_______________________________________________________
ECONOMIC VIABILITY ASSESSMENT OF THE EMERGING FYLDE LOCAL
PLAN TO 2032
RESPONSE TO A DEVELOPER
_______________________________________________________
Prepared on Behalf of
Fylde Council
Town Hall
St Annes
FY8 1LW
February | 2016
LIVERPOOL
MANCHESTER
GLASGOW
LONDON
Alabama House
6 Rumford Place
Liverpool L3 9BY
Hill Quays
14 Commercial Street
Manchester M15 4PZ
272 Bath Street
Glasgow
G2 4JR
26 York Street
London
W1U 6PZ
www.keppiemassie.com
MOORSIDE HOMES LIMITED
____________________________________________________________________________
We have been provided with a copy of the letter dated 3 December 2015 prepared by a developer in
response to the consultation that has taken place in relation to the Local Plan and in particular the Economic
Viability Assessment. We have considered the comments that have been made by the developer and have
provided our comments below.
General Comments
In preparing Viability Assessment for the Fylde Local Plan we have prepared over 800 financial appraisals
using Argus Developer software which is an industry recognised and widely used development appraisal
software package. Given the number of appraisals that have been undertaken it would be impractical to
publish all of the appraisals alongside the Local Plan report, if required however we can provide a sample
of appraisals to satisfy the developer’s requirement and address any concerns that there may be potential
flaws or errors in the testing undertaken.
In considering the overall impact of Local Plan policies we have provided at tables 9.1 to 9.24 of the Fylde
Local Plan Economic Viability Assessment (EVA) details of the resultant residual land values that would be
payable to landowners accounting for local plan policies.
In terms of the consideration of CIL, then to ensure robust conclusions can be drawn in relation to its impact
we presented to stakeholders details of its impact not only in relation to GDV but also cost and the reduction
in residual land value.
The CIL guidance suggests simplicity in terms of setting CIL charging boundaries and allows Local Planning
Authorities some pragmatism in setting rates. The option of a single charging rate is just one option that
Fylde may wish to consider, they could of course adopt a more complex structure with multiple charging
zones.
With reference to the final paragraph under this heading reference is made to the development surpluses
for greenfield sites in Zone 1 (table 9.2) and Zone 3 (table 9.16) of the EVA assuming the inclusion of a
S106/S278 contribution based on £10,000 per dwelling and the fact that a charge of £70 per sq.m is not
appropriate in Zone 1. The writer suggests that a lower tariff should be payable in Zone 1.
Based on the discussions that we have undertaken with the Council we understand that if CIL is introduced
then the extent of S106 requirements is likely to be limited and relate to site specific items only. As a result
as outlined at the stakeholder meeting in considering the prospects for CIL we have adopted a reduced
S106/S278 payment of £2,000 per dwelling.
With reference to the levels of development surplus identified by the developer the respective adjusted
figures contained in the stakeholder presentation are:
Zone 1
£148 - £117 per sq.m of market housing floorspace
Zone 3
£403 - £332 per sq.m of market housing floorspace
It should also be noted that the surpluses per sq.m that are referenced by the developer in the EVA are
based on the total development floorspace per sq.m including affordable housing. The latter are exempt
from CIL and hence the surplus rates that are identified in the EVA would need to be adjusted to exclude
the floor area of the affordable units. The rates would increase accordingly. The results that we presented
to stakeholders in the context of considering CIL are based on the total floor area of the market housing
only.
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Residential Development Types, Density and Mix
The developer makes reference to the average unit sizes being excessive in the lower value areas at 30
dwelling per hectare although no specific details are given. The dwelling sizes that have been adopted for
the purpose of our testing have regard to the new Minimum Space Standard and are reflective of planning
permissions that have been granted in the Borough. The one example provided by the developer is that of
the 5 bed unit which they suggest should be 128 sq.m (1,378 sq.ft) not 158 sq.m (1,700 sq.ft) which is
adopted in our testing.
