Financial Viability Appraisal in Planning Decisions: Theory and Practice

Research
April 2015
Financial Viability Appraisal
in Planning Decisions:
Theory And Practice
rics.org/research
Financial Viability Appraisal
in Planning Decisions:
Theory And Practice
rics.org/research
Report for Royal Institution

of Chartered Surveyors
Report written by:

Neil Crosby
Professor of Real Estate
School of Real Estate & Planning
Henley Business School, University of Reading
f.n.crosby@reading.ac.uk
Peter Wyatt
Professor of Real Estate Appraisal
School of Real Estate & Planning
Henley Business School, University of Reading
p.wyatt@reading.ac.uk
RICS Research team

Dr. Clare Eriksson FRICS
Director of Global Research & Policy
ceriksson@rics.org
Amanprit Johal
Global Research and Policy Manager
ajohal@rics.org
Pratichi Chatterjee
Funded by:
Global Research & Policy Officer
pchatterjee@rics.org
Published by the Royal Institution of Chartered Surveyors (RICS)

RICS, Parliament Square, London SW1P 3AD
www.rics.org
The views expressed by the authors are not necessarily those of RICS nor any body
connected with RICS. Neither the authors, nor RICS accept any liability arising from
the use of this publication.
All rights reserved. No part of this publication may be reproduced or transmitted in any
The RICS Research Trust, a registered form or by any means, electronic or mechanical, including photocopy, recording, or any
charity established by RICS in 1955 information storage and retrieval system, without permission in writing from the publisher.
to support research and education
in the field of surveying. Copyright RICS 2015
© RICS Research 2015 3

Financial viability appraisal in planning decisions: theory and practice
Contents
1.0 Introduction .................................................................................................... 5
2.0 Background ..................................................................................................... 6
2.1 Viability in forward planning............................................................. 7
2.2 Viability in site-specific appraisals................................................. 8
2.2.1 Estimation of scheme-specific development profit................... 9
2.2.2 Handling of development finance (and tax)................................... 9
2.2.3 Input uncertainty..............................................................................10
2.2.4 Estimation of land value..................................................................10
3.0 Viability appraisals for site-specific decision-taking
in planning ......................................................................................................13
3.1 Legislation..........................................................................................13
3.2 Government guidance......................................................................13
3.3 Industry guidance.............................................................................15
4.0 Viability appraisals in planning appeals .......................................17
4.1 Modelling approach...........................................................................17
4.2 Input uncertainty..............................................................................18
4.3 Profit....................................................................................................18
4.4 Finance.................................................................................................18
4.5 Landowner’s return...........................................................................19
5.0 Discussion ......................................................................................................22
6.0 Conclusions ...................................................................................................26
7.0 References ....................................................................................................27
8.0 Appendices ....................................................................................................28
8.1 Appendix A: Threshold Land Value.................................................29
8.2 Appendix B: Planning Appeals ........................................................32
9.0 Acknowledgements ..................................................................................39
List of Figures
Figure 1 Components of development value..........................................................19
Figure 2 Components of land value I.........................................................................19
Figure 3 RLVs for residential, commercial and industrial land uses.................23
Figure 4 Components of land value II........................................................................23
4 © RICS Research 2015

rics.org/research
1.0 Introduction
The aim of this research project is to formulate consistent
approaches to land valuation within site-specific development
viability appraisal (DVA) based on a critical evaluation of the
theory and practice of appraisal. The project develops the
current research agenda into development appraisal and
valuation and its specific application within DVA in the UK.
It builds on research carried out by the University of Reading
over the last three years that has examined development
appraisal theory and practice, identifying a number of issues
inherent in development appraisal modelling in general, and
particular issues concerning the application to DVA.
This project categorises these modelling issues and
developed a set of research questions, which were then
addressed using a case study methodology. The cases
were drawn from the increasing number of disputes
concerning the level of planning obligations on individual
sites. The methodology included a document analysis of
proofs of evidence and decisions.
Section 2 of this report provides the background to the
research by discussing the viability issues that arise in
both area-wide and scheme-specific DVAs. Section 3 then
reviews the policy and guidance that has been published by
government ans industry in relation to DVA practice. Section
4 reports the findings of the empirical investigation of issues
arising from scheme-specific planning appeals.

2.0 Background
The grant of planning permission to change the use of positive residual amount that is sufficient to persuade
or to physically alter a piece of land usually leads to uplift the landowner to sell, this indicates viability. The basic
in value, often referred to as ‘development value’. There equation for calculating site value is:
have been attempts by the UK Government in the past to
capture some or even all of this uplift for the benefit of the
community (Allmendinger, 2011). However, a development
Value of completed development
value tax of this kind is not current policy. Instead, local
government is able to legally impose planning obligations Less Development costs (including planning
and infrastructure levies on landowners upon grant of obligations and infrastructure levy)
planning permission so long as they do not jeopardise the
Less Developer’s profit
economic viability of the proposed development.
Equals Residual land value
A development viability appraisal or DVA tests
economic viability. It is a financial model that is based
on the ‘residual method’ of land valuation because the
residual amount is that which is left to bid for the land So the uplift in land value from existing use value to
after deducting the estimated costs associated with a residual land value must adequately compensate the
development from the estimated value of the completed landowner, the developer and the community (in terms of
scheme. As well as construction costs and risk-adjusted planning obligations and CIL). DVAs are typically carried
return to the developer, the cost of planning obligations out at two stages in the planning process: at the policy
and the Community Infrastructure Levy (CIL) must also setting or forward planning stage and at the scheme-
be deducted from the development value. If there is a specific development control stage.

rics.org/research
2.1 Viability in forward planning Financial viability appraisals are therefore necessary to
assess the extent to which a planning policy can be met
Christophers (2014) notes that the first official recognition or the extent to which adverse impacts of development
of viability in planning was in relation to the delivery can be mitigated. Often referred to as ‘area-wide’ DVAs
of affordable housing through the use of planning they typically consist of a set of valuations of hypothetical
obligations. Circular 6/98 (DETR, 1998) advised local development sites across a local authority area at a
authorities to ensure financially viability when negotiating particular point in time. The valuations incorporate the
the amount of affordable housing that could be supplied estimated financial implications of the proposed level of
from a development scheme. Circular 05/2005 (ODPM, planning obligations.
2005) provided guidance for planners when testing the To determine viability the estimated site values are
economic viability of planning obligations: viability was benchmarked against a ‘threshold land value’ (see
defined as a site’s ability to remain sufficiently “profitable” Appendix A for an explanation of threshold land value) and
at a given level of planning obligations. As the idea of therefore the basis on which this threshold is established
viability testing took hold, its remit was extended from site- and the level at which it is set is critical to development
specific development management to forward planning. viability appraisal at the policy-setting (area-wide) level.
PPS12 (DCLG, 2008) stated that viability considerations Essentially it is an estimate of the value at which a
should constitute part of the evidence base in Core landowner would be prepared to sell. If the estimated site
Strategies and other Development Plan Documents, and values are higher than the threshold land value the policy
PPS3 (DCLG, 2011) required local authorities to set targets target is considered viable. Local authorities are required
for affordable housing and to assess the likely economic to assess the likely cumulative impact on viability resulting
viability of these targets. Following the enactment of the from existing and proposed development regulations (such
2008 Planning Act by the then Labour Government and as the Code for Sustainable Homes), planning obligations
the introduction of the 2010 Community Infrastructure (including affordable housing requirements) and CILs.
Levy Regulations1 by the Liberal Democrat / Conservative According to the NPPF (DCLG, 2012: 42) the cumulative
coalition Government, local authorities are able to set a impact should not put implementation of the development
CIL for offsite infrastructure. As with planning obligations, plan at serious risk and should facilitate development
CIL is also subject to a viability test. throughout the economic cycle, in other words, be kept
The National Planning Policy Framework (NPPF), under review.
published in 2012, supersedes earlier planning policy Crosby et al (2013) discuss the methodological issues
in relation to planning obligations. It retains the need for surrounding area-wide DVAs, focusing on the inability of
forward plans to ensure that “… the scale of development conventional valuation techniques to deal with multi-site
identified in the plan should not be subject to such a scale appraisals and market shifts. Essentially, policy is set for
of obligations and policy burdens that their ability to be wide areas and enforced over long periods of time and
developed viably is threatened.” More specifically, with the viability testing methods struggle to deal with this.
regard to the issue of viability in particular, the level of The main issues surrounding area-wide DVA are therefore:
planning obligations
• The difficulty in spatially and temporally extrapolating
“… should, when taking account of the normal cost from a set of time-specific hypothetical sites to actual
of development and mitigation, provide competitive development sites;
returns to a willing land owner and willing developer
to enable the development to be deliverable” • Confusion over the approach to DVA for area-wide
(DCLG, 2012: 41) applications in relation to forecasting (or not) of growth
in revenue and inflation in costs; and
• The impact of using size-based levies on development
sites that are marginal in viability terms.
1 SI 2010 No 948

2.2 Viability in site-specific

appraisals
The main thrust of this research paper is DVA at a site-
specific level. Site-specific DVAs use the same residual
land valuation approach but incorporate more detail
about the proposed development scheme. Coleman
et al (2012) and Crosby et al (2013) raise a number of
issues concerning the specific application of development
appraisal to DVA within the UK planning system. In addition
to some fundamental criticisms concerning the technical
competence of development appraisal methods in
practice, they also included critiques of arguably the major
research question facing development viability modelling
within the UK planning process; the determination of
threshold land value. It appeared from this research that
decisions within the planning system were not adopting
a consistent approach to the assessment of land value
within a residual valuation framework. However, this initial
observation needed to be tested in more detail.
This research builds on the previous work in two ways;
first, it identifies applications of DVA modelling in more
detail than has been possible before and, second, it
expands the critical evaluation of the methods that
identify threshold land value within DVA in a site-specific
context. The results of this research will have very specific
application to viability assessment in the UK but other
countries incorporate viability assessments in their
planning system (tax increment financing for example)
and development appraisal modelling is universal. The
findings will therefore be relevant to international as well as
UK markets and should influence future guidance on both
development appraisal and viability modelling. The main
issues, a priori, surrounding scheme-specific DVA are:
• The inclusion of a uniform developer’s profit for
scheme-specific development projects;
• The handling of development finance and tax;
• Input uncertainty and risk analysis including whether
or not to include inflation, forecasting and review
mechanisms; and
• Fundamental disagreement over the approach used to
estimate landowner return (threshold land value).

