Affordable Housing Viability Assessment - 17-07-13€¦ · City and County of Swansea Affordable...

City and County of Swansea Affordable Housing Viability Assessment

Final Report

July 2013

Dr Andrew Golland, BSc (Hons), PhD, MRICS

Andrew Golland Associates

[email protected]

Vii: July 2013

City and County of Swansea Affordable Housing Viability Study – August 2013

Contents page Page Chapter 1 Introduction 3 Chapter 2 Approach to Viability and Methodology 8 Chapter 3 High Level Testing 13 Chapter 4 Further viability tests 24 Chapter 5 Land supply, small sites and use of commuted sums 27 Chapter 6 Case Study viability analysis – smaller sites 33 Chapter 7 Main findings and conclusions 38 Appendix 1 Workshop notes 44 Appendix 2 Method statement 49 Appendix 3 High Level Testing Results 50 Appendix 4 Worked example of an appraisal 52 Glossary of Terms 58


1 INTRODUCTION

Review of project aims

1.1 The City and County of Swansea (the Council) appointed Dr Andrew Golland to undertake an Affordable Housing Viability Assessment (AHVS) in relation to a range of housing market circumstances across the local authority area. The AHVS will be used by the Council to inform the development of policies in its Local Development Plan (LDP).

1.2 The project brief set out that the study was to:

• Identify appropriate thresholds and targets for affordable housing provision. This should include consideration of whether it is economically viable and appropriate for the Council to adopt a lower trigger threshold for affordable housing provision;

• Review the likely development viability impact of a differential approach to affordable housing provision/ financial contributions.

• Suggest an appropriate formula on which the Council might take commuted sums.

1.3 When preparing the LDP, the Council needs to balance maximising the

affordable housing target to deliver enough to meet its needs with the importance of having policies that ensure sufficient housing land is brought forward to meet its overall housing requirement. If the affordable housing target is set too high, the adverse impact on development viability will choke off supply. If the target is set too low the need for affordable housing will not be met and landowners and developers will get a return greater than essential to maintain an adequate land supply.

1.4 This report explains the research undertaken to address the brief and the main findings of that research. This project will support work on the Councils’ LDP.

Policy context – national

1.5 The question of the viability of land for housing is central to planning policy. This states that Local Planning Authorities (LPAs) should, when preparing development plans, set targets for affordable housing which reflect the likely economic viability of land for housing. In line with Technical Advice Note 2: Planning and Affordable Housing (TAN 2) this involves making informed assumptions about the levels of finance available for affordable housing and the type of affordable housing to be provided.

1.6 The Courts have further emphasised the importance of robust viability

evidence to underpin affordable housing policies in development plans. The Court of Appeal in 2008 decided in a case brought against Blyth Valley Council that:

“… an informed assessment of the viability of any such percentage figure is a central feature of the Planning Policy Statement (PPS3) on affordable housing. It is not peripheral, optional or cosmetic. It is patently a crucial requirement of the policy”.


1.7 This study focuses on the percentage of affordable housing sought on mixed tenure sites and the size of site from above which affordable housing is sought (the site size threshold). LPAs require an AHVS as part of their evidence base for use in preparing LDPs. The importance of gathering evidence about development economics was identified in TAN 2 which states that, in relation to setting the affordable housing target:

“The target should take account of the anticipated level of finance available for affordable housing, including public subsidy, and the level of developer contribution that can realistically be sought”. (TAN 2, Para 9.1)

1.8 Guidance from the Welsh Government on the preparation of Affordable

Housing Delivery Statements (2007 – 2011)1 by local authorities re-iterates the importance of viability evidence in identifying targets for affordable housing delivery: “Targets for the amount of affordable housing to be provided should reflect an assessment of the likely economic viability of land for housing within the area, taking account of risks to delivery and on the likely levels of finance available for affordable housing, including both public subsidy such as Social Housing Grant and the level of developer contribution that could reasonably be secured. A viability calculation is equally relevant in a buoyant or a depressed market. The needs of both current and future occupiers should be provided for, building on evidence in the Local Housing Market Assessment.” (Para 1.24)

1.9 Evidence on viability is also required to demonstrate the robustness of the site

size threshold to be set out in the LDP. The threshold identifies the size of site above which the LPA can seek affordable housing. TAN 2 does not provide any national guidance on appropriate thresholds and leaves this to LPAs to identify. However, TAN 2 does comment that: “When setting site-capacity thresholds and site specific targets local planning authorities should balance the need for affordable housing against site viability”. (TAN 2 para 10.4)

1.10 Planning Policy Wales (Edition 5 November 2012) states that Development

Plans must include an authority-wide target for affordable housing (expressed as numbers of homes) based on the Local Housing Market Assessment (LHMA) and identify the expected contributions that the policy approaches identified in the development plan (for example, site thresholds, site specific targets, commuted sums and affordable housing exception sites) will make to meeting this target. The target should take account of the anticipated levels of finance available for affordable housing, including public subsidy, and the level of developer contribution that can be realistically sought. In principle all new market housing may contribute to meeting the need for affordable housing.

1 Published by the Welsh Assembly Government in February 2009: http://wales.gov.uk/topics/housingandcommunity/housing/publications/affordablestatements/?lang=en


1.11 Although the necessity of providing evidence about viability in preparing LDPs is widely recognised, there is no guidance from the Welsh Government (WG) on how this work should be done. Consequently in 2009 LPAs in SE Wales working with the WG, the Home Builders Federation (HBF) and housing association representatives commissioned Three Dragons (for whom Dr Golland used to lead on viability work) to produce guidance for LPAs on how to prepare an AHVS. The guidance subsequently prepared by Three Dragons is now endorsed by the WG as Good Practice Guidance and is accepted by the Planning Inspectorate and the HBF at LDP examinations.2

1.12 The guidance and development viability software has now been adopted by

most LPAs in Wales. The software is used by LPAs to calculate what would be a ‘reasonable’ selling price for specific parcels of land given the location, size and type of development that is proposed by the developer. It also assists LPAs in negotiations, as it can estimate the profit margins that the developer will achieve and can recommend what would be ‘reasonable’ for the developer to put back into the community via Section 106 agreements. For example, it will recommend the type and number of affordable housing units it is ‘reasonable’ for the developer to provide and identify what affect this will have on profit margins. Current Development Plan policy

1.13 Development Plan policy is, as ever, evolving. Policy HC3 of the Swansea

UDP (Nov 2008) states that:

‘In areas where a demonstrable lack of affordable housing exists, the Council will seek to negotiate the inclusion of an appropriate element of affordable housing on sites which are suitable in locational/accessibility terms and where this is not ruled out by exceptional development costs. In most parts of the Plan area such negotiations will focus on new housing developments of 25 or more dwellings or sites of 1ha or more or phases of such developments.

However, in the large and small villages subject to policies EV16 and EV17 and Swansea West Strategic Housing Policy Zone where opportunities for housing development are more constrained, negotiations for the inclusion of a percentage of affordable housing in new housing schemes will be sought on new housing developments of 10 or more dwellings or sites of 0.4ha or more or phases of such developments.’

1.14 Policies EV16 and EV17 relate predominantly to settlements west of Swansea

and in the Gower. These policies relate to small and large villages respectively.

2

http://www.rctcbc.gov.uk/cy/relateddocuments/publications/developmentplanning/examination/examin

ationlibrary/southeastwalesdocuments/sew6-sewspgguidanceonaffordablehousingviabilitystudies.pdf


Research undertaken for this study 1.15 There were four main strands to the research undertaken to complete this

study:

• Discussions with a project group of officers from the Council to help inform the structure of the research approach;

• Analysis of information held by the authority, including that which described the profile of land supply;

• Use of the Development Appraisal Toolkit to analyse scheme viability (and described in detail in subsequent chapters of this report);

• A workshop held with developers, land owners, their agents and representatives from a selection of Registered Social Landlords active in the City and County.

Structure of the report

1.16 The remainder of the report uses the following structure:

• Chapter 2 explains the methodology we have followed in, first, identifying sub markets and, second, undertaking the analysis of development economics. We explain that this is based on residual value.

• Chapter 3 describes the analysis of residual values generated across a range of different development scenarios (including alternative percentages and mixes of affordable housing) for a notional 1 hectare site;

• Chapter 4 provides sensitivity analysis in relation to the housing market, a higher Section 106 contribution and for a higher Code level (BREEAM Code for Sustainable Homes).

• Chapter 5 considers options for site size thresholds. It reviews national policy and the potential future land supply and the relative importance of small sites. The chapter considers practical issues about on-site provision of affordable housing on small sites and the circumstances in which collection of a financial contribution might be appropriate (and the principles by which such contributions should be assessed);

• Chapter 6 identifies a number of case study sites (generally small sites which are currently being developed, that represent examples of site types found in the City and County). For each site type, there is an analysis of the residual value of the sites and compares this with their existing use value;

• Chapter 7 summarises the evidence collected through the research and provides a set of policy options.


2 APPROACH TO VIABILITY and METHODOLOGY Overview

2.1 The appraisal model adopted is the Wales Development Appraisal Toolkit (DAT)3. This generic model operates in the majority of local authorities in Wales. It is regarded as the industry standard in Wales and is endorsed by the development industry.

