ASSUMPTIONS AND SCENARIO TESTING (including elements to be agreed) FOR UPDATE AFFORDABLE HOUSING VIABILITY STUDY – CHESHIRE WEST AND CHESTER DISTRICT
1.VIABILITY TESTING PRINCIPLES
1.1The National Planning Policy Framework now recognises the importance of viability to ensuring that residential schemes come forward. This is especially important in times when development is under threat in times of economic hardship. We recognise that this means that underestimating the full burden of development requirements may mean that schemes do not come forward.
1.2Planning advice also now supports the use of viability tools such as that advocated by the Greater London Authority (GLA), or that used by the Homes and Communities Agency (HCA) for the assessment of whether schemes should be supported by Social Housing Grant. This tool is a residual land value assessment model which suggests that a site will only come forward with an affordable housing contribution where the resulting overall site value exceeds the existing or alternative use of that site. Residual land value assessment is a recognised practice within the development industry for evaluating costs and incomes associated with the development. In essence, such appraisals consider the income from a development in terms of sales or rental returns and compare this with the costs associated with developing that scheme. The amount left over, or residual, is what is left for land acquisition, i.e. the residual land value.
1.3This residual value is then compared to a number of baseline values to gauge the likelihood that the imposition of affordable housing might prevent the scheme from coming forward on a given parcel of land.
1.4The 2009 study concluded that viability should be tested against existing/alternative land values. In light of the above it is proposed that the 2013 update study repeats this test of viability.
2.AREA ANALYSES
2.1The original Viability considered 11 ‘beacon’ sites to test viability across the region on sites of different characteristics and sizes. These are set out in the following table:
Site / Site Location and Character / Developable Ste Area / No. of Dwellings / Density (per hectare)1. / Ellesmere Port; Urban / 4.06 / 180 / 44
2. / Ellesmere Port; Suburban / 15.80 / 553 / 35
3. / Ellesmere Port; Rural; Market Town / 1.18 / 35 / 30
4. / Vale Royal; Northwich; Suburban / 30.16 / 1,055 / 35
5. / Vale Royal; Wingford; Suburban / 3.11 / 109 / 35
6. / Vale Royal; Rural; Large Village / 3.06 / 92 / 30
7. / Vale Royal; Market Town; Urban / 1.57 / 63 / 40
8. / Chester City; Urban / 1.08 / 153 / 142
9. / Chester City; Suburban / 0.80 / 64 / 80
10. / Vale Royal; Rural / 1.50 / 45 / 29
11. / Ellesmere Port; Semi Rural / 11.52 / 427 / 37
2.2These site typologies need consideration, updating and/or amending based upon typical densities that have come forward for residential development in the District.The range of sites should reflect the characteristics of those sites that may come forward and may need to take account of rural development. In addition, a range of development densities may be considered for each site location. Densities at 30 to 45 dwellings per hectare will mainly be houses (detached house at the lower densities and more semi detached and terraced houses at the higher end of these densities). At higher densities (80 dph and above) will have more or mainly apartments.
3.Unit Types
3.1Within the site typologies we will consider the full range of flat and house types appropriate for each density and location including with net internal areas in m2:
1 bed studio flat 32m2
1 bed 2 person flat 48m2
2 bed 3 person flat 60m2
2 bed 4 person flat 67m2
2 bed 3 person house 71m2
2 bed 4 person house 76m2
3 bed 4 person house 81m2
3 bed 5 person house 86m2
3 bed 6 person house - 2 storey 95m2
3 bed 6 person house - 3 storey 100m2
4 bed 6 person house - 2 storey 101m2
4 bed 6 person house - 3 storey 107m2
4 bed 7 person house - 2 storey 108m2
4 bed 7 person house - 3 storey 115m2
5 bed 7 p house 2 storey 115m2
6 bed 8 person house 125m2
3.2Site typologies will use evidence from current sites with planning permission as well as sites that have come forward over the last two years taking account of delivery across all sites.
4.VALUES
4.1The original study set out values for house types and land in the area locations. These were set using research undertaken at the time of the study. It is proposed to undertake up to date land and property values. The robustness of any viability depends upon the quality of the inputs. We will work closely with an independent valuer who will provide advice on comparable evidence on land and property values taking into account the local context using local evidence and in consultation with the Council’s property team.
4.2This update study will take place in late June and early July 2013 and it is proposed to use a valuation date of June 2013.
5.CONSTRUCTION COSTS
5.1The original report was undertaken with an effective valuation date of Quarter 4 2007. Costs were assumed to be £710 per m2 (66 per ft2) for housing and £850 per m2 (£79 per ft2) for flats/apartments. Costs are likely to have moved since that time and it is proposed to update values and costs to take account of revisions to build costs as at the valuation date of June 2013. It is proposed to use updated Building Cost Indicator Service (BCIS) all in tender prices for basic residential developments using the BCIS local multiplier.