At Appendix 1 of the EVA we have provided information regarding sales and asking prices of dwellings in
the Borough. There are a limited number of 5 bed units which is reflected in the dwelling mix that we have
adopted. In the lower value areas there are a number of 5 bed units that have sold or are available are
follows:
The Heathers, Staining – The Loughborough house type at 166 sq.m (1,786 sq.ft)
Brookwood Park, Kirkham – The Mayfair house type at 177 sq.m (1,905 sq.ft)
The Laurels, Weeton – The Loughborough house type at 166 sq.m (1,786 sq.ft)
There are also a number of significantly large 4 bed dwellings within these lower value areas including the
following:Whitehill, Meadows – The Sunningdale house type at 151 sq.m (1,621 sq.ft)
Westfield Point, Whitehills – The Baltimore house type at 160 sq.m (1,724 sq.ft)
The Pastures, Wesham – The Marlborough house type at 156 sq.m (1,681 sq.ft)
Brookwood Park, Kirkham – The Balmoral house type at 160 sq.m (1,724 sq.ft)
With reference to the comments from the developer regarding development at 40 dph, testing has been
undertaken at this density to reflect the Local Plan policy requirements to achieve this density in Key Service
Centres. Contrary to the developer’s comments to achieve this density the dwellings will not all need to be
3 storey dwellings.
The developers suggest that for testing at 40 dwellings per hectare there should be adjustments to the
sales, build periods, marketing costs and profit requirements however no evidence has been provided
regarding these points. In terms of sales incentives and discounts these have already been addressed in
the reduction to the net selling price that the developer have welcomed.
Land Values
The developer makes a number of comments in relation to Land Values.
In relation to their point regarding a review of the appraisal summaries then this has been dealt with
elsewhere but as required summaries can be provided.
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The next point relates to the land sales provided at Appendix 1 to the report. As outlined at Para 5.5 of the
EVA we have had regard to the good practice guidance contained in the document Viability Testing Local
Plans. This advocates the use of ‘threshold land value’ which represents the value at which a typical willing
landowner is likely to release land for development, before the payment of taxes. The guidance suggests
that threshold land value needs to take account of the fact that future plan Policy requirements will have
an impact on land values and landowner expectations, and therefore using a market value approach as a
starting point carries the risk of building in assumptions of current Policy costs rather than helping to inform
the potential for future Policy. As a result it suggests that market values can be a useful ‘sense check’ and
suggests that the threshold land value is based on a premium over current use values and credible
alternative use values. The latter would be most appropriate where there is competition for land among a
range of alternative uses such as in town centres.
Similarly the PPG makes reference to the fact that the land price will need to provide an incentive for the
landowner to sell in comparison with the other options available which may include the current use value
of the land or its value for a realistic alternative use that complies with planning policy. The developer’s
comments only appear to relate to the greenfield land values that have been adopted. In this context we
have assumed a land input cost in the region of £494,000 per hectare (£200,000 per acre) to £618,000 per
hectare (£250,000 per acre) dependent on site size and location as being the level at which a landowner
would consider releasing a site for development in the first instance. Based on prevailing current use values
for agricultural purposes, at £25,000 - £50,000 per hectare (£10,000 - £20,000 per acre) or less these land
costs represent as a minimum a 10 to 12.5 fold increase in value.
Any evidence of land transactions needs to be treated with a degree of subjectivity as adjustments may be
necessary for factors such as abnormal site conditions, contamination etc however our report notes that as
a sense check we have also considered residential land sales based on the available evidence.
The sales listed at Appendix 1 of the EVA show that there is a significant range of prices that have been
paid for land with residential planning permission reflecting the differing characteristics of the development
site, the landowner’s expectations and the existing planning policy requirements. The analysis that we
have been able to undertake based on the available evidence, shows the prices paid for land (both greenfield
and brownfield) with residential planning permission range from £610,000 per net hectare (£247,000 per
net acre) to £1,763,000 per net hectare (£713,800 per net acre). The prices paid per gross area range
from £475,000 per hectare (£192,000 per acre) to £1,675,000 per hectare (£678,000 per acre). These
values can only provide guidance in relation to the subject viability testing as these sales will include the
pre-existing policy requirements and as a consequence are not directly comparable for this exercise.