rics.org/research
2.2.1 Estimation of scheme-specific 2.2.2 Handling of development finance

development profit (and tax)
It is usual practice in a conventional development It is normal practice in a development appraisal to allow
appraisal to assume a required return in terms of a capital for the cost of borrowing money to pay for development
sum, and to include it in the cash flow on the assumption costs as they occur. The accumulated total costs are
that the development will be sold on completion and a then subtracted from the estimated value of the scheme
capital profit received. The profit sum is usually expressed and then this residual land value is discounted at the
as a simple ratio, for example, a proportion of total costs finance rate to give the present day value of the site. An
or a margin on development value. These ratios are not alternative approach, which will give the same residual
sensitive to time. For instance, all else being equal, the land value, is to calculate the net cash flow in each period
profit level (if expressed as a ratio of development costs (costs incurred less any sales income received) and then
or value) would be the same for a one or ten year scheme. discount each cash flow back to the present day at the
appropriate finance rate. This is in contrast to mainstream
However, in this situation, if the actual rate of return that
project appraisal where the viability of a project is
was earned on cost (the internal rate of return or IRR) were
assessed before finance and the impact of financing on
calculated, the outcome would be different for any time
return is assessed separately. Typically, this is achieved by
period. The question is, therefore, are DVAs accurately
discounting the pre-finance cash flow at the developer’s
representing development profit by assuming profit as
risk adjusted target rate of return to determine whether
a lump sum return on costs or value?
the project produces a positive net present value or to
In mainstream capital budgeting theory and in property compare the project IRR against the investor’s required
investment appraisal, the required profit is expressed return. So both finance and lump sum profit have no place
as a required rate of return. The expected cash flow, in a technically competent cash flow appraisal.
excluding land cost, finance costs and profit allowance, is
However, not only is finance included, it would appear
discounted at the required rate of return in order to assess
that it is also common practice in development appraisal
the surplus available to purchase the land. Alternatively,
to assume that all of the development costs are debt
the cash flow, including land price, can be discounted at
financed. This approach is at odds with most real
a discount rate that gives a zero net present value. This
development projects which source finance from a
discount rate represents the scheme’s IRR, which can be
combination of debt and equity. This has important
compared with the developer’s required rate of return. It is
implications for the development profit metric (return
important to acknowledge that rates of return are implicit
on costs or return on equity). To reflect the use of a
in all conventional development appraisal techniques when
combination of debt and equity finance, a tax-adjusted
applying simple profit on GDV and profit-on-cost ratios.
cash flow can be discounted at a WACC. While such an
Adoption of a developer’s profit that is expressed as approach is arguably suitable for appraising corporate
an annual rate of return rather than a capital sum might investment opportunities, its application to development
be more rigorous but the question remains; what is an project appraisal is debatable because there is little direct
acceptable or appropriate risk-adjusted market return connection between the rate at which a company can
for development activity? Given location and scheme borrow and the appropriate discount rate to be applied to
heterogeneity and market volatility, it will depend on the a specific project. This is particularly so when the expected
type of developer, type and location of the development cash flow is subject to a high degree of risk, as in many
and the state of the market. Moreover, there can be property developments. Other options include:
substantial heterogeneity within the project cash flow
a) Return on total development costs (costs typically
itself: Geltner et al (2007, chapter 29) note that deriving
include finance)
IRRs from development project cash-flows is risky
because they vary depending on construction period b) Return on equity (also includes finance and therefore
cash-flow and exit value assumptions. They suggest a is a geared measure of return, albeit one that does not
number of possible approaches, contingent upon the reflect the timescale of the project)
stage in the development process, that draw upon real c) Ungeared IRR
option pricing, the use of a ‘reinterpreted’ weighted
average cost of capital (WACC) or historic return data from d) IRR on equity (geared IRR)
‘pure play’ real estate development companies. Brown Combining the two issues of profit specification and
and Matysiak (2000) discuss risk grouping, risk ratios, finance, there are also questions concerning the different
capital asset pricing model, arbitrage pricing theory and levels of these inputs for different property types and
WACC. Moreover, estimating a required rate of return for for different forms of the same property type; affordable
development opportunities requires data that typically do versus standard housing for example.
not exist or assumptions that are difficult to verify.

2.2.3 Input uncertainty There are examples of DVA studies which include a dozen
or more input variables, together with modelled changes
It is common practice to incorporate current values and
to these variables, that result in vast quantities of tabulated
costs in a development appraisal. For schemes expected
results that attempt to illustrate the sensitivity of the
to take a long time to complete or undertaken in phases,
output to changes in the inputs. How this output is used
two alternatives have evolved, re-appraisals and projection
is unclear, no indication of risk or probability is attached
models. With regard to the former it is unclear whether
to the output so the output is simply an array of possible
and what type of review mechanisms are employed by
output values.
vendors of development sites to try and capture potential
future revenue gains. Little is known about the structure, The impact of this uncertainty surrounding the inputs
triggers and so on (delayed starts and longer schemes) can be taken into account in development appraisal.
of these arrangements. With regard to the latter, revenue In some basic appraisals this can be as straightforward
from development is received on completion (usually) so as a contingency allowance on costs and the adoption
the rate of value change over the development period of a suitably high risk-adjusted return to the risk-
will influence the amount received. This can be assessed taker. However, there is also the ability to apply more
in either real or nominal terms. If the finance rate and sophisticated risk analysis techniques for identifying the
developer’s risk-adjusted return are real rates, i.e. impact on the outcome; sensitivity analysis, scenario
inflation-adjusted then the cash flow must be real (rather testing and simulation for example. This research
than nominal) too. However, it would appear that often will attempt to identify the level of risk analysis within
no forecasting of costs or revenue is undertaken due no planning appeals.
doubt to the level of uncertainty surrounding future value
change. However, it would also appear that the finance 2.2.4 Estimation of land value
rates applied are nominal which imply nominal change in
Granting planning permission for a change of use creates
values. Over short time periods the resulting inaccuracy
uplift in land value. To encourage supply, part of this uplift
may be small but for larger schemes with lengthy
will flow to landowners. To encourage development to
development periods it could be much greater.
take place, an appropriate level of return to developers is
Appraisers are also uncertain about current levels of required to compensate for risk. Within this context, local
costs and revenues. The output from a development authorities are required to set economically viable targets
viability model is very sensitive to changes in key inputs; for planning obligations and levies that are sustainable
rental and capital value, building costs and development over wide geographical areas and long periods of time.
period in particular, but many of the other inputs are ratios This is proving difficult and the moribund market has
of these key inputs. For instance, asset disposal fees are compounded the difficulties. Setting obligations and levies
expressed as a percentage of revenue; professional fees too high risks choking off supply and development of
are expressed as a percentage of construction costs; that supply, too low allows developers and landowners
profit is assumed to be a percentage of cost or revenue. to make excessive returns compared to the amount
In essence, estimates of future fees are affected by given back to the community. Where the developer or
uncertainty in: current levels of the input variable landowner believes their rewards are too low, these area-
(e.g. construction costs), estimated change in the level wide targets are tested on a scheme-by-scheme basis
of the input variable (e.g. building cost inflation), the using DVA.
parameter (e.g. fee rates) and future changes in the
Scheme-specific DVA involves inputting estimates of
parameters. As a consequence these ratios inputs are
expected revenue and expenditure, including planning
also stochastic variables.
obligations (whether affordable housing and/or CIL) and
It is well understood that development is an activity with the output is sometimes a profit sum but more usually
very high operational gearing and a degree of uncertainty a residual land value (RLV). The first approach raises
attached to the input value estimates due to poor data the question, where did the land value input come from?
availability, heterogeneity of sites, and volatility within The second approach raises the question, where did
and between markets (construction, capital/finance and the profit level come from, as discussed in section
various demand sectors). These characteristics mean 2.2.1 above.
that it is not difficult to make (justifiable, defensible) minor
Focusing on the second, more common, approach, RLV
alterations to modelling and input assumptions in order
can be either before or after policy compliant planning
to make significant changes to the output from the DVA
obligations. Where it is after planning obligations have
that would support a particular perspective. Moreover,
been deducted, the RLV can be compared to current
in some models the sheer number of inputs that can be
use value to determine the size of the uplift in land
legitimately included in a DVA may give the impression of
value. If this uplift is enough to persuade the landowner
spurious model accuracy, and the resultant detail that the
release the land for development then the site is viable.
model must deal with can encourage calculative practices.