2.2 The toolkit compares the potential revenue from a site (Gross Development

Value (GDV)) with the potential costs of development before a payment for land is made. In estimating the potential revenue, the income from selling dwellings in the market and the income from producing specific forms of affordable housing are considered. The estimates involve: (1) assumptions about how the development process and the subsidy system operate and (2) assumptions about the values for specific inputs, such as house prices and building costs.

2.3 It is important to understand how viability is assessed in the planning and

development process. The assessment of viability is usually referred to as a residual development appraisal approach. Our understanding is illustrated in the diagram below (Figure 2.1). This shows that the starting point for negotiations is the gross residual site value which is the difference between the scheme revenue and scheme costs, including a reasonable allowance for developer return or margin.

Figure 2.1 Assessing residual value

http://denbighddms.wisshost.net/webfiles/submission/CD%202/LDP%20Evidence%20Base%20EB%

20(August%202011)%20Part%20II/EB019%20Strategic%20Site%20Evaluation%20(Entec)/Appendix

%20C.pdf


2.4 Once Community Infrastructure Levy (CIL) or Section 106 contributions have been deducted from the gross residual value, a ‘net’ residual value results. The question is then whether this net residual value is sufficient in terms of development value relative to the site in its current use.

2.5 Calculating what is likely to be the value of a site given a specific planning

permission, is only one factor in deciding what is viable.

Assessing viability

2.6 A site is extremely unlikely to proceed where the costs of a proposed scheme exceed the revenue. But simply having a positive residual value will not guarantee that development happens. The ‘existing use value’ (EUV) of the site, or indeed a realistic ‘alternative use value’ (AUV) for a site (e.g. commercial) will also play a role in the mind of the land owner in bringing the site forward and thus is a factor in deciding whether a site is likely to be brought forward for housing.

Figure 2.2 Assessing viability

2.7 Figure 2.2 shows how this operates in theory. Residual value (RV) falls as

the proportion of affordable housing increases. At point (a), RV is greater than EUV and provided that this margin is sufficient for the land owner to bring the site forward, then it will be viable.

2.8 At point (b) the RV is equal to the EUV and there is relatively little incentive in

theory to bring the site forward.


2.9 Beyond points (a) and (b), the scheme will not come forward as the developer will not be able to pay the land owner enough relative to the land owner’s EUV.

2.10 Where grant is available, viability for affordable housing is enhanced. Up to

point (c) RV is greater than EUV and there is a land owner incentive. At point (c) RV is equal to EUV and so, whilst a higher affordable housing contribution is likely than say at point (b), in principle the land owner is in exactly the same position as at (b).

2.11 At point (d), the scheme will not be viable even with grant. 2.12 Under all circumstances, the Council will need to consider whether a realistic

and justifiable AUV applies. Where the AUV is higher than the EUV, and can be justified, then the AUV becomes the appropriate threshold value against which RV is judged. Cases and precedent supporting the approach outlined above:

2.13 In 2009, the Homes and Communities Agency published a good practice

guidance manual ‘Investment and Planning Obligations: Responding to the Downturn’. This defines viability as follows: “a viable development will support a residual land value at level sufficiently above the site’s existing use value (EUV) or alternative use value (AUV) to support a land acquisition price acceptable to the landowner”.

2.14 A number of planning appeal decisions provide guidance on the extent to

which the residual land value should exceed existing use value to be considered viable:

Barnet & Chase Farm: APP/Q5300/A/07/2043798/NWF

2.15 Here it is stated that: ‘the appropriate test is that the value generated by the

scheme should exceed the value of the site in its current use. The logic is that, if the converse were the case, then sites would not come forward for development’.

Bath Road, Bristol: APP/P0119/A/08/2069226

2.16 The key quotation from this case is that: ‘the difference between the RLV and

the existing site value provides a basis for ascertaining the viability of contributing towards affordable housing’.

Beckenham: APP/G5180/A/08/2084559

2.17 The statement on the definition of viability is here less clear cut, although the

approach to defining viability is nevertheless implicit in the statement: ‘without an affordable housing contribution, the scheme will only yield less than 12% above the existing use value, 8% below the generally accepted margin necessary to induce such development to proceed’.


Oxford Street, Woodstock: APP/D3125/A/09/2104658. 2.18 This case, consistent with the previous one outlined here, focuses on the

margin required for a land owner to achieve over and above the Existing Use Value in order to achieve a change of use of the land:

2.19 ‘The main parties’ valuations of the current existing value of the land are not

dissimilar but the Appellant has sought to add a 10% premium. Though the site is owned by the Appellants it must be assumed, for valuation purposes, that the land is being acquired now. It is unreasonable to assume that an existing owner and user of the land would not require a premium over the actual value of the land to offset inconvenience and assist with relocation. The Appellants addition of the 10% premium is not unreasonable in these circumstances.’

2.20 The approach has been very much bolstered in the report by Mr Keith

Holland, the Examiner appointed by the Mayor of London to evaluate the London Community Infrastructure Levy. The planning Inspector stated in response to an alternative (and ‘market value’) approach being promoted by the Royal Institution of Chartered Surveyors (RICS):

‘The market value approach is not formalised as RICS policy and I understand

that there is considerable debate within the RICS about this matter. The EUV plus a margin approach was used not only by the GLA team but also by several chartered surveyors in viability evidence presented to the examination. Furthermore the SG at paragraph 22 refers to a number of valuation models and methodologies and states that there is no requirement for a charging authority to use one of these models. Accordingly I don’t believe that the EUV approach can be accurately described as fundamentally flawed or that this examination should be adjourned to allow work based on the market approach to be done’.

Good practice approach

2.21 We have adopted the approach promoted in SEWSPG’s (South East Wales

Strategic Planning Group) Good Practice Guide to carrying out affordable housing studies. The general approach has been endorsed by the development industry in Wales.

2.22 A summary of the approach is shown in Figure 2.3 below.


Figure 2.3 Good practice approach to carrying out affordable housing

viability studies (SEWSPG Guide)


3 HIGH LEVEL TESTING Introduction

3.1 This chapter of the report considers viability for mixed tenure residential development for a number of different proportions and types of affordable housing.

3.2 The analysis is based on a notional one hectare site and has been

undertaken for a series of house price sub markets that have been identified. The notional one hectare site is used as a comparable and practical measure for benchmarking results.

3.3 The chapter explores viability of development and looks at the residual value

in a range of scenarios tested. Sub Market areas

3.4 Variation in house prices will have a significant impact on development economics and the impact of affordable housing on scheme viability.

3.5 We undertook a broad analysis of house prices in the City and County using

HM Land Registry data to identify the sub markets. These sub markets are based on post code sectors and have been informed by discussions with the Council and a Workshop held with the industry (Appendix 1).

3.6 The house prices which relate to the sub markets provide the basis for a set

of indicative new build values as at April 2013. Table 3.1 sets out the sub markets adopted in the study.

3.7 Table 3.2 sets out the indicative new build house prices adopted.


Table 3.1 Viability sub markets in the Swansea area

Source: Market value areas as agreed between AGA and the City and County of Swansea and tested at the Viability Workshop


Table 3.2 Indicative new build house prices

Source: HM Land Registry and Local Comparable Sales


Assumptions (notional one hectare site)

3.8 For the viability testing, we defined a number of development mix scenarios,

using a range of assumptions. The scenarios were based on an analysis of typical development mixes and were discussed at the stakeholder workshop.

3.9 The development mixes discussed were as shown in Table 3.3 below:

Table 3.3 Development densities discussed at the workshop

3.10 Subsequent to the workshop, the Council have undertaken work on housing

needs (ORS, 2012). This study has concluded that a higher proportion of one bed units are needed. Overall the study suggests broadly, a mix of 15% one bed units, 30% two bed units, 45% three bed units and 10% four bed units.

3.11 The following table (Table 3.4) has been generated therefore to reflect

housing needs locally.


Table 3.4 Updated densities and development mixes reflecting local needs

Density (Dph)

20 30 40 50 100

1 Bed Flat 5 10 15 15 60

2 Bed Flat 5 5 5 10 40

2 Bed Terrace 10 20 25 20

3 Bed Terrace 10 10 15 15

3 Bed Semi 10 15 15 15

3 Bed Detached 25 20 10 10

4 Bed Detached 25 15 10 10

3 Bed Bungalow 10 5 5 5

100 100 100 100 100

3.12 The range of densities and development mixes is tested in this study further

across a range of affordable housing targets. In order to consider a full range of possible affordable housing targets, testing took place assuming delivery of 10%; 20%; 30%; 40%; 70% and 100% of affordable housing; based on a tenure split of 50% Social Rent and 50% Intermediate Affordable (Rent) Housing. This reflects feedback from the local authority taking into account housing needs and pragmatic delivery considerations. The scenarios are discussed in detail below. Section 106 (or similar) contributions

3.13 The method includes making an allowance for the impact of financial

contributions required under s106 for provision other than affordable housing on the residual value (e.g. infrastructure, community provision etc). The study applies the assumption that the development will be required to contribute £5,000 per unit under Section 106 agreements for the provision of facilities other than affordable housing. This assumption/contribution level is based on s106 monitoring information supplied by the Council and discussions at the stakeholder workshop. Results: residual values for a notional one hectare site

3.14 This section shows the impacts of increasing the percentage of affordable

housing on residual site values. The full set of results is shown in Appendix 3. They reflect a contribution of £5,000 per unit under s106 agreements in each case and a 17% profit margin on gross development value to the developer on the market element of the scheme, along with a 5% overhead on build costs. These figures are based on agreed assumptions with the house building industry as set out in the Wales Development Appraisal Toolkit (DAT).


