Document Title

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]

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.

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

(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. However, our recommended rates are capped so that CIL rates for uses and areas are kept under or around a yardstick of 5% of total development costs. This allows a very substantial buffer between the proposed rates and the maximum that could be set, allowing both for changes in the market and to meet site-specific exceptional costs in individual developments in what is one of the most dynamic and diverse development environments in the country. Key findings

1.14 The results of this study are reflective of current market conditions, which on the basis of the evidence set out in this report and the council’s other documentation are likely to improve over the medium term (even if more modestly in the residential sector than seen in recent years). It is therefore important that the Council keeps the viability situation under regular review so that levels of CIL can be reviewed, if necessary, to reflect any future changes.

■ The ability of residential schemes to make CIL contributions varies depending on area and the current use of the site. Having regard to these variations, residential schemes should be able to absorb on-site affordable housing sought at levels of 35% (or 25% in some areas) in combination with a CIL rate of up to £550 per square metre in Prime Zone, £400 per square metre in the Core Zone and £200 per square metre in the Fringe Zone.

2 Rightmove, House Price Index, December 2014 edition 3 Ramidus Consulting Ltd., The Prime Residential Market in Westminster, February 2014 4 Deloitte Real Estate, London Office Crane Survey (Winter 2014) 5 PricewaterhouseCoopers, UK Hotels Forecast 2015

CLG guidance requires that charging authorities do not set their CIL at the margins of viability. Other authorities have set their rates at a discount to the maximum rate to enable the “buffer” referred to earlier, with these “buffers” ranging significantly. Table 1.14.1 summarises our maximum and suggested CIL rates for residential development.

Table 1.14.1: Maximum CIL rates – residential Area Maximum Suggested Viability CIL £s per CIL after ‘buffer’ sqm buffer £s per sqm Prime £3,325 £550 83% Core £2,315 £400 83% Fringe £2,506 £200 92%

Table 1.14.2: Maximum CIL rates – commercial

Development Area Maximum Suggested Viability type CIL rate £s rate after ‘buffer’ per sq m buffer £s per sq m Offices Prime £3,483 £200 94% Core £2,961 £150 95% Fringe £1,472 £50 97% Retail (A-class Prime £4,068 £200 95% uses, SG retail, Core £3,880 £150 96% nightclubs and Fringe £1,075 £50 95% casinos) Hotel Prime £3,289 £200 94% Core £2,148 £150 93% Fringe £1,251 £50 96%

With regards to offices, the proposed CIL rates in the Prime and Core zones have been reduced by £50 per square metre from the rates proposed in the PDCS. This reduction takes into account a number of factors specific to offices in Westminster, including prospects for the global economy and the

effects his may have on demand for offices in Westminster; qualitative changes to the demands of office occupiers and the potential of these on build costs; and how these two factors might combine to affect the viability of development plan policies. Having regards to these factors the lower rates would provide a more cautious set of CIL rates by increasing the viability buffer, helping to minimise yet further the impact that CIL has on overall development costs. In our view these factors do not apply to the other types of development we have tested in the same way or extent. ■ D1 and D2 uses (e.g. schools, community centres, healthcare facilities etc) often do not generate sufficient income streams to cover their costs. Consequently, they require some form of subsidy to operate. This type of facility is very unlikely to be built by the private sector. We therefore suggest that a nil rate of CIL be set for D1 and D2 uses. However, entertainment uses (nightclubs, casinos) are developed as commercial propositions and are therefore able to absorb a CIL contribution without any adverse impact on viability, and have been included in the hotel category as they share many of the same characteristics in development viability terms.

1.15 The suggested CIL rates are summarised in Table 1.15.1, with buffers below the maximum rate ranging from 83% to 97%. Clearly there is an option of simplifying the residual rates by combining some of the areas together (and the suggestions we have made relating to the proposed office rates will help to this end by leaving a single “commercial” rate in each zone), but this would not fully reflect differences in viability fundamentals across the City and would be at the expense of a potential loss of CIL income.

Table 1.15.1: Proposed CIL rates (per square metre)

Area Prime Core Fringe

Residential £550 £400 £200

Offices £200 £150 £50

Hotels £200 £150 £50

Retail (all ‘A’ use classes and sui generis £200 £150 £50 retail), Nightclubs, Casinos.

Other uses Nil

1.16 For the vast majority of developments in Westminster, the application of CIL is unlikely to be an overriding factor in determining whether or not a scheme is viable. When considered in the context of total scheme value, the proposed CIL rates will be a modest amount, typically accounting for less than 5% of overall development costs. This is lower than a typical contingency allowance that developers include in their appraisals (and for this reason this figure has become a widely-used yardstick in assessing proposed CIL rates). At the rates proposed, CIL is a marginal factor that is unlikely to have a significant impact upon the viability of development of the area as a whole.

1.17 It should be noted that the appraisals in this report do not discount areas of existing floorspace, which may reduce the amount of CIL actually paid, or of the Government’s recently announced ‘vacant building credit’ (which is likely to reduce the amount of affordable housing secured).

2 Introduction

2.1 This study has been commissioned to contribute towards an evidence base to inform Westminster City Council’s (‘the Council’) CIL Draft Charging Schedule (‘DCS’), as required by Regulations 14 and 16 of the CIL Regulations April 2010 (as amended). The aims of the study are summarised as follows:

■ To help establish the maximum CIL rates that the Council could seek having regard to viability of a range of development types in different areas of the city; and ■ to test CIL alongside the Council’s requirements for affordable housing (as set out in policy S16 of Westminster’s City Plan: Strategic Policies) and other planning policy requirements (including in particular the Mayor of London’s CIL and Crossrail s106 policy).

2.2 We have adopted a standard residual valuation approach to testing the impact on development viability of a range of levels of CIL, with CIL incorporated as a development cost. However, due to the extent and range of financial variables involved in residual valuations, they can only ever serve as a guide. Individual site characteristics (which are unique), mean that conclusions must always be tempered by a level of flexibility in application of policy requirements on a site by site basis. In keeping with national guidance, these “proxies” form a sample to provide a broad test of viability across Westminster and as such are considered to be generally representative of the kinds of development that come forward here. There is no requirement in national guidance – even if it were statistically possible – to have a sample that is quantitatively as well as qualitatively representative of all developments that have come forward over a given period. As it is, the extent of evidence provided in this assessment compares favourably with that in other documents of its kind.

2.3 Given the fact that any CIL viability assessment will be broad and area-based, it is essential that levels of CIL are set so as to allow a sufficient margin to address site specific variations to the extent appropriate to form the kind of viability assessment required by the CIL Regulations and guidance. For the reasons explained later in this report, it is considered that this is a safer approach in terms of avoiding widespread risks to development viability than trying to aim at a probably spurious level of precision in viability assessment. CIL Policy Context

2.4 From April 2015 the S106/planning obligations system ( i.e. the use of ‘pooled’ S106 obligations for infrastructure) became limited. The adoption of a CIL Charging Schedule is discretionary for the Council; however, the scaling back of the use of pooled S106 obligations is not discretionary. As such, should the Council elect not to adopt a CIL Charging Schedule, it is likely to have significant implications with regard to funding infrastructure in the City. The City Council is aware of such implications in their decision-making; indeed, this is a major consideration in it bringing its CIL proposals forward.

2.5 It is worth noting that some site specific S106 obligations for infrastructure will remain available for negotiation after the adoption of CIL/April 2015. However these will be restricted to site specific mitigation that meet the three tests set out in CIL Regulation 122, to the provision of affordable housing and to non- infrastructure items. They cannot be used for securing payments towards infrastructure that benefits more than one development, unless they are funded from no more than five Section 106 planning obligations [1].

2.6 The CIL Regulations state that in setting a charge (and any differential charges by area/type/scale of development), local authorities must strike “an appropriate balance” between revenue maximisation on the one hand and the potentially adverse impact upon the viability of development on the other. The Regulations also state that local authorities should take account of other sources of available funding for infrastructure when setting CIL rates. This report deals with viability only and does not consider other sources of funding (this is considered elsewhere within the Council’s evidence base).

2.7 Local authorities must consult relevant stakeholders on the nature and amount of any proposed CIL at two stages; after publication of the Preliminary Draft Charging Schedule[2] (‘PDCS’) and the Draft Charging Schedule (‘DCS’). Following consultation, a charging schedule must be submitted for independent examination.

2.8 Once a charging schedule has been adopted, payment of CIL becomes mandatory on all developments that comprise a residential dwelling and for other uses all new buildings and extensions to buildings with a gross internal floorspace over 100 square metres. The CIL Regulations allow a number of reliefs and exemptions from CIL. Firstly, affordable housing and buildings with charitable uses (if controlled by a charity) are subject to exemption or relief. Secondly, the CIL Regulations have been amended to exempt residential extensions or annexes and self-build housing from CIL.

2.9 Local authorities may also, if they choose, elect to offer an exemption on proven viability grounds. A local authority wishing to offer this exceptional circumstances relief in its area must first give notice publicly of its intention to do so. The local authority can then consider claims for exemption on chargeable developments from landowners on a case by case basis. In each case, an independent expert with suitable qualifications and experience must be appointed by the claimant with the agreement of the local authority to assess whether paying the full CIL charge would have an unacceptable impact on the development’s economic viability.

2.10 This exemption would be available for 12 months, after which time if the development had not been implemented the viability of the scheme concerned would need to be reviewed. To be eligible for exemption, regulation 55 states that the Applicant must enter into a Section 106 agreement; and that the Authority must be satisfied that granting relief would not constitute state aid. It should be noted however that CIL cannot simply be negotiated away or the local authority decide not to charge CIL.

[1] This infrastructure should not be identified on the Council’s Regulation 123 list. [2] In addition to these statutory consultation exercises, the Council has consulted informally with key stakeholders to open a dialogue regarding CIL and development viability.

2.11 CIL Regulation 40 includes a vacancy period test for calculating CIL liability so that vacant floorspace can be offset in certain circumstances. Where a building is entirely vacant and has no part which has been in lawful use for a continuous period of at least six months within the last three years, ending on the day planning permission first permits the chargeable development, the floorspace may not be offset. Regulation 40 was amended with regards to buildings which fail the use test but where the proposed use of the building is not changing (or does not require planning permission). In these circumstances, developers will now be able to offset the existing floorspace against new floorspace when calculating their CIL liability.

2.12 The CIL Regulations enable local authorities to set differential rates (including zero rates) for different zones within which development would take place; for different types of development; and different scales of development. The Government’s Community Infrastructure Levy Guidance (published in June 2014) clarifies that CIL Regulation 13 permits charging authorities to levy ‘differential rates by reference to different intended uses of development… The definition of “use” for this purpose is not tied to the classes of development in the Town and Country Planning Act (Use Classes) Order 1987, although that Order does provide a useful reference point.’ (ID 25-022-20140612). The February 2014 amendments to the CIL Regulations further extended the ability to set differential rates in relation to, ‘scales of development’. The Government guidance also makes clear that “Differences in rates need to be justified by reference to the economic viability of development. Differential rates should not be used as a means to deliver policy objectives”.

2.13 The 2010 Regulations set out clear timescales for payment of CIL, which can be varied according to the size of the payment, which by implication is linked to the size of the scheme. The 2011 amendments to the Regulations allow local authorities to set their own timescales for the payment of CIL if they choose to do so. If a Charging Authority does not adopt an instalments policy, then the full CIL liability is payable within 60 days of commencement of development.

2.14 Numerous local authorities have undertaken viability assessments and have drafted CIL charging schedules, which they have submitted for independent examination. Most London boroughs have been through the examination process and are at various stages of implementation.