rics.org/research
However, the landowner’s decision may be influenced “The residual land value method of determining viability
by a number of issues; the size of uplift compared to assumes that a viable development will support a residual
the current use value, the size of the uplift compared land value at level sufficiently above the site’s existing use
to the cost of the planning obligations, any legitimate value (EUV) or alternative use value (AUV) to support a
alternative use value and the landowner’s expectations land acquisition price acceptable to the landowner.”
of how the policy situation may change are examples. HCA (2009)
Another influence particularly relevant to this paper is any
“An objective financial viability test of the ability of a
expectation that they can use the existing planning policy
development project to meet its costs including the cost
framework to reduce the amount of planning obligations
of planning obligations, whilst ensuring an appropriate site
that will have to be paid to the community. This issue may
value for the landowner and a market risk adjusted return
also be influential in determining the price a developer may
to the developer in delivering that project.” RICS (2012b)
be prepared to pay the landowner.
The concepts “competitive returns to a willing landowner”
The RLV can also be determined before policy compliant
(op cit), “price acceptable to the landowner” and “appropriate
planning obligations have been deducted. In this case, the
site value for the landowner” that are included in the National
difference between the RLV and the current use value is the
Planning Policy Framework are closely linked to the concept
amount available to persuade the landowner to release the
of threshold land value. Whilst the words ‘competitive’,
land and to fund the planning obligations. A key question
‘acceptable’ and ‘appropriate’ are somewhat nebulous, it
is how much of this uplift should go to the landowner to
is generally accepted that the landowner should receive an
provide sufficient incentive to sell? In other words, at what
additional sum over and above the amount that they could
price or threshold land value (somewhere between residual
sell the site assuming that it remained in its existing use.
land value excluding planning obligations and current use
value) would the landowner be prepared to sell? Recent guidance has attempted to define threshold land
value as “… the value at which a typical willing landowner
Previous research indicates no consensus regarding either
is likely to release land for development, before payment
the derivation or the level of threshold land value. Nearly
of taxes….” (LHDG, 2012: 28). If a site has no possibility
half of the studies investigated by Coleman et al (2012)
of permission for an alternative use then the starting point
regarded a scheme as viable if the residual land value
is based on its existing use only. If there is a prospect
exceeded a threshold land value that was equivalent to
of permission for alternative use(s) (for example, in a
existing or alternative use value. A similar number added a
development plan for an alternative use) there may be a
premium of 15-30% of either the existing or alternative use
higher alternative use value. If the site has planning consent
value as an incentive to the landowner to sell. A minority of
for an alternative use then a usually higher land value
studies specified market values as benchmarks, the basis
results. The alternative use land value then becomes the
indicated within a RICS Guidance Note (RICS, 2012b).
starting point for assessing threshold land value, although
Clearly the landowner requires some level of financial this use may also have planning obligations attached,
incentive over and above current use value. Estimating which would complicate the issue. Essentially threshold
this incentive is difficult because it attempts to quantify land value is based on existing use value plus a proportion
the amount of land value uplift that should go to the of uplift. The actual price at which a landowner would sell
landowner and the amount that should go to the will, by definition, be a market price or value. Market value
community. It is, essentially, a question of how the uplift is defined as an exchange price (IVS 2013) and theoretically
in land value, or betterment, should be distributed. So will have priced in planning policy requirements. In practical
the key unresolved question concerns the appropriate terms the identification of residual land value, existing use
allocation of the uplift between landowner and community. value, alternative use value and market value requires
myriad assumptions and this is confounding the setting of
As indicated earlier, if there is uncertainty over the level
policy and the drafting of guidance.
of planning obligations payable then this will increase
the option value element of land value (due to increased Many of the key issues can be illustrated by a simple
volatility), thus increasing land prices. This can lead to example. A site currently used as farmland has an existing
higher land prices in the market and a threshold land use value of £100 as evidenced by agricultural land sales
value that is based on market value will also increase. where there is absolutely no hope of any development in
Developers will appeal to have planning obligations foreseeable future. The site is allocated for employment
reduced and, if successful, this creates an environment use in the Local Plan. With this alternative use, the value is
of further uncertainty (as local authorities review their estimated to be £1,000 although, given local oversupply,
planning obligation targets downwards), higher land there is currently little demand from developers for such
prices and the process repeats. sites. There are no planning obligations tied to permission
for this use. If planning permission were granted for
It is not surprising that land value is therefore at the heart
residential development, it is estimated that the site would
of both the 2009 Homes and Communities Agency and
be valued at £10,000 assuming no planning obligations.
2012 RICS definitions of viability:

This estimate is the product of a market valuation carried

out within a residual valuation framework. However, there
is no direct market evidence to support this estimate
since local planning authorities in the region have been
able to secure affordable housing and other planning
obligations and this has affected land prices. In other
words, developers reduce their bids to landowners to take
account of these additional costs. It is estimated that under
the current regulatory regime for planning obligations,
the value of the site assuming planning permission for
residential use is £7,500. This estimate of site value with
planning permission would be based on the evidence from
the other market transactions. Consequently a decision
to grant planning permission for residential development
could create a land value uplift of £9,000 from the £1,000
alternative use value to £10,000 value assuming no planning
obligations. For similar sites without a likely alternative use,
the uplift would be even higher (£9,900). In this hypothetical
scenario, threshold land value could be set between £1,000
and £10,000. Where it is set determines the distribution of
the financial gains from planning permission between the
community and the landowner.
It may seem surprising that the setting of threshold land
value has been a contested issue in development viability
modelling given the above scenario. In order to fulfil the
viability requirements (a competitive return to the landowner,
an appropriate return to the developer and policy compliant
planning obligations for the community), the outcome
is straightforward. There is no doubt that to persuade a
landowner to sell, the market value of the land needs to be
paid. The landowner will see the other landowners receiving
this amount and want the same. The uplift is therefore from
an EUV of £100 or an AUV of £1,000 to £7,500. The RLV,
taking into account an appropriate profit to the developer
was £10,000 so there is a sum of £2500 for planning
obligations. These should be policy compliant as the prices
paid for the other sites would have reflected the full policy
requirements. If these outcomes appear generous to the
landowner, it means that the policy requirements are too
low and that the planning obligations should be higher. If
they had been higher, market prices would have adjusted
accordingly and the £7,500 would have become say £5,500
if the policy requirements had been worth say £4,500.
Section 4 illustrates that the actual cases are far from as
straightforward as the above and that the interaction of
price paid, time, market value assumptions, EUV and AUV
all interact to create a relative minefield of inter-connecting
issues that need addressing if viability modelling is to
deliver consistent and appropriate outcomes.

rics.org/research
3.0 Viability appraisals for site-specific

decision-taking in planning
3.1 Legislation 3.2 Government guidance
The Growth and Infrastructure Act 20132 inserts In 2009 the Homes & Communities Agency published a
Sections 106BA, BB and BC into the 1990 Town and ‘good practice note’. In paragraph 18 on page 5 it states that:
Country Planning Act 19903. These sections provide
“Affordable housing delivery from planning obligations
a new application and appeal procedure for affordable
is viable when the cost to the developer in the form of
housing obligations in extant planning permissions.
a discounted price to the affordable housing provider,
The Government has published guidance to accompany
can be accommodated in the scheme economics,
this legislative change (DCLG, 2013). Section 2 and
without undermining profitability, and the cost of this
Annexe A of this guidance provides direction on method
developer contribution is reflected in the price paid for
and assumptions. In short, a viability appraisal should
the land.” (HCA, 2009)
determine the level of affordable housing that can be
obtained while maintaining competitive returns to both This means that in a viability appraisal where developer’s
landowner and developer, assuming current development profit is the output (and therefore a land value must be
costs, current sale prices for market dwellings and a entered as an input) the land value should be adjusted to
typical build out rate. The provision of affordable housing reflect likely planning obligations; in other words, not simply
can be tailored in terms of tenure mix, offsite/onsite mix, based on market prices for similar land (unless they too
delivery timing and so on. reflect the same amount of planning obligations).
More specifically the guidance makes a number of Annex 2 of the practice note provides some guidance on
statements that raise several questions in terms of method the key viability assumptions. Under the heading ‘profit/
and assumptions: margin’ it states that profit may be treated as a percentage
of cost or value. The assumed output from a viability model
• It is suggested that, in the appraisal, site acquisition
is referred to as the ‘scheme position’, which in this case
price or market value are acceptable inputs.
is an additional amount of developer’s profit but may also
• Further, significant ‘overbids’ should be disregarded. be the total profit if a ‘normal’ profit is not accounted for
It is not clear how these might be identified. in inputs to the model. The confusion stems from what is
• It is not clear whether competitive return to landowner referred to as ‘above’ and ‘below the line’ profit. No mention
and developer are as of the date of the review or at the is made of profit expressed as a rate of return. Under the
time of the original planning permission. ‘risk and profit’ heading it is explained that different land
uses in a scheme might attract different profit margins
• Finance costs can be included but these will clearly (forward-sold affordable housing compared to speculatively
vary depending on the nature of the scheme and type built market housing for example) but there is no mention
of developer. of different levels of risk (and therefore different levels
• Developer’s profit will vary from scheme to scheme and of developer’s profit or return) between schemes and
from developer to developer. This is acknowledged but locations. Throughout the annex, the presumption is that
it is unclear how such profit margins or target rates of developer’s profit expressed as a capital sum is the output
return should be derived other than that they should be from the viability model rather than a rate of return. Under
before finance and tax. the heading ‘development finance’ mention is made of the
• Related to the above point, how is a post-finance equity effect of the (presumably debt) finance rate but there is no
return to be incorporated if the developer’s return is to reference to debt/equity arrangements, the effect of gearing
be pre-finance? and profit sharing arrangements.
• Given the impact of taxation on finance it is odd that no In the section entitled ‘decision taking’, which sets out
mention of handling of tax is provided. policy in relation to site-specific planning (as opposed to
local plan making), the National Planning Policy Framework
(DCLG, 2012) does not mention viability. However, a viability
guidance note published recently (NPPF, 2014) provides
some direction in relation to viability for plan making and
decision taking. Of particular interest here is the guidance
in relation to viability appraisal for decision taking, which
raises a number of methodological questions.
2 http://www.legislation.gov.uk/ukpga/2013/27/contents/enacted 3 http://www.legislation.gov.uk/ukpga/1990/8/contents