Residual values at 20 dph

3.15 Figure 3.1 shows the residual values for a 20 dph (dwellings per hectare)

scheme for each of the sub markets. Figure 3.1 Housing (at a density of 20 dph) – Residual value in £s

million

• Figure 3.1 shows a full range of residual values in £ million per hectare across the urban and rural areas of the Swansea district. The results show in essence the impact of differing house prices. Small differences in house prices lead to large differences in residual values.

• The variation in residual values is very marked across the whole area. Residual values in Mumbles and Western Gower are very strong; indeed at 70% affordable housing, residual values in these two locations are between £400,000 and £600,000 per hectare. By contrast, residual values in the three lower value sub markets (Western Fringe, Swansea East and Swansea North) are low to marginal, even assuming nil affordable housing contributions. This of course relates to a 20% affordable housing contribution.

• This does not mean that housing will not be developed in these (lower value) areas. There will be hot spots within these locations where development will be viable, even though the general tone of residual values looks low.

• The chart (Figure 3.1) shows that reasonably robust residual values are generated in locations such as Swansea South West, the City Centre and Swansea West. At 30% affordable housing, residual values range between £680,000 per hectare and £260,000 per hectare.


Residual values at 30 dph 3.16 Figure 3.2 shows the residual values for a 30 dph scheme for each of the

market value areas. Figure 3.2 Housing development (at a density of 30 dph) – Residual

value in £s million

• Figure 3.2, like Figure 3.1, shows a similar pattern of residual values. These differences indicate the importance in considering a differential approach to policies on affordable housing, particularly targets in the different Swansea sub markets.

• At this stage (20 dph to 30 dph), a higher density produces a higher residual value. If a mid market location such as Swansea West is looked at, it can be seen that at 30 dph (at say 30% affordable housing), a residual value of £0.41 million per hectare is generated; as against £0.26 million per hectare at 20 dph.

• In the areas where residual value was negative at 20 dph, development is less viable at 30 dph. This is in large measure a function of the maths, where we are compounding a negative number to show an even greater negative value.

• Residual values in many locations are robust. At 40% affordable housing, in the City Centre sub market, residual value is £420,000 per hectare; a value that should ‘compete’ well with other land uses in many instances. Clearly in Mumbles and Western Gower, residual values are high, suggesting that the Council may set a fairly ambitious target in these (mainly smaller) settlements and areas.



3.17 Figure 3.3 shows residual values for a 40 dph scheme for each of the market value areas.

Figure 3.3 Housing development (at a density of 40 dph)

• Figure 3.3 shows a very similar pattern of residual values across the housing sub markets.

• Middle value sub markets continue to show robust residual values. In the case of the City Centre and Swansea West, residual values range between £260,000 per hectare and £480,000 per hectare at 40% affordable housing. These are values which should compete well with other urban and rural land uses.

• Residual values in Mumbles and Western Gower remain very robust at 70% affordable housing and even at 100% affordable housing, RV is around £250,000 per hectare.


3.18 Figure 3.4 shows residual values for a 50 dph scheme for each of the sub market areas.


Figure 3.4 Housing development (at a density of 50 dph) – Residual value in £s million

• The chart shows that as with previous graphs, there is a broad split in residual values. This falls between Mumbles and Western Gower (one broad market), Swansea South West, City Centre and Swansea West (another broad market) and, the Western Settlements, Swansea East and Swansea North. The lower values sub markets (the lowest 3) are marginal to negative in all but exceptional cases (mainly Western Fringe settlements at lower percentages of affordable housing).

• As previously, it is important to emphasize that negative residual values at this broad brush level do not necessarily mean that sites will not come forward. Some schemes in the lower three sub market areas will generate residual values more akin to those in the middle market areas; some schemes, in select locations, may generate residual values even higher than this.

• This means that policy setting should not ‘shut out’ the lower market areas in terms of an affordable housing target. Indeed, it will be advisable to have a target of some measure in order to, wherever possible, meet housing needs.

• The relationship between housing density and development mix is important. Increasing density does not always increase the residual value. Indeed, as we move to a higher density still (Figure 3.5) residual value increases in some sub markets, whilst in others it does not. Because of these complexities, great care is needed when negotiating sites, and in ensuring that developers make every effort to balance development mix and policy considerations to maximise Section 106 contributions.



3.19 Figure 3.5 shows residual values for a 100 dph scheme for each of the sub market areas.

Figure 3.5 Housing development (at a density of 100 dph) – Residual

value in £s million

• The chart shows now significantly higher residual values generally. The scheme tested here is flats: 60% one bed and 40% two bed.

• It will be noted that apartment schemes in locations such as Mumbles and Western Gower (where they are built) generate residual values in excess of £2 million per hectare even at 40% affordable housing.

• Robust residual values are achieved in the middle markets of the Swansea local authority area at 100 dph.

Commentary on results

3.20 This Study has assessed the residual value for a notional one hectare site for

a series of scenarios across the eight sub market areas of the Swansea area. 3.21 The sub markets generate a very varied range of residual values and, for the

same set of assumptions about density/development mix and proportion of affordable housing, different residual values have been found.

3.22 The residual values shown are markedly different. There is a broad split in

residual values. This falls between the Mumbles and Western Gower (one broad market), Swansea South West, City Centre and Swansea West (another broad market) and, the Western Settlements, Swansea East and Swansea North.


3.23 Looking at values generally, there is a significant challenge in delivering affordable housing, indeed housing at all, in the weakest three sub markets. However, a target should be set for these weaker sub markets, since in these areas housing needs will be significant, and there will be higher value areas or hot spots which will justify an affordable housing contribution.


4 FURTHER VIABILITY TESTS

Impact of the Code for Sustainable Homes 4.1 The Code for Sustainable Homes (CFSH) and the requirement for more

sustainable construction may or may not have a negative impact on the viability of schemes. It should be stressed that it is uncertain whether higher levels of CFSH will impact negatively since viability depends on the relationship between scheme revenue and scheme cost, not simply costs alone. Thus housing development could become more viable in the future despite the impacts of CFSH.

4.2 This viability study uses current RICS Building Cost Information Service

(BCIS) build cost data. The average build costs are assumed to include Code Level 3 as a baseline position. The cost impact of moving from Level 3 to Level 4 of the CFSH is estimated, according to DCLG research (Cost Analysis of The Code for Sustainable Homes: Final Report July 2008)4, at around £5,000 per unit.Moving to Code Level 4 could therefore generate additional costs of around £200,000 per hectare (based on a 40 dph scheme) for example.

4.3 The impacts will vary according to location across the Swansea local authority

area. As a broad indication, reaching Code Level 4 (versus Code Level 3 now) will reduce residual value by around 8% at the top of the market (30% affordable housing at 40 dph) but will reduce residual value by around 30% (30% affordable housing at 40 dph) in a middle market location. At the lower end of the market, residual value will be made even more negative.

4.4 For a number of reasons, we have not considered it appropriate to test any

additional impact of achieving higher Code Levels at this time. The introduction to higher levels of code will be more staggered, and it is currently difficult to test reasonable assumptions given the unknown performance of house prices over time. It is also irrefutable that progress towards zero carbon building is taking significantly longer than initially envisaged.

4.5 In all events, schemes can be negotiated individually taking into account the

marketability of the location, the design and build quality and the development mix. Ultimately, the relationship between RV and EUV will determine viability.

Impact of a different level of Section 106 contribution

4.6 We have tested our baseline analysis for Section 106 contributions (in

addition to affordable housing) at £5,000 per unit which is the figure discussed at the workshop.

4 The Code for Sustainable Homes: Final Report July 2008:

http://www.rbkc.gov.uk/pdf/63%20Cost%20Analysis%20of%20the%20Code%20for%20Sustainable%

20Homes%20July%202008.pdf


4.7 Section 106 costs (alongside affordable housing) however could be higher in some instances. At £10,000 per unit (a figure we have tested elsewhere for similar local authoritities) there would be a residual value reduction of £200,000 on a scheme of one hectare at 40 dph.

4.8 This will have a similar effect on residual value to that seen where a scheme

moves from Code 3 to Code 4; i.e. reductions in value of up to10% at the top end of the market and of around 30% in the mid market locations; all assuming 30% affordable housing.

4.9 As previously, the contributions will vary from site to site and can be

negotiated according to site specific conditions.

Lifetime Homes 4.10 Lifetime Homes may be included within new developments. The estimated

additional costs of meeting the (16) design criteria will be around £500 per unit and will not prove a constraint to viability.