Key planning requirements

2.15 The Council’s key planning requirements are set out in ‘Westminster’s City Plan: Strategic Policies’, which was formally adopted on 13 November 2013. Some of its key policies are summarised below:

■ S1: encouraging mixed use development in the Central Activities Zone. Requiring an equal amount of residential floorspace alongside an increase in commercial floorspace;

■ S7: seeks to maintain and enhance the West End Special Retail Policy Area, through appropriate retail growth, public realm and public transport improvements, and provision of services that complement retail;

■ S12: tackling deprivation and promoting economic activity in the North Westminster Economic Development Area, including through transport, environmental and social infrastructure;

■ S14: setting out the Council’s requirements for optimising housing delivery, which prioritises housing development above other uses, with some site- specific exceptions;

■ S15: developments should provide appropriate mixes of units in terms of size, type and affordable housing provision to contribute towards a range of housing needs;

■ S16: the Council will aim to exceed 30% of new homes to be affordable homes, with affordable housing being provided on-site or – if this is considered by the Council to be impractical – through off-site development or a payment in lieu (a separate interim guidance note - which is not iself policy but which deals with implementation of policy S16 - indicates that 35% affordable housing will be sought in parts of the City and 25% elsewhere6;

■ S18: encouraging commercial development and directed to Paddington, Victoria and Tottenham Court Road opportunity areas, named shopping streets, the North West Economic Development Area and designated shopping centres;

■ S20: which encourages office development in the areas identified in Policy S18;

■ S21: protecting existing shops and related uses and directing new retail floorspace to designated shopping centres;

■ S23: directing hotels and conference facilities to the three opportunity areas, the Core Central Activities Zone, named streets, the Knightsbridge Strategic Cultural Area and the North West Economic Development Area;

■ S28: encourages exemplary standards of sustainable and inclusive urban design and architecture;

6 Westminster City Council, Interim Guidance Note: Affordable Housing Policy http://transact.westminster.gov.uk/docstores/publications_store/Interim%20note%20revised%20april %202014.pdf

■ S33: secure the delivery of upgrades to existing infrastructure and the provision of new infrastructure to enable development to be sustainable, including through planning obligations and CIL;

■ S34: encourages new social and community facilities throughout Westminster;

■ S35: protection and enhancement of open spaces;

■ S40: major developments to achieve renewable energy generation to achieve at least 20% carbon emissions

■ S41: support for sustainable transport options;

■ S43: support for transport infrastructure improvements;

■ S44: support for waste infrastructure.

2.16 The Council is currently reviewing its strategic policies and this may result in changes and additions to the existing requirements. As part of the review process there will be a comprehensive viability review of the policies which will take account of the Council’s adopted CIL rates. However, it is not anticipated that any of these changes will have significant viability impacts that would affect the conclusions of this Assessment. The respective timetables for CIL-setting and the City Plan review mean that the Council will, in any case, be undertaking its review in the context of a set of (by that point) established CIL rates. Economic and housing market context

2.17 The historic highs achieved in the UK housing market by mid-2007 followed a prolonged period of real house price growth. However, a period of ‘readjustment’ began in the second half of 2007, triggered initially by rising interest rates and the emergence of the US subprime lending problems in the last quarter of 2007. The subsequent reduction in inter-bank lending led to a general “credit crunch” including a tightening of mortgage availability. The real crisis of confidence, however, followed the collapse of Lehman Brothers in September 2008, which forced the government and the Bank of England to intervene in the market to relieve a liquidity crisis.

2.18 The combination of successive shocks to consumer confidence and the difficulties in obtaining finance led to a sharp reduction in transactions and a significant correction in house prices in the UK, which fell to a level some 21% lower than at their peak in August 2007 according to the Halifax House Price Index. Consequently, residential land values fell by some 50% from peak levels. Similarly, the crisis of 2007/8 brought an end to a long, sustained period of growth in the London office market

2.19 One element of government intervention involved successive interest rate cuts and as the cost of servicing many people’s mortgages is linked to the base rate, this financial burden has progressively eased for those still in employment. This, together with a return to economic growth early 2010 (see Figure 2.19.1, November 2014 Bank of England GDP fan chart below, showing the range of the Bank’s predictions for GDP growth to 2017) has meant that consumer confidence continued to improve. Looking forward, the Bank expects that UK economic growth will settle back to around historical average rates, underpinned by a gradual pickup in demand abroad and a revival in productivity and real household income growth. Inflation is likely to remain below the Monetary Policy Committee’s 2% target in the near term. When interest rates rise, they are likely to do so gradually, with rates probably remaining below

average historical levels for some time (in its February 2015 Inflation report, published as this Assessment was being completed, the Bank notes that market participants expect rates to remain below 1.5% over the next three years).7

Figure 2.19.1 November 2014 Bank of England GDP fan chart

Source: Bank of England

2.20 Throughout the first half of 2010 there were some tentative indications that improved consumer confidence was feeding through into more positive interest from potential house purchasers. Against the background of a much reduced supply of new housing, this would lead one to expect some recovery in prices. However, this brief resurgence abated with figures falling and then fluctuating in 2011 and 2012, with the Halifax House Price Indices showing a fall of 0.6% in the year to March 2012. The Halifax attributed some of recovery during that period to first time buyers seeking to purchase prior to the reintroduction of Stamp Duty from 1 April 2012. The signs of improvement in the housing market towards the end of 2012 continued through 2013 and into 2014. More recently the market has shown signs of cooling, with rates of increase falling in some sectors of the market (particularly in the prime markets for housing worth more than £2 million). Both The Halifax and Nationwide expect further moderation in house price growth into 2015, particularly as a result of political uncertainty, the strength of sterling lessening the attraction of London property to some international buyers and a decline in affordability resulting from weak wages growth. Looking forward, however (and particularly across the two-year period the Council intend to allow between the setting of their CIL rate and the first formal review), most commentators expect that demand will be supported by continued economic growth and higher employment; low inflation and the prospect of increasing real income gains; relatively low interest rates; and the effects of Stamp Duty reforms in the 2014 Autumn Statement. These are likely

7 Bank of England, Inflation report, November 2014

to support renewed growth, albeit at rates lower than those seen in recent years. Savills, for example, forecast a fall in value growth in prime central London (which includes Westminster) of -1% in 2015, but renewed growth of 8% in 2016, 6.5% in 2017 and 5% in 20188. This short-term view is supported by Winkworths, who forecast a fall in prime central London values of 5% in the first half of 2015, with a slight pick-up in the second half, with prices flat over the year as a whole9. For the mainstream market (properties worth less than £1 million) Savills forecast no change in prices in 2015, a 3% increase in 2016,a further 3% in 2017 and a 2% in each of 2018 and 2019.

2.21 Research for the City Council by Ramidus Consulting Ltd on “The Prime Residential Market in Westminster” demonstrates that prices in the prime market (£2 million+) are likely to be affected by factors different from the more mainstream market. Between 2003-13 these comprised 8% of all transactions in Westminster, but 41% of total value. Sales volumes of these properties appears to track the price of gold, indicating that they are seen as a store of value and factors like levels of international uncertainty, exchange rates and taxation policy will be important. Conversely, volumes in the “core” market track earnings in the way more typical of the market nationally. It should also be borne in mind that in Westminster the great majority of prime sales are of second hand stock, which is less relevant for CIL purposes.

2.22 Looking at the market more widely most observers consider that values will grow, although at a more subdued rate – particularly in London. Nationwide’s economist, Robert Gardner, states that “The slowdown in housing market activity is surprising given further steady gains in employment, a pickup in wage growth (albeit from low levels) and the continued low level of mortgage rates. Moreover, surveys suggest consumers remain in high spirits…If the economic backdrop continues to improve as we and most forecasters expect activity in the housing market is likely to regain momentum in the months ahead”. The Halifax’s economist Martin Ellis reports that “Despite downward pressure, housing demand should be supported by continuing economic recovery, growth in employment and still low mortgage rates. Average earnings also appear set to rise more quickly than inflation next year with the first gain in ‘real’ earnings for several years stimulating demand. Overall, house prices nationally are expected to increase in a range of 3-5% in 2015”.

2.23 On this basis, the outlook for the UK economy and house prices would appear to be expected to continue to increase into the medium term, albeit at rates lower than those seen in the past two years.

2.24 According to Land Registry data, residential sales values in Westminster have recovered since the lowest point in the cycle in April 2009. Between May 2009 and December 2013, prices in Westminster increased by 64%. Average prices in Westminster now stand 41% above the previous market peak in May 2008.

8 Savills World Research, Spotlight Prime London Residential Market (Autumn 2014) 9 M Winkworth PLC – Trading Statement and Market Outlook, December 2014

Figure 2.24.1: House prices in Westminster

Figure 2.24.2: Sales volumes in Westminster

Source: Land Registry

2.25 The future trajectory of house prices is inherently uncertain, and the complexity of the market in Westminster makes making predictions difficult. As it is, the CIL rates recommended in this report are not reliant on any given rate of price increase. However this brief review of the housing market and the economic fundamentals underpinning it support the consensus view of forecasters that 2015 will see values essentially static in 2015 and then growing at a more subdued rate into the medium-term. There is no evidence to suggest a long- term, sustained fall in values of the order that would bring the evidence in this report into question. Indeed, demographic evidence suggests there will be increasing demand for housing in Westminster as the population and number of households increase.

2.26 Much of Westminster is considered part of the ‘Prime Central London’ market, where Savills predict that values will increase by broadly the same cumulative amount over the period 2014-2018 (22.7%). However, the predicted growth is distributed differently over this period (3.0% in 2014, -1.0% in 2015, 8.0% in 2016, 6.5% in 2017 and 5.0% in 2018. It is important to bear in mind, however, that unlike other parts of London, in Westminster what is commonly termed the “prime” residential market is predominantly in second-hand properties rather than new build, to which CIL will apply.

Development context

2.27 Westminster’s stock includes diverse forms of housing, ranging from high density development in the central area and lower density housing in the north and the south. Westminster has no significant stock of surplus industrial land that can be released for housing and as a consequence of the historic fabric development tends to be small scale. Many sites accommodate existing offices, shops and housing with high existing use values and new housing is often delivered through change of use and enhancing densities of sites.

2.28 The diversity of Westminster’s stock can also be seen through sales data. In the ten year period 2003-2013, 92% of sales were for properties worth less than £2 million (80% in 2013), with the remainder falling into the “prime” category. Over the period, there were 3,335 transactions which made up 8% of transactions but 14% by value. Prime properties are widespread across Westminster, with a particular “core” in Knightsbridge and Belgravia, a “periphery” around Hyde Park and parts of Belgravia. Sales of properties worth £5 million+ show the same concentration around Knightsbridge and Belgravia with “hotspots” at St John’s Wood and along Park Lane10.

2.29 Westminster has few major development sites, but does have three ‘Opportunity Areas’ (Paddington, Victoria and part of the Tottenham Court Road Area) which have already delivered a substantial quantum of new housing and commercial floorspace. Commercial development

2.28 Changes to the London economy, including a shift from manufacturing to offices, deregulation of the financial market and technical innovation all supported a growth in employment and substantial increase in the office stock between the mid-1980s and 2008 (interrupted by the brief early-1990s recession). This trend was brought to an end by the 2007-8 crisis in the financial system which had a substantial impact on the London office market. There were signs of a recovery in market sentiment in 2010, but developments including the Eurozone crisis, the Japanese earthquake and tsunami, and uncertainty about the strength of the UK economy hit confidence and contributed both to a reduction in office take-up and a shortage of finance supporting new development.11

2.29 The result was that a number of high-profile projects stalled and the number of office scheme starts fell. Availability in the West End rose from 4.5% in 2007 to 6.6% at the end of 2008. At the same time expectation of rising supply bore down on prime rent levels which in the second half of 2008 fell from £1,184 per square metre to £1,049 per square metre12. For a number of reasons (including competition from high value uses such as prime residential), however, the expectations of supply did not materialise. As the economy improved and confidence returned, take up increased and availability fell – by November 2014 West End office availability was at 4.4%13. This has been reflected in resumed growth in rents. In quarter 3 of 2014, BNP Paribas Real Estate projected that by the end of that year prime rents for Mayfair and St James’s would reach £1,292 per square metres and £861 in Victoria. In their Winter 2014 London Office Crane Survey, Deloitte Real Estate reported that 2014 saw West End office rent

10 Ramidus Consulting Ltd., op cit 11 Ramidus Consulting Ltd., London Office Policy Review 2012, September 2012 12 Ibid, paras. 2.2.6 and 2.2.7 13 CBRE, Central London Office MarketView, November 2014

increases of 10% with two sub-markets (Soho and North of Oxford Street) surpassing previous rental highs14.

2.30 The Mayor of London uses five strategic benchmarks on the performance of the Central London office market to help inform and implement strategic policy on office development. The second of these deals with the relationship between availability and rent levels. It uses an 8% availability level as the level below which there will be a tendency for rents to increase, reflecting a narrowing choice of accommodation. There is little surprise, therefore, that rents have risen or that, given the relatively limited quantum of new stock likely to come onto the market in the short to medium-term following a peak in completions in 2014, they are projected to increase further – Deloitte Real Estate project a further 8.7% increase in West End office rents during 2015. There are some indications of increased demolition activity – a sign that developers are looking to deliver new stock early in the next cycle in order “to capture the expected increases in rents as the market imbalance between falling availability and strengthening demand continues for a while longer”15. Future potential employment growth is likely to underpin office development - over the longer term, Greater London Authority employment projections suggest a growth in Westminster office employment of 86,000 between 2011 and 2036.

