Viability Study Sandwell Community Infrastructure Levy – Viability Assessment Sandwell Metropolitan Borough Council March 2014 Private and Confidential Sandwell Metropolitan Borough Council CIL Viability Assessment March 2014 Quality Assurance Date 12 March 2014 Filename and path C:\Users\Parm\Documents\AVL local (C)\_Client Projects\1401 CIL Refresh Study_Sandwell MBC\_Reports\140312 Sandwell CIL Viability Report_v6.docx Version Final Authorised by Limitation This report has been prepared on behalf of and for the exclusive use of Aspinall Verdi Limited’s Client and it is subject to and issued in connection with the provisions of the agreement between Aspinall Verdi Limited and Sandwell Metropolitan Borough Council. Aspinall Verdi Limited accepts no liability or responsibility whatsoever for or in respect of any use of or reliance upon this report by any third party. Sandwell Metropolitan Borough Council CIL Viability Assessment March 2014 Contents Executive Summary Report 1 Introduction 4 Report Structure 4 2 CIL Policy 6 CIL Examinations 9 3 Market Overview 11 National Outlook 11 Black Country 11 Residential 13 Office Space 22 Industrial Space 27 Retail 32 Hotels 35 Conclusions 36 4 Development Typologies 37 Residential 37 Offices and Industrial 41 Retail 44 Hotels 48 Non-Residential Institutions, Assembly & Leisure 48 Summary of Development Typologies 49 5 Viability Analysis 51 Development Economics 51 Gross Development Value 52 Balance 56 Viability Modelling 57 Assumptions 58 Profit, Finance and Overhead 61 6 Appraisal Outputs 63 Residential Typologies 63 Commercial Typologies 67 7 Conclusions & Recommendations 73 Economics of Brownfield Land 73 Charging Rates on Use Basis 75 Draft Charging Schedule 77 Next Steps 79 Appendices Appendix 1 – Residential Development Appraisals Appendix 2 – Commercial Development Appraisals Sandwell Metropolitan Borough Council CIL Viability Assessment March 2014 Executive Summary ES1 This report provides a viability assessment on a range of potential development typologies to support the possible introduction of a Community Infrastructure Levy (CIL) across Sandwell Metropolitan Borough. Methodology ES2 The key elements of the study are as follows: An analysis of the property market (including consultations with developers) across the Borough for a range of uses in order to identify the assumptions (e.g. sales values, rents, yields, supply and demand). We have also undertaken an assessment of land values across Sandwell to identify whether there any significant variances by location/development type. A review of planning policy and development data monitoring (i.e. completions) to identify the range of development typologies (scheme types) that are likely to come forward during the Black Country Core Strategy (February 2011) plan period (2006 – 2026). A bespoke CIL viability model to test the development typologies using the information ascertained from the market analysis to assess whether the proposed development schemes can generate a surplus for CIL having allowed for all costs and a reasonable developer’s profit, and in respect of residential development the Council’s affordable housing requirements. Key Findings ES3 The results of the viability assessment for all the development typologies show that there is a significant challenge to viability across the Borough. Only retail and residential uses show any development surplus for CIL. ES4 We have devised a draft charging schedule to reflect the outcomes of the viability analysis and take into account the need to have an ‘appropriate balance’ that allows for sufficient headroom in the levy rates so not to impact on the viability (i.e. delivery) of the scheme even if market conditions (values/costs) change. ES5 Retail: As a result of the market and viability analysis it is clear that nearly all types of retail are viable cross Sandwell, apart from unit shops (up to 280 sqm) outside the strategic centre of West Bromwich. Supermarkets of less than 280 sqm are also marginal in terms of viability and 1 Sandwell Metropolitan Borough Council CIL Viability Assessment March 2014 therefore we have recommended a nil rate for these two typologies and a range of rates for the other retail development typologies. ES6 Residential: We recommend a rate of £30 psm for any residential schemes between 1-14 units and £15 psm for all other residential developments (i.e. 15 units plus). The different rates are supported by the viability analysis which clearly shows that residential schemes between 1-14 units are more viable than the other development typologies and therefore can afford to pay a higher CIL rate. ES7 Offices, Industrial and Hotels: The market values generated by these uses are currently insufficient to cover the costs