Viability and Deliverability Report (Local Plans) Supporting Newcastle City Council Pre-Submission Development and Allocations Plan (Sept. 2018) & Gateshead Council Submission Draft Making Spaces for Growing Places (Sept. 2018) Newcastle City Council and Gateshead Council September 2018 CP Viability Ltd Deliverability and Viability Report Sections CP Viability Ltd August 2018 Independent Viability Experts CONTENTS Chapter 1: Purpose of Report 4 Chapter 2: Background to Viability and National Policy Changes 5 Chapter 3: National Policy Guidance and Legislative Context 12 Chapter 4: Background: Core Strategy and Urban Core Plan and CIL 21 Testing Chapter 5: Stakeholder Engagement (Local Plans) 29 Chapter 6: Viability Methodology / Assumptions Review 42 Chapter 7: Plan Costs 93 Chapter 8: Plan Viability Testing 112 Chapter 9: Non-residential Testing 138 Chapter 10: Delivery Interventions 147 Chapter 11: Conclusions 163 Appendices: 1) Maps: a. Newcastle Residential Value Areas Gateshead Residential Value Areas b. Newcastle Commercial Value Areas Gateshead Commercial Value Areas c. Newcastle CIL Charging – Residential Gateshead CIL Charging – Residential d. Newcastle CIL Charging - Commercial Gateshead CIL Charging – Commercial 2) Viability Questionnaire and Responses a. 2017 2 Deliverability and Viability Report Sections CP Viability Ltd August 2018 b. 2018 3) Viability Stakeholders Breakfast Meeting Note: 18/06/2018 4) Persimmon Stakeholder Meeting Note 5) Bellway Stakeholder Meeting Note 6) HBF note 7) BDW note 8) RP meeting note 9) Bernicia Meeting Note 10) BCIS 2018 Article 11) BCIS All-in Tender Price Index 12) BCIS Economies of Scale Note (2016) 13) Residential Baseline Modelling 14) M4(2) Sensitivity Analysis 15) M4(3) Sensitivity Analysis 16) Affordable Housing Sensitivity Analysis 17) Low Cost Developer Sensitivity Analysis 18) -5% Market Value Reduction Sensitivity Analysis 19) Build to Rent / Private Rented Sector Sensitivity Analysis 20) Commercial Baseline Modelling 3 Deliverability and Viability Report Sections CP Viability Ltd August 2018 1. Chapter 1: Purpose of Report 1.1 In the current economic climate, balancing the provision of infrastructure and affordable housing with the delivery of economic growth presents challenges for many development proposals. The issue of viability is often a key issue for plan - making and decision makers to grapple with. 1.2 This report has been prepared to support part three of the Gateshead Local Plan, Making Spaces for Growing Places (referred to as MSGP), and part two of Newcastle’s Local Plan, the Development and Allocations Plan (referred to as DAP). These documents follow on from the Gateshead and Newcastle Core Strategy and Urban Core Plan (referred to as CSUCP). The report provides evidence on viability and delivery matters, building upon the approach taken in the NewcastleGateshead Viability Assessment (May 2012), the Gateshead and Newcastle Viability and Deliverability Report (February 2014), and the Gateshead and Newcastle Viability and Deliverability Report Annex Update (February 2016). The report assesses the cumulative impact on viability of policies and proposals in both authorities Local Plans to ensure that they are deliverable, in accordance with Paragraph 34 of the NPPF. Specifically, the report will seek to: - Test the policy costs resulting from MSGP and DAP (cumulatively with other known costs, including the Community Infrastructure Levy (CIL), for example); - Test the viability of MSGP and DAP site allocations; - Consider issues and evidence raised as part of stakeholder engagement; and - Provide evidence of our ability to deliver proposals and policies. 4 Deliverability and Viability Report Sections CP Viability Ltd August 2018 2. Chapter 2: Background to Viability and National Policy Changes 2.1. In July 2018 the updated National Planning Policy Framework (“NPPF”) and Planning Practice Guidance (“PPG”) on viability were published, superseding previous versions. These documents reiterated the importance of viability in plan-making, confirming that Local Authorities should seek to ensure emerging policies are set at achievable levels that do not financially undermine development sites being brought forward. 2.2. These newly published documents build on established viability concepts and also a consultation process undertaken by central government. By way of context this chapter summarises the background to the recent NPPF / PPG changes. 2.3. Viability Testing Local Plans – Local Housing Delivery Group (“Harman Review” – June 2012) 2.3.1. This is a key document for providing technical guidance on how to undertake an area wide viability study and was created immediately following the introduction of the National Planning Policy Framework (‘NPPF’). 