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Community Infrastructure Levy: Viability Assessment Prepared for Westminster City Council May 2015 Contents 1 Executive Summary 3 2 Introduction 8 3 Methodology and appraisal inputs 21 4 Development appraisals 26 5 Appraisal outputs 35 6 Assessment of the results 37 7 Conclusions and recommendations 48 Appendices Appendix 1 - Map of CIL zones Appendix 2 - Appraisal inputs and sample appraisal Appendix 3 - Appraisal results Contact details: Anthony Lee MRTPI MRICS Senior Director – Development Consulting BNP Paribas Real Estate 5 Aldermanbury Square London EC2V 7BP Tel: 020 7338 4061 Fax: 020 7404 2028 Email: [email protected] 2 1 Executive Summary 1.1 This report tests the ability of a range of development types throughout Westminster to yield contributions to infrastructure requirements through the Community Infrastructure Levy (‘CIL’). Levels of CIL have been tested in combination with the Council’s other planning requirements, including in particular the provision of affordable housing in accordance with the City Council’s planning policies. Full account has also been taken of the Mayor of London’s CIL rates, and his policy for the use of section 106 planning obligations to help pay for Crossrail. 1.2 The report forms part of the evidence base supporting the City Council’s CIL proposals and should be read in conjunction with the infrastructure planning evidence in the “Addendum to the Westminster Infrastructure plan: technical Assessment 2006-2026” and the council’s “Information and evidence to support the development of the City of Westminster’s Draft Charging Schedule” which explains how the council has drawn on the viability and infrastructure evidence, and other work it has undertaken to develop its proposals. Together, these documents constitute the “relevant evidence” that will support the draft charging schedule at its public examination. 1.3 Considering the potential impact of CIL rates on economic viability across the whole area of the City of Westminster requires an appreciation of the unique circumstances of a place that comprises a world city in its own right, home to national government and administration, to the largest number of jobs of any London borough and to the biggest centre of comparison retailing in the country. This is reflected in a uniquely dynamic land market, evidenced by the fact that more Stamp Duty Land Tax was raised from transactions in Westminster in 2012-13 than the 29 largest local authorities in the United Kingdom put together. As will be explained later, this assessment takes an approach tailored to the uniqueness of the City and its land market, and this is reflected in its recommendations. 1.4 The City of Westminster covers an area of 2,149 hectares, 76% of which is covered by conservation areas, with over 11,000 listed buildings and structures, a world heritage site, and five royal parks. Of this area, 38.2% (821 hectares) comprises greenspace. The remaining 1,323 hectares has to provide space among other things for development on a scale, and of a diversity, found nowhere else in the UK – for example: ■ a resident population of over 230,000, projected by the Greater London Authority to grow to 242,100 by 2020, 250,000 by 2025 and to 254,600 by 2030. New housing targets introduced through the further alterations to the London Plan published in March 2015 suggest a need for at least 10,607 new homes between 2015 and 2025. Taking account of the area of land in the City actually available for building, Westminster already has a density of population comparable to that of Islington, the borough with the highest density of population in London. ■ A workforce filling 717,400 jobs in over 50,000 active businesses (in both cases the most of any London borough), occupying 9 million square metres of office floor space and 8,500 retail premises covering 2.5 million square metres. The Greater London Authority’s (‘GLA’) employment projections estimate that Westminster might see job growth of over 10% into the 2030s (GLA Economics, 2013). ■ A retail and leisure complex in the West End that is the largest in London, attracting 55 million tourist trips to Westminster annually. 3 1.5 Westminster’s land is a scarce resource much in demand to meet a range of pressing needs. It is expensive, and many of the buildings on it are very valuable. On the other hand, development here can give extremely high returns, and this is reflected both in the dynamic land market and the volume of development proposals considered by the Council (which handles over 12,000 planning applications a year). 1.6 It is unsurprising that, as this report shows, the question of the effect of a CIL rate on development viability will be different here from anywhere else (to take one example, rent and yield data shows that the West End office market is wholly distinctive, even compared with those in nearby Midtown and the City), and as a result this report differs from any similar report prepared to support a proposed charging schedule. Purpose of the report 1.7 In setting a CIL, Westminster as a “charging authority” must strike an appropriate balance between the desirability of funding infrastructure required to support the development of its area on the one hand, and the potential effects (taken as a whole) of the imposition of CIL on the economic viability of development across its area on the other1. This report deals with the second part of this balancing test, providing a broad, area-wide assessment of viability across the City of Westminster, as required by the CIL legislation and national guidance. Methodology 1.8 The study methodology compares the residual land values of a range of developments that have been granted planning permission in Westminster (plus a number of hypothetical schemes to test categories of development where there are insufficient actual cases to provide an adequate test) against their current use values. If a development incorporating a given level of CIL (alongside the Council’s other policy requirements and the Mayoral CIL and section 106 planning obligations) generates a higher value than the benchmark land value, then it can be judged that the proposed level of CIL will be viable. This is the most widely-used approach to preparing CIL viability evidence, and has been endorsed by independent examiners as being the most appropriate basis on which to appraise CIL viability. 1.9 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 and CIL) and developer’s profit. CIL is included as a development cost, as are Mayoral CIL, Crossrail Section 106 and other planning policy requirements. 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. This approach is adopted for both residential and commercial developments. 1.10 The housing and commercial property markets are inherently cyclical and the Council is testing its proposed rates of CIL after a housing market recession and a recovery. As measured by the Rightmove House Price Index, values in Westminster are now (April 2015) over 80% higher than their September 2008 peak (with average prices increasing from £1,077,146 to £ 1,941,099). There are signs of price growth moderation, with falls in some parts of the market 1 Community Infrastructure Levy Regulations 2010 (as amended), regulation 14 4 (particularly at the top of the prime sector among units worth more than £5 million). Looking forward from the time of going to press, there is particular uncertainty in the very short-term, particularly surrounding the potential effects of changes to Stamp Duty announced in the November 2014 Autumn Statement2. Most forecasters expect Central London residential values will remain subdued during 2015, but with demographic and economic fundamentals supporting longer-term growth. There has been a decline in prime residential values in Westminster, particularly at the top end of the market. Research for the City Council by Ramidus Consulting has shown that most of the “prime” stock worth £2 million or more is second hand and is therefore less relevant for CIL purposes3. We have allowed for this by running a sensitivity analysis which tests an increase in sales values of 10% and an increase in build costs of 5%, to enable the Council to take a view on the impact of movements in sales values in the short term. We have also tested a fall in sales values of 5% to enable the Council to assess the impact of an adverse movement. 1.11 For offices, existing mismatches between demand and supply for Grade A space and projected employment growth is likely to see continued growth in rents into the medium-term. Deloitte Real Estate reports that 2014 saw West End office rents increase by 10%, with the area north of Oxford Street and Soho surpassing previous rental highs; they project a further 8.7% rental growth in the West End in 2015, reaching a peak in 2017 and then flattening off as new supply increases4. Economic momentum and a buoyant travel market are likely to support new hotel provision5. 1.12 This analysis is indicative only, but is intended to assist the Council in understanding the levels of CIL that are viable in today’s terms but also the impact of changing markets on viability. 1.13 Our appraisals indicate that the rates of CIL could be set at a significantly higher level than those of some other charging authorities in London.

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