2.31 Available evidence suggests that the judgements about office viability here are fundamentally robust at time of going to press. There are factors including uncertainty about prospects for the global economy (particularly important in the internationally-oriented West End office market); qualitative changes in the demands that occupiers in key growth sectors are increasingly making of office space and the effects these can have on build costs; and the cumulative impact these trends might have on delivery of development plan policies given the way in which the central London office market has developed that may suggest a cautious approach might be justified in the final rate-setting decision for this development type.

2.32 Westminster has a distinctive pattern of retailing. In the West End, it has the country’s largest concentration of comparison retailing (there is as much comparison floorspace on Oxford Street west of Oxford Circus as there is in the entire City of Birmingham) and the larger of London’s two international retail centres. In 2011, almost £2.6 billion was spent on comparison goods there16. Westminster also covers a small part of the second international centre, Knightsbridge.

2.33 The second major retailing area is Victoria, currently the seventh largest centre in Greater London by spend (over £311 million in 201117). Around these centres the London Plan identifies seven retail centres within the Central Activities Zone (‘CAZ’) – Baker Street, Covent Garden/Strand, Edgware Road South, Marylebone High Street, Marylebone Road, Warwick Way/Tachbrook Street and part of Charing Cross Road. Beyond the CAZ, Queensway/Westbourne Road (which straddles the boundary with the Royal Borough of Kensington and Chelsea) is identified as a Major centre and Edgware Road/Church Street, Harrow Road, Praed Street/Paddington and St John’s Wood are identified as district centres.

2.34 Demand for retail floorspace in central London has remained sufficiently robust to outweigh shop closures as a result of retail administrations during the

14 Deloitte Real Estate, London Office Crane Survey, Winter 2014 15 Ibid, page 24 16 Mayor of London, Consumer Expenditure and Comparison Goods Floorspace Need in London, October 2013 17 ibid

economic downturn. This is reflected in research by Colliers showing that in 2014 it was the only UK region showing prime retail rental growth18. The West End is at the forefront in driving this success; demand for retail floorspace is particularly supported by three factors:

■ The importance of the visitor economy. London is Europe’s top visitor destination, in 2013 attracting 16.8 million (an increase of 1.3 million over 2012; in the first quarter of 2014 visitor numbers were 8% up on the same time the previous year). International tourists spend on average more than four times as much as domestic shoppers, and the West End “remains the number one destination for London retail owing to its compelling department store offer, multi-lingual staff and the wealth and diversity of leisure provision it provides”19. It makes particular provision for higher worth visitors, around Bond Street, for example.

■ The West End fills a particular niche in the emerging multi-channel retailing environment. Its large flagship stores are increasingly being used by retailers to merchandise a full product offer and as showrooms for customers who then make purchases online20. At the other end of the scale, brands that start by trading on-line are seeking physical space in prime locations “to boost awareness and engagement of their brands”21.

■ The prospect of Crossrail starting operations in 2018 is already supporting significant demand for space east of Oxford Circus.

2.34 These trends have helped bring about a situation in which the West End is commonly described by analysts as being “white hot”22 . Unsurprisingly, this is having an effect on rent levels. During 2014, rents in Oxford Street increased by 25%, with typical rates of £950 per square foot, with those in Regent Street increasing 8% to a level of £700 per square foot . Bond Street saw growth of 8.3%, to £1,300 between the third quarter in 2013 and the same period in 2014. Beyond the international centre, these trends are also supporting growth in areas like Covent Garden, which saw rents grow 15.9% during 2013-14, to £840 per square foot. In autumn 2014, Knight Frank were reporting that their latest survey showed that the average vacancy rate in central London was just 2.8% at the end of June, with some locations having zero availability and evidence that units are being marketed 1-2 years in advance of release. Colliers report that the demand for central London space is “higher than ever”, with 2014 seeing the strongest zone A central London rental growth since 1998. The supply of retail space is at record lows with a sharp fall in vacancy by units – in the West End specifically vacancy by units fell to its lowest in three years.

2.35 These pressures are encouraging retailers to look beyond the principal streets to locations previously considered to be peripheral. Knight Frank point to Mayfair, with emerging streets such as Conduit Street, Dover Street and Brook Street, all of which have seen “marked improvements to tenant mix which has resulted in significant rental growth”23. Colliers report that in 2014 rents grew by 43% in Dover Street, to £500 per square foot, and by 25% in Mount Street –

18 Colliers, Central London Retail Healthcheck, Winter 2013 19 Colliers, Central London Retail Healthcheck, Autumn 2013 20 ibid 21 Colliers, Central London Retail Healthcheck, December 2014 22 The term used in GVA, Retail Bulletin, Winter 2014 and Colliers, Central London Retail Healthcheck, December 2014 23 Colliers, Central London Healthcheck, December 2014

again to the £500 per square foot mark. Centres like Marylebone High Street are also benefitting24.

2.36 Looking forward, forecasts to 2020 suggest total spend by overseas visitors to London could increase by 65% on 2013 levels, reaching £18.8 billion. This growth is likely to be boosted by the forthcoming relaxation of visa requirements. Evidence suggests that at least a quarter of this might be spent shopping. This is likely to intensify occupational demand and rental pressure, particularly in areas serving the higher end market.

2.37 Other centres are less influenced by overseas visitors, and here prospects are likely to be influenced more by the national economic trends mentioned earlier, particularly low inflation, high levels of employment and the prospect of increases in real wages. Westminster has a generally high-income resident population, with demand in centres like Victoria boosted by large numbers of commuters (and in this particular case, by significant growth in local office floorspace). More locally-oriented centres (particularly those beyond the CAZ) are unlikely to see large-scale retail development (indeed monitoring of planning applications has shown a fall in retail floorspace in these centres, particularly due to changes to more immediately profitable uses).

2.38 The hotel market in Westminster is also distinctive. It has a cluster of high end luxury hotels in the West End (it has a very high proportion of all London hotels in the 5* + bracket), and a second serving the upper end of the mid-market around Bayswater and north of Hyde Park. Further clusters near Paddington and Victoria particularly serve the mid-market. The sector has been generally buoyant in Westminster, which has seen 1,452 net additional rooms between 2004-2013.

2.39 The fundamental factors underpinning the hotel market, particularly tourism (see above) and business travel, have meant that occupancy rates have remained relatively stable in central London, even through the economic downturn (fluctuating between 79.3% in 2008 and 82.2% in 2013). Average revenue per available room was at £94.11 in 2007, fell back to £93.37 in 2009 and has steadily risen since then, reaching £113.63 in 201325. PricewaterhouseCoopers project that 2014 overall will have seen an increase in occupancy to around 83% and in average revenue per available room to £116.41. For 2015 they forecast that trading fundamentals will remain sound, driven by an improving economy and buoyant travel market and particularly by the Rugby World Cup in the autumn; they forecast an increase in occupancy rates to 84% and an increase in revenue per available room of 5.1% to over £12226. Visit Britain’s 2015 projection for overseas visitors published in December 2014 was for a 2.5% increase in volume and 4.5% increase in value; although they recognised downside risks from economic uncertainty in the Eurozone and exchange rates, these are offset by reduced oil prices, the removal of Air Passenger Duty for economy class passengers aged under 12 and improvements to air connectivity. It is also worth bearing in mind that the economy in the US (London’s largest single overseas visitor market) is robust, with a strengthening dollar favouring American visitors.

2.40 The strength of the visitor economy has attracted a number of new international brands into the central London hotel market (the opening of the Chiltern Firehouse in Marylebone by the owner of The Standard Group and the acquisition of a site on Hyde Park Corner by the Hong Kong-based Peninsular

24 Colliers, Central London Healthcheck, Autumn 2013. 25 GVA, The Changing Face of the UK Hotel Sector, Autumn 2014 26 Pwc, UK Hotels Forecast 2015: Forecast for London, www.pwc.co.uk/hospitality-leisure/uk- hotels-forecast/hotels-forecast-london.jhtml

Group are recent examples). Savills report that the improved operational performance and investor sentiment is fuelling appetite for hotel assets, and suggest that “we are now seeing the rise of the ‘distressed buyer’ who is increasingly eager to allocate their allocated funds”. This lack of stock, improved investor demand and confidence in the sector led to compressed yields in 2014; additional compression is forecast as supply constraints continue.27

27 Savills, UK Hotel Investment, Q3 2014

3 Methodology and appraisal inputs

3.1 Our methodology follows standard development appraisal conventions, using assumptions that reflect local market and planning policy circumstances. It has been widely used to support charging authorities CIL proposals and takes the approach recommended by the Local Housing Delivery Group28. The study is specific to Westminster and reflects the Council’s planning policy requirements. Approach to testing development viability

3.2 Appraisal models can be summarised via the following diagram. The total scheme value is calculated, as represented by the left hand bar29. In the case of a residential scheme, this includes the sales receipts from the private housing and the payment from a Registered Social Landlord (‘RSL’) for the completed affordable housing units. The model then deducts the build costs, fees, interest, CIL (at varying levels and included as a development cost) and developer’s profit. A ‘residual’ amount is left after all these costs are deducted – this is the land value that the Developer would pay to the landowner. The residual land value is represented by the pink portion of the right hand bar in the diagram.

£100

£90

£80

£70

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£50

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Value and costs (£ costs Millions) Value and £30

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£0 Scheme value Costs

Build Profit Fees Interest Residual Land Value CIL

3.3 The Residual Land Value is normally a key variable in determining whether a scheme will proceed. If a proposal generates sufficient positive land value (in excess of current use value), it can be implemented viably. If not, the proposal is unlikely to go ahead, unless there are alternative funding sources to bridge the ‘gap’.

3.4 Ultimately, the landowner will make a decision on implementing a project on the basis of return and the potential for market change, and whether alternative developments might yield a higher value. The landowner’s ‘bottom line’ will be achieving a residual land value that sufficiently exceeds ‘existing use value’ or

28 Local Housing Delivery Group, Viability Testing Local Plans, June 2012 29 For a residential scheme, total scheme value would be comprised of the values achieved for the private housing and the payment for the affordable housing received from a Registered Provider. For a commercial scheme, the value would be arrived at by calculating the investment value of the rental income receivable from tenants.

another appropriate benchmark to make development worthwhile. The margin above current use value may be considerably different on individual sites, where there might be particular reasons why the premium to the landowner should be lower or higher than other sites.

3.5 Clearly, however, landowners have expectations of the value of their land which often exceed the value of the current use. CIL will be a cost to the scheme and will impact on the residual land value. Ultimately, if landowners’ expectations are not met, they will not voluntarily sell their land and (unless a local authority is prepared to use its compulsory purchase powers) some may simply hold on to their sites, in the hope that policy may change at some future point with reduced requirements. It is within the scope of those expectations that developers have to formulate their offers for sites. The task of formulating an offer for a site is complicated further still during buoyant land markets, where developers have to compete with other developers to secure a site, often speculating on increases in value. Viability benchmark

3.6 The CIL Regulations provide no specific guidance on how local authorities should test the viability of their proposed charges. However, there is a range of good practice generated by the Local Housing Delivery Group; the Homes and Communities Agency; and appeal decisions that assist in guiding planning authorities on how they should approach viability testing for planning policy purposes.

3.7 In 2009, the Homes and Communities Agency published a good practice guidance manual ‘Investment and Planning Obligations: Responding to the Downturn’. This defines viability as follows: “a viable development will support a residual land value at level sufficiently above the site’s existing use value30 (EUV) or alternative use value (AUV) to support a land acquisition price acceptable to the landowner”. This definition is consistent with the Local Housing Delivery Group’s 2012 definition (“if, after taking account of all costs…the scheme provides a competitive return to the developer and generates a land value sufficient to persuade the landowner to sell the land for the development proposed. If these conditions are not met, a scheme will not be delivered”) and with paragraph 173 of the National Planning Policy Framework.

3.8 It is possible to draw some guidance on the extent to which the residual land value should exceed existing use value to be considered viable from a number of planning appeal decisions:

Barnet & Chase Farm: APP/Q5300/A/07/2043798/NWF “the appropriate test is that the value generated by the scheme should exceed the value of the site in its current use. The logic is that, if the converse were the case, then sites would not come forward for development”

Bath Road, Bristol: APP/P0119/A/08/2069226 “The difference between the RLV and the existing site value provides a basis for ascertaining the viability of contributing towards affordable housing.”