5.2An allowance for Code for Sustainable Homes Level 4 will be taken as a base.
6.TARGET PERCENTAGE AND TENURE MIXES
6.1The original study considered affordable housing targets of between 20% and 40%. This is likely to be the range of targets to be tested as a core but any views on targets outside this range would be appreciated. The ratio of social rent to intermediate affordable housing tenures was considered at 50:50 and 70:30 splits. Since the time of the original study new models of affordable rent have been proposed by the Coalition government and it will be necessary to consider the impact of this. This will have a spatial aspect as affordable rents may be set against market rents.
6.2Affordable rents will be based upon 80% of the local market rents as advised by the study’s valuation advisor. Arc4 has used a model that assumes capitalisation of rents although this will be cross referenced with social rent transfer values from local Registered providers.
6.3A similar methodology is to be used for the capitalisation of new affordable rents.
6.4The base assumption is that, initially, there is no public capital subsidy available to support either the social rent or the affordable rent options in line with advice from the Housing and Communities Agency.
7.Developer Contributions (Community Infrastructure) and Other Costs
7.1Our modelling will take into account the implications of all additional costs that might apply both due to potential ground conditions and other planning obligations that might be required. This will be based upon an assessment of costs identified over the last two years.
7.2As far as community infrastructure is concerned the Council will have variable requirements and these will all have an effect on development economics. The calculation of these contributions is yet to be established but it is essential that the methodology used here is able to feed in to the assessment of viability of Community Infrastructure contributions.
7.3The original viability study used a basic contribution per unit of £1,600. An assessment of current levels of CIL/S106 contribution will be used in this update in a similar way but with a scenario test at different levels both high and low.
7.4We will look at different levels of planning contribution, again based upon a real world assessment of what these might be, both in the short and longer terms.
8.OTHER ASSUMPTIONS
8.1A number of other assumptions were made in order to undertake the original study. These rates have been used based upon our extensive experience of the development industry and undertaking similar studies elsewhere. The following are the main inputs that we would like to be considered together using the assumptions from the original study:
Developer Profit – 15% of costs (including residual value);
Ground rents - £150 per property capitalised at 5% yield;
Professional fees – 7% of construction costs;
Contingency at 5% of construction contract;
Realistic allowance for other fees (planning, building regs,etc.)
Finance charges during development – charge at 5.5% pa and earned at 2.5%);
8.2Some of these levels may have to be reconsidered following further consultation. In particular developer profit and professional fees may be underestimated taking into account the current market position.
9. SCENARIO TESTING
9.1We are currently in an economic downturn reflected in the housing market. Therefore we do not want to assess viability solely based upon this challenging economic period. It is proposed to use the assumptions set out above as a base position. In order to future proof this viability assessment it will be necessary to consider what may happen over the longer term. There are a number of assessments of the market including from Acadametrics and Savill’s. We are wary to use a single assessment of the market ad we propose scenarios based on high medium and low value growth over the next 10 years in order to consider their effect on viability at different level s of affordable housing. These economic scenarios will test normal increases in build costs and higher than average construction costs.
9.2In addition to the assessment of the effect of changing economic conditions we will consider different scenarios will be tested based upon the following requirements
1. A range of tenure splits between social/affordable rent and market. The ratios to be considered need to be agreed but are likely to be based around:
70:30 Social/affordable rent : intermediate (shared ownership)
60:40 Social/affordable rent: intermediate (shared ownership)
50:50 Social/affordable rent: intermediate (shared ownership)
It will be noted that rented tenures may need to be tested at both affordable and at social rented levels. The Council will need to confirm the level of social rent that it wishes to test bearing in mind affordability levels and the willingness of Registered Providers in the District to consider this tenure. Currently, grant for social rent is not available and the Homes and Communities Agency are looking to prioritise affordable rent. However, the Council will have views on the affordability of the affordable rent product.
2.The level of CIL will be tested as discussed in section 7 above. Higher and lower levels of CIL will also be tested.
3. The level of developer return in a difficult economic climate is crucial in assessing viability. We therefore propose to consider the agreed rate of return and a higher rate (perhaps at 17% and 20%) but based upon feedback from consultation with local developers and builders.
9.3The number of potential sensitivities that could be tested is almost infinite but we are mindful to ensure that the sensitivities remain both real world and manageable. We therefore wish to limit the number of scenarios to those set out above in order to give a reasonable range that shows the effect of changes to tenure, costs, values and rates of return.