4.11 Thus residual values could be expected to hold up reasonably well under

these circumstances. Fire Sprinklers and Part L Building Regulations (Conservation of fuel

and power; Regulatory Impact Assessment July 2012) 4.12 There has been much discussion, largely promoted by the Home Builders

Federation at LDP examinations in Wales, about the possible incidence of higher costs resulting from fire sprinklers and Part L of the building regulations.

4.13 A great deal of uncertainty surrounds this topic. The Welsh Government are

currently looking at the impacts on Section 106 delivery. The timing is uncertain, as indeed are the quantum of costs. Initial estimates suggested the total cost would run to some £20,000 per unit. More recent discussions (at for example the Conwy LDP examination) suggest additional costs of around £7,000 per unit.

4.14 Given the uncertainty around timing it is inappropriate to include these costs

as a baseline, particularly given the need to look at any additional impacts in the light of market change. It is highly unlikely that overall build costs will rise significantly in the face of a market where prices are stagnant or falling.

4.15 In all events, the impacts of regulation should be seen in the round. Land

owners generally understand that planning permission and windfall gains in land value result from policy. It follows that they should also understand that regulation may in some instances mean that their windfalls are not as great as perhaps initially expected.


4.16 Further, the true impact of these policies will not be seen until we get the BCIS Tender prices through which will demonstrate whether the policy is actually increasing overall build costs. It would not take much of a fall in general construction costs to offset the impact of the new policy.

Short and long term housing market trends 4.17 It is helpful, in contextualising the findings of Chapter 3 in particular, to look at

long term trends in the housing market. Figure 4.1 shows the relationship between the short and longer term housing market trends.

4.18 The figure shows trends for Wales as a whole. It demonstrates the short term

volatility in house prices against the long term straight line trend. The chart shows that current prices (indicated by the dotted line) are marginally below the long term (straight line) trend. The ‘y’ axis shows the Halifax Index.

Figure 4.1 Long term house price trend

Source: Halifax House Price Index August 2012

4.19 Figure 4.1 suggests that the analysis set out above has not, in the light of

longer term trends, been overly optimistic in the assesment of viability. Current prices are below the long term trend, even if only marginally. This means that our assessment of viability for policy making purposes, will be ‘conservative’ in nature and able to withstand an assertion that policy has not been realistically set.


5 LAND SUPPLY, SMALL SITE ANALYSIS AND USE OF COMMUTED SUMS Introduction

5.1 This chapter reviews the policy context and options for identifying the size of sites above which affordable housing contributions would be sought, in the national policy context.

5.2 The current policy position with regards to affordable housing delivery is set

out in Policy HC3 of the UDP which states that schemes should include an appropriate element of affordable housing in most parts of the Plan area. The qualifying threshold is 25 units or more or sites of one hectare.

5.3 Large and small villages are covered by policies EV16 and 17, and in these

locations affordable housing is sought on sites of 10 units or more, or where the site is 0.4 hectares or larger. Planning Obligations Supplementary Planning Guidance (SPG), 20105 sets targets of 25% to 30% of all dwellings being affordable housing.

5.4 This chapter provides an assessment of the profile of site supply and the likely

relative importance of small sites. It then considers practical issues about on-site provision of affordable housing on small sites and the circumstances in which collection of a financial contribution might be appropriate (and the principles by which such contributions should be assessed). Purpose of the Analysis

5.5 The ability of a local authority to deliver affordable housing depends on the

trigger point at which policy allows affordable housing to be sought. Clearly a low threshold provides a Council with a greater potential contribution to affordable housing than a high one.

5.6 In policy terms, Technical Advice Note 2 (TAN 2) from the Welsh Government,

Paragraph 10.3 states: ‘Local planning authorities should include in their development plan either site thresholds or a combination of thresholds and site specific targets: • Thresholds - a site-capacity threshold for residential developments on allocated and unallocated sites. Thresholds may either be set for the plan area or different thresholds (for example different site-capacity thresholds for different parts of the plan area or a range of site capacity thresholds in conjunction with differential affordable housing contributions) above which an element of affordable housing will be sought.’

5.7 Thus local authorities can set thresholds either on a local authority wide basis, or differentiated according to local market or land supply situations.

5 http://www.swansea.gov.uk/media/pdf/o/h/PO_SPG_FINAL.pdf


Overview of supply 5.8 In recommending whether the Council should adopt a lower threshold in the

LDP going forward, two issues are perhaps most important. First, whether small sites are necessarily less viable than large ones per se. And second, whether the Council really sees small sites as being significant in meeting overall housing needs.

5.9 We address the second question first. The Joint Housing Land Availability

Study (JHLAS) for 2011 looks at a range of schemes all with a capacity of 10 dwellings or more.

5.10 The JHLAS concluded that a five year land supply exists, with a significant

reliance on large sites. The Table below (Table 5.1) shows how this capacity is broken down. Table 5.1 Housing Land Supply – April 2011 to 2016 (Large Sites)

Source: Swansea JHLAS 2011.

5.11 The assessment of future supply in the JHLAS is based on recent

completions. Capacity from small sites is estimated at 556 units for the purposes of the five year land supply. This equates to completions 2006 to 2011.

5.12 Figure 5.1 shows the relationship between completions on small and large

sites over the same period (2006 to 2011). It shows JHLAS completions broken down by four main areas which are based on the strategic housing policy zones contained in the UDP:

• The Gower (including Gower Fringe and the AONB) (1 and 2)

• Greater North West Swansea; (3)

• North, East and Central Swansea; (4)

• West Swansea; (5)


Figure 5.1 Housing completions by sub market

5.13 These areas are shown the map below:


Link between JHLAS and viability areas

5.14 It may helpful to show the approximations between the JHLAS areas (as in the map above) and the viability sub markets. These approximations are shown in Table 5.2 below:

Table 5.2 JHLAS and Viability Sub Markets

SHMA Areas Viability Sub Markets

Greater North West Swansea Western Fringe Settlements

City Centre

Swansea East North, East and Central Swansea

Swansea North

Mumbles West Swansea

Swansea South West

Gower Western Gower

Gower Fringe Swansea West

5.15 These approximations are helpful in understanding potential policy options

with respect to thresholds which are now discussed. 5.16 Figure 5.1 above shows housing completions by (JHLAS) sub markets. It

shows that in recent years the lion’s share of development has been built on larger (than 10 dwellings) sites. Generally speaking the percentage of dwellings completed on small sites across the local authority area has been less than 20%, although in West Swansea small sites make up a greater percentage of total completions in that sub market.

5.17 The precise percentages of completions on small sites (by sub market) are:

Greater North West Swansea, 12.8% (small site completions of total); North, East and Central Swansea 13.1% of total for that sub market, West Swansea, 28.4% of total for that sub market, with Gower having 100% small sites.

5.18 This presents a significant number of dwellings built on smaller sites. 5.19 On the face of it, and taking into account the general approximations drawn

here, it would seem sensible to draw a distinction in the threshold between, on the one hand the largely urban area (encompassing Greater North West Swansea and North, East and Central Swansea), and on the other, West Swansea and the two Gower sub market areas.

5.20 In terms of the viability sub markets, this will mean a lower threshold in

Western Gower, Mumbles and Swansea West, and a higher threshold in the other (largely urban) locations.

5.21 Where to set the threshold will depend on viability considerations, which are

now looked at.


Small sites - overview 5.22 Small sites (here defined as less than 10 dwellings) vary in nature and size.

As a broad overview (see Figure 5.2), sites of one dwelling are highly significant.

5.23 Sites of two, three and four dwellings are also important in the overall supply

of housing from small sites. Figure 5.2 Scheme sizes – small sites (2006 to 2011)

Use of commuted sums 5.24 As a general principle, we recognise that seeking on-site provision of

affordable housing will be the first priority and that provision of affordable housing on an alternative site or by way of a financial payment in lieu (or commuted sum) should only be used in exceptional circumstances.

5.25 Where commuted sums are sought as an alternative to direct on or off-site

provision, an appropriate principle for assessing financial contributions is that they should be of broadly equivalent value. Our approach is that the commuted sum should be equivalent to the ‘developer/landowner contribution’ if the affordable housing was provided on site. One way of calculating this is to take the difference between the residual value of 100% market housing and the residual value of the scheme with the relevant percentage and mix of affordable housing. For example:

RV at 100% market housing £800,000 RV at say 30% affordable housing £350,000 Commuted sum therefore: £450,000

5.26 If the ‘equivalence’ principle is adopted, then the decision of the local authority

to take a commuted sum will be based on the acceptability or otherwise of off-site provision as a housing and spatial planning solution. In other words, the local authority should not take viability into account when deciding whether to deliver on or off site contributions.


5.27 Any concerns about scheme viability (whatever size of site) should be reflected by providing grant or altering tenure mix, or by a ‘reduced’ affordable housing contribution whether provided on-site, off-site or as a financial contribution. Other planning obligations may also need to be reduced under some circumstances.

5.28 However, if affordable housing is sought from very small sites, in certain

circumstances it becomes impractical to achieve on site provision e.g. seeking less than 33% on a scheme of 3 dwellings or less than 50% with a scheme of 2 dwellings. There will also be occasions where on-site provision can only deliver a partial contribution towards the proportion of affordable housing sought e.g. 40% affordable housing in a scheme of 3 dwellings would deliver one affordable unit on site (representing 33% of provision).