The developer notes that they were the agent involved in the sale of Riverslea Farm. With reference to
Appendix 1 of our report the information that we have is that the site was sold based on a price per net
developable acre of £350,000, albeit the developer appears to suggest that the price paid was £325,000
per net acre.
The developer suggests that for low value areas £325,000 per net acre would be a more appropriate base
land value. As noted in paragraph 9.10 of the EVA even if a figure of £802,750 per hectare (£325,000 per
acre) was adopted as a benchmark land value for greenfield sites, 105 of the 126 development scenarios
tested based on the combined Local Plan Policies have residual land values in excess of this amount.
The development scenarios with residual land values that are below this figure are in Zone 1, and in the
majority of cases are the sites tested on the basis of the highest S106/S278 contribution of £10,000 per
dwelling.
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In 6 cases the schemes are those in excess of 500 dwellings were it is assumed that all of the land is
acquired and paid for on day 1, which have a limiting effect on viability given the extent of finance costs
that are then carried on the land over a very lengthy development programme. Normal market practice in
relation to these sites would be to acquire the land on a phased basis over a number of years hence limiting
finance costs and improving viability and the ultimate land price paid significantly. If a landowner did sell
the entire site on day 1 then we would expect a discount to the price paid to reflect this.
The developer notes that a prudent land owner correctly advised will recognise current housing needs and
therefore the strong development potential of such sites. Conversely they will also be aware of the supply
of competing sites in the market and inevitable impact that this must have on limiting their expectations of
value. As noted in the EVA the NPPF requires local authorities to provide a buffer of 5% or 20% in relation
to their supply of sites to ensure choice and competition in the market for land. This is intended to ensure
that the landowner will have to compete in the market to sell their site so will have to competitively price
it to sell albeit will still want a return in excess of its current or alternative use value. If a landowner has
unrealistic expectations of value, then the theory is that developers will then just acquire a more
competitively priced site elsewhere and the overpriced site will remain undeveloped.
The developer also suggests that no allowance has been made in the testing undertaken for potential
abnormal development costs that may occur even on greenfield sites. It should be noted in fact that a
significant allowance for such costs has been made in the viability testing and is referred to under the broad
heading of ‘site opening up costs’.
As noted in WYG’s report at Appendix 2 the following amounts per dwelling have been adopted based on
the size of the site.
No Dwellings
Cost Per Dwelling
0-14
£0
15-49
£2,750
50-99
£4,000
100-199
£5,000
200+
£7,500
The developer notes that for small sites already in residential use the land values proposed are insufficient
to encourage landowners to bring sites forward for development. No further information or evidence is
provided in support of this comment. It is assumed that such forms of development would be reflected in
the testing that we have undertaken for schemes of 4 and 10 dwellings on brownfield sites. Here we have
assumed input land values based on £1,110,000 per hectare (£450,000 per acre) to £864,500 per hectare
(£350,000 per acre). It should be noted that with reference to tables 9.1 and 9.3, the residual land values
for these sites, assuming the cumulative policy position are well in excess of these land values. Even on
the basis of a S106/S278 contribution of £10,000 per unit the residual land values range from £1,133,720
per hectare (£458,996 per acre) to £1,557,036 per hectare (£630,379 per acre).
Sales Values
With reference to para 4.32 of the EVA the source of the data is Land Registry. In formulating our
assumptions in relation to the likely net selling prices we have had regard to current levels of sales
incentives. We note the information provided by the developer in relation to incentives/discounts available
at Meadows View in 2014, although this is obviously slightly historic now.
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Affordable Housing
The affordable bid prices assumed have been informed by discussions with RPs active in the area. Recent
changes to the funding of RPs, rents reductions and RTBs may in due course impact on their ability to fund
the purchase and delivery of new affordable provision and is a matter that will need to be monitored in
consultation with the RPs in the area over the coming months to determine whether there are likely to be
any implications for viability.
Marketing and Disposal Costs
Keppie Massie is actively involved in the development market, and we regularly prepare and review
development appraisals for a variety of purposes. Our role frequently involves assessing financial appraisals
prepared by many of the active house builders in the region for planning and other purposes. The
information provided to us in this respect is commercially sensitive and we are obviously unable to publish
this as part of the study. We have however compiled a considerable data base of appraisal inputs and
having regard to this marketing and sales costs generally range from between 2% and 4.5% dependent on
the characteristics of the scheme, local property market conditions and marketability of the development.