Beckenham: APP/G5180/A/08/2084559 “without an affordable housing contribution, the scheme will only yield less than 12% above the existing use value, 8% below the generally accepted margin necessary to induce such development to proceed.”

30 This term should not be confused with the RICS Red Book definition. Existing Use Value in this context is taken to mean the value of the site in its current use, disregarding opportunities for redevelopment of the site for other uses.

Oxford Street, Woodstock: APP/D3125/A/09/2104658 “The main parties’ valuations of the current existing value of the land are not dissimilar but the Appellant has sought to add a 10% premium. Though the site is owned by the Appellants it must be assumed, for valuation purposes, that the land is being acquired now. It is unreasonable to assume that an existing owner and user of the land would not require a premium over the actual value of the land to offset inconvenience and assist with relocation. The Appellants addition of the 10% premium is not unreasonable in these circumstances.”

3.9 The guidance issued by the Local Housing Delivery Group31 (‘LHDG’) on 22 June 2012 recommends the use of current use value plus an appropriate premium as a benchmark for testing CIL and local plan policy requirements.

3.10 It is clear from the LHDG guidance, planning appeal decisions and HCA good practice publication that the most appropriate test of viability for planning policy purposes is to consider the residual value of schemes compared to the existing or current use value plus a premium. This principle has been endorsed with regard to CIL-setting by independent examiners (see below). As discussed later in this report, our study adopts benchmark land values that are reflective of the circumstances in which sites are brought forward.

3.11 The examination on the Mayor of London’s CIL charging schedule considered the issue of an appropriate land value benchmark. The Mayor had adopted the existing use value used here, while certain objectors suggested that ‘Market Value’ was a more appropriate benchmark. The Examiner concluded that:

“The market value approach…. while offering certainty on the price paid for a development site, suffers from being based on prices agreed in an historic policy context.” (para 8) and that “I don’t believe that the EUV approach can be accurately described as fundamentally flawed or that this examination should be adjourned to allow work based on the market approach to be done” (para 9).

3.12 In his concluding remark, the Examiner points out that

“the price paid for development land may be reduced [so that CIL may be accommodated]. As with profit levels there may be cries that this is unrealistic, but a reduction in development land value is an inherent part of the CIL concept. It may be argued that such a reduction may be all very well in the medium to long term but it is impossible in the short term because of the price already paid/agreed for development land. The difficulty with that argument is that if accepted the prospect of raising funds for infrastructure would be forever receding into the future. In any event in some instances it may be possible for contracts and options to be re-negotiated in the light of the changed circumstances arising from the imposition of CIL charges. (para 32 – emphasis added).

3.13 This principle has been most recently endorsed by the examiner considering the proposed CIL rates proposed by the London Borough of Tower Hamlets (November 2014):

“having regard to the representations to the contrary, I also agree with the Council that benchmark land values and current use values (which in the study appraisals are subject to a landowner premium as an incentive for the site to come forward for development) are a more appropriate basis on which to

31 This group was led by the Homes and Communities Agency and comprises representatives from the National Home Builders Federation, the Royal Town Planning Institute, local authorities and valuers (including BNP Paribas Real Estate).

appraise CIL viability than historic market values. Historic market values will have been affected by the wide variety of circumstances applicable at the time and these may have changed or may no longer be relevant. Moreover, historic market values will not have been influenced by CIL as they are likely to be if and when CIL is in place.”

3.14 The approach is also consistent with paragraphs 6.6 to 6.8 of supplementary planning guidance published by the Mayor of London on “Use of Planning Obligations in the funding of Crossrail, and the Mayoral Community Infrastructure Levy”.

3.15 It is important to stress, however, that there is no single benchmark land value at which land will come forward for development. The decision to bring land forward will depend on the type of owner and, in particular, whether the owner occupies the site or holds it as an asset; the strength of demand for the site’s current use in comparison to others; how offers received compare to the owner’s perception of the value of the site, which in turn is influenced by prices achieved by other sites. Given the lack of a single benchmark land value, it is difficult for policy makers to determine the minimum land value that sites should achieve. This will ultimately be a matter of judgement for each individual Charging Authority informed by the evidence available to it. Our approach to determining benchmark land values is discussed at paragraphs 4.37 to 4.41.

3.16 Respondents to Westminster’s (and other charging authorities’) PDCS consultations have made various references to the RICS Guidance on ‘Viability in Planning’ and have suggested that those authorities should run their analyses using benchmarks based on market value. There is no requirement in either legislation or national guidance to use any particular methodology. As shown earlier, examiners have concluded that the market value approach could well be an extremely misleading measure against which to test viability of a new policy or charge, as market values should reflect existing policies already in place, and would consequently tell the Council nothing as to how future - as yet unadopted - policies might impact on viability. It has been widely accepted elsewhere that market values are inappropriate for testing levels of CIL.

3.17 The issue of viability benchmarks has been considered at length by the Local Housing Delivery Group. The Harman Guidance counsels against using market values in testing of planning policies and CIL. Relying upon historic transactions is a fundamentally flawed approach, as offers for these sites will have been framed in the context of current planning policy requirements, so an exercise using these transactions as a benchmark would tell the Council very little about the potential for developments to absorb as yet unadopted policies. Various CIL examiners have accepted the key point that CIL will ultimately result in a reduction in land values, so benchmarks must consider a reasonable minimum threshold which landowners will accept. For local authority areas such as Westminster, where most sites have been previously developed, the ‘bottom line’ in terms of land value will be the value of the site in its existing use. This fundamental point is recognised by the RICS at paragraph 3.4.4. of their Guidance Note on ‘Financial Viability in Planning”:

“For a development to be financially viable, any uplift from current use value to residual land value that arises when planning permission is granted should be able to meet the cost of planning obligations while ensuring an appropriate Site Value for the landowner and a market risk adjusted return to the developer in delivering that project (the NPPF refers to this as ‘competitive returns’ respectively). The return to the landowner will be in the form of a land value in excess of current use value”.

3.18 The Guidance goes on to state that “it would be inappropriate to assume an uplift based on set percentages … given the diversity of individual development sites”.

3.19 However, given that a CIL Viability Study is not testing specific sites, it is not possible to reflect the individual nature of all sites, so it is necessary to introduce some set percentages in terms of uplifts above current use values. This approach has been accepted at numerous other CIL examinations, including the Mayoral CIL examination, where the argument that use of the approach outlined in the RICS guidance should be required was considered and rejected.

3.20 Other respondents to CIL consultations have also made references to ‘market testing’ of CIL rates. This is another variant of the benchmarking advocated by respondents outlined at paragraph 3.15. These respondents advocate using benchmarks that are based on the prices that sites have been bought and sold for. There are significant weaknesses in this approach which none of the respondents who advocate this have addressed. In brief, prices paid for sites are a highly unreliable indicator of their actual value for the following reasons:

. Transactions are often based on bids that ‘take a view’ on squeezing planning policy requirements below target levels. This results in prices paid being too high to allow for policy targets to be met. If these transactions are used to ‘market test’ CIL rates, the outcome would be unreliable and potentially highly misleading;

. Historic transactions of housing sites are often based on the receipt of grant funding, which is no longer available for developments where a registered provider is not the lead developer;

. There would be a need to determine whether the developer who built out the comparator schemes actually achieved a profit at the equivalent level to the profit adopted in the viability testing. If the developer achieved a sub-optimal level of profit, then any benchmarking using these transactions would produce unreliable and misleading results. The same issue applies to other key appraisal variables.

. Developers often build assumptions of growth in sales values into their appraisals, which provide a higher gross development value than would actually be achieved today. Given that our appraisals are based on current values, using prices paid would result in an inconsistent comparison (i.e. current values against the developer’s assumed future values). Using these transactions would produce unreliable and misleading results.

3.21 For the reasons set out above, the approach of using current use values is a more reliable benchmark for testing viability than using market values or prices paid for sites, as advocated by some. It reflects best practice guidance on conducting area-wide viability testing of policies, providing a proportionate and practical approach to providing high-level assurance that the CIL rates proposed by the council are set in a way that is compatible with the likely economic viability of development needed to deliver its local plan32.

32 Local Housing Delivery Group, op cit,, page 15

4 Development appraisals Development typologies

4.1 As suggested by national CIL guidance, we have tested a sample of developments broadly representative of the kinds of development that comes forward in Westminster. For the Viability Study issued with the PDCS, we appraised a series of developments, 73 of which were based on application schemes submitted to the Council between 2010/11 and 2012/13, alongside an additional reflecting 20 hypothetical developments. While the proxies were based on applications from the last few years, the development costs inputs used in the viability modelling of each proxy were current as of summer 2014. This is the highest volume of individual development typologies we have undertaken when testing CIL viability and is reflective of the more complex, mixed use nature of development in Westminster. The 20 hypothetical developments include 14 commercial schemes which are required by Policy S1 to provide residential floorspace. This was reflected in our appraisals in the PDCS Viability Study.

4.2 Following the PDCS consultation, the Council has requested that additional proxies be tested to address actual or perceived gaps in the evidence base for certain uses. For the purposes of this updated Viability Study, we have added the following additional proxies:

Table 4.2.1: Additional proxies added

Use Original number Additional Total proxies of proxies in proxies added in assessed in this PDCS Viability this Study Study Study Residential 53 22 75 Retail 11 13 24 Office 16 10 26 Strategic sites 3 5 8 Casino - 3 3 D1 1 - 1 Hotel 9 6 15 Nightclub - 3 3 Totals 93 62 155

4.3 The range of sales values/capital values and also sizes/types of development and densities of development vary across Westminster. The inputs to the appraisals are based on research on the local housing and commercial markets. CIL (at varying levels) is incorporated as a development cost into all the appraisals. The appraisal inputs and a sample appraisal are attached as Appendix 2.

Strategic Sites

4.4 Strategic sites form a part of this testing as sites of importance for the delivery of local plan targets. Three major residential sites were tested as part of the PDCS Viability Study - Chelsea Barracks, St John’s Wood Barracks, and Hyde Park Barracks, the first two of which have recently secured planning permission.

The Council has instructed us to assess five additional strategic sites identified as such in Westminster’s City Plan: Strategic Policies for this updated study (Development at Lilestone Street, Mallory Street, Penn House and Jerome Crescent; 35-50 Rathbone Place; Dudley House, North Wharf Road; Arundel Great Court; and 38-44 Lodge Road). In addition, baseline costs and values data from the viability assessments for two other strategic sites was used to inform the entire testing process (Middlesex Hospital and North Westminster Community School). Inputs and baseline data from around 20 other site specific viability assessments were also used to inform the entire testing process, representing an appropriate sample of development typologies across the city.

4.5 Many of the strategic sites in Westminster are relatively small, particularly those in the central part of the city, and many of them are also planned to be mixed use in nature in line with Westminster policy. They are also located on or around long term strategic transportation sites such as Crossrail or mainline station upgrade sites, and can therefore contain as much or more commercial floor space than residential. Therefore, Westminster is not as reliant on strategic sites for housing delivery when compared to some other London boroughs. In addition, many of the proposals sites are estate renewal schemes, particularly those around Church Street in the north of the City. These schemes will mainly involve the re-provision of existing housing and associated social and community facilities, with some new social and private housing. Therefore the impact of CIL on these sites is likely to be marginal.

4.6 This is reinforced by housing delivery statistics, which shows the proportion of housing (planned and delivered) that comes from strategic sites against other forms of delivery. In the last three years in Westminster only 5 of the completed 696 residential sites in Westminster have been strategic sites. Of the 100 sites on the 5-15 year housing supply schedule, 31 are on strategic sites. In terms of residential unit numbers, in the last three years the strategic sites provided 12 units out of a total of 2,251 completed units over that time. Looking forward to the 5-15 year housing supply schedule, the strategic sites are forecasted to provide 2,682 residential units out of a total of 6,083. However, as the data show, a majority of housing delivery in Westminster comes from smaller windfall sites, which are not known in the longer term in the same way as strategic sites. It is therefore unsurprising that the further you look forward, the greater proportion of delivery is projected to come from the strategic sites, which are larger ‘known’ sites.

