high level review, considering average appraisal inputs. The intention is not to set precedents for individual site assessments. Consequently, the findings of this study should not be used to inform individual viability appraisals, which will need to be undertaken on a site by site basis reflecting the specific nature of each site. 3. The research and appraisals which inform this report were undertaken prior to the Housing and Planning Act being enacted (13 May 2016). Any future Whole Plan and CIL Viability Assessment will need to consider the Act, including the provision of Starter Homes (the details of which will be confirmed through emerging regulations). 4. Likewise, and reflecting an emerging policy aspiration of the Council, any future study may also need to consider the need for specific dwelling types, particularly those which increase the housing options of older people (e.g. bungalows, level access flats, sheltered housing / extra care dwellings). Any assessment of sheltered / extra care dwellings would need to recognise the nuances of the care market and adjust the appraisal model accordingly. Linked to this, the study may also need to consider enhanced specification standards, for example dwellings meeting the Optional Category 2 of the 2015 edition of “Approved Document M (access to and use of buildings) – Volume 1”), which forms part of the Building Regulations 2010 (Category 2 relates to “accessible and adaptable dwellings”). 2 5. We conclude the residual method is appropriate, meeting the requirements of the NPPG / NPPF. This involves identifying a sample of sites considered representative of the area (either real or hypothetical site types) and running individual viability appraisals. The approach is not without its flaws, and can be subject to variances due to the high number of inputs. However, it is considered appropriate for a study of this nature and is commonly used in the industry. 6. One advantage of the residual approach is that it is flexible. The study is seeking to identify appropriate S106, affordable housing and CIL contributions, therefore we recommend ‘fixing’ all other elements of the appraisal (including land value and developer’s profit). If a scheme is shown to demonstrate a surplus, this could then be allocated, on a proportional basis, as S106 / affordable housing / CIL charges. 7. The NPPF / NPPG recommends Whole Plan and CIL assessments build in appropriate ‘buffer’ allowances (i.e. conclusions reached should not be based on the ‘extremes’ of viability). This is to limit the impact of the inherent weaknesses in the residual method and to minimise the impact of market changes over time. With regard to CIL, recent CIL examinations support a reduction in the region of 25 – 30%, to be applied to the ‘rate per sq m’ identified through initial viability testing. 8. When considering non-residential site types the approach should be the same as for residential sites. In Section 5 we have identified hypothetical site ‘types’ for non- residential (should this be the preference). This is an attempt to cover all the likely non-residential site ‘types’ that could come forward given the current market conditions, but should not be regarded as being exhaustive at this stage. 9. Whilst full testing has not been undertaken at this stage, we anticipate that higher value areas are likely to have a better chance of delivering viable schemes. In this regard, we would expect locations such as Durham City, Chester-le-Street and Barnard Castle to show the strongest viability results. However, this will need to be confirmed through a robust appraisal process. 3 Summary Schedule – Draft Viability Assumptions Appraisal input Draft views What is an appropriate gross to net Circa 85% ratio? What are appropriate assumptions - 2 / 2.5 storey dwellings regarding house types and average - Detached house 110 sq m sizes? - Semi-detached house 85 sq m - Terraced house 75 sq m What is a reasonable assumption Circa 50 – 55% of market value. regarding affordable rent transfer values? What is a reasonable assumption Circa 67.5% - 70% of market value regarding shared ownership transfer values? What should be considered as an - For a scheme in excess of 50 dwellings £840 per sq m. average ‘basic’ build cost? - For schemes producing less than 50 units use BCIS median figures (currently £963 per sq m) - Single garages - £5,000 to £7,500 per unit - Double garages - £10,000 to £15,000 per unit. How should external / site 17.5% of the