Development Economics a practical case study

Kathleen DunmoreJo HarrisonGary TuckerPaul Brunige

Changing market economics• House prices (outside London

and SE) are still lower than in 2007

• East Midlands region of contrasts– Derbyshire Dales median

house price over £200,000– Bolsover median price under

£100,000

• Development is stalling – East Midlands 15,720

units 2007/08– 9,510 units 2011/12

DCLG table 253

3

Lessons from previous downturns

• It takes several years for recovery to commence.

• In the 1990s house prices did not recover to their 1989 peak until 1997.

• By 1938 house prices were still below their 1931 peak.

• House prices fell in 4 of the 8 years following a downturn

1930s house price crash

-12-10-8-6-4-20246

1931 1932 1933 1934 1935 1936 1937 1938

a bumpy landing in the 1990s

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1989 1990 1991 1992 1993 1994 1995 1996 1997

What is a normal market ?• Historic long term house

price trend is upwards

• Fuelled by household growth and changing patterns of economic activity – spot winner and loser locations

• But over a 6 year period price change can range from zero to house prices doubled

• Plan for what – and what price localism ?

• How often to review the plan

House price change over 6 yrs

0.00

0.50

1.00

1.50

2.00

2.50

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

1=price 6 yrs ago

5

Residual valuation model• Gross Residual =

revenue – costs

• Nett Residual (RV) = gross residual – (S106 contributions + CIL + affordable housing)

• CIL Not negotiable• On-site S106 essential• All other requirements

negotiable ??

and now CIL

Some sites are more equal than others

• Land values are highest in the rural areas

• And lowest in the market towns

• Two 1,000 unit SUEs are proposed on the edge of the market towns. What will their values and costs be?

South Northants 45 dph no grant

£0.00£0.50£1.00£1.50£2.00£2.50£3.00£3.50£4.00£4.50

BrackleyNorthern

Hinterland

Rural SouthWest

Central Rural Northern Rural Towcester Brackley

£m

0% 10% 15% 25% 30% 35% 40% 50%

Negotiating a stalled site

• Understand what is viable• Be clear about what you want – and how much it costs• Try not to get into a position where there is only 1

possible site for development• Understand that very big sites have higher costs and

lower values than small sites – but location is key• Development is a risky process• There are no “right answers” - only what works for you

Principles of viability appraisal applied to specific schemes

• Calculation– Compare revenues and costs– Arrive at a calculated residual value (RV)

• Negotiation– Agree between parties what is a reasonable RV– Identify areas of uncertainty and agree how to share

risk and reward– Set up appropriate legal mechanisms

• Outcome– Improved mutual understanding and trust

5 Year Land

Supply !!

Radstone Fields S. Northamptonshire

• 1,000 units, greenfield location edge of market town• Essential to 5 year land supply• Target

– 40% affordable housing, – CSH level 3 – high design standards - kerb stones, street furniture– New secondary school– £1m+ town centre improvements – Total cost S106 and design £20m, infrastructure £20m

(£40,000 per dwelling)

How it worked out

The deal• Agreed 22% AH, • S106 with phased review • All uplift in RV goes to local

authority as additional affordable housing on site or as commuted sum

• Phased review encourages early start on site

Why it worked• Willing and informed

landowner and developer• Political will• Officers actively involved in

viability appraisal – not a black box

• The right size of development with no punitive infrastructure requirements

• In the right place – would it have worked in N Northants?