2.3.2. The document therefore provides an interpretation of the NPPF and how this should be implemented in a technical way when undertaking plan wide viability testing. A number of key principles (reinforcing the NPPF and Planning Practice Guidance) are discussed in detail, including: - The cumulative impact of plan policies rather than policies considered in isolation. - The necessary balance between local infrastructure requirements and the economic realities of development. - Collaboration with partners / stakeholders who are active in the local market, which should help mitigate the risk of making unrealistic assumptions in the modelling. 5 Deliverability and Viability Report Sections CP Viability Ltd August 2018 - The plan viability testing can only provide a high-level view, it cannot guarantee that all sites will be viable (and therefore those that are deemed to be unviable at the planning application stage should be dealt with through an individual viability assessment as appropriate). - An iterative approach is important to show the impact policies can have which will help inform the final decisions on policy levels. 2.3.3. The Harman Review defines development viability as follows: An individual development can be said to be viable if, after taking account of all costs, including central and local government policy and regulatory costs and the cost and availability of development finance, the scheme provides a competitive return to the developer to ensure that development takes place and generates a land value sufficient to persuade the land owner to sell the land for the development proposed. If these conditions are not met, a scheme will not be delivered. 2.3.4. With regards to evidence, the Harman Review states, “An early task should therefore be to review existing assessments and their evidence bases, to determine what can be used or developed further as part of the plan-wide viability assessment”. Past viability studies can therefore form part of the evidence base. 2.3.5. Regarding methodology, the Harman Review advocates the use of the “residual valuation” method, which is a core valuation approach as set out by the Royal Institute of Chartered Surveyor (“RICS”). This is discussed in more detail in Chapter 6. 2.3.6. Detailed commentary is provided various aspects of implementing the residual method, however there is a particular focus on Threshold Land Value (which is the same as the Benchmark Land Value or BLV), stating: Pg 29 – “We recommend that the TLV [same as BLV] is based on a premium over current use values [same as Existing Use Value or EUV] and credible alternative use value…” 6 Deliverability and Viability Report Sections CP Viability Ltd August 2018 Pg 30 – “It is widely recognised that this approach [i.e. a percentage increase over the EUV] can be less straight forward for non-urban sites or urban extensions, where landowners are rarely forced or distressed sellers…This is particularly the case in relation to large greenfield sites…Accordingly, the uplift to the current use value sought by landowners will invariably be significantly higher than in an urban context and requires very careful consideration”. 2.3.7. The guidance therefore recommends a clear methodology for determining the BLV, which is to apply a premium to the EUV of the land. 2.3.8. However, the guidance recognises that this is more straight forward for urban / brownfield sites, where a premium (perhaps in the order of 10% – 50%) is deemed sufficient to incentivise a landowner to release the land for development. However, this would not be the case for non-urban / greenfield land where the current use value may only be a modest agricultural value (for example £20,000 per Ha). For this greenfield land, clearly an uplift of 50% (or £10,000 per Ha) would not be sufficient to release the land for development. The uplift would need to be considerably more. 2.3.9. In this regard, the guidance only highlights the recommended method for determining the BLV, it does not seek to fix parameters as to how the method is applied. Instead, the guidance is clear that the assessor should adopt an evidence- based approach when seeking to establish the level of premium appropriate above a EUV: Pg 30 – “…local sources should be used to provide a view on market values (the ‘going rate’), as a means of giving a further sense check on the outcome of the current use value plus premium calculation”. Pg 30 – “…for sites of this nature [i.e. greenfield], it will be necessary to make greater use of benchmarks, taking into account local partner views on market data and 7 Deliverability and Viability Report Sections CP Viability Ltd August 2018 information on typical minimum price provisions used within developer / site promoter agreements for sites of this nature”. 2.3.10. In this regard, direct evidence of agreed BLV’s can be the main focus of the assessor, with land transactional evidence acting only as a general ‘sense check’. 2.3.11. In terms of identifying other appraisal inputs for the purposes of the viability testing, the Harman Review also references revenue, build costs, fees, marketing costs, finance etc. it states that these should be based on current costs and values and an evidence-led approach should be adopted (i.e. tangible data should inform the conclusions). 2.4. Financial Viability in Planning – RICS Guidance Note 1 – Aug 2012 2.4.1.