6 CASE STUDY VIABILITY ANALYSIS – SMALLER SITES Introduction

6.1 The analysis in Chapters 3 and 4 provides a good indication of the likely

viability of sites across the Swansea local authority area. The analysis in those chapters will apply for large as well as small sites (on a pro rata hectare basis). We do not have any systematic evidence to suggest that the economics change significantly between large and small sites.

6.2 Data produced by the Valuation Office has consistently shown that small sites

can achieve higher land values than larger ones, suggesting that the economics of developing smaller sites could actually be more favourable than developing larger ones.

6.3 Therefore, there is no real need to review in detail viability issues for small

sites. However, for the sake of further illustration, and recognising that there may be circumstances which impact on the viability of some types of smaller sites, it is felt helpful to review the development economics of some illustrative case studies of smaller sites. Case Study sites

6.4 In this section we review a number of case study developments which are

examples of small sites for residential development. 6.5 An analysis of the data for small sites shows that a significant number of

developments are single dwellings. Our experience suggests that many of these schemes will be built on residential amenity land: garden land, other back land and land adjacent existing dwellings. We test these sites in the analysis below.

6.6 On the basis of the data, we have selected three case studies for further

investigation. These cover the very small single dwelling sites as well as those sites of less than five dwellings. Table 6.1 tests these schemes in a sample of sub market circumstances.


Table 6.1 Case Study sites

Case Study

No of dwellings

Type of new development

Site Size (Ha)

Dph Comment

A 1 1 x 4 bed detached house

0.03 32 Significant source of supply. Garden land is a key source. Covers ‘one for one’ schemes.

B 2 1 x 3 bed detached house; 1 x 4 bed detached house

0.05 40 Covers small new build schemes on residential amenity land

C 4 2 x 3 bed semis; 2 x 3 bed detached

0.1 40 Covers new build and schemes where 4 new build replace one existing dwelling.

For each case study we have undertaken an analysis of residual values for a selection of sub markets. We test at 0%, 10%, 20%, 30%, 40%, 70% and 100% affordable housing. All the other assumptions used are the same as for the main analysis described in Chapter 3. Outputs are by scheme and the equivalent per hectare. Case Study A – Develop one detached house on a 0.03 ha site

6.7 The first scenario assumes the development of one four bed detached house.

The results, with the affordable housing impacts are shown in Table 6.2:


Table 6.2 Develop one detached house

% Affordable Housing

0% 10% 20% 30% 40% 70% 100%

Western Gower

(RV for scheme) £114,000 £101,000 £87,000 £72,000 £62,000 £24,000 -£14,000

(RV per ha - £m) £3.80 £3.37 £2.90 £2.42 £2.07 £0.80 -£0.47

City Centre

(RV for scheme) £46,000 £38,000 £28,000 £20,000 -£5,000 -£13,000 -£39,000

(RV per ha - £m) £1.53 £1.27 £0.93 £0.67 -£0.17 -£0.43 -£01.30

Western Fringe

Settlements

(RV for scheme) £14,000 £7,000 £0.00 - £6,000 -£13,000 -£31,000 -£51,000

(RV per ha - £m) £0.47 £0.23 £0.00 -£0.20 -£0.43 -£1.03 -£1.70

Swansea North

(RV for scheme) -£14,000 -£20,000 -£24,000 -£29,000 -£33,000 -£47,000 -£62,000

(RV per ha - £m) -£0.47 -£0.67 -£0.80 -£0.97 -£1.10 -£1.57 -£2.07

Note: Table shows residual values in a selection of market value areas: the upper figure is the residual value for the scheme and the lower figure is the equivalent residual value per hectare (in £s million).

6.8 Table 6.2 shows that the development of one new detached house will generate a reasonably robust residual value in the higher to middle value sub markets. For example at 40% affordable housing in the Western Gower, plot residual value will be around £60,000.

6.9 At the lower end of the market, plot values reflect the High Level Testing

analysis. That is to say in some instances, they are negative. This indicates non viability, although some sites will not reflect average (low) values, and hence be viable.

6.10 Where a single new house replaces an existing dwelling we would normally

expect the economics to prevent an affordable housing contribution on the basis that EUV will be too high. Even at the top of the market such a scheme will only generate around £100,000 for a building plot at a 10% affordable housing contribution – on the basis of a market unit. In most cases, we do not think this will be sufficient to cover the property acquisition costs for an existing market dwelling, unless these are exceptionally favourable.

6.11 This type of scheme (demolition and replacement) may work best for self build

projects where a profit margin may be lower, thereby raising the residual value.


Case Study B – Develop two detached houses (one 3 bed and one four bed) on a 0.05 ha site

6.12 The viability of developing two detached houses rather than one will depend

on a number of factors including location, development mix and the intensity to which the site is developed. Table 6.3 shows residual values for the development of two detached houses. Table 6.3 Develop two detached houses


0% 10% 20% 30% 40% 70% 100%

Western Gower

(RV for scheme) £208,00

0 £185,000 £168,000

£139,00

0 £128,000 £68,000 £7,000

(RV per ha - £m) £4.16 £3.70 £3.36 £2.78 £2.56 £1.36 £0.14

City Centre

(RV for scheme) £84,000 £71,000 £58,000 £45,000 £32,000 -£7,000 -£47,000

(RV per ha - £m) £1.68 £1.42 £1.16 £0.90 £0.64 -£0.14 -£0.94

Western Fringe

Settlements

(RV for scheme) £20,000 £11,000 £2,000 - £8,000 -£18,000 -£46,000 -£75,000

(RV per ha - £m) £0.40 £0.22 £0.04 -£0.16 -£0.36 -£0.92 -£1.50

Swansea North

(RV for scheme) -£2,000 -£30,000 -£37,000 -£72,000 -£51,000 -£72,000 -£24,000

(RV per ha - £m) -£0.48 -£0.60 -£0.74 -£1.44 -£1.02 -£1.44 -£0.48


6.13 With schemes of two dwellings, similar issues apply (to one dwelling). For

infill, backland and garden plots, we believe that a significant uplift in residual value will occur in the middle to higher value sub markets and here a contribution to affordable housing would not make development unviable.

6.14 As previously, the lower value sub markets present significant viability

problems and absolute as well as relative returns will be low even where prices are above the average for the wider area.

6.15 In all cases, whether land comes forward for housing will depend on existing

use considerations. With replacement dwelling schemes (i.e. one demolished and two new build) we think it unlikely that an affordable housing contribution will normally be viable.


Case Study C – Develop four dwellings (Two semi-detached and two detached houses) on a 0.1 ha site

6.16 A significant number of schemes in the area involve the development of three

to five dwellings (we take here four dwellings as the average). We have modelled here the development of two, three bed semi-detached houses and two, four bed detached houses. Table 6.4 Develop two semis and two detached houses


0% 10% 20% 30% 40% 70% 100%

Western Gower

(RV for scheme) £417,000 £372,000 £327,000 £254,00

0 £237,000 £43,000 £72,000

(RV per ha - £m) £4.17 £3.72 £3.27 £2.54 £2.37 £0.43 £0.72

City Centre

(RV for scheme) £193,000 £162,000 £131,000 £100,00

0 £70,000 -£24,000 -£117,000

(RV per ha - £m) £1.93 £1.62 £1.31 £1.00 £0.07 -£0.24 -£0.12

Western Fringe

Settlements

(RV for scheme) £73,000 £49,000 £26,000 £3,000 -£20,000 -£92,000 -£162,000

(RV per ha - £m) £0.73 £0.49 £0.26 £0.03 -£0.20 -£0.92 -£1.62

Swansea North

(RV for scheme) -£15,000 -£33,000 -£51,000 -£69,000 -£86,000 -£141,000 -£195,000

(RV per ha - £m) -£0.15 -£0.33 -£0.51 -£0.69 -£0.86 -£0.14 -£1.95


6.17 This case study generates reasonably strong residual values, reflected in

most scenarios tested for the higher and middle value areas. In the City Centre (as a medium value area), a residual value of equivalent £1 million per hectare is generated at 30% affordable housing.

6.18 At the lower value end of the market, residual values are low and negligible or

negative. 6.19 Where a scheme for four new build units replaces a demolished dwelling, we

still believe that in most cases the Council will only exceptionally be able to take an affordable housing contribution. Commentary on the results

6.22 This section on case studies is mainly illustrative, and looks at the economics

with particular reference to smaller sites including consideration of achieved residual values for different sites and how they compare with existing use values.


6.23 Sites with a low number of dwellings (smaller sites) are not necessarily less viable than larger schemes.

6.24 Where a dwelling is to be replaced by one or two new dwellings, we believe

the economics are not favourable to the provision of affordable housing. Normally in excess of four new dwellings will be needed where one is demolished and this applies only to the highest value locations. Elsewhere, well in excess of four new dwellings will be needed to be developed where one existing dwelling is demolished if affordable housing contributions are not to hold sites back.


7 MAIN FINDINGS AND CONCLUSIONS Sub market areas

7.1 The analysis of the housing market in the Swansea local authority area

indicates that there are eight sub markets: Mumbles, Western Gower, Swansea South West, City Centre, Swansea West, Western Fringe Settlements, Swansea East, and Swansea North.