The guidance begins by stating that “[d]ecision-taking obligations, and finance costs; the latter proving to be a
on individual schemes does not normally require an particularly complicated input to deal with on a scheme-
assessment of viability. However viability can be important specific basis. Perhaps the most challenging assumption
where planning obligations or other costs are being is the level of developer’s profit. First, should it be
introduced. In these cases decisions must be underpinned expressed as a cash sum percentage of costs or value
by an understanding of viability …” It also states that or should it be expressed as an annual rate of return.
“[t]here is no standard answer to questions of viability, nor The guidance acknowledges that the “return will vary
is there a single approach for assessing viability.” Whilst significantly between projects to reflect the size and risk
it seems reasonable for there to be variation in method, profile of the development and the risks to the project”
if there are no standard answers to questions of viability and recommends that a “rigid approach to assumed profit
then how are they to be resolved? Perhaps what is meant levels should be avoided and comparable schemes or data
here is that there may be no universal assumptions for sources reflected wherever possible.” In practice, this kind
developer’s profit, finance costs, threshold land value of information is rarely released into the public domain.
and so on. But should there be a common decision
Having taken these inputs into account, the resultant land
rule… Indeed, it would seem that there is one when it is
value should “… be informed by comparable, market-
stated that a “… site is viable if the value generated by its
based evidence wherever possible.” It is not clear whether
development exceeds the costs of developing it and also
this evidence relates to the existing use value of the site,
provides sufficient incentive for the land to come forward
alternative use values or whether it should include market
and the development to be undertaken.”
evidence for similar sites that have been granted planning
As with the Growth and Infrastructure Act, this guidance permission for developments comparable to the subject
suggests that viability assessments in decision-taking site. The latter would reflect levels of planning obligations
should be based on current costs and values except for at the time of the transaction so this raises a circularity
schemes that require phased delivery over the medium issue, as it is the level of planning obligations that is
and longer term (time periods that are not defined) when being estimated. The guidance states that the value
forecasts of costs and value may be considered. How “… will need to provide an incentive for the landowner
these forecasts might be undertaken at the scheme- to sell in comparison with the other options available.
specific level is not addressed. Those options may include the current use value of the
land or its value for a realistic alternative use that complies
The guidance continues in similarly ambiguous terms:
with planning policy.” Furthermore the guidance states
estimates of costs should be based on robust evidence
that, where transacted bids are significantly above the
that is reflective of market conditions. Build costs should
market norm, they should not be used as part of this
be based on appropriate data and should include
exercise. How these overbids are identified is not clear.
abnormal costs, infrastructure, policy costs and planning

rics.org/research
3.3 Industry guidance This means that site value (whether an input into or output
from the model) should be based upon the market value
In 2012 the Highbury Group on Housing Delivery published of comparable land but taking into account planning policy
a note on development viability appraisals that referred to (in particular policy compliant planning obligations) as they
viability testing of individual schemes. It suggests that there exist now rather than at the date(s) of the market evidence.
is only a need for scheme-specific financial appraisals if The problem that arises is that the basis for this adjustment
the application is not policy compliant. The note becomes is what the viability appraisal is supposed to be identifying –
rather unclear on the matter of cost assumptions. It clearly a circular argument whereby the market value should
suggests that the appraisal should “… relate to the specific take into account the level of policy compliant planning
costs and values of a known development proposal based obligations but that market value will then be part of the
on the facts available at a specific point in time” but that assessment process by which the amount of planning
an “… assessment can model different development obligations are judged. Section 2.3.2 actually states this:
options and scenarios for different costs and values over
a development period.” It is ambiguous over whether that “Any assessment of Site Value … will have regard
means both a best estimate and a risk analysis around to prospective planning obligations and the point of
that estimate are required. the viability appraisal is to assess the extent of these
obligations while also having regard to the prevailing
Also in 2012 the Royal Institution of Chartered Surveyors property market.”
published a guidance note (RICS, 2012b), which focuses in
the main on site-specific DVA. The guidance recommends Paragraph 3.4.5 on page 18 tries to capture it more fully.
a conventional residual approach to the determination It states that:
of either developer’s return or land value. Whichever “The Site Value will be based on market value, which
of these outputs is chosen it should be compared will be risk-adjusted, so it will normally be less than
to a corresponding ‘benchmark’ (page 4). The RICS current market prices for development land for which
recommends market value as a basis for determining planning permission has been secured and planning
an appropriate threshold land value. On page 12 the obligation requirements are known. The practitioner will
guidance states that: have regard to current use value, alternative use value,
“Site Value should equate to the market value subject market/ transactional evidence (including the property
to the following assumption: that the value has regard itself if that has recently been subject to a disposal/
to development plan policies and all other material acquisition), and all material considerations including
planning considerations and disregards that which planning policy in deriving the Site Value.”
is contrary to the development plan.” RICS (2012b)

This is not straightforward as paragraph 3.4.6 concedes,

and there is no guidance as to how these adjustments and
judgments might be made, other than ‘professionally’.
Paragraph 3.4.7 elaborates:
“…depending on the planning status of the land, the
market price will include risk-adjusted expectations of
the nature of the permission and associated planning
obligations. If these market prices are used in the
negotiation of planning obligations then account should
be taken of any expectation of planning obligations
that are embedded in the market price, or valuation
in the absence of a price. In many cases, relevant and
up-to-date comparable evidence may not be available,
or the diversity of development sites requires an
approach not based on direct comparison.”
It is clear from this passage that the RICS regards
transactions as important evidence of current residual
land values and that the best evidence of market value is
those comparables. But it admits that they are agreed in
different market conditions and regulatory environments.
Therefore adjustments need to be made, and this will be
done subjectively or, as the RICS puts it, professionally.
Past transactions may indicate the current or alternative
use value of the subject property and the aim is to select
that which is considered to produce the most appropriate
starting point for the threshold land value assessment.
Much emphasis is placed on the use of comparable
evidence and this contrasts with the caution associated
with the actual purchase price of the subject property.
In paragraph 3.6.1 the guidance states that the site
purchase price should be treated as a special case
because: it may have taken place some time ago; the
purchaser may have made unrealistic assumptions about
the viability of the development scheme; there may be
synergistic value arising from land assembly. But all of
these points excluding the timing apply equally to any
recent comparable evidence used to benchmark residual
land value.
Regarding developer’s return the guidance is ambiguous;
professional judgment should be used to determine its
acceptability in respect of the proposed development and
the state of the market.

rics.org/research
4.0 Viability appraisals in planning appeals
The Planning Portal4 records details of planning appeals the estimation of residual land value or developer’s profit
and disputes over levels of planning obligations and these either included or excluded planning obligations (both
reveal some of the key issues raised above. It is therefore approaches have been adopted within the appeals)
timely to identify these cases and carry out a detailed also used a residual approach. Whether a cash flow or
document analysis of them to investigate the viability traditional residual was adopted was not a main issue in
issues that have arisen. Planning appeals uploaded to the any of the cases. The exception to this was the estimation
Planning Portal by the 20 November 2014 were accessed of existing use value which is often a comparative approach
and the search criteria specified appeals that had been not involving any development appraisal modelling.
completed by this date in England and included ‘planning
The general approach was to estimate the residual land
obligations’ as an appeal issue. A further refinement
value (RLV) of the development site taking into account cost
was that only appeals made by landowners, developers
of planning obligations and an appropriate return (profit) to
and house-builders were selected. A search based on
the developer. The amount of planning obligations would
these criteria returned 99 appeals. On inspection of the
reflect the policy target for affordable housing in the locality.
local authority websites, supporting documentation was
If the resulting RLV was higher than the existing use value
available for 32 cases. Summary details of these appeals
of the site and high enough to persuade the landowner to
are set out in Appendix B.
sell (i.e. it provides an adequate return) then the proposed
The examination of these appeals concentrated on development scheme was considered viable. If the RLV
the approach to appraisal modelling and, following the was negative, viability testing is undertaken at a range
discussion of viability modelling issues identified from the of affordable housing targets to determine what amount
literature review, the main categories for analysis were might be acceptable to both parties. Alternatively, where
identified as; choice of modelling approach, dealing with profit was the output, the viability appraisal tested whether
input uncertainty, assumptions regarding developer’s profit, the level of profit, expressed as a simple return on value
treatment of finance and benchmarking landowner’s return. or cost, was adequate for the developer. Again, in cases
where it appeared to fall below a reasonable level, the
4.1 Modelling approach determination assessed the level of planning obligations
required to create an acceptable return to the developer.
The precise details of the methods used were generally The two main issues that result are the basis of land value
not stated explicitly in the appeal documents but the use required where the output was profit and the basis of
of some form of residual approach; either expressed as profit where the outcome was land value. Allied to these
a cash flow or a traditional residual, was virtually universal. issues are the benchmarks against which the outputs are
More specifically, the residual method was used to assessed. If the output is a RLV then what should this be
estimate developer’s profit (where land value was an input), compared to (i.e. what is an acceptable return to the land
residual land value (where developer’s profit was an input) owner) and if the output is profit, what is an acceptable
or alternative use value. In addition, appeal cases involving profit margin?
4 http://www.planningportal.gov.uk