4.7 This illustrates the nature of development in Westminster, and of the built environment in the City overall. Westminster does not contain any greenfield sites, with all development effectively being smaller brownfield site redevelopments and not large scale regeneration sites that are found elsewhere in London. Many of the strategic sites also have importance beyond housing delivery in terms of providing significant, strategically important, transportation upgrades, social and community facilities and other local and regional plan aims. The Victoria and Tottenham Court Road Opportunity Areas have not been identified as having any particular viability issues, reflected in existing and future predicted values and their presence in the prime commercial area. Paddington has weaker viability fundamentals compared to the other two opportunity areas, reflected in current use values (such as lower office and retail rents than the other two opportunity areas), however this has been taken into account by including it in the core commercial area.

Residential sales values

4.8 The nature of the residential market in Westminster has been explained earlier. “Core” residential values in Westminster reflect national trends in recent years but do of course vary between different sub-markets. We have considered comparable evidence of both transacted properties in the area and properties currently on the market to establish appropriate values for testing purposes. This exercise indicates that developments in Westminster will attract average sales values ranging from circa just under £11,000 per square metre to £31,000 per square metre in the highest value part of the prime area (see Table 4.8.1).

Table 4.8.1: Average sales values used in appraisals

Area Average Average values £s values £s per sq ft per sq m Prime (Mayfair, Knightsbridge, Belgravia, £2,080 £22,400 Whitehall, Covent Garden, Strand, St John’s Wood) Core (Soho, Fitzrovia, Pimlico, Westbourne £1,465 £15,750 Grove, Paddington, Bayswater, Marylebone, Victoria) Fringe (Lisson Grove, Church Street, Queens £1,022 £11,000 Park, Churchill)

4.9 As noted earlier in the report, Savills predict that sales values in the mainstream market across London will increase by circa 10.4% over the five years 2015 to 19, with central London prime values increasing by 18.5% between 2015 to 2018. To test the impact of the potential increase in sales values, we have modelled a sensitivity analysis with an increase in prices of 10%, alongside construction inflation of 5% to provide the Council with an indication of the impact of changes in costs and values on viability. We have also tested the impact of a 5% fall in sales values to test the sensitivity of the CIL rates to a reverse in market conditions.

Commercial rents and yields

4.10 Our assumptions on rents and yields are summarised in Table 4.10.1 below. Rents and yields are reflective of transactions across Westminster over the past eighteen months; Savills have reported that Grade A rents in January 2015 had increased to £892 per square metre, while Prime rents had increased to £1,126 per square metre with rent free periods of 8 months33. This is echoed by Jones Lang LaSalle’s ‘Central London Office Market Report (Q4 2014) which reports that prime West End rents had increased to £1,238 per square metre34 Jones Lang LaSalle also predict that prime rents will increase during 2015 to £1,346 per square metre. Prime yields are reported to be between 3.75% and 4.5%35.

4.11 BNP Paribas Real Estate’s ‘UK Retail Focus’ (Q4 2014) reports that retail yields for in-town retail (prime towns) had fallen to 5% and that 181-183 Oxford Street had been sold by Cew Capital LLP to Emperor International for £35 million (a yield of 2.36%).

33 Savills: ‘West End Office Market Watch’ January 2015 34 Jones Lang LaSalle ‘Central London Office Market Report’ Q4 2014 35 ibid

4.12 For retail, Knight Frank’s ‘Central London Retail: Occupier and Investment Markets Winter 2014’ report states that Prime rents on key London streets were at £1,300 per square foot (Zone A) in Bond Street; £800 per square foot (Zone A) in Oxford Street with similar rent levels in Covent Garden, both of which were marginally higher than Regent Street. In the same report, Knight Frank report yields of 2% on investments in Bond Street and 3% on Oxford Street. Examples quoted are 15-16 New Bond Street (purchased by Meyer Bergman for £112 million representing a 2.1% net initial yield) and 97 New Bond Street (purchased by Whittington Investments for £18.75 million at a net initial yield of 2.22%).

Table 4.12.1: Commercial rents (per square metre) and yields

Use Prime Prime Core Core Fringe Fringe rent yield rent yield rent yield Retail £1,000 4.00% £850 4.50% £400 5.00% 36 Office £950 4.00% £800 4.25% £600 4.50% B2/B8 £150 7.00% £150 7.00% £150 7.00% C1 £600 4.50% £500 4.75% £450 5.00% C2 £250 5.00% £250 5.00% £250 5.00% D1/D2 £300 7.00% £250 7.00% £250 8.00%

Affordable housing tenure and values

4.13 The Council’s current policy position is that developments comprised of 10 or more units (or over 1,000 square metres of additional floorspace) should provide between 25% and 35% of floorspace as affordable housing, subject to viability and depending on location. For the purposes of our appraisals, we have incorporated the 35% affordable housing requirement, with lower percentages in 5% increments, with a tenure mix of 60% rented housing and 40% intermediate housing. No account has been taken of the Government’s recently announced ‘vacant building credit’ or the national guidance setting a lower threshold of more 10 units below which affordable housing should not be sought, both of which will tend to decrease affordable housing requirements.

4.14 The Council accepts the new Affordable Rent tenure, with rents of up to 80% of market rents. Registered providers are expected to ensure the rents are affordable and have due regard to limits imposed by the Universal Credit and Local Housing Allowances. This requires that rents are set at lower proportions of market rents for larger properties. For modelling purposes, we have assumed that rents are no higher than the relevant local housing allowance.

4.15 The CLG/HCA ‘Affordable Homes Programme 2015-18: Prospectus‘(January 2014) document clearly states that RPs will not receive grant funding for any affordable housing provided through planning obligations. The London Housing Strategy (April 2014 and covering the period 2015 - 2018) adopts a consistent position with regards to grant funding. Consequently, all our appraisals assume nil grant. We recommend that the Council revisits this assumption when it next reviews its charging schedule, by which time a new funding programme may have been introduced by central government.

4.16 For shared ownership units, we have assumed that RSLs will sell 25% to 50% initial equity stakes and charge a rent of 2.75% on the retained equity. A 10%

36 We have adopted a more cautious rent of £850 per square metre in our appraisals.

charge for management is deducted from the rental income and the net amount is capitalised using a yield of 5.25%. However, we have assumed that prices of sold equity are capped to ensure that household incomes required to purchase are maintained within London Plan limits. In consultation on the PDCS, representors pointed out that a rent level of 1.75% is often sought in Westminster given the high level of market rents in the City; this would make extremely little difference to the appraisal outcomes given the caps we have placed on assumed receipts from RPs.

4.17 Consequently, our appraisal model incorporates £1,600 per square metre for affordable rented units and £3,200 per square metre for shared ownership units. On the basis of a tenure mix of 60% rented and 40% shared ownership, this results in a blended rate across both tenures of £2,240 per square metre.

Residual Section 106 costs

4.18 Our appraisals incorporate an allowance of £20 per square metre across all development types to address any Section 278 and residual Section 106 costs. This accords with the Council’s evidence of sums sought on planning applications in Westminster, when items that do not satisfy the three tests identified by Regulation 122 and the other restrictions on use of planning obligations under the CIL Regulations are excluded.

Mayoral CIL and Crossrail Section 106

4.19 Our appraisals incorporate Mayoral CIL at £50 per square metre and Crossrail Section 106 top-up at £40 per square metre for retail development; £90 per square metre for office development; and £11 per square metre for hotel development. These amounts are based on the indicative charges set out in the Mayor’s Supplementary Planning Guidance, after deducting Mayoral CIL.

Build costs

4.20 We have sourced build costs for the residential schemes from the RICS Building Cost Information Service (BCIS), which is based on tenders for actual schemes. We have adopted ‘upper quartile costs’ for all uses to reflect the more complex nature of development in Westminster, the prevalence of listed buildings, conservation areas and other heritage designations noted in paragraph 1.3. Where developments are known to include retained facades, base build costs have been increased by 20%. In addition to the build costs outlined below, our appraisals include a contingency of 5% of build costs. Build costs have also been based on data taken from individual site viability assessments from planning permissions over the last 18 months in Westminster, to make them more locally reflective. The adjusted BCIS upper quartile cost has therefore been further adjusted to make it more locally specific and accurate, particularly for residential development where costs can be higher.

Table 4.20.1: Build costs before external works and CSH allowances

Development type Cost per square Cost per square metre foot Retail £1,642 £153 Offices £1,817 £169 B2 £700 £65 B8 £700 £65 Hotels £2,054 £191 D1/D2 £1,500 £139 Residential £2,832 - £3,20037 £263 - £297

4.21 Representations to the PDCS consultation asserted that residential build costs were around 20% lower than those experienced in live developments. We have therefore undertaken a sensitivity analysis in which costs are increased by 20% above the levels adopted previously. This increase has also been applied to all non-residential floorspace.

4.22 We have added 10% to the base costs to account for external works, which are not accounted for by BCIS. This assumption is based on an average cost for external works on live developments. In addition, for the updated assessment we have added an additional 5% of base build costs to account for demolition of existing buildings.

4.23 A further 6% is added to the base costs to account for the cost of meeting Code for Sustainable Homes level 4. This assumption is based on the CLG studies in 2008 and 2010. More recent updates indicate that the cost of meeting CSH level 4 has fallen below 6% of base costs.

Professional fees

4.24 In addition to base build costs, schemes will incur professional fees, covering design, valuation, highways consultants and so on. Our appraisals incorporate an allowance of 10%, covering all professional inputs and planning fees, EPCs and NHBC costs.

Sales and marketing costs

4.25 Our appraisals incorporate an allowance of 3% of GDV to cover marketing costs. An additional 0.5% of GDV is included for legal costs on sales.

4.26 We have includes letting agents fees of 10% of first year’s rent and legal letting fees of 0.75% of capital value. Disposals fees of 1% of capital value are also included.

Finance costs

4.27 Our appraisals incorporate finance costs on land and build at 7%.

Stamp duty and acquisition costs

4.28 We include stamp duty at 4% of land costs, agents fees of 1% and legal fees on acquisition of 0.8%.

37 Additional allowance for retained facades

Development and sales periods

4.29 Development and sales periods vary between types of scheme. However, our sales periods are based on an assumption of a sales rate of 10 units per month. We have not reflected any off-plan sales in our appraisals, although we note that many schemes in central London are now selling almost entirely off plan.

4.30 Our appraisals assume that the investment value of the commercial element of developments is sold following practical completion. We have assumed a 2 year rent free period, which considerably overstates the incentive package typically offered in Westminster.

Developer’s profit

4.31 Developer’s profit is closely correlated with the perceived risk of residential development. The greater the risk, the greater the required profit level, which helps to mitigate against the risk, but also to ensure that the potential rewards are sufficiently attractive for a bank and other equity providers to fund a scheme. In 2007, profit levels were at around 15% of scheme value. However, following the impact of the credit crunch and the collapse in interbank lending and the various government bailouts of the banking sector, profit margins have increased. It is important to emphasise that the level of minimum profit is not necessarily determined by developers (although they will have their own view and the Boards of the major housebuilders will set targets for minimum profit).

4.32 The views of the banks which fund development are more important; if the banks decline an application by a developer to borrow to fund a development, it is very unlikely to proceed, as developers rarely carry sufficient cash to fund it themselves. Consequently, future movements in profit levels will largely be determined by the attitudes of the banks towards development proposals.

4.33 The near collapse of the global banking system in the final quarter of 2008 is resulting in a much tighter regulatory system, with UK banks having to take a much more cautious approach to all lending. In this context, and against the backdrop of the current sovereign debt crisis in the Eurozone, the banks may not allow profit levels to decrease much lower than their current level of 20% of scheme value.

4.34 Our assumed return on the affordable housing GDV is 6%. A lower return on the affordable housing is appropriate as there is very limited sales risk on these units for the developer; there is often a pre-sale of the units to an RSL prior to commencement. Any risk associated with take up of intermediate housing is borne by the acquiring RSL, not by the developer. A reduced profit level on the affordable housing reflects the GLA ‘Development Control Toolkit’ 2014 guidance and Homes and Communities Agency’s guidelines in its Economic Appraisal Tool

4.35 The vast majority of development in Westminster is relatively small scale and developed over 24 to 36 month periods. Certain representations to the PDCS consultation suggested that profit should be measured on an Internal Rate of Return (‘IRR’) basis. This measure of return is only relevant to very large developments38, which are rarely, if ever, encountered in Westminster.

Phasing of CIL payments

4.36 The Council is yet to formulate its instalment policy. For testing purposes, we

38 For example, IRR has been used on developments of the scale of Battersea Power Station (circa 3,500 residential units and 1 million square feet of non-residential floorspace) and Wood Wharf (a similar quantum of residential units and circa 1.5 million square feet of office floorspace).

have assumed that any CIL due will be payable upon commencement. The approach tested is a conservative one, although given the relatively small sums involved, an instalments policy is likely to make relatively little difference to viability overall.