7.2 It can be seen from the analysis that house prices vary significantly across the

sub market areas and these are reflected in the residual values for the different scenarios we tested. Relatively insignificant apparent differences in house prices can lead to significant differences in residual values. The range of residuals shown suggests a varying or split affordable housing target to be a reasonable stance to take.

7.3 Residual value is dependent not only on location but also on the density and

development mix adopted. Residual values and scenario testing

7.4 The analysis shows very significant variation in residual values across the City

and County of Swansea area. There is a broad split in residual values. This falls between the Mumbles and Western Gower (one broad market), Swansea South West, City Centre and Swansea West (another broad market) and, the Western Settlements, Swansea East and Swansea North.

7.5 At 30 dph for example, residual value is almost £1.8 million per hectare at

40% affordable housing in Mumbles; in Western Gower it is around £1.4 million. By contrast, in Swansea West (by no means the weakest sub market) at nil affordable housing, residual value is around £600,000 per hectare.

7.6 These differences make it easier to support a policy position where the

affordable housing target varies by location or sub market. 7.7 Residual value generally increases with density. However care is needed

since the level of residual is also affected by the percentage of affordable housing. The conclusions depend further on the relationship between density and development mix. Higher density tends to increase residual value, but only up to a point. Higher density, combined with negative residual simply makes the residual more negative, all other things equal.

7.8 It should be emphasised that the analysis reflects a 17% net profit margin to

the developer which is based on gross development value and a £5,000 per unit Section 106 contribution (over and above the affordable housing). The impact of planning contributions on viability has been tested at a baseline position of £5,000 per dwelling. The impact of this will vary by sub market, but will most affect viability at the lower end of the market.


7.9 Further, that all the results described above are based on nil grant and assume that the intermediate affordable element of the affordable housing is 50% Social Rent and 50% Intermediate Affordable (Rent) Housing.

7.10 The Authority will need to monitor the local requirements for Social Rented

and Intermediate affordable housing and balance these requirements with the viability findings of this report. Site supply and smaller sites

7.11 The analysis of recent trends of the Housing Land Supply data suggests that

the Council will rely to a significant extent on larger sites in meeting housing demands and needs.

7.12 The data suggests that a significant proportion of homes will be built on sites

with a capacity of 10 or more dwellings. The Housing Land Supply figures set out a capacity of 8227 dwellings on these sites. An additional 556 units are foreseen on smaller sites. This is a relatively low percentage (6%) of the total.

7.13 The precise percentages by market area are: Greater North West Swansea,

12.8% (small site completions from total); North, East and Central Swansea (13.1% of total) and West Swansea, 28% of total. Gower has 100% small sites.

7.14 A case could be made on this basis for a lower threshold in West Swansea

and to a lesser extent, North, East and Central Swansea. Gower is also clearly a location where smaller sites are likely to predominate. Smaller sites and viability

7.15 If the local planning authority wished to consider a threshold below the current

levels of 10 and 25 (depending on the area) the information provided in this report about the viability of small sites would become important as part of the evidence for a reduced threshold.

7.16 Viability is sensitive to the relationship between existing, or, where justified,

alternative use value. Many smaller schemes involve the development of residential ancillary land – gardens, back land or infill. We do not believe, based on the likely very significant uplift in value, there is a viability problem here in the middle and higher value areas, and therefore the Council could, if it chooses, take affordable housing contributions from these types of site.

7.17 Overall, it is important to highlight that it is not the size of the site per se that

causes difficulties with viability, but the nature of the existing or alternative use. Moreover location, density and development mix are better indicators of viability generally.


Use of payments in lieu 7.18 Where a financial payment in lieu of on-site provision of affordable housing (or

commuted sum) is to be sought, it should be of “broadly equivalent value” to on-site provision. This means it should put the land owner in the same financial position whether an on or off site contribution is taken. This approach is, on the evidence we have considered, a reasonable one to take in policy terms.

7.20 If this ‘equivalence’ principle is adopted, then the decision of the local authority

to take a commuted sum will be based on the acceptability or otherwise of on-site provision as a housing and spatial planning solution, not in response to viability issues. Conclusions and policy options

7.21 There is no detailed government guidance setting out how targets should be

assessed, based on an assessment of viability. An assessment of viability for policy setting purposes might have reference to a range of factors including: past and recent delivery of affordable housing, residual values, the relationship between residual values and existing use values, what has been found to be robust targets in similar authorities through the LDP process, the land supply equation and its relationship to the policy weight given to affordable housing delivery in the wider context of housing supply generally. To some extent land owner expectations are also significant. The experience of the consultant, working in conjunction with the local authority and through developer workshops helps to arrive at a robust policy stance, as outlined below

7.22 The analysis has led us to suggest three options for setting affordable housing

proportions for spatial planning policy purposes which would be a reasonable policy conclusion from the viability information presented. In coming to our conclusions, we again note that viability is not the only consideration that the local authority will need to take into account in deciding on its policies and that it will need to consider the priority given to achieving affordable housing delivery to help address the high level of need for affordable housing in the City and County.

7.23 We consider that the three options are:

a. An overall target of 20% which would be applied across the City and County area;

b. Introduce a three way target reflecting more the specifics of local sub markets. If this approach were adopted we would suggest: a 40% target for Mumbles and Western Gower; a 30% target for Swansea South West, City Centre and Swansea West, and a 10% target for developments in the Western Fringe Settlements, Swansea East and Swansea North.


c. A more bespoke, four way target. This would require a (high) 70% affordable housing in Mumbles and Western Gower, a 30% target in Swansea South West and City Centre, a 20% target in Swansea West and Western Fringe Settlements and a nil target in Swansea East and Swansea North.

7.24 The split target approach reflects more specifically local market

circumstances. However, the Council will need to take into account the pattern of potential land supply for housing. Setting a lower (than overall) target may not optimise delivery of affordable housing in higher value areas (‘hot spots’). A single target approach, where this applies, is probably a more sensible strategy.

Viability on individual sites

7.25 Our analysis has indicated that there will be site-specific circumstances where

achievement of the affordable housing proportions set out above may not be possible. This should not detract from the robustness of the overall targets but the Council will need to take into account specific site viability concerns when these are justified.

7.26 If there is any doubt about viability on a particular site, it will be the

responsibility of the developer to make a case that applying the Council’s affordable housing requirement for their scheme makes the scheme not viable. Where the Council is satisfied this is the case, the Council has a number of options open to it (including changing the mix of the affordable housing and supporting a bid for grant funding from the Welsh Government and/or using their own funds) before needing to consider whether a lower level of affordable housing is appropriate. In individual scheme negotiations, the Council will also need to consider the balance between seeking affordable housing and its other planning obligation requirements.

Dealing with viability changes over time 7.27 It is impractical for the Council to have to review the policy too frequently. Our

findings should be robust over the medium to longer term. There will however be instances where sites are to be developed over a long time frame or where changing local market conditions are envisaged.

7.28 Under these circumstances, the Council will need to have in place a protocol

for dealing with deferred contributions. There are a number of options here. One, most commonly used, is to compute contributions by reference to the GDV (Gross Development Value) of a scheme; in other words, as price levels increase, sums become payable to the Council. The precise mode of calculation can be bespoke to the scheme, with, in some instances, the developer taking a greater share of the downside risk.


7.29 There are other arrangements for calculating deferred contributions. One approach is to agree for a re-run of the appraisal models using updated figures at an agreed point in time in the whole scheme. Typically, this will relate to a given phase. This approach will normally be based on any increases in residual value attributable to the updated scheme position. Thresholds

7.30 The current policy position on thresholds with regards to affordable housing

delivery is 25 dwellings in the larger settlements and 10 dwellings in the smaller settlements (EV16 and EV17).

7.31 Given the level of need for affordable housing in the City and County and the

lack of any systematic evidence to indicate that the viability of smaller sites is a particular problem, there is a case for a threshold significantly lower than 25 and 10 dwellings, as policy currently stands.

7.32 However, the analysis of the housing supply data suggests that there is

relatively low reliance on small sites to deliver affordable housing, with the exception of the rural areas.

7.33 Overall therefore we suggest a split threshold across the City and County

area. The split threshold could be set very low for Western Gower – say at one or two dwellings, with a threshold of say 5 for Mumbles, Swansea South West, Swansea West, say 10 for the Western Fringe Settlements and say 15 for all other sub markets.

7.34 If the Council were to adopt say a threshold of one unit, this would not be

inconsistent with the viability analysis, although in practice affordable housing would only likely be delivered in the middle to higher value sub markets.

7.35 Where the threshold is set depends not only on viability. In practice the

Council will need to consider the implications for its workload in reducing the threshold which could trigger a significant additional number of affordable housing negotiations. Commuted sums

7.37 Where commuted sums are collected a possible approach to calculating the

appropriate sum sought is to base this on the equivalent amount which would be contributed by the developer/landowner were the affordable housing provided on site. This is expressed as follows: RV 100% M = Residual value with 100% market housing

RV AH = Residual value with X% affordable housing (say 30%) Equivalent commuted sum = RV 100% MV minus RV AH


7.38 Where commuted sums are collected, the Council will need to have in place a strategy to ensure the money is spent effectively and in a timely manner. Options for spending will be a matter for the Council to consider but could include supporting schemes which would otherwise not be viable, increasing the amount of social rented housing in a scheme, increasing the proportion of family units in a scheme, seeking higher quality affordable housing (e.g. a higher level of the Code for Sustainable Homes).