4.2 Input uncertainty In this case, in the model put forward by the appellant, the
default settings were 20% of GDV for private sales and
It is widely accepted that input uncertainty is a major issue 10% of GDV for affordable housing (and 20% on the costs
in valuation as a whole (IVS, 2014) and in development of commercial land use), resulting in a blended target profit
appraisal in particular (Coleman et al, 2012). Risk analysis margin of 18% of GDV. Larger schemes are regarded as
is a basic part of any development appraisal but it appears more risky, hence the relatively high benchmark set for
to be only intermittently carried out in the appeal cases. the Shinfield Road site, which was for 126 dwellings. In
the Poplar Business Park case (APP/E5900/A/217892) the
Forecasting of costs and values has been attempted profit margin for affordable housing was assumed to be
in a few cases but was rejected in 2008 in Godalming 7% of GDV, and the scheme was regarded as unviable.
(APP/R3650/A/08/2063055) and in 2009 in Bristol (APP Consequently, the inspector determined a 20% affordable
P0110/A/08/2069226). However, also in 2009, it was housing provision against a 35% target.
deemed reasonable for multi-phase schemes developable
over many years (Lydney APP/P165/A/08/2082407). Given that not all of the development viability appraisals
In the same year, the inspector rejected forecasting were based on the standard residual model but had
in another large development site at Innsworth in elements of cash flow within them, it might be expected
Gloucester (APP/G1630/A/09/2097181). But this inspector that the pre-finance IRR and the project IRR of the
recommended that in large longer term developments development cash flow would have been preferred
a further review during the development period was benchmarks but this was not the case. Even when IRR
undertaken, acknowledging that viability moves through was calculated, it was the basic returns on GDV and/or
time. This approach was later adopted in Beverley (APP/ cost which dominated discussions on viability.
E2001/V/08/1203215) in 2010.
Basic risk analysis in the form of sensitivity analysis 4.4 Finance
has been carried out on some valuations within some
schemes but the impact this had on the decisions is Assumptions regarding finance are linked to those relating
unclear within the inspector reports. to profit. 100% debt financing appears to be universal
and unchallenged and even the rate used appears non-
contentious with 7% adopted in four out of five cases
4.3 Profit where it is mentioned. As stated above, the return to the
developer is included as a cash sum, calculated as a ratio
There is no evidence from the appraisals that there is a to total development costs or gross development value.
generally accepted level of profit from development. In In reality very few developments are funded using 100%
evidence for the Clay Farm and Glebe Farm, Cambridge debt finance. Instead financing arrangements are usually
appeal (APP/Q0505/A/09/2103592 & 99) the developer’s a mixture of debt and equity funding and the developer
target return was quoted to be in the band of 18% to typically funds a proportion of the development costs as
21% of GDV. In the Jericho Canalside, Oxford appeal an equity provider. Consequently a true measure of return
(APP/G3110/A/08/2070447) it was agreed that the target on the developer’s investment should be a function of this
should be 15% of GDV or 20% of costs although they equity stake, i.e. a return on equity or, more correctly, an
also agreed that this was site specific and would vary equity IRR.
depending on the state of the market, the site and the
scheme. However, in the majority of cases where the
level of developer’s profit is discussed, figures equal
to or in excess of the two targets agreed at Jericho
were used. In the Shinfield Road, Reading case (APP/
X0360/A/12/2179141) the Inspector determined that:
“The appellants supported their calculations by
providing letters and emails from six national house-
builders who set out their net profit margin targets for
residential developments. The figures ranged from a
minimum of 17% to 28%, with the usual target being in
the range 20-25%. Those that differentiated between
market and affordable housing in their correspondence
did not set different profit margins. Due to the level and
nature of the supporting evidence, I give great weight it.
I conclude that the national house-builders’ figures are
to be preferred and that a figure of 20% of GDV, which
is at the lower end of the range, is reasonable.”

rics.org/research
4.5 Landowner’s return Figure 1 Components of development value

The determination and role of land value in development
viability assessment is the key battleground within the Revenue Costs
appeals. With a relatively consistent target for developer’s
profit (despite the shortcomings of the capital sum Residual land value
approach), the main issue centres on whether a policy-
compliant level of planning obligations can be supported
Planning obligations
by the scheme whilst ensuring an acceptable return to
GDV
the landowner. As indicated above, within the residual
valuation framework, the uncertainty surrounding Developer’s profit
valuations gives parties to the case scope to vary the
inputs and the outcomes. Over and above this valuation Development costs
variation, there is also scope for a more conceptual
scrutiny of the application of residual valuation models
and the subsequent determination of threshold land value,
below which it is assumed the landowner would not be
prepared to sell and therefore development land would
not come forward.
Figure 1 shows that a typical development viability
appraisal would include the cost of planning obligations
required by policy in the appraisal, together with
development costs and developer’s profit. The residual Figure 2 Components of land value I
land value (i.e. the landowner’s return) that balances the
right-hand side of the scales with the left is then compared
to a threshold land value. If it is higher, this means the
development is viable at the required level of planning
obligations. If it is lower, then it is not. Residual land value
Figure 2 illustrates the uplift in land value from existing Uplift to community
use value (EUV) that is possible when a site is granted Threshold land value
Uplift
planning permission. A rational landowner would require
a premium over and above EUV to compensate for the Uplift to landowner
fact that the land has some development potential. In a Existing land value
DVA, the remaining share of the uplift up to the full RLV is Value in existing use
assumed to take the form of planning obligations. The key (disregarding hope value)
issue, therefore, is estimating what the landowner would
regard as an acceptable premium over and above EUV.
This determines the benchmark or threshold land value
From figure 2 it can be seen that, all else being equal,
the higher the EUV, the less uplift is available for planning
obligations. There have been cases (discussed below)
in which developers have sought to determine the level
of threshold land value by reference to the price paid for
the site. This raises an important practical question about
the assumptions made by both sellers and purchasers.
Purchasers could have paid too little or too much for a site
based on inaccurate assumptions; perhaps purchasers’
expectations in terms of planning permission were
unrealistic for example. Also, ‘perceived’ high and low
prices may be due to the fact that prices are a distribution.
There is an extensive real estate literature on valuation
accuracy and bias that suggests a wide variation in
valuations and prices in both residential and commercial
markets; with development sites being cited as one of the
most variable situations. These issues of valuation and
price uncertainty affect both price based and valuation-
based approaches to DVA.

Second, given that development land values are residuals Ref APP/C1950/A/09/2113786). Later in the same year,
and highly geared in relation to development values and the Planning Inspectorate dismissed an appeal in London
costs, prices of development land can be volatile in the (Appeal Ref APP/E5900/A/10/2127467) in which the
short term. An historic price may have been right at the developer argued that the current site value should be
time but should that price be relevant to a viability appraisal based on the price paid for the site back in September
undertaken at a different time in a different market state? 2007 (£13m) marked down using a land price index to
Perhaps more pertinently as far as DVA is concerned, what a value of £9.3m. The current use value of the site in its
if a purchaser paid a price that reflected the possibility that industrial use was approximately £3m and, together with
they could appeal the level of policy compliant planning the Council’s estimate of residual land value at £6m, this
obligations under the current viability regime? meant that the policy target of 35% affordable housing
was viable.
Regardless of the motivation, if values have fallen, a
threshold land value within the DVA based on purchase It would appear that developers trying to use the price
price would be at a level higher than current values would they paid for the site in the DVA are not succeeding if it is
suggest. This, in turn, would reduce the share available for decided that either they overpaid for the site by not taking
planning obligations, passing some of the value that would the correct level of planning obligations into account when
otherwise flow to the community back to the developer. purchasing or the price is out of date. Where the price is
recent and perceived to be a “correct” price, it might be
The use of price in DVA has been the subject of a number
taken into account. The next question that arises from the
of appeals. In 2005, an appeal decision in Norwich
appeals concerning land value is what should threshold
(Appeal Ref APP/G2625/A/04/1154768) rejected price paid
land value be based upon if it is not purchase price?
in favour of a valuation that reflected the cost assumptions
relating to the known policy planning obligations. However, A second possibility discussed in the guidance and
in contrast to the Norwich decision, in a later 2006 case in allowed in some appeals is the existing use value with or
Chilworth, the purchase price was used (Appeal Ref APP/ without an uplift to persuade a landowner to bring the
Y3615/A/06/2016787). The decisions continued to flip-flop land forward. The uplift appears arbitrary. In the case of
and in April 2008, in Homerton Road, London, it was Hampton Hill (APP/L5810/A/05/1181361) in 2007, both
decided that site value should not be based on purchase parties agreed that existing use value should be the basis
price. But the reason was that in this particular case the for the threshold land value. The local authority argued that
price was too high and had ignored policy requirements no uplift should be applied and that the landowner should
(Appeal Ref APP/U5360/A/07/2059530). However, later therefore accept existing use value only as an acceptable
that same year, using an appraisal model where land cost return. The appellant argued that the threshold land value
went in as an input and developer’s profit was the output, should be EUV plus 25%. The Inspector found for the
a developer successfully argued that the site value should appellant. However, in the Flambard’s Way, Godalming
be based on purchase price (Jericho, Oxford Appeal Ref appeal in 2008 (APP/R3650/A/08/2063055), although
APP/G3110/A/08/2070447). Given that the site was sold the Inspector also favoured a threshold land value that
by tender and other bids were close to the purchase price, was based upon EUV, the Secretary of State called in the
the inspector accepted its relevance even though it had appeal and preferred a market value approach.
taken place nine months earlier. The appeal was upheld
This third possibility is recommended by the RICS.
and the inspector set a contribution of 35% affordable
However, as indicated previously, it assumes all planning
housing rather than the policy requirement of 50%.
obligation policies are fully reflected in the valuation.
In 2010, in an appeal related to a multi-phase residential The RICS states:
development in Cambridgeshire (Appeal Ref APP/
“Site Value should equate to the market value subject
Q0505/A/09/2103599), the Planning Inspectorate took the
to the following assumption: that the value has regard
opposite view. It was decided that the price paid for the
to development plan policies and all other material
land was irrelevant on this larger scheme. If the landowner
planning considerations and disregards that which is
was allowed to use the purchase price in any subsequent
contrary to the development plan.” [RICS, 2012b, 12]
modelling, they were essentially insuring against any risk
of market movements downwards. The Inspector was not Market value based on comparable transactions was
prepared to accept such a fundamental transfer of risk. adopted in Holsworthy (APP/W1145/Q/13/2204429)
and in King Street, London (APP/H5390/A/13/2209347).
Similarly, in March 2010 in Welwyn Garden City, an
It is not clear whether these transactions, on which the
Inspector repeated that the correct approach was current
market value was based, fully took into account the
existing use value and not price paid, reiterating that the
existing policies.
developer carries the risk, not the local authority (Appeal