associated with these schemes and therefore are unviable, which means that they are not able to pay a CIL. ES8 Other Uses: With regards to leisure and education uses, as we explained in the development typologies sections, these uses are rarely viable and therefore are unable to pay a CIL rate. ES9 The recommended CIL rates are summarised on the table overleaf: 2 Sandwell Metropolitan Borough Council CIL Viability Assessment March 2014 Development Typology CIL Rate £ psm Supermarkets/Superstores and Retail warehousing £60 >280 sqm Retail Units (Strategic Centre Only)* £50 Residential: 1-14 Units £30 Residential: 15 Units plus £15 Offices Industrial Industrial Warehousing £Nil Retail Units Outside Strategic Centre* Supermarkets/superstores < 280 sqm Hotel Leisure Education Residential Care Homes Table ES 1 - Sandwell MBC Draft CIL Charging Schedule *Retail Units are those within Use Classes A1-A5, excluding convenience and retail warehouses. 3 Sandwell Metropolitan Borough Council CIL Viability Assessment March 2014 1 Introduction 1.1 AspinallVerdi has been commissioned by Sandwell Metropolitan Borough Council (SMBC) to prepare a Borough wide development viability assessment to be used as evidence to support the possible introduction of a Community Infrastructure Levy (CIL) charging schedule. This assessment is an update of an earlier CIL viability study undertaken by AspinallVerdi in 2012 and it is based on 2014 market evidence. 1.2 This study will be important evidence to ensure that, if adopted, the CIL charging schedule is commercially robust. The key elements of the study are as follows: An assessment of land values across Sandwell to identify if there are any significant variances by location/development type. A viability assessment of CIL rates including sensitivity testing to include; various different uses; a range of locations; different scales of development; and key policy requirements, including affordable housing. Recommend CIL tariffs/rates to achieve an appropriate balance between delivering infrastructure and the impact on development viability; and to establish the evidence base for zoning if appropriate. Report Structure 1.3 The remainder of this report is structured as follows: Section 2 – CIL Policy – in this section we provide a brief overview of CIL policy, the key regulations and latest guidance (February 2014) issued by DCLG. Section 3 - Market Overview – in this section we provide an overview of the current national economic context and also the local property market evidence which informs the assumptions for the CIL viability model. This also enables us to identify whether there is a significant differential in values across the Borough to warrant different CIL charging zones. Section 4 – Development Typologies – in this section we summarise current planning policy and provide an overview of the proposed development within the core strategy. We compare this to where development has taken place in the past (as well as taking into consideration the market analysis undertaken in section 3) in order to identify the development typologies to be tested by the CIL viability model. Section 5 – Viability Analysis - in this section we set out our methodology and assumptions for undertaking the modelling required to test whether there is scope to charge CIL. 4 Sandwell Metropolitan Borough Council CIL Viability Assessment March 2014 Section 6 – Appraisal Outputs – in this section we set out the findings of our viability model and the implications for setting CIL Charges. Section 7 – Conclusions & Recommendations – in this section we draw together the results of the viability analysis and present a draft charging schedule for discussion. 5 Sandwell Metropolitan Borough Council CIL Viability Assessment March 2014 2 CIL Policy 2.1 CIL is a new planning charge that came into force on 6 April 2010 through the Community Infrastructure Regulations 2010 (amended in 2011, 2012, 2013, and 2014). CIL is a levy that enables local authorities to raise funds from developers undertaking new building within their area to pay for infrastructure that is needed as a result of development. 2.2 Local Authorities are normally required to implement their charging schedules on the basis of an up to date development plan. In this case, the Council’s key planning policies are enshrined in the Black Country Core Strategy (BCCS) (Adopted February 2011), Site Allocations and Delivery Development Plan (August 2011), West Bromwich Area Action Plan (AAP) (August 2011) and the Smethwick and Tipton AAP (2008). 2.3 We set out below a summary of the regulatory context and some recent Examiners report recommendations. The February 2014 guidance was issued by the Secretary of State under section 221 of the Planning Act 2008