Based on the data that is available to us we are satisfied that our assumptions in respect of marketing costs
are typical for the forms of residential development likely to come forward in Fylde.
Development Period
The developer suggests that at 3 per month for developments of 25-100 and 5 per month on the largest
sites (assuming multiple outlets) the sales rates that we have adopted are too optimistic. They suggest a
rate of 2 per month for the site of less than 100 dwellings and offer no comment about an appropriate rate
for the larger schemes.
We are concerned that the developer’s comments may be reflective of historic market circumstances and
at present market conditions suggest that the rates that we have adopted are robust. The assumption of
a sales rate at 2 per month is unrealistic and in the context of a development of 1,000 dwellings would
result in a sales programme of 500 months or 42 years.
Similarly it is very common on a larger site for a number of complementary developers with differing
products to bring forward the development of the site. This may be in the form of companies within the
same group such as Barratt/DWH with a different product offer seeking differing market sectors, or indeed
even competing developers such as Bellway/Barratt or Wainhomes/Bellway. More locally Kensingtons and
Redrow have developed Lytham Quays. This helps to spread the cost and risk of the developing the site
and generate market interest and a market destination given the significant size of sites involved.
Development Margin
At present we are typically seeing developers profit return requirements for market housing in the range of
17% - 20% for the larger development sites. In terms of the 20% figure it has only been in relation to the
large, heavily contaminated sites where this level of profit has been sought for example the site of a former
steelworks. We have also come across requirements of 20% for listed building conversions and also some
apartment developments where there is little opportunity to phase development. For the majority of
standard new build residential development we have generally seen developer’s profit requirements
benchmarked to around 18% of GDV.
The affordable housing that forms part of the development carries less risk than the market housing and it
has become common practice over the last few years for a contractors profit return at around 6-8% of cost
or GDV to be applied to this element of the development. This approach has been adopted as good practice
by the RICS in their viability training and is also built into the HCA model.
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For the purpose of our assessment we have adopted what is considered to be a very robust approach to
profit and have applied the rate of 20% of GDV to both the market and affordable housing. With reference
to the specific query from the developer we can therefore confirm that the same level of profit return has
been applied to both the market and affordable units.
In terms of the smaller developments the return of 15% of GDV has been applied to reflect the smaller lot
size and more limited risk. For those developments that include affordable provision this level of return
has been applied to both the market and affordable units.
Build Costs
The developer suggests that not adopting BCIS data is at odds other authorities. PPG notes that build costs
should be based on appropriate data, and uses BCIS as one example of this. The extensive build cost data
base that is maintained by WYG also provides appropriate data for the purpose of preparing Local Plan
Viability Assessments. This cost data base contains data from many sources including at least 150 open
market projects where cost reviews have been undertaken together with live housing projects upon which
WYG are appointed as Quantity Surveyor and/or Employers Agent.
WYG note that the majority of data upon which BCIS is based is received from development contracts
generally administered on behalf of providers of affordable housing, registered providers or the like. Very
little information is received from private developers in terms of open market housing. As a result of the
nature and basis of BCIS costs they may not then necessarily reflect the same specification as open market
developers are likely to require.
BCIS costs are historic and thus also include for works such as those needed by RPs to comply with higher
levels of code. Also included within BCIS will be any additional costs for abnormal works within
substructures or superstructures such as costly foundations or the results of specific planning requirements.
WYG note that BCIS also includes partial preliminaries allocated by cost. Preliminaries are largely driven
by the construction period which is determined by the sales rate and hence the approach within BCIS may
not be consistent with the actual costs.
BCIS can be a useful guide in high level testing, however to achieve a greater degree of transparency and
clarity in relation to the cost assumptions WYG consider a more robust approach to the construction cost
assessment in this case is to adopt the relevant data from their data base of actual projects. This allows
the preparation of a clear and consistent elemental assessment of costs.