Benchmark land values for the residential analysis

4.37 Benchmark land values, based on the current use value or alternative use value of sites are key considerations in the assessment of development economics for testing planning policies and tariffs. Clearly, there is a point where the Residual Land Value (what the landowner receives from a developer) that results from a scheme may be less than the land’s current use value. Current use values can vary significantly, depending on the demand for the type of building relative to other areas. Current use value is effectively the ‘bottom line’ in a financial sense and therefore a key factor in this study.

4.38 We have based the current use value for each site on the actual floorspace on the site at the time planning applications were submitted. For the 20 hypothetical developments, we have assumed that the new development will result in an intensification of development, with a lesser volume of space on site than will be developed. Our rent and yield assumptions for the existing floorspace are summarised in Table 4.38.1. These assumptions are based on the lower quartile of lettings in Westminster over the past 18 months, therefore reflecting poorer quality stock which is more likely to be redeveloped than stock which attracts higher rents.

Table 4.38.1: Rents and yields for existing floorspace

Use Prime Prime Core Core Fringe Fringe rent yield rent yield rent yield Retail £500 5.50% £400 6.25% £175 6.50% Office £550 5.50% £450 5.75% £350 6.25% B2/B8 £110 8.00% £110 8.00% £110 8.00% C1 £300 6.00% £275 6.00% £250 6.00% C2 £175 6.00% £140 6.00% £140 6.00% D1/D2 £150 8.00% £120 8.00% £120 8.00%

4.39 Redevelopment proposals that generate residual land values below current use values are in most straightforward commercial situations (see paragraph 5.7) unlikely to be delivered. While any such thresholds are only a guide in ‘normal’ development circumstances, it does not imply that individual landowners, in particular financial circumstances, will not bring sites forward at a lower return or indeed require a higher return. If proven current use value justifies a higher benchmark than those assumed, then appropriate adjustments may be necessary. As such, current use values should be regarded as benchmarks to underpin an area-wide assessment of viability rather than definitive fixed variables on a site by site basis.

4.40 It is also necessary to recognise that a landowner will require an additional incentive to release the site for development39. The premium above current use value would be reflective of specific site circumstances (the primary factors being the occupancy level and strength of demand from alternative occupiers).

39 This approach is therefore consistent with the National Planning Policy Framework, which indicates that development should provide “competitive returns” to landowners. A 20% return above current use value is a competitive return when compared to other forms of investment.

For policy testing purposes it is not possible to reflect the circumstances of each individual site, so a blanket assumption of a 20% premium has been included to reflect the ‘average’ situation.

4.41 We would draw readers’ attention to the comments on land values in Examiner’s report on the Mayor of London’s CIL40, which indicates that owners will need to adjust their expectations to accommodate allowances for infrastructure.

40 Para 32: “the price paid for development land may be reduced…. a reduction in development land value is an inherent part of the CIL concept…. in some instances it may be possible for contracts and options to be re-negotiated in the light of the changed circumstances arising from the imposition of CIL charges.”

5 Appraisal outputs

5.1 The full outputs from our appraisals of the 135 application schemes and 20 hypothetical developments are attached as Appendix 2.

5.2 We have tested all 155 developments based on the following assumptions:

1 Base sales values and base costs (including Code for Sustainable Homes Level 4); 35% to 0% affordable housing; 20% profit on private housing;

2 Base sales values and base costs inflated by 20% (including Code for Sustainable Homes Level 4); 30% to 0% affordable housing; 20% profit on private housing;

3 As (1), with sales value increase of 10% and build cost inflation of 5%

4 As (1), with sales values falling by 5%;

5.3 We assume that all development types will meet Code for Sustainable Homes Level 4. Level 4 is reflected through a 6% adjustment to our base build costs for all tenures.

5.4 For all 155 developments, we have run two sensitivity analyses; firstly, with sales values increasing by 10% and build costs also increasing by 5%; and secondly, with sales values falling by 5%. This analysis is provided for illustrative purposes and may assist the Council in understanding how viability might be affected by movements in sales values (up and down) over time. However, the future trajectory of the housing market is inherently uncertain and predictions cannot be relied upon.

5.5 The residual land values from each of the development appraisals is then compared to the current use value of each site. If a surplus above current use value is generated, this is fed back into the appraisal model as CIL. This ensures that development finance on CIL payments is reflected in the appraisals. The total CIL amount is divided by the total floorspace to calculate a maximum rate per square metre. These maximum rates and the suggested rates are summarised in a series of tables. A sample table is provided below.

Table 5.5.1: Sample of summary results table

Proxy number Development type Zone 35% AH 30% AH 25% AH 2 Office - MU with resi and retail Core n/a n/a £50 80 Office on existing office Core £2,872 £2,969 £3,066 81 Office on existing office Core £3,049 £3,154 £3,260 135 Resi with office on existing C2 Core £3,350 £3,509 £3,668 Resi with office on existing 134 office and B8 Core £4,055 £4,178 £4,302 Resi with retail, storage and gym on existing retail/ 152 office/storage Core £1,377 £1,620 £1,864 12 Residential MU Core £2,802 £3,154 £3,507 23 Residential MU Core £1,382 £1,621 £1,860 33 Residential MU Core £2,781 £2,898 £3,014 57 Residential MU Core £510 £724 £938

5.6 The table shows the development type, area and maximum CIL per square metre. At this rate of CIL, all of the surplus above the benchmark land value is assumed to be paid towards infrastructure funding through CIL. Clearly the Council will need to allow for a ‘viability margin’, or ‘headroom’ below the maximum rate in each case to allow for changes to the market or to development costs. As a broad indication, other authorities have sought to limit their CIL so that it does not exceed 70% of the maximum CIL, or so that it does not exceed about 5% of development costs. The 5% yardstick reflects principles that have been widely used by charging authorities and examiners in considering CIL proposals, as it is similar to the allowance developers commonly make for contingencies – a sum developers can put by in most cases without having undue effect on overall viability.

5.7 In some cases, the equation RLV less BLV results in a negative number, so the development would not (in most cases, at least) proceed, whether CIL was imposed or not. We therefore focus on situations where the RLV is greater than BLV and where (again, all other things being equal) the development would proceed. In these situations, CIL has the potential to ‘tip the balance’ of viability into a negative position. It is interesting to note, however, that examination by the Council of the actual cases in which this high-level assessment showed to be “unviable” showed that many had in fact been implemented (see paragraph 4.39 of the Council’s Information and Evidence document).

6 Assessment of the results

6.1 This section should be read in conjunction with the full results attached at Appendix 3. In these results, the residual land values are calculated for scenarios with sales values and capital values reflective of market conditions across Westminster. These RLVs are then compared to benchmark land values. Any surplus above the benchmark land value is reduced to nil by inserting the surplus back into the appraisal as a CIL contribution. This process establishes a CIL maximum rate. In considering these results it is important to bear in mind that the appraisals have been carried out to provide a high-level assurance that the proposed CIL rates are compatible with the likely economic viability of development needed to deliver the plan. They are not intended to give a precise, site-specific answer as to the viability of each development.

6.2 The CIL Regulations state that in setting a charge, local authorities must “strike an appropriate balance” between revenue maximisation on the one hand and the potentially adverse impact of CIL upon the viability of development across the whole area on the other. Our recommendations are that:

■ Firstly, the Council should take a strategic view of viability across its area as a whole. There will always be variations in viability between individual sites, but viability testing should establish the most typical viability position; not the exceptional situations. ■ Secondly, the Council should take a balanced view of viability – residual valuations are just one factor influencing a developer’s decision making – the same applies to local authorities. ■ Thirdly, while a single charge is attractive, it may not be appropriate for all authorities, particularly in areas where sales values and capital values vary between areas and intended uses of development. ■ Fourthly, markets are cyclical and subject to change over short periods of time. It is important to sensitivity test levels of CIL to ensure they are robust in the event that market conditions improve over the life of a Charging Schedule. ■ Fifthly, the Council should not set rates of CIL at the limits of viability. The Council should leave a margin or contingency to allow for change and site specific viability issues.

6.3 It has now been widely recognised that there is no requirement for a Charging Authority to slavishly follow the outputs of residual valuations. At Shropshire Council’s examination in public, Newark & Sherwood Council argued that rates of CIL should be set at the level dictated by viability evidence which would (if followed literally) have resulted in a Charging Schedule with around thirty different charging zones across the Shropshire area. Clearly this would have resulted in a level of complexity that CIL is intended to avoid. The conclusion of this debate was that CIL rates should not necessarily be determined solely by viability evidence, but should not be logically contrary to the evidence. Councils should not follow a mechanistic process when setting rates – appraisals are just a guide to viability and are widely understood to be a less than precise tool. The Council is therefore able to exercise an element of informed judgement when adopting CIL rates, taking account of the evidence presented in this study, but also other appropriate available evidence at its disposal, such as other viability assessments and its knowledge of markets within its area.

Assessment – residential development

6.4 As CIL is intended to operate as a fixed charge, the Council will need to consider the impact on two key factors. Firstly, the need to strike a balance between maximising revenue to invest in infrastructure on the one hand and the need to minimise the impact upon development viability on the other. Secondly, as CIL will effectively take a ‘top-slice’ of development value, there is the potential for it to impact on the quantity of affordable housing (or financial contribution in lieu) or on the tenure mix that can be secured. This is a change from the current system of negotiated financial contributions, where the planning authority can weigh the need for contributions against the requirement that schemes need to contribute towards affordable housing provision. However, this trade-off has always existed under the current system of securing direct provision or funding for infrastructure through Section 106 obligations. This has been recognised in this report, which takes full account of the City Council’s policies on affordable housing.

6.5 In assessing the results, it is important to clearly distinguish between two scenarios; namely, schemes that are unviable regardless of the level of CIL (including a nil rate) and schemes that are viable prior to the imposition of CIL at certain levels. If a scheme is unviable before CIL is levied, it is (in most cases) unlikely to come forward and CIL would not be a factor that comes into play in the developer’s/landowner’s decision making. We have therefore disregarded the ‘unviable’ schemes in recommending appropriate levels of CIL. The unviable schemes may only become viable following a degree of real house price inflation, or in the event that the Council agrees to a lower level of affordable housing within the flexibility allowed by its adopted policy in the short term41. On the other hand, as the sensitivity test assuming improvements in market conditions show that increases in sales values can bring schemes into viability; the Council then has to consider the effects of its CIL rates on these (paradoxically, perhaps, an improving market may reduce the scope for increasing CIL rates).

Determining maximum viable rates of CIL for residential development

6.6 As noted in paragraph 6.5, where a scheme is unviable the imposition of CIL at a zero level will not make the scheme viable. Other factors (i.e. sales values, build costs or benchmark land values) would need to change to make the scheme viable. For the purposes of establishing a maximum viable rate of CIL, we have had regard to the development scenarios that are currently viable and that might, therefore, be affected by a CIL requirement. All the results summarised below assume that current affordable housing requirements are met in full (sensitivity analyses which adopt reduced levels of affordable housing are also provided).

6.7 The appraisal outputs were drawn on by the City Council alongside other evidence and discussions with developers and others to identify three potential charging zones – Prime, Core and Fringe (further detail about the process used for identifying the zones is set out in the Council’s Evidence and Information document). Tables 6.9.1 and 6.9.2 summarise the results of the residential-led mixed use scheme and wholly residential schemes and arranges them according to the agreed zones. Each table includes the maximum amounts of

41 However, as shown by the sensitivity analyses (which tests affordable housing between 0% and 35% in 5% increments) even a reduction in affordable housing does not always remedy viability issues. In these situations, it is not the presence or absence of planning obligations that is the primary viability driver – it is simply that the value generated by residential development is lower than some existing use values. In these situations, sites would remain in their existing use or be brought forward for different types of development.

CIL that could be charged in combination with the full policy requirement of 35% affordable housing (where required) and lower proportions.

6.8 Across the Core Zone, the average maximum CIL rate is £2,713 per square metre when 35% affordable housing is provided. In the Prime Zone, the average maximum CIL would be £3,279 per square metre when 35% affordable housing is provided. In the Fringe Zone, the average maximum CIL would be £2,506 per square metre.