Appendix 1 CITY AND COUNTY OF SWANSEA HOUSING VIABILITY STUDY – WORKSHOP – FRIDAY 24TH JUNE 2011 – COUNCIL OFFICES SWANSEA Delegates Andrew Jones, Family Housing Association Gareth Jenkins, Gwalia Housing Society Elfed Roberts, Gwalia Housing Society Geraint Nutt, Coastal Housing Group Ben Davies, Coastal Housing Group Richard Lloyd, First Choice Gemma Davies, Lovell Partnerships Ltd Ben Francis, Hygrove Housing Andrew Golland, Three Dragons Paul Meller, City and County of Swansea (CCS) Richard Jones, CCS Margaret Weston, CCS Lucy Kelly, CCS Andrew North, CCS Kate Sinclair, CCS Tom Gronow, CCS Tom Evans, CCS David Rees, CCS Apologies Richard Price, House Builders Federation Wales Keith Richardson, Bullock Cymru Workshop Notes A workshop was held on Friday 24th June 2011 at the City and County of Swansea Council offices. Representatives of the development industry, landowners and RSLs were in attendance. The Council and Three Dragons would like to thank all those in attendance for their inputs to the study. At the workshop Three Dragons gave a presentation summarising the methodology and outlining the process of higher level and detailed testing which would be carried out to determine viability targets. It was agreed that the Powerpoint presentation (attached) would be made available to all Workshop participants in conjunction with feedback notes.


1 Introduction Three Dragons has been commissioned to carry out an Affordable Housing Viability Appraisal in accordance with the requirements of TAN2 in order to establish a robust evidence base to support emerging policy requirements as set out in the LDP. The project includes: i) An Affordable Housing Viability Study to guide the setting of new affordable

housing targets and thresholds for the Local Development Plan; ii) A Financial Appraisal Toolkit to assist negotiations on specific sites. The purpose of the meeting was to discuss viability assumptions and the overall methodology. The purpose of the study is to support the evidence base for realistic and accurate policies which reflect local viability conditions. 2 Basis for interpreting viability The main methodology of the viability model was outlined. This is based upon scheme revenue versus development costs (including developer margin and S106 agreements). Delegates agreed in principle to the over-riding method for assessing viability proposed by Three Dragons. This measures viability by reference to residual scheme value less the existing or alternative use value of a site. It was stated that in two schemes 30% affordable housing had been achieved and that viability was generally not an issue. 3 Overall methodology Three Dragons explained that the approach to the study will be two stage with the first stage focusing on testing a notional one hectare site, assuming different development mixes and different percentages of affordable housing, with the second stage looking at a range of generic site types, ranging from large green field through to small and large brown field sites. Participants at the workshops supported the approach set out (see also Powerpoint which explains the approach diagrammatically). Three Dragons stated that this was an approach which has been accepted elsewhere at Core Strategy Exam and is also adopted in the SEWSPG Good Practice Guide. Data sources (e.g. HMLR for house prices and BCIS for build costs) were explained to participants. The need for best primary data sources based on a large sample was understood and agreed.


4 Sub markets and market values A key part of the study will involve the analysis of viability at a sub market level. Sub markets will be defined primarily by house prices. The Powerpoint presentation shows a table of areas. Participants were invited to submit comments on submarkets by email to the Council. It was explained by Three Dragons that prices were derived from three years worth of HM Land Registry data and then adjusted to today’s values. AG clarified that the prices are indicative new build for June 2011. AG explained the intention of the submarket area analysis could be to provide a range of policy options to the Council which reflect any house price differences. It was stated that delegates would prefer to comment on prices and sub markets following the workshop. One delegate stated that Swansea Waterfront should have its own sub market. Another stated that Southgate and Pennard should not fall within the same sub market. All – please note – prices and market areas are included in the Powerpoint Presentation. 5 Land values Delegates were asked what they thought current land values were. It was agreed that these are difficult to generalise. Delegates are asked to feedback with as much information as possible here, thanks. 6 Density and development mix Three Dragons set out the suggested range of schemes which the DAT will test. These ranged from 20, 30, 40, 50 and 60 dwellings per hectare. It was suggested that the higher densities may not be appropriate in Swansea. However, it was pointed out that apartment developments have nevertheless been built and that a higher density test would be relevant. There were no comments on the particular mix of units at each density. It was stated that DQ1 unit sizes can provide a basis for testing. 7 Thresholds and the viability of smaller sites The current affordable housing policy is set out in the Unitary Development Plan (Adopted November 2008). It states that (Policy HC3):


‘The Council will seek to negotiate the inclusion of an appropriate element of affordable housing on sites which are suitable in locational/accessibility terms and where this is not ruled out by exceptional development costs. In most parts of the Plan area such negotiations will focus on new housing developments of 25 or more dwellings or sites of 1ha or more or phases of such developments. However, in the large and small villages subject to policies EV16 and EV17 and Swansea West Strategic Housing Policy Zone where opportunities for housing development are more constrained, negotiations for the inclusion of a percentage of affordable housing in new housing schemes will be sought on new housing developments of 10 or more dwellings or sites of 0.4ha or more or phases of such developments. Policies EV16 and EV17 relate to settlements west of Swansea and in Gower. These policies relate to small and large villages respectively. It was suggested at the workshop that threshold in the West and Gower is currently too high and misses many small sites which could provide affordable housing. 8 Development costs Three Dragons presented the proposed page that will be used for the testing framework. This is included in the Powerpoint presentation. It was explained that the base build costs per square metre will be calculated from the BCIS data source. It was stated that Three Dragons will test the analysis at a 17% return rate on gross development value for the market element of a scheme and at 5% for the affordable element of a scheme. One (housing association) delegate suggested build costs of around £1,300 per square metre. Another suggested £1,250 per square metre. These figures include professional fees. Weather durable materials are very important in the Swansea area. Flood mitigation costs will be significant on some sites. Code for Sustainable Home costs were discussed. It was suggested that costs at Code 5 can be as high as £1,800 per square metre. 9 Section 106 costs (in addition to affordable housing) It was recognised that Section 106 costs (in addition to affordable housing) will vary from site to site, and it was suggested that it is difficult to establish from the Council what contributions are required. One issue is drainage in West Swansea around the Burry Inlet. The costs of mitigation are anticipated to be significant. It is suggested that a cost of £5,000 per unit is a reasonable baseline figure, but with an additional £10,000 per test at a higher level.


10 Affordable housing tests and issues Three Dragons suggested a range of policy scenarios which should be tested and questioned whether they were reasonable for the LDP plan period and the various areas of the City and County. These were: 10%, 15%, 20%, 25%, 30%, 35% and 40%. It was suggested (please see Powerpoint presentation) that a 70% Social Rent: 30% HomeBuy (Shared Ownership) tenure split be applied. However, it was suggested that a revised Housing Market Assessment might suggest a different mix – with a greater percentage of Intermediate units. It was suggested that a 50% (SR) and 50% (HomeBuy) mix be tested. Transfer prices – it was stated that transfer prices are set at 42% of ACG, often on a tenure neutral basis. A key issue is affordability in the higher value areas. In some locations, prices are 15 x local incomes. It was suggested that a Local Needs policy should be tested for viability. 11 Next Steps If you could direct your comments to Andrew Golland at the email address below, this would greatly assist in taking forward the study. Andrew Golland [email protected]


Appendix 2 Three Dragons model: Method statement The Toolkit provides the user with an assessment of the economics of residential development. It allows the user to test the economic implications of different types and amounts of planning obligation and, in particular, the amount and mix of affordable housing. It uses a residual development appraisal approach which is the industry accepted approach in valuation practice. The Toolkit compares the potential revenue from a site with the potential costs of development before a payment for land is made. In estimating the potential revenue, the income from selling dwellings in the market and the income from producing specific forms of affordable housing are considered. The estimates involve (1) assumptions about how the development process and the subsidy system operate and (2) assumptions about the values for specific inputs such as house prices and building costs. These assumptions are made explicit in the guidance notes. If the user has reason to believe that reality in specific cases differs from the assumptions used, the user may either take account of this in interpreting the results or may use different assumptions. The main output of the Toolkit is the residual value. In practice, as shown in the diagram below, there is a ‘gross’ residual value and a ‘net’ residual value. The gross residual value is that value that a scheme generates before Section 106 is required. Once Section 106 contributions have been taken into account, the scheme then has a net residual value, which is effectively the land owner’s interest.