basic build cost infrastructure costs be allowed for? What level of contingency should be 3% of basic build costs included? How should ‘abnormal’ development - £150,000 per gross Ha for the greenfield sites costs be accounted for? - £200,000 per gross Ha for the brownfield sites. What is an appropriate average for 6% of basic build costs / externals professional fees? What is a reasonable assumption for 3% of sales value, plus an additional allowance for legal costs marketing costs? at £500 per dwelling How should an appropriate - Larger schemes (over 50 units) 8% on cost for the developer’s return be factored into affordable units, 18.5% on revenue for market value. the appraisals? - Smaller schemes (sub 50 units) 8% on cost for the affordable units, 15 – 17.5% on revenue for market value. What is a reasonable allowance for - 5.5% to 6% debit finance costs? - 3% credit How should sales values be factored - Low value area sub £1,750 per sq m into the appraisal, taking into - Medium value area £1,750 - £2,000 per sq m account the granular nature of the - High value area over £2,000 per sq m market? 4 What is appropriate for greenfield - Low value area sub £250,000 per gross Ha Threshold Land Values? - Medium value area £250,000 to £400,000 per gross Ha - High value area over £400,000 per gross Ha What is appropriate for brownfield - £125,000 to £400,000 per gross Ha for secondary / tertiary Threshold Land Values? industrial land - All other brownfield sites should be assessed on a site by site basis How should site acquisition costs be - 0.5% legal fee included? - 1% sales agent fee - Stamp duty at prevailing rate Are Section 106 obligations to be Draft / emerging policies should be considered as part of the factored into the appraisals? If so, testing process and in the context of the NPPF / NPPG, which how? seeks to ensure policies adopted by the Council do not undermine the viability of schemes. 5 1. INTRODUCTION Pg 8 Instruction 8 2. VIABILITY METHODOLOGY 10 National Planning Policy Framework (“NPPF”) 10 National Planning Policy Guidance (“NPPG”) 11 Professional Guidance for Viability Assessments 11 The Financial Appraisal Model / The 'Residual' Method 16 Summary 19 3. DRAFT VIABILITY ASSUMPTIONS 21 Introduction 21 'Real' Site Assessments Or Hypothetical Site Types 21 Local Market Conditions 22 Gross And Net Developable Areas 22 Capacity / Density 23 Dwelling Mix And Sizes 25 Specification 27 Affordable Rented Assumptions 27 Intermediate / Shared Ownership Assumptions 30 'Basic' Build Costs 31 Externals / Infrastructure 36 Contingency 40 Abnormal Development Costs 43 Professional Fees 44 Marketing 47 Developer's Profit 49 Finance 52 Threshold Land Value 53 Site Acquisition And Disposal Costs 71 Section 106 Contributions / Emerging Policy Aspirations 71 4. RESIDENTIAL SALES REVENUE 72 Introduction 72 Market Conditions 72 County Durham Housing Market Review 73 Summary 74 5. COMMUNITY INFRASTRUCTURE LEVY (“CIL”) – SITE TYPES 76 Introduction 76 Methodology 76 Site Types 78 Evidence 79 Comments 84 6. FINAL COMMENTS 85 6 Table 1 – Gross to net ratio evidence 23 Table 2 – Sample of rented modern houses & affordable rent calculation 29 Table 3 – Greenfield transactional evidence 65 Table 4 – Brownfield transactional evidence 70 Table 5 – Average House Prices 74 Table 6 – Non-residential Market Rent and yield ranges 80 Table 7 – Non-residential key appraisal inputs 81 APPENDIX 1 – Gardiner and Theobald Build Cost Evidence APPENDIX 2 – County Durham Housing Market Review 7 1. INTRODUCTION 1.1 Instruction 1.1.1 Durham County Council (“the Council”) is seeking a high level assessment of viability across Durham County, which identifies particular issues and options likely to be faced in a future Whole Plan and Community Infrastructure Levy (“CIL”) Viability assessment. 1.1.2 The Council is specifically seeking commentary on: 1. Proposed methodology for a future Whole Plan and CIL Viability Assessment, clearly stating the recommended approach to be adopted to any future assessment. 2. Draft assumptions for a future Whole Plan and CIL Viability Assessment. 3. How any future Whole Plan and CIL Viability Assessment will derive affordable housing targets. 4. What types of development could be tested when assessing appropriate CIL charges to ensure that any future Whole Plan and CIL Viability Assessment identifies all possible uses and sets out the proposed assumptions to be applied for each.
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