6.9 As noted previously, there were comments during the PDCS consultation that the costs we had assumed were too low. We have therefore re-run the appraisals with an uplift of 20% to all uses and the results are summarised in Table 6.9.2. These appraisals indicate a reduction in the average maximum CIL rate as one would expect (£2,323 per square metre in the Core; £3,018 in the Prime; and £1,319 in the Fringe). However, the maximum rates remain high in comparison to the actual rates consulted on during the PDCS.

Table 6.9.1: Residential-led schemes (base costs) – 35% affordable housing (where applicable)

Zone Average maximum CIL rate per square metre Prime £3,279

Core £2,713

Fringe £1,890

Table 6.9.2: Residential-led schemes (costs inflated by 20%) – 35% affordable housing (where applicable)

Zone Average maximum CIL rate per square metre

Prime £3,018

Core £2,323

Fringe £1,319

Sensitivity analysis on affordable housing percentage

6.10 Current experience in Westminster indicates that delivering the Council’s affordable housing target without grant can sometimes be challenging and in many cases a reduced level of provision is being accepted upon the acceptance of a proven viability case within the flexibility allowed by its adopted policy. We re-tested all site types with a reduced level of affordable housing (30%, 25%, 20%, 15%, 10%, 5% and 0%). The results of these analyses are summarised in tables 6.11.1 and 6.11.2. While we are not suggesting that the Council should change its affordable housing policies, the exercise demonstrates that its application by the Council with the scope for flexibility it allows will ensure that the cumulative effects of policy requirements including CIL will not render development unviable. However, we appreciate that the Council will be keen to minimise the impact on affordable housing as far as possible and this is a key factor when determining rates of CIL.

6.11 The primary purpose of this exercise was to determine whether changes to

affordable housing requirements on individual schemes would enable unviable sites42 to contribute towards infrastructure. The results show positive movement in terms of the viability of CIL rates when affordable housing levels are reduced. However, this change to affordable housing levels makes only a modest difference and does not indicate to the Council’s that its aim of exceeding 30% of new homes as affordable (by seeking 25% or 35% depending on area in accordance with its Interim Guidance Note) across the plan period is at risk.

Table 6.11.1: Residential-led schemes – affordable housing sensitivity analysis (base costs)

35% AH 30% AH 25% AH 20% AH 15% AH 10% AH 5% AH 0% AH

Prime £3,279 £3,259 £3,499 £3,625 £3,763 £3,800 £3,953 £4,006

Core £2,713 £2,893 £2,644 £2,494 £2,708 £2,923 £2,799 £2,881

Fringe £1,890 £2,108 £2,327 £2,545 £2,764 £2,982 £3,200 £3,419

Table 6.11.2: Residential-led schemes – affordable housing sensitivity analysis (base costs plus 20%)

35% AH 30% AH 25% AH 20% AH 15% AH 10% AH 5% AH 0% AH

Prime £3,018 £3,020 £3,142 £3,163 £3,403 £3,540 £3,577 £3,734

Core £2,323 £2,293 £2,473 £2,653 £2,833 £2,300 £2,514 £2,728

Fringe £1,319 £1,537 £1,756 £1,974 £2,193 £2,411 £2,629 £2,848

6.12 Across the Core Zone, the average maximum CIL rate increases from £2,323 per square metre with 35% affordable housing (at higher costs) to £2,473 per square metre with 25% affordable housing.

6.13 In the Fringe Zone, the average maximum CIL rate would increase from £1,319 per square metre with 35% affordable housing (at higher costs) to £1,756 per square metre with 25% affordable housing.

6.14 In the Prime Zone, the average maximum CIL rate increases from £3,018 per square metre with 35% affordable housing (at higher costs) to £3,142 per square metre with 25% affordable housing.

Sensitivity analysis on values and costs

6.15 As noted in Section 5, we carried out further analyses which consider the impact of increases in sales values of 10%, accompanied by an increase in build costs of 5%, and a decrease in sales values of 5%. This data is illustrative only, as the future housing market trajectory is very uncertain given the economic outlook and technologies for sustainability measures are likely to become cheaper over time. However, if such changes were to occur, Appendix 3 shows the results in terms of the levels of CIL that could be absorbed.

42 In this case, meaning unviable with the full 30% affordable housing requirement.

6.16 The effect of the changes to the market referred to earlier makes the 10% sales value sensitivity test more relevant. This illustrates the extent to which improvements in the market might provide scope for increasing CIL rates. It will be noted that the main effect is to significantly improve the viability of sites that were previously capable of absorbing relatively low CIL rates.

Suggested CIL rates

6.17 Although the results indicate that viability of residential development is sometimes challenging, it is possible for rates of CIL to be levied across the whole area, subject to allowing for a buffer or margin to address risks to delivery. There are five key risk factors:

■ individual sites might incur exceptional costs (façade retention, difficult ground conditions etc) and as a result the residual land value could fall. Developers will try and reflect such costs in their offer to the landowner, but the extent of any issues is not always fully apparent until the land value is fixed. Where sites have an existing use, an owner will not be prepared to accept a reduction below the value of the current building to accommodate exceptional costs on a redevelopment;

■ current use values on individual sites will inevitably vary and will fall somewhere between the values used in our appraisals. As a result, the ability of schemes to absorb high rates of CIL could be adversely affected;

■ setting rates of CIL at too high a level may impact on the ability of sites to provide affordable housing;

■ sales values could fall or normal build costs could rise over the life of the Charging Schedule, adversely affecting scheme viability; and

■ imposing a high rate of CIL in the Council’s first Charging Schedule could ‘shock’ the land market with a consequential risk that land supply falls. This factor has led many charging authorities to seek to limit their CIL rates to around 5% of development costs, or to set their CIL rates so that they are broadly comparable to existing Section 106 contributions43.

6.18 Our recommendation on the maximum rates of CIL indicated by our appraisals is outlined below. The results of our testing incorporating varying levels of affordable housing only are provided at Appendix 3. Given the range of results above, and the risk factors outlined in the previous paragraph, our conclusion is that the rates of CIL that the Council might set – having regard to the range of the results and taking account of viability across Westminster as a whole – should be set at a substantial discount to the maximum rates, as shown in Table 6.19.1.

6.19 The maximum rates are derived from the results in tables 6.11.1 and 6.11.2. We have sought to address any significant impact on scheme viability by pegging our recommended rates well below the maximum rate in all cases.

43 For example, Wandsworth Council has adopted this approach in the Vauxhall Nine Elms Opportunity Area, where the existing tariff has been converted into a per square metre CIL rate.

Table 6.19.1: Maximum and suggested residential CIL rates (all assume base costs plus 20%)

Area Maximum Suggested Viability CIL £s per CIL after ‘buffer’ sqm44 buffer £s per sqm Prime £3,018 £550 82% Core £2,323 £400 83% Fringe £1,319 £200 85%

6.20 In determining the maximum levels of CIL and the recommended rates above, we have based our assessment on current costs and values only. We have run a set of appraisals that show the impact of an increase in sales values, accompanied by an increase in build costs and a further set of results that show the impact of a fall in sales values (the results are included in Appendix 3). These appraisals provide an indication of the likely movement in viability that any ‘buffer’ below the maximum rates would need to accommodate. The suggested CIL rates sit well within this buffer should costs increase or values fall. Assessment – commercial development

6.21 Our appraisals indicate that the potential for commercial schemes to be viably delivered varies between different uses and between locations. Retail and office rents are higher in the prime area but developments across Westminster generate sufficient surplus residual values to absorb a contribution towards infrastructure through CIL.

6.22 As noted in section 4, the level of rents that can be achieved for commercial space varies according to exact location; quality of building; and configuration of space.

6.23 Our appraisals include twenty hypothetical appraisals that test an increase in floorspace in the same use. These appraisals assume that the uplift in commercial floorspace is matched by an equivalent provision of residential floorspace, in line with the Council’s Strategic Policy S1.

Office development

6.24 The results of our research in the Prime West End office market indicates that new build rent levels here are £950 per square metre (£88 per square foot) and investments yields are circa 4%. In the Core area, rents are lower at circa £800 per square metre, with yields at 4.52%, while in the Fringe area, rents are circa £600 per square metre and yields are 4.5%. This is supported by the research cited in paragraphs 2.28 to 2.40. Deloitte’s Winter 2013 London Office Crane Survey “Growing Confidence” makes the following observations about the West End office market:

“The combination of declining construction and strengthening occupier demand will begin to temper the rising availability. Factor in the continued removal of stock for residential conversion and the West End is positioned for further rental growth, providing additional opportunities for developers to deliver space in an improving landlord’s market”.

6.25 Table 6.26.1 summarises the results of our appraisals of wholly office or office-

44 Assuming 35% affordable housing, which is not sought in all areas across Westminster.

led mixed-use schemes. Where the developments incorporate a residential element, the results here assume that 35% of floor area is provided as affordable.

6.26 In the Prime area, the average maximum CIL equates to £3,483 per square metre at base costs and £2,963 with costs inflated by 20%. The corresponding figures for the Core area are £2,961 per square metre and £2,466 per square metre; and in the Fringe area are £1,472 per square metre and £978 per square metre.

Table 6.26.1: Office-led development: maximum CIL rates per square metre (residential element assumed to provide 35% affordable housing)

Zone Average maximum CIL rate Average maximum CIL per square metre rate per square metre, with costs inflated by 20% Prime £3,483 £2,963 Core £2,961 £2,466 Fringe £1,472 £978

Retail development

6.27 The existing prime retail market in Westminster is located in the West End Special Retail Policy area (which includes the international shopping streets of Oxford Street, Regent Street and Bond Street), as well as Covent Garden, Soho and the second International shopping centre, Knightsbridge. 6.28 Our research indicates that retail rents in the prime area are between £850 and £1,000 per square metre with yields of circa 4%. In the Core area, rents are £850 per square metre with yields of 4.5%, while rents in the Fringe area are at circa £400 per square metre and yields are at 5%. 6.29 Table 6.30.1 summarises the results of our appraisals of retail development, which include a residential element where appropriate. The table identifies the average maximum CIL rates. 6.30 The average maximum CIL rate in the Prime area is £4,068 per square metre. The average maximum CIL with costs inflated by 20% is shown as £4,088 per square metre, as one of the schemes becomes unviable with higher costs. The corresponding figures elsewhere are £3,880 and £3,405 per square metre in the Core area and £1,075 and £600 per square metre in the Fringe area.

Table 6.30.1: Retail development: maximum CIL rates per square metre

Zone Average maximum CIL rate Average maximum CIL per square metre rate per square metre, with costs inflated by 20% Prime £4,068 £4,088

Core £3,880 £3,405

Fringe £1,075 £600

Hotel development

6.31 Capital values for hotels vary significant across Westminster, with higher values in the Prime and Core areas than in the fringe areas. Our research indicates that capital values in the Prime and Core areas can exceed £500,000 per room, while in the fringe areas, capital values are considerably lower (circa £200,000 per room).

6.32 Table 6.32.1 summarises the outputs of our appraisals of hotel development, which includes extensions to existing hotels. In the prime area, the average maximum CIL rate equates to £3,289 per square metre and when costs are inflated by 20%, the average maximum falls to £2,280 per square metre. In the Core area, the average maximum rate is £2,148 per square metre, falling to £1,966 per square metre when costs are inflated by 20%. In the Fringe area, the corresponding figures are £1,251 and £777 per square metre.

Chart 6.32.1: Hotel development

Zone Average maximum CIL rate Average maximum CIL per square metre rate per square metre, with costs inflated by 20% Prime £3,289 £2,820

Core £2,148 £1,966

Fringe £1,251 £777

Industrial and warehouse development

6.33 We are not aware of any significant developments of industrial and warehouse floorspace in Westminster in the last year and this is not a development that the City Plan relies upon in the future. It is unlikely that industrial development would generate significant – if any – surplus land values beyond those required to fund other planning requirements, including Mayoral CIL. We therefore recommend a nil CIL rate on industrial development.

D1 and D2 floorspace development

6.34 D1 and D2 floorspace typically includes uses that do not accommodate revenue generating operations, such as schools, health centres, museums and places of worship. Other uses that do generate an income stream (such as swimming pools) have operating costs that are far higher than the income and require public subsidy. Many D1 uses will be infrastructure themselves, which CIL will help to provide. It is therefore unlikely that D1 and D2 uses will be capable of generating any contribution towards CIL.