This is an approach that WYG have adopted for Local Authorities elsewhere in the preparation of Local Plan
and CIL viability assessments and previously very few comments have been received regarding these costs
assessments. In fact in the most recent Local Plan examination hearing a National Housebuilder described
the cost assessment made by WYG as ‘robust’.
With reference to the query raised by the developer the costs contained in Appendix A of WYGs report are
inclusive of fees, preliminaries, contingencies etc. If required, WYG are happy to provide a full breakdown
of their background calculations.
The specification that has been adopted by WYG reflects that of a typical scheme of estate housing based
on their knowledge of the schemes that they have been involved with. In addition to this they have assumed
an increase in specification for the executive dwellings. For the purpose of undertaking the viability
assessment WYG are satisfied that the form of housing assumed is reflective of type of development which
will be constructed.
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The developer also raises a query in relation to garages (which are reflected in the assessment) and the
cost of development at 40 dwellings per hectare. In the context of development at 40 dph WYG consider
that the developer are overstating matters when they state that the majority of dwellings will be 3-storey.
Whilst there will be some 2.5 or 3 storey dwellings constructed (and our sales revenues reflect this) the
majority of dwellings will be 2 storey. The form of development will also result in reduced external areas
and associated costs and hence the slight reduction in the overall build cost that WYG have assessed at 40
dwellings per hectare.
The final point relates to the use of BCIS data by WYG in the context of commercial development. WYG
note that in general all data is provided on behalf of commercial developers to BCIS so the data is fully
reflective of the costs associated with the forms of development tested.
S106 Contributions
Following discussions with FBC about likely recovery and requirements for S106 contributions in the absence
of CIL, testing was undertaken based upon a range of indicative amounts which were considered to
represent a reasonable position from the Councils perspective.
Contingency
In preparing their construction cost assessments WYG have applied a contingency of 5% to all construction
related costs including professional fees. In their experience it would be highly unusual to adopt a figure
in excess of this for a contingency and indeed normal practice; particularly with reference to the HCA model
referred to earlier by the developer is simply to apply the contingency to the dwelling construction costs
alone not all construction costs. In many cases we have also seen contingencies based on a much lower
rate than 5%.
Whilst WYG have come across instances of developers adopting a higher contingency sum this has generally
been in relation to complex conversion schemes relating to conversions of listed buildings, where
contingencies ranging from 7.5% to 10% have been adopted.
Bank Funding Costs
With reference to the developer’s initial query we can confirm that our appraisals have been prepared on a
cashflow basis with finance costs being calculated with reference to the timing of all costs and revenues.
Interest is therefore applied to all development costs.
We have undertaken the review and preparation of a significant number of development appraisals both in
the context of planning applications, valuations and for funding purposes. We have generally seen a broad
range of assumptions made with finance rates ranging from 5.5 to 7.5%. The higher levels are typically
inclusive of arrangement and monitoring fees. We note the comments that have been made by the
developer with reference to the finance rate and the significant variation in the market between lenders.
Based on our current experiences of development appraisals that are being submitted to us for review we
consider that 7% inclusive of arrangement and monitoring fee represents a reasonable position in terms of
a robust benchmark finance cost.
Instalments Policy
This is a matter for the Council to consider should it decide to introduce CIL. The introduction of an
instalments policy will however help to spread development costs, reduce finance and improve overall
cashflow and viability.
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Conclusions
We have considered the points raised by the developer and addressed these in the commentary above. As
required we are happy to provide the background information to the WYG construction cost assessments
and summary appraisals.
We have considered the matters raised by the developer and do not consider it is correct for the developer
to state that there are errors or omissions in the assessment that has been undertaken. The assessment
that has been undertaken to inform the Viability of the Local Plan and its policies is based on appropriate
available evidence and the assumptions made are considered to be robust.
The developer makes reference to CIL and proposed tariffs. The assessment that has been prepared
considers the Local Plan and its policies and the consultation is based on this. At the appropriate time
should the Council decide to progress CIL further consultation will take place and the developer’s input into
this would be welcomed.
………………………………………….…….
KEPPIE MASSIE
Date: 5 February 2016
Ref: AGM/JA/RC
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