rics.org/research
Alternative Use value (AUV) is also relevant in development

viability modelling. It is defined as the market value taking
into account viable alternative, policy compliant uses. For
it to be a relevant alternative to existing use value, it must
be assumed that all policy compliant obligations have been
factored into the AUV, so reducing its value to one that
can support these obligations. The inter-action of planning
obligations within AUV and the proposed scheme are
discussed in the next section. In the 2009 appeal on a site
at 189 Streatham Rd, Mitcham (APP/T5720/A/08/2087666),
the agent for the appellant argued that the threshold land
value should be derived from the EUV, the AUV and the
purchase price (within reason). The appellant paid £1.6m
for the site and they used this figure as the EUV to be
input into the appraisal. The appellant argued that the
RLV ignoring planning obligations would have to be below
£359,000 (compared to a purchase price of £1.6m) for
some affordable housing to be viable. The council argued
that the purchase price was not relevant to the decision
on how much affordable housing was viable and that EUV/
AUV were the appropriate bases for threshold land value. In
this particular case, regardless of whether EUV or AUV was
used, no amount of affordable housing was viable so the
Inspector’s decision did not provide any detailed comments
on the basis for land value. The same thing happened in a
number of appeals where the site value for the proposed
development, even when planning obligations are zero, was
below EUV or AUV; they were not viable within the context
of current planning policy (for example appeal refs APP/
D3125/A/09/2104658, 660, 663 in Woodstock, Oxford
in 2009 and APP/X5210/A/12/2173598 in St Edmund’s
Terrace, London in 2012).
A further approach is to base threshold land value on
estimates of EUV and RLV ignores planning obligations.
The latter is not observable in the market but is the
output from a standard residual land valuation, assuming
no planning obligations. Referring to figure 2 above the
difference between these two values is land value uplift.
Instead of trying to determine a threshold land value that
would induce the landowner to deliver the site to the
market, and a target level of planning obligations that
the local authority requires, the uplift is simply shared in
some way between these parties. This approach was
adopted in the 2012 Shinfield Road, Reading appeal (APP/
X0360/A/12/2179141) where the gap between existing use
value and RLV ignoring planning obligations was split 50-
50, a split suggested by the appellant. The inspector in the
2008 Bath Road, Bristol case also previously suggested
that the correct approach was based on the difference
between residual land values and existing use values (APP/
P0119/A/08/2069226).

5.0 Discussion
The grant of planning permission can produce significant commercial and industrial land uses in Reading over a
uplifts in land value and planning policy now acknowledges ten-year period from 2001 to 2010. Fixing a threshold land
that the three major stakeholders (landowners, developers value through this volatility means that the apportionment
and the community) can all participate in that added of uplift between landowner and community will vary
value. But the mechanism by which this participation is widely over time. DVA needs to operate within a flexible
implemented is fraught with difficulty. The central theme time framework that allows the impacts of changing market
of the development viability appeal cases that were states to be reflected in the modelling process. Many of
investigated is the application of residual development the appeals are associated with market shifts and the
appraisal modelling in general and the determination failure of DVA to flex in both downturns, when landowners
of threshold land value and its role in the modelling and developers suffer, and in upturns. There seems little
in particular. comment of the situation when a buoyant property market,
with highly volatile development residual values, increases
There are some general issues concerning the institutional
the development gains for landowners and developers –
background that has arguably failed to deliver a coherent
with no additional returns to the community. A mechanism
modelling process for property development in the UK (see
is required that can travel in both directions.
Crosby et al, 2013 and Coleman et al, 2012). But added
to that there is evidence from recorded planning appeals However, there appears little doubt that the central issue
of a confused picture concerning the ability to determine is the determination of threshold land value within the
the correct framework for assessing appropriate returns viability process. The value of a site that has potential for a
to developer, landowner and community. For example, change of use will be the higher of (a) its existing use value
developer’s return is highly site and market specific and or (b) alternative use value. If (b) involves development
significantly influenced by project finance structure. To date, activity that requires planning consent then it is usually
the industry’s response to these issues is to adopt broad estimated using the residual valuation method. There is
rules of thumb regarding level of developer and landowner little argument within both government policy and industry
return and to assume very simplistic financial structures. guidance that a developer should be able to obtain an
While some of this generality might (arguably) be acceptable appropriate risk-adjusted return from the development
for area-wide DVAs, it does not seem appropriate for site- scheme. The landowner will therefore receive the RLV
specific DVAs. that remains after the costs of development (including
developer’s profit and planning obligations) have been
One of the main problems with development appraisal is
deducted from the estimated value of the completed
the sensitivity of the residual output to changes brought
development (gross development value). Essentially, figure
about by input uncertainty and time. Sites are individual
2 is rearranged so that the share of uplift for planning
and site values change quickly and with far more volatility
obligations is input as a development cost, thus reducing
than developed real estate and other assets. As a
the RLV as shown in figure 4.
consequence, fixing cost and value inputs through time
magnifies the geared changes in RLV. Figure 3 illustrates
this point. The lines track changes in RLVs for residential,

rics.org/research
Figure 3 RLVs for residential, commercial and industrial land uses

8,500,000
7,500,000
6,500,000
Average House Price Nottingham £
5,500,000
4,500,000
3,500,000
2,500,000
1,500,000
500,000
0
-500,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
Residential RLV (no CIL) per ha assuming dph and 100 sqm dwelling size
Industrial RLV (no CIL) assuming 75% site cover (£/ha)
Office RLV (no CIL) assuming 75% site cover (£/ha)
Source: Compiled by authors using data from DCLG, VOA and CBRE
Figure 4 Components of land value II
Residual land value of site assuming it has planning permission for

change of use and taking account of the cost of planning obligations
Uplift to landowner
Uplift
Existing land value

Value in existing use
(disregarding hope value)

This residual development technique is a recognised with the RLV output, excluding planning obligations,
valuation method for assessing the market value of to determine the appropriate level of planning obligations.
development land and it gives some weight to guidance This introduces an element of circularity into the appraisal
put forward by the RICS that the market value of a explained below, which can be used by appellants to
development site should be the basis for threshold land their advantage.
value. At any point in time the RLV (the market value of a
If the land value used in the viability assessment is derived
development site) will reflect relevant policy on planning
from sales of similar sites, developers can argue that
obligations, i.e. the ‘cost’ of these obligations are included
the land value benchmark should be based on these
in the valuation as an input. Theoretically, a landowner
transactions – it is prime facia evidence of market value.
should be willing to sell a development land when its RLV
In fallen markets this may not be as favourable as using
is higher than existing use value and the price reflects
historic price but is the next best alternative.
the new use. On this basis there does not appear to be
a problem and the RICS guidance is correct. However, If market values of comparable sites are to be used as
it appears that this model may have been misapplied the basis for the determination of threshold land value,
in practice. Some of this misapplication surrounds the the critical assumption is that the comparable evidence
crucial market value special assumption concerning is adjusted to take account of current policy in relation to
the inclusion of policy compliant planning obligation planning obligations. If this were done correctly then the
assumptions. If they are not fully taken into account market valuation would necessarily confirm that the policy
in DVA, landowners and developers can manipulate compliant planning obligations were affordable and there
the situation to their financial benefit. These issues are would be no reduction in planning policy obligations on
discussed below. appeal, precisely because of the circularity issue. The
input land values are adjusted to take account of the cost
In the appeals, some appellants have argued that the
of planning obligations, and those are the obligations
market value of the site should not be used and the
that the DVA is trying to estimate. Both the use of either a
historic purchase price for the site should be used instead.
current purchase price or a current market value therefore
However, Planning Inspectors in a number of cases have
suffers from the same issue. If the price and the valuation
identified this as an attempt to shift some of the risk of
are correct under the planning obligation policy special
development activity from the developer to the community
assumption, they will automatically confirm that the
even though developers use risk-adjusted profit margins
policy planning obligations are affordable. The planning
in their original decision-making. One of the significant
obligations will only be unviable if the market value is
risks associated with development is input uncertainty
less than the EUV. A simple example will illustrate. Two
caused by market changes over time. Once land price
similar sites, A and B, each have a RLV before planning
has been fixed at the commencement of the developer’s
obligations of £100,000. The developer already owns
involvement, the impact of subsequent market changes
site A, having paid £85,000 in a much better market, and
will fall on the developer. If they are able to shift any
wants to buy the other one as well. The owner of site B
downside risk associated with these market shifts onto
is holding out for £80,000 given the price paid for the
the community by fixing the land price in any subsequent
site A. Current planning obligations are expected to cost
viability appraisal, that appraisal should incorporate a
£30,000 so a residual valuation identifies the RLV after
more moderately risk-adjusted return to the developer in
planning obligations to be £70,000 for each site. However,
order to reflect the reduced level of risk. There was no
the developer has just won an appeal on another site
evidence of such risk adjustment by appellants trying to
and the inspector referred to market values evidenced
use purchase price in DVAs. The historic purchase price
by transactions. The developer now purchases site B for
should never be used in a DVA.
£80,000 and submits an appeal in relation to site A quoting
If the use of market value is deemed to be the correct the market comparable of £80,000 to argue for a reduction
approach, as indicated above, its practical derivation in planning obligations to £20,000. If the RLV had been
is problematic. Normal valuation practice is to adjusted to take account of the policy compliant planning
assess developments with relatively homogeneous obligations, the outcome should have been £70,000 and
characteristics by direct capital value comparison using a decision that the site was viable. Theoretically, the use
a unit of comparison such as a price per square metre of a policy compliant RLV will always produce a policy
or, for residential land, price per hectare with suitable compliant set of planning obligations unless, as indicated
adjustments for location and physical differences. For above, the RLV falls below EUV or AUV.
more individual development sites, especially in the
It is unclear whether planning inspectors realise that actual
commercial sector, a residual method is used (see RICS
purchase prices and market valuations of comparable
guidance notes on comparative valuations (RICS, 2012a)
sites raise the same circularity issue. What is clear is that a
and development land (RICS, 2008)).
number of decisions have used purchase price or market
In the appeals, DVA was based on the residual method value based on comparable transaction evidence and this
but the direct comparison method was often used to is an open invitation for developers to overpay for sites
determine either the land value input where profit was in the knowledge that the current application of DVA will
the output or the benchmark against which to compare enable them to use these prices in assessing reduced