Casinos

6.35 Capital values for nightclubs will inevitably vary across Westminster, with higher values in the Prime and Core areas than in the fringe areas. There is very little transactional activity, with one pertinent deal being the sale of the Grosvenor Victoria Casino for £55.5 million in July 2014 representing a net initial yield of 4.75%. The rental value is £58.11 per square foot (£2.8 million per annum). In our appraisals, we have adopted a more cautious rent of £30 per square foot and a yield of 7%.

6.36 The three proxies we have appraised are all located in the Prime area and it is unlikely that any would be developed outside this area. The average maximum CIL rate is £1,463 per square metre at base costs and £1,023 per square metre with costs inflated by 20%.

Nightclubs

6.37 Capital values for nightclubs will inevitably vary across Westminster, with the bulk of nightclubs located in the West End. There is very little recent transactional activity, although there are some rent reviews and lettings from 2011 which provide a guide to likely rent levels. Stringfellow’s Angels Club at 53 Berwick Street has a passing rent of £56 per square foot; while Ronnie Scott’s rent was reviewed at £84 per square foot in November 2011. Rent at the Sound Club following an open market letting is £185 per square foot.

6.38 The three nightclub proxies we have appraised are all located in the Prime area and it is unlikely that any would be developed outside this area. The average maximum CIL rate is £1,156 per square metre.

Strategic sites

6.39 The 155 proxies include 8 ‘strategic’ sites (see Table 6.39.1) which make a significant contribution towards the Council’s housing supply. These 8 sites have been tested in the same manner as the other 147 sites in terms of sensitivities.

Table 6.39.1: Strategic sites

Proxy Site Development type Zone number 123 35-50 Rathbone Place Resi and office on Core existing office and B8 124 Dudley House, North Wharf Resi on existing resi, Core Road and 139-147 Harrow retail and D1 Road 125 Arundel Great Court Surrey Resi, retail, office and Core Street hotel on existing hotel and office 127 Dev Site At 4 Lilestone St, Resi with office on Fringe Mallory St, Penn Hse, existing resi and D1 Bernhardt Cres, Wycombe Gdns And Jerome Crescent London NW8 126 38-44 Lodge Road Resi on existing Prime electricity transfer station 55 St Johns Wood Barracks, 2 Resi on existing other Prime And 6 Queen's Terrace Ordnance Hill

43 Chelsea Barracks Resi MU Prime

93 Hyde Park Barracks Resi on existing other Prime

6.40 The results of the appraisals are summarised in Table 6.40.1 (base costs) and Table 6.40.2 (base costs plus 20%). As can be noted, site 124 and 127 are not viable before CIL is applied. However, site 124 (Dudley House) is an estate renewal scheme which will require subsidy to come forward (and has secured

planning permission in any event, so will not be CIL liable). Site 127 (Lilestone Street) is Council-led development involving the reprovision of housing for older people and the provision of a new community/health hub. This scheme has also secured planning permission and will not be CIL liable. All the other developments are viable and generate maximum CIL rates significantly higher than the Council’s proposed rates.

Table 6.40.1: Strategic sites results (base costs)

Proxy 35% 30% 25% 20% 15% 10% 5% 0% number AH AH AH AH AH AH AH AH 43 £4,836 £5,340 £5,844 £6,348 £6,852 £7,356 £7,860 £8,364 55 £1,266 £1,528 £1,790 £2,053 £2,315 £2,578 £2,840 £3,102 93 £3,367 £3,899 £4,431 £4,963 £5,495 £6,026 £6,558 £7,090 123 £4,055 £4,178 £4,302 £4,426 £4,550 £4,673 £4,797 £4,921 124 n/v n/v n/v n/v n/v n/v n/v £252 125 £1,497 £1,582 £1,666 £1,751 £1,836 £1,920 £2,005 £2,090 126 £3,990 £4,483 £4,976 £5,469 £5,962 £6,455 £6,948 £7,441 127 n/v n/v n/v n/v n/v n/v n/v n/v

Table 6.40.2: Strategic sites results (base costs plus 20%)

Proxy 35% 30% 25% 20% 15% 10% 5% 0% number AH AH AH AH AH AH AH AH 43 £4,201 £4,705 £5,209 £5,713 £6,217 £6,721 £7,225 £7,729 55 £669 £931 £1,194 £1,456 £1,718 £1,981 £2,243 £2,506 93 £2,573 £3,105 £3,637 £4,169 £4,701 £5,233 £5,765 £6,297 123 £3,489 £3,613 £3,737 £3,860 £3,984 £4,108 £4,231 £4,355 124 n/v n/v n/v n/v n/v n/v n/v n/v 125 £973 £1,058 £1,142 £1,227 £1,312 £1,396 £1,481 £1,566 126 £3,172 £3,665 £4,158 £4,651 £5,143 £5,636 £6,129 £6,622 127 n/v n/v n/v n/v n/v n/v n/v n/v

Maximum rates and proposed rates

6.41 Table 6.41.1 summarises the maximum rates identified for each type of commercial development and shows the proposed rates after a buffer.

Table 6.41.1: Commercial development – maximum and proposed rates

Development Area Maximum Suggested type rate £s per rate £s per sq m sq m Offices Prime £3,483 £200 Core £2,961 £150 Fringe £1,472 £50 Retail (A-class Prime £4,068 £200 uses, SG retail, casinos, Core £3,088 £150 nightclubs) Fringe £1,075 £50 Hotel Prime £3,289 £200 Core £2,148 £150 Fringe £1,251 £50

7 Conclusions and recommendations

7.1 The results of our analysis indicate a degree of variation in viability of development in terms of different development types and different areas of Westminster. In light of these variations, two options are available to the Council under the CIL Regulations. Firstly, the Council could set a single CIL rate across Westminster, having regard to the least viable types of development and least viable locations. This option is likely to result in a reduction in income, depending of course on where the bulk of development is located. Sites that could have provided a greater contribution towards infrastructure requirements would not do so. In other words, the Council could be securing the benefit of simplicity at the expense of potential income foregone that could otherwise have funded infrastructure. Secondly, the Council has the option of setting different rates for different types of development and different areas. The results of our study point towards the second option as the preferable route. However, the option of differential rates would need to be considered alongside the potential additional income that would be secured; if the additional income is minimal, the Council might prefer a simple structure.

7.2 We have also referred to the results of development appraisals as being highly dependent upon the inputs, which will vary significantly between individual developments. In the main, the imposition of CIL is not the critical factor in determining whether a scheme is viable or not (with the relationship between scheme value, costs and land value benchmarks being far more important). This point is also illustrated in Chart 7.2.1 below, which compares the impact on the residual value of a scheme of a 10% increase and decrease in sales values and a 10% increase and decrease in build costs to a £100 per sq metre change in CIL.

Chart 7.2.1: Impact of changing levels of CIL in context of other factors

£2.00

£1.50

£1.00

£0.50

£0.00 Sales Build CIL (£0.50)

(£1.00)

(£1.50) Change toResidual Land Value (£m) (£2.00) + 10% (£100 psm CIL increase) - 10% (£100 CIL psm reduction)

7.3 Given CIL’s nature as a fixed tariff, it is important that the Council selects rates that are not at the margins of viability. This is particularly important for commercial floorspace, where the Council does not have the ability to ‘flex’ other planning obligations to absorb site-specific viability issues, outside of the associated use of the Strategic Plan mixed use policy. In contrast, the Council could in principle set higher rates for residential schemes as the level of affordable housing could be adjusted in the case of marginally viable schemes. The relationship between affordable housing levels and different rates of CIL is

clear (see tables 6.11.1 and 6.11.2). Consequently, sensitive CIL rate setting for residential schemes is vital to minimise the impact on affordable housing delivery. However, it is important to note that the recommended CIL levels are considerably lower than the potential maximum rates. Consequently, the rates have been set with a substantially higher ‘buffer’ below the maximum rates than is the case in other charging authorities.

7.4 Our recommendations on levels of CIL are therefore summarised as follows:

■ The results of this study are reflective of current market conditions, which are likely to improve over the medium term. It is therefore important that the Council keeps the viability situation under review so that levels of CIL can be adjusted to reflect any future changes. ■ The ability of residential schemes to make CIL contributions varies depending on area and the current use of the site. Having regard to these variations, residential schemes should be able to absorb an affordable housing quantum of 35% (or 25% in some areas) in combination with a CIL rate of up to £550 per square metre in Prime Zone, £400 per square metre in the Core Zone and £200 per square metre in the Fringe Zone. CLG guidance requires that charging authorities do not set their CIL at the margins of viability. Other authorities have set their rates at a discount to the maximum rate, with discounts ranging significantly. Table 7.4.1 summarises our maximum and suggested CIL rates for residential development.

Table 7.4.1: Maximum CIL rates – residential

Area Maximum Suggested Viability CIL £s per CIL after ‘buffer’ sqm buffer £s per sqm Prime £3,018 £550 82% Core £2,323 £400 83% Fringe £1,319 £200 85%

■ Whilst the maximum rates are significantly higher than the proposed rates, the buffer will help to mitigate a number of risk factors (primarily the potentially adverse impact on land supply of setting the rates at a high level and ‘shocking’ the market). However, there is no prescribed percentage buffer and this is a matter for the Charging Authority’s judgement informed by the viability evidence presented here. In addition to the buffer, it is also important to note that our assumptions err on the side of caution, including (for example) the assumption that all sites have no existing floorspace which might reduce the amount of CIL paid. Furthermore, the buffers we have used are far larger than those recommended to, and adopted by, other charging authorities. ■ The maximum and suggested rates for commercial developments are summarised in Table 7.4.2. The maximum CIL rates are higher in the Prime and Core zones than in the Fringe Zone and this is commensurate with the differences in rents and yields between these zones. The suggested rates account for a modest proportion of the maximum rate and are therefore considered to be cautious. ■ With regards to offices, the proposed CIL rates in the Prime and Core zones have been reduced by £50 per square metre from the rates proposed in the PDCS. This reduction takes into account a number of factors specific to offices in Westminster, including prospects for the global economy and the

Table 7.4.2: Maximum CIL rates – commercial

Development Area Maximum Suggested Viability type rate £s per rate £s per ‘buffer’ sq m sq m Offices Prime £3,483 £200 94% Core £2,961 £150 95% Fringe £1,472 £50 97% Retail (A-class Prime £4,068 £200 95% uses, SG retail, casinos, Core £3,880 £150 96% nightclubs) Fringe £1,075 £50 95% Hotel Prime £3,289 £200 94% Core £2,148 £150 93% Fringe £1,251 £50 96%

■ D1 and D2 uses often do not generate sufficient income streams to cover their costs. Consequently, they require some form of subsidy to operate. This type of facility is very unlikely to be built by the private sector. We therefore suggest that a nil rate of CIL be set for D1 and D2 uses. However, entertainment uses (nightclubs, casinos) are developed as commercial propositions and are therefore able to absorb a modest CIL contribution without any adverse impact on viability.

7.5 The suggested CIL rates are summarised in Table 7.5.1, with buffers below the maximum rate ranging from 83% to 97%. Clearly there is an option of simplifying the residual rates by combining some of the areas together, but this would be at the expense of a potential loss of CIL income.

Table 7.5.1: Proposed CIL rates (per square metre)

Area Prime Core Fringe Residential £550 £400 £200 Offices £200 £150 £50 Hotels £200 £150 £50 Retail (all ‘A’ use classes £200 £150 £50 and sui generis retail), Nightclubs, Casinos. Other uses Nil

7.6 As can be gleaned from tables 7.4.1 and 7.4.2, there is clearly scope for the CIL rates to exceed those suggested in Table 7.5.1. However, this would require the rates to exceed 5% of development costs, which as noted elsewhere in the report is a ‘yardstick’ that carries some weight with examiners in London and elsewhere as a broad test of reasonableness. Increases in CIL rates are therefore likely to attract more forensic scrutiny at examination, particularly in reference to the potentially adverse impact on the Council’s ability to secure its target levels of affordable housing. There might also be concern as to the impact on marginal sites which may be prevented from coming forward if the CIL was much higher than 5% of development costs.

7.7 For developments in Westminster, the application of CIL of is unlikely to be an overriding factor in determining whether or not a scheme is viable. When considered in context of total scheme value, the proposed CIL rates will be a modest amount, typically accounting for no more than 5% of overall development costs. This is equivalent to the typical contingency allowance that developers include in their appraisals. At the rates proposed, CIL is a marginal factor that is unlikely to have a significant impact upon the viability of development of the area as a whole.

Appendix 1 - Map of CIL zones

Appendix 2 - Appraisal inputs and sample appraisal

Appendix 3 - Appraisal results