The Planning Inspectorate has considered the correct approach to determining benchmark land values for viability assessments.

The Planning Inspectorate has recently considered the correct approach to determining benchmark land values for viability assessments, and indicated a change in direction. The market value approach was rejected in favour of an “Existing Use Value Plus” valuation method. Under this method, the purchase price of the land itself will no longer be a determinative factor, even if it may give an indication of what the uplift (plus) to the existing use value ought to be.

The appeal by Parkhurst Road Limited (the appellant) against the decision of Islington Borough Council (“the council”) to refuse planning permission for a residential development is the latest of a number of planning appeals to consider the correct approach to determining benchmark land values (BLV) when assessing the impact of affordable housing provision on the viability of a development.

The decision of the Inspector appears to demonstrate a change in direction from other recent decisions, and indicates that Market Value (MV) (representing the value of the property on the open market) or Alternative Use Value (AUV) (the value where there is a viable alternative use for the land) valuations will not, in most circumstances, be appropriate methods to determine the BLV. Instead, the Existing Use Value Plus (EUV Plus) valuation method is the approach to be adopted, which takes as its starting point the value of the property with its existing use plus an uplift to reflect the need to incentivise a sale.

Background

The appellant purchased the site, the Former Territorial Army Centre on Parkhurst Road in Islington, in May 2013 for £13.25 million. In 2014, the appellant applied for planning permission for a residential development, which was refused, although the refusal was not due to the (under) provision of affordable housing.

In January 2016, the appellant applied for planning permission for a 96 unit development to correct the issues with the 2014 application. The appellant initially offered no affordable housing based on its viability assessment, but during the course of the appeal revised its offering to 10%, claiming that even this proportion was not viable. The council, following its planning policies, began by demanding 50% provision. Given the disparity between the appellant and the council, it is not surprising that the affordable housing offering became the key issue of the appeal.

The main policies

The Islington Core Strategy (2011) requires 50% of housing built in Islington during the plan period to be affordable housing. This is a strategic target, which accepts that it is not viable for every site to provide that amount, but the policy does indicate that it is expected that many sites will deliver the target percentage of affordable units.

The National Planning Policy Framework (paragraph 173) makes the viability of a development an important consideration, and acknowledges the need for competitive returns and the need to ensure that the viability of a development is not put at risk by imposing overwhelming burdens. The Planning Practice Guidance (PPG) advises flexibility in applying policy requirements, and sets out that, when determining site value for the BLV, land or site value should:

  • reflect policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy charge
  • provide a competitive return to willing developers and landowners (including equity resulting from those wanting to build their own homes)
  • be informed by comparable, market-based evidence wherever possible. Where transacted bids are significantly above the market norm, they should not be used as part of this exercise.

Recently adopted policies, the Mayor of London's Housing Supplementary Planning Guidance (March 2016) (the “Mayor’s Housing SPG”) and the Council’s Development Viability Supplementary Planning Document (January 2016) (the “Development Viability SPD”), both endorse the use of EUV Plus in Islington Borough.

Determining land value

The Inspector considered the correct approach to determining the BLV at length. He agreed with the parties that the Existing Use Value (EUV) of the Former Territorial Army Centre was negligible, particularly as that use had ceased. The Inspector also found that there was no AUV other than the proposal being put forward by the appellant. The Inspector was not made aware of any other proposals, or any other more intensive residential scheme, and this proposal therefore represented a good indication of the likely potential value of the site. There was no additional AUV that would justify any inflation in the site value above the appellant's scheme.

The appellant argued that the MV approach should therefore be preferred. The appellant further argued that the affordable housing provision was irrelevant to determining land value.

The Inspector did not agree. In particular, he highlighted the difficulties of using comparable evidence as to market value where there is a lack of evidence available of similar transactions with comparable attributes, for example EUV, AUV or abnormal costs, as was the case in this instance. Comparing bids for different sites without knowing the assumptions of the landowner or developer also makes it impossible to know whether the circumstances are in fact comparable.

The Inspector was similarly unwilling to accept the appellant’s submission that the affordable housing provision was not relevant to determining the land value. He commented that any notional willing landowner would be required to consider planning policy and obligations in their expectation of land value. Furthermore, the purchase price is the developer's risk. The developer must account for planning policy and guidance when considering the amount that it is willing to pay for a site.

The council advocated the EUV Plus approach. This approach accepted that the EUV for the site was low, while acknowledging the "strong potential" for residential development which was established by the allocation of the site for residential use. This approach is also endorsed by the Mayor’s Housing SPG and the Development Viability SPD.

The EUV Plus method was, in the Inspector's view, the most appropriate methodology. This method allowed for a premium above EUV to be paid to the landowner to incentivise the release of the land for development. It also reflected local policies and did not require the use of comparable market-based evidence which, as stated above, he found to be inherently unreliable in determining the BLV for this site.

The Inspector also commented that the use of EUV Plus allows regard to be had to the market as a consideration, rather than a determining factor.

In submitting its suggested BLV, the council acknowledged that an incentive would be required and calculated that a BLV of £6.75 million was appropriate for the site. The Inspector agreed, and noted that this calculation recognised a significant uplift on the residual land value (stated to be £2.4 million), despite being less than half the value paid for the site by the developer. The Inspector also commented that he had had regard to the need to encourage rather than restrain development and the need for flexibility when applying planning policy, but that this should not be at the expense of delivering affordable housing. He concluded that "an inflated land value should not be subsidised by a reduction in affordable housing".

The decision of the Inspector to apply the EUV Plus approach is significant in that it casts doubt on the appropriateness of using market value valuations and comparable evidence when determining the BLV. There is a risk that, if this decision is indeed demonstrative of a wider change of approach by planning decision-makers and policy-makers, there will be an impact on the viability of development sites for which an overly-competitive purchase price has been paid.

However, the Inspector explicitly acknowledged that there is a need to pay a premium to incentivise landowners to sell their land. Therefore, it will be open to developers to argue that the price paid reflects the need to provide this incentive. It is also worth noting that the Inspector was able to apply specific local policies which endorsed the EUV Plus approach, and that this decision is not binding.

The clear disparity between the price paid for the land and the BLV used to calculate the viability for affordable housing creates uncertainty for landowners and developers in predicting the outcome of planning decisions where viability is contested with the local planning authority.