rics.org/research
levels of planning obligations; either directly by inserting the It does not resolve any of the difficulties associated
price or indirectly by using the prices as comparables for with input uncertainty. But those are inherent within the
market valuations. What is the solution? In early cases, one residual valuation method and no resistance to the use
approach was to adopt EUV plus a premium to persuade of this method in DVA was found in the appeal cases.
landowners to release the land. However, this takes no This is despite the theoretical and practical criticisms
account of the substantial variations in the uplift from EUV levelled at it (see Coleman et al 2013, Crosby et al
to RLV. For example, a planning consent to allow residential 2013). The decision in the Shinfield case amounted to a
development on a greenfield site can generate a very large proportionate sharing of the land value uplift, essentially
uplift in land value whereas a consent to change the use a tax on the development gain. Consequently, despite
of a brownfield site from commercial to residential land its advantages over alternative approaches, it might be
use might generate a much smaller uplift from EUV. The viewed as a politically difficult solution to implement.
greenfield site would require very substantial premiums to
AUV does impact on this proposed solution. If there are
persuade a landowner to sell. In a number of the appeal
no planning obligations associated with the AUV, then
cases, EUV was above RLV even before any planning
AUV becomes the starting point for the uplift in value. If
obligations were deducted. In these cases no planning
there are planning obligations associated with the AUV
obligations were required. Effectively the EUV plus a
then the solution becomes less complicated. Assuming
premium approach is confounded by the heterogeneity
the same basis for planning obligations in both the grant
of development sites.
of the proposed permission and the alternative use
Finally, we are left with the approach that was adopted in planning permission (say 50% of the uplift), the AUV can
the appeal involving the site at Shinfield Road, Reading be ignored and the planning obligations for the proposed
(op cit). In that case the landowner and community development are simply 50% of the difference between
shared equally the land value uplift from EUV to a RLV RLV for the proposed development and the EUV, as if the
that ignored the effect of any planning obligations. This AUV didn’t exist.
approach addresses the issue of changing viability
through time and avoids the circularity issue that afflicts
threshold land values that are based on market values
or purchase price.

6.0 Conclusions
This research has examined appeal cases relating The problem centres on the difficulty in selecting an
to scheme-specific DVAs where the level of planning appropriate threshold land value, whether it is reliant
obligations was one of the issues in dispute. It has upon purchase price, comparison-based market value
identified threshold land value as the main point of or EUV plus a premium. One solution is to avoid setting
contention. The discussion in this paper has therefore a threshold land value altogether. By estimating EUV and
concentrated on this aspect. an RLV that ignores planning obligations, the Shinfield
appeal case split the uplift in value between the landowner
The present position is confused and conflicting. There
and the community. This approach has the trace of a
is evidence within appeal cases that planners, planning
development gains tax – the rate was 50% in the Shinfield
inspectors and surveyors acting as evidence providers
case – but it tracks changing market states and shares the
are doing so within a poor quality modelling environment.
profits of development between developers, landowners
Coleman et al (2012) indicate how little change there has
and the community in a way that is more equitable and
been in the development appraisal modelling framework
responsive than current approaches.
compared to the investment property modelling framework
over the same time period. The appeal cases have In addition to the conclusions on threshold land value
provided evidence that the institutionalised background that dominate the DVA issue, we also make two further
has not supplied the expertise necessary to carry out recommendations, one concerning the reporting of cases
rigorous development modelling in the English planning and the availability of information and the other the timing
system and that educators, trainers, learned societies, and of reviews.
industry have failed to deliver this expertise. In particular,
Publically available information on these cases varies
the research questions whether planning inspectors are
widely and needs to be made more transparent and
sufficiently versed in the expertise of development appraisal
consistent. In some cases there is only the basic planning
and finance to be able to spot the inconsistencies.
information and the Inspector’s report; in others, details of
The paper has examined the various approaches to the appraisals and viability assessments are available for
determining land value and supports the view that the scrutiny. If landowners and developers wish to challenge
use of historic purchase price is flawed as it attempts to area-wide and site specific community contributions, they
transfer one of the primary risks of development – changes need put their reasoning and evidence, including financial
in market state and its impact on costs and values within details, into the public domain.
the development – to the community. The risk-adjusted rate
Finally, one of the main problems with development
of return already rewards developers for taking these risks.
appraisal is the sensitivity of the residual output to
In addition the paper suggests that the market value changes brought about by input uncertainty and time.
approach is only theoretically correct if applied as per Sites are heterogeneous and site values change quickly
the assumptions set out in the RICS Guidance Note. and with far more volatility than developed real estate and
A correct application of market value would protect the other assets. As a consequence, fixing cost and value
community from changes in market state and ensure inputs through time magnifies the geared changes in
that any site brought forward for development would be RLV. In weak markets fixed planning obligations will act
able to provide policy compliant planning obligations. against the policy imperative, which attempts to bring
If market value is based on comparable evidence without sites forward for development, and in strong markets
proper adjustment to reflect policy compliant planning may restrict the amount that the community receives
obligations, this introduces a circularity, which encourages relative to landowners and developers. This has important
developers to overpay for sites and try to recover some implications for the Community Infrastructure Levy.
or all of this overpayment via reductions in planning
obligations. However, a correct interpretation of market
value would not persuade landowners to bring forward
sites for development in weak land markets and so acts
against the policy imperative. A possible solution lies
in the use of existing use value but, if that is not related
to the development in any way, it becomes a very blunt
instrument that takes no account of a landowner’s
perspective when deciding to bring a site forward
for development.

rics.org/research
7.0 References
Allmendinger, P (2011) New Labour and planning: from new right to new left,
Routledge: Abingdon, Oxon
Christophers, B. (2014) …Wild Dragons in the City: Urban Political

Economy, Affordable Housing Development and the Performative
World-making of Economic Models. International Journal of Urban and
Regional Research. 38 (1); pp 79-97.
Brown, G. and Matysiak, G. (2000) Real Estate Investment : A Capital

Markets Approach. Financial Times Prentice Hall: Harlow, Essex
Coleman, C., Crosby, N., McAllister, P. and Wyatt, P. (2012) Development

appraisal in practice: some evidence from the planning system. Journal of
Property Research, 30 (2), pp. 144-165
Crosby, N., McAllister, P. and Wyatt, P. (2013) Fit for planning? An evaluation
of the application of development viability appraisal models in the UK
planning system. Environment and Planning B: Planning and Design,
40 (1). pp. 3-22
DCLG (2008) Planning Policy Statement 12 Local Spatial Planning.

Department for Communities and Local Government: London.
DCLG (2011) Planning Policy Statement 3 Housing. Department for

Communities and Local Government: London.
DCLG (2012) National Planning Policy Framework. Department for

Communities and Local Government: London. https://www.gov.uk/
government/uploads/system/uploads/attachment_data/file/6077/
2116950.pdf
DCLG (2013) Section 106 affordable housing requirements: review and

appeal. Department for Communities and Local Government: London.
https://www.gov.uk/government/publications/section-106-affordable-
housing-requirements-review-and-appeal
DETR (1998) Affordable Housing Circular 6/98. Department of Environment,

Transport and the Regions.
Geltner D., Miller, N., Calyton, J. And Eichholtz, P. (2007) Real Estate
Analysis and Investments. Thomson: Mason, Ohio.
HCA (2009) Investment and planning obligations: responding to the

downturn, Good Practice Note, Homes and Communities Agency: London,
http://www.homesandcommunities.co.uk/sites/default/files/investment_
and_planning_good_practice_note.pdf
Highbury Group on Housing Delivery (2012). Viability in Planning –

Discussion Paper. University of Westminster: London https://
rtpilondoncalling.files.wordpress.com/2012/09/12-09-12-highbury-group-
paper.pdf.
IVSC (2013). International Valuation Standards 2013. International Valuation

Standards Council: London.
IVSC (2014). Valuation Uncertainty. Technical Information Paper No 4.

International Valuation Standards Council: London.
LHDG (2012) Viability Testing Local Plans: Advice for Planning Practitioners.
Local Housing Delivery Group: London. http://www.local.gov.uk/c/
document_library/get_file?uuid=e317f7aa-488b-40fb-9e5c-
c18417e678dc&groupId=10180
NPPF (2014) Viability. National Planning Policy Framework Guidance. http://

planningguidance.planningportal.gov.uk/blog/guidance/viability-guidance/
ODPM (2005) Planning Obligations Circular 05/2005. Office of the Deputy

Prime Minister: London
RICS (2008) Valuation of Development Land. Valuation Information Paper

No 12. RICS: London
RICS (2012a) Comparable Evidence in Property Valuation. Information

Paper. RICS: London
RICS (2012b) Financial Viability in Planning. Guidance Note. RICS: London