Appendix 3 Results – Residual values – no grant scenarios (£s million per

hectare)

20 DPH

0% 10% 20% 30% 40% 70% 100%

Mumbles £2.09 £1.88 £1.67 £1.46 £1.25 £0.62 £0.00

Western Gower £1.74 £1.55 £1.37 £1.18 £0.99 £0.42 -£0.14

Swansea South West £1.13 £0.98 £0.84 £0.68 £0.53 £0.09 -£0.36

City Centre £0.77 £0.65 £0.52 £0.40 £0.26 -£0.12 -£0.50

Swansea West £0.61 £0.50 £0.38 £0.26 £0.14 -£0.21 -£0.56

Western Fringe S'ts £0.26 £0.16 £0.06 £0.03 -£0.13 -£0.41 -£0.69

Swansea East £0.12 £0.04 -£0.05 -£0.14 -£0.23 -£0.50 -£0.74

Swansea North -£0.07 -£0.14 -£0.22 -£0.30 -£0.36 -£0.59 -£0.81

30 DPH

0% 10% 20% 30% 40% 70% 100%

Mumbles £2.91 £2.66 £2.38 £2.09 £1.79 £0.93 £0.05

Western Gower £2.48 £2.21 £1.95 £1.69 £1.43 £0.65 -£0.14


City Centre £1.13 £0.95 £0.77 £0.60 £0.42 -£0.11 -£0.64

Swansea West £0.90 £0.74 £0.58 £0.41 £0.25 -£0.24 -£0.73


Swansea East £0.22 £0.10 -£0.02 -£0.14 -£0.26 -£0.62 -£0.98

Swansea North -£0.05 -£0.15 -£0.26 -£0.36 -£0.46 -£0.77 -£1.08

40 DPH

0% 10% 20% 30% 40% 70% 100%

Mumbles £3.68 £3.32 £2.96 £2.59 £2.22 £1.13 £0.27

Western Gower £3.02 £2.69 £2.37 £2.04 £1.72 £0.75 -£0.23


City Centre £1.36 £1.14 £0.93 £0.70 £0.48 -£0.18 -£0.85

Swansea West £1.08 £0.87 £0.67 £0.47 £0.26 -£0.34 -£0.95


Swansea East £0.25 £0.10 -£0.05 -£0.20 -£0.35 -£0.80 -£1.26

Swansea North -£0.09 -£0.23 -£0.35 -£0.48 -£0.61 -£1.00 -£1.35

50 DPH

0% 10% 20% 30% 40% 70% 100%

Mumbles £4.51 £4.06 £3.60 £3.15 £2.69 £1.33 -£0.03

Western Gower £3.75 £3.34 £2.93 £2.53 £2.12 £0.90 -£0.32


City Centre £1.70 £1.42 £1.14 £0.86 £0.59 -£0.25 -£1.08


Swansea West £1.31 £1.08 £0.83 £0.58 £0.32 -£0.45 -£1.22


Swansea East £0.31 £0.12 -£0.07 -£0.26 -£0.46 -£1.04 -£1.60

Swansea North -£0.13 -£0.29 -£0.45 -£0.62 -£0.78 -£1.28 -£1.76

100 DPH

0% 10% 20% 30% 40% 70% 100%

Mumbles £5.66 £4.99 £4.31 £3.64 £2.96 £0.94 -£1.09

Western Gower £4.65 £4.04 £3.43 £2.82 £2.21 £0.37 -£1.47

Swansea South West £2.71 £2.21 £1.73 £1.24 £0.75 -£0.72 -£2.20

City Centre £1.63 £1.21 £0.78 £0.36 -£0.06 -£1.33 -£2.61

Swansea West £1.13 £0.74 £0.34 -£0.05 -£0.44 -£1.61 -£2.78

Western Fringe S'ts £0.33 -£0.01 -£0.35 -£0.69 -£1.04 -£2.06 -£3.09

Swansea East -£0.24 -£0.55 -£0.86 -£1.16 -£1.47 -£2.39 -£3.30

Swansea North -£0.96 -£1.22 -£1.49 -£1.75 -£2.01 -£2.78 -£3.57


Appendix 4 Worked example; one hectare site at 40 dph at 30% affordable housing in Swansea West


GLOSSARY OF TERMS A Abnormal Development Costs: costs associated with difficult ground conditions e.g. contamination. Affordable Housing: housing that includes Social Rented and Intermediate Affordable housing. Affordable Rented Housing: housing let at above Social Rented levels and up to 80% of Open Market Rent. Alternative Use Value (AUV): The value of a site in an alternative use. Appraisal: development calculation taking into account scheme revenue and scheme cost and accounting for key variables such as house prices, development costs and developer profit. B Base Build Costs: including costs of construction: preliminaries, sub and superstructure; plus an allowance for external works. C Commuted Sum: a sum of money paid by the applicant in lieu of providing affordable housing on site. Code for Sustainable Homes: an assessment method for rating and certifying the performance of new homes. It is a national standard for use in the design and construction of new homes with a view to encouraging continuous improvement in sustainable home building. D Developer’s Profit or Margin: a sum of money required by a developer to undertake the scheme in question. Profit or margin can be based on cost, development value; and be expressed in terms of net or gross level. Developer Cost: all encompassing term including base build costs (see above) plus any additional costs incurred such as fees, finance and developer margin. Development Economics: the assessment of key variables included within a development appraisal; principally items such as house prices, build costs and affordable housing revenue. E Existing Use Value (EUV): the value of a site in its current use; for example, farmland, industrial or commercial land. F Finance (developer): usually considered in two ways: Finance on the building process; and finance on the land. Relates to current market circumstances.


G Gross Development Value (GDV): the total revenue from the scheme. This may include housing as well as commercial revenue (in a mixed use scheme). It should include revenue from the sale of open market housing as well as the value of affordable units reflected in any payment by a housing association(s) to the developer. I Intermediate Affordable Housing: Intermediate housing is that where prices or rents are above those of social rent but below market housing prices or rents. L Land Value: the actual amount paid for land taking into account the competition for sites. It should be distinguished from Residual Value (RV) which is the figure that indicates how much should be paid for a site. Lifetime Homes Standard: is a set of 16 design criteria that provide a model for building accessible and adaptable homes M Market Housing: residential units sold into the open market at full market price to owner occupiers, and in some instances, property investors. Usually financed through a mortgage or through cash purchase in less frequent cases. P Planning Obligation: a contribution, either in kind or in financial terms which is necessary to mitigate the impacts of the proposed development. Affordable housing is a planning obligation as are, for example, education and open space contributions. (see Section 106). Proportion or Percentage of Affordable Housing: the proportion of the scheme given over to affordable housing. This can be expressed in terms of units, habitable rooms or floorspace. R Residual Valuation: a key valuation approach to assessing how much should be paid for a site. The process relies on the deduction of development costs from development value. The difference is the resulting ‘residue’. Residual Value (RV): the difference between Gross Development Value (GDV) and total scheme costs. Residual value provides an indication to the developer and/or land owner of what should be paid for a site. Should not be confused with land value (see above). Registered Provider (RP): a housing association or a not for profit company registered with the Homes and Communities Agency and which provides affordable housing.


Registered Social Landlords (RSL): are also known as Housing Associations. Housing Associations are independent, not-for-profit organisations, that provide homes for people in housing need. They are the UK's major providers of new homes for rent. Many also run shared ownership schemes to help people who cannot afford to buy their own homes outright. Over recent years a number of local authorities have transferred all or part of their housing stock, including their sheltered housing, to RSLs. S Scheme: is a development proposed to be built. It can include a range of uses – housing, commercial or community, etc. Section 106 (of the Town and Country Planning Act 1990): this is a legally binding agreement between the parties to a development; typically the developer, housing association, local authority and/or land owner. The agreement runs with the land and bids subsequent purchasers. (see Planning Obligation). Shared Ownership (SO): also known as a product as ‘New Build HomeBuy’. From a developer or land owner’s perspective SO provides two revenue streams: to the housing association as a fixed purchase sum on part of the value of the unit; and on the rental stream. Rent charged on the rental element is normally lower than the prevailing interest rate, making this product more affordable than home ownership. Social Rented Housing (SR): Rented housing owned and managed by local authorities and registered social landlords, for which guideline target rents are set through the national rent regime. Sub Markets: Areas defined in the Viability Study by reference to house price differentials. Areas defined by reference to postcode sectors, or amalgams thereof. Supplementary Planning Guidance (SPG): planning documents that provide specific policy guidance on e.g. affordable housing, open space, planning obligations generally. These documents expand policies typically set out in Local Development Plans. T Target: refers to affordable housing target. Sets the requirement for the affordable housing contribution. If say 30% on a scheme of 100 units, then 30 must be affordable (if viable). Tenure Mix: development schemes usually comprise a range of housing tenures. These are described above including market and affordable housing. Threshold: the trigger point which activates an affordable housing contribution. If a threshold is set at say 15 units, then no contribution is payable with a scheme of 14, but is payable with a scheme of 15. The appropriate affordable housing target is then applied at the 15 units, e.g. 20%, or 30%, etc.


V Viability: financial variable that determines whether a scheme progresses or not. For a scheme to be viable there must be a reasonable developer and land owner return. Scale of land owner return depends on the planning process itself.

Affordable Housing Viability Assessment - 17-07-13€¦ · City and County of Swansea Affordable...

Documents

Transcript of Affordable Housing Viability Assessment - 17-07-13€¦ · City and County of Swansea Affordable...