8.0 Appendices

rics.org/research
Appendix A: Threshold Land Value

The Homes & Communities Agency (HCA) provided the
first detailed evaluation of threshold land value in an annex
3. Premium over Existing or
to user notes for a viability-modelling tool. The discussion Alternative Use Value
in the annex covered all the alternatives that have been
proposed in later formal guidance. However, whilst they Whilst all approaches to threshold land value
evaluated a number of options, they did not make strong axiomatically involve a premium over the value in
recommendations regarding which approach should be current use, one proposed method is to anchor the
adopted. The options discussed were: threshold land value to existing use value (EUV) rather
than to market value of the proposed use. HCA (2010,
9) stated
1. Market Land Value “benchmarks and evidence from planning appeals
The market value of land was stated to be “a relevant in a range of 10% to 30% above EUV in urban areas.
benchmark, as it is tangible evidence of the value For greenfield land, benchmarks tend to be in a
at which land has been released for development.” range of 10 to 20 times agricultural value”.
The central problem with this approach was explicitly
In the hypothetical example, this would suggest a wide
identified as its circularity: “market values are
range in Threshold Land Value. Assuming a multiplier
influenced by expectations of planning obligations,
of 10 or 20 from EUV, a threshold of £200,000 to
introducing circular logic to the appraisal” (HCA,
£400,000 would result. Assuming £400,000 and a gain
2010, 8). The effect of this circularity is to reinforce the
of £1,800,000 created by planning permission, this
status quo in terms of policy (see Crosby, McAllister
means that the landowner obtains just over 22% of
and Wyatt, 2012). In the hypothetical example set out
the financial gain created by the planning permission.
above, the threshold land value would be £1,200,000
with the landowner capturing two thirds of the uplift It should be noted that alternative uses require
in value created by the planning permission granted planning permission and would be subject to policy
for residential planning permission compared to the requirements. Consequently, alternative use values,
alternative use value. like market values, would be price-adjusted to reflect
these and so the circularity problem arises once again.
2. Percentage of Gross
Development Value Share of Land Value Uplift
The HCA document also noted that some area-wide
The HCA noted that some area-wide viability studies viability studies had used the concept of share of uplift
had used percentage of gross development value in land value (between existing use value and theoretical
(GDV) as a benchmark to assess threshold land residual land value ‘unencumbered’ by planning
value. The percentage uplift from current use value obligations) as a basis for estimating threshold land
to residual value is a form of development land value value. In the hypothetical example, assuming an uplift of
taxation and the proportion of completed scheme £1,800,000 and an AUV of £200,000, a 50/50 share of
value would seem to be a simple heuristic rather than the financial gain from planning permission between the
a logically based threshold value. Comparable market community and the landowner would produce a threshold
prices, in the rare cases where they exist, will have land value of £1,100,000.
been reduced to the extent that they ‘price in’ the
prospect of planning policy requirements, as noted Following this guidance, a number of organisations
above. It might be argued that valuers are capable representing sometimes conflicting and sometimes
of adjusting market evidence of land prices to take overlapping groups have produced further guidance.
this into account (see RICS, 2012 for example) but Prompted by the Housing Minster, the Local Housing
there has been no investigation as to whether this Delivery Group’s remit was to produce:
is a robust approach. Crosby et al (2012) argue that “…practical advice for planning practitioners on
there is no economic reason to expect land costs to developing viable Local Plans underpinned by a
be any specific proportion of development value. In commitment from the HBF (Home Builders Federation)
the hypothetical example above, since the ratio is a and LGA (Local Government Association) to engage
product of previous transactions using the 20% of their members in applying this advice and continuing to
GDV as a threshold would tend to reinforce the policy develop the guidance over time, as we all get to grips
status quo. with the implementation of the new National Planning
Policy Framework (NPPF).” (Local Housing Delivery
Group, 2012, 4)

It seems clear that an attempt was being made to The drawbacks of TLV based on current use value plus
create some consensus among representatives of the a premium are twofold. First, there is no empirical basis
community (represented by LGA) and the real estate for the level incentive premium that is unlikely to be the
development sector (represented by the HBF) about the same for all types of development or points in time. As
approach, method and assumptions for viability testing. the Prince’s Foundation for the Built Environment5 asks:
However, with regard to the crucial issue of Threshold will landowners sell at prices developers can afford given
Land Value, the guidance is ambiguous. It begins by the scarcity of capital, burden of sunk land costs, level
stating the commonly accepted premise that TLV “should of debt on balance sheets, money needed to finance full
represent the value at which a typical willing landowner is range of infrastructure levies and planning obligations?
likely to release land”. It then advises the viability modeller Some landowners are locked into option agreements
to base TLV “on a premium over current use value” or that they cannot fulfil, others (such as family landowners)
on alternative use value. However, almost immediately have investment horizons that are far longer than most.
this statement is qualified. The report suggests that the Others are becoming partners with developers and
premium above current use value should be determined house builders, the contractual details of which cannot be
locally and be based on evidence. There is no hint as to reflected in a simple premium.
how this should be done or where the evidence might
Second, if the premium is based on a percentage of
come from. Indeed, the complexity surrounding the use
current use value, this does not relate to the value of the
of TLV is revealed when reasons as to why the premium
land in its developed state. Rational landowners would
might significantly vary are described (Local Housing
seek a return that reflects the value of the proposed
Delivery Group, 2012: 30):
development. Geltner et al (2007) suggest that this return
• In areas where landowners have long investment comprises two value premiums over and above current
horizons and they are content with current land use, use value. The first is a ‘growth premium’ that reflects the
the premium will be higher than in those areas where present value of the future growth in value of the land after
key landowners are more minded to sell. Essentially, it has been developed. The second is an ‘irreversibility
the premium will vary over space. premium’ which reflects compensation for giving up the
• Landowner’s return will vary substantially depending option to develop some time in the future. Basing TLV on
on whether the land is urban or rural. The report current use value plus a percentage of current use value
suggests referring to “… market data and information would not properly account for these premiums.
on typical minimum price provisions …” and “… if local This issue of landowner’s return, based on a share of
market evidence is that minimum price provisions uplift in value, was raised by Barker (2004). Planning Gain
are substantially in excess of the initial benchmark Supplement (PGS) was to be based on the uplift between
assumptions, then the plan will be at significant risk current use value and ‘Planning Value’. This raised some
unless Threshold Land Values are placed at a higher methodological questions: how would a valuer be able
level, reflecting that market evidence” (p30). There is to find evidence of current use value (defined as market
significant blurring between a TLV set using current value without hope of future development). Planning value
use value plus premium or market prices. was to reflect all factors affecting market value including
• Similarly, due to the effect of hope value, landowners’ planning obligations. In fact, planning value would ‘often
returns will differ substantially between small, edge be the price paid for the land’ and ‘it will often fall to
or settlement, greenfield sites and other large the developer to take account of PGS liability when
greenfield sites. negotiating the purchase of the land’ (p7). So planning
value is reduced to reflect PGS liability and is used to
• A ‘viability cushion’ should be established to ensure determine the amount of PGS liability. Barker did not
‘marginal’ sites still come forward, to guard against the resolve the circularity issue.
potential that small changes to external circumstances
could render many sites unviable. In other words, the Recent guidance from the Homes and Communities
premium will vary over time. There is no guidance Agency (HCA, 2012a) provides little clarification, stating
as to how such a cushion should be derived or what that establishing a TLV is ‘difficult’, although it does
magnitude it should take. expand on this by explaining that:
• Some sites are allocated as development sites in “The threshold of existing use value, or existing use
the development plan and costs are incurred in their value plus a premium, may not be the best benchmark
promotion. for testing viability in some land markets, particularly
land currently in agricultural use. In these cases,
The guidance then points out that “reference to market
because the value uplift resulting from a planning
values can still provide a useful sense-check”, albeit
consent is much more significant than for urban
using market values “risks building-in assumptions of
sites, landowners (sic) expectations may be better
current policy”
benchmarked by a comparable or other assumed land
value” (HCA, 2012: 5)
5 Delivering Sustainable Urbanism: SLIM - A Strategic Land Investment Model, The Prince’s Foundation for the Built Environment, undated

rics.org/research
Almost simultaneously the RICS were also producing

guidance on DVA. With regard to Threshold Land Value,
the emphasis in this guidance was somewhat different to
the Local Housing Delivery Group. The RICS guidance
states that “site value should equate to market value
subject to the following assumption: that the value has
regard to development plan policies and all other material
planning consideration and disregards that which is
contrary to the development plan” and further that “site
value … may need to be further adjusted to reflect the
emerging policy/CIL charging level.” This is in recognition
of the fact that more planning obligations and CIL will
reduce land values.
The most recent guidance from the DCLG on the issue
seems most aligned to the RICS approach but also contains
similarly ambiguous guidance. After acknowledging that
the assessment of land or site value is central to the
consideration of viability, it is stated that whilst
“… in all cases, land or site value should reflect policy
requirements and planning obligations and, where
applicable, any Community Infrastructure Levy charge
… it should be informed by comparable, market-based
evidence wherever possible.”
The main ambiguity is whether it is current or future
planning requirements and obligations that should be
reflected. The statement that they should be informed
to market-based evidence would suggest that it is the
former, raising the problem of circularity that plagues
definitions of Threshold Land Value that are based on
historic transaction evidence.
There would appear to be two issues of concern in relation
to the concept of TLV; the way in which it is set and the
level at which it is set. Getting these ‘wrong’ could manifest
in two ways; an unexpectedly low number of development
sites would come forward (i.e. land owners would be
reluctant to sell) and marginal sites in particular would
not come forward.

Appendix B
Table 1 Planning Appeals
Appeal Appeal Issue Handling of Handling

decision case (pertinent Appraisal Handling of landowner’s developer’s of input
date Number Address Scheme to viability) model return return uncertainty Decision and remarks
2007 APP/ Hampton Hill, 28 retirement Sufficient Three Both parties agreed that Both parties None Appeal allowed. The Inspector
L5810/ Hampton. flats. provision for Dragons the land value input into the agreed on a agreed with the appellant’s
05/ AH. Planning Toolkit viability appraisal should be residual approach argument and offer of AH
1181361 policy requires based on EUV. In this case that calculated contribution. The benchmark
40% onsite the EUV was £2,820,000. developer’s profit was £3,525,000 (i.e.
but offsite in The council argued that rather than land £2,820,000 + 25%)
exceptional benchmark for the landowner’s value. There was no hint of RLV
circs (all return should be EUV and the The resultant ignoring the obligations being
1 subject to
viability), and
appellant argued that it should
be EUV+25%.
developer’s profit part of the argument for
was 12.4% of the 25%.
it was agreed GDV, considered
by both parties to be lower than
that this the benchmark
case was an 15% of GDV but
exception. acceptable in the
case of a large
scheme like this.
2007 APP/ Hayward 6 apartments Whether the Not known. The main issue of contention Developer’s profit None. The appeal was allowed.
Y3615/ depot, and 8 houses. scheme makes between the parties relates was the output. The inspector accepted the
A/06/ Dorking Rd, adequate to the MV of the site. A appellant Infinity Homes’s
2016787 Chilworth. provision valuation in 2006 values the approach as it was more
for AH. The site between £600,000 and substantiated.
appellants £700,000, much lower than High EUV affected decision,
offered 6 AH the purchase price. There was but no comment on whether
units (shared no comparable evidence to the purchase price disregarded
ownership). The support this valuation and there planning requirements.
LPA considers was evidence that the EUV
6 as the right of the site was much higher.
number but Infinity Homes had a contract
2 that 2 should to purchase the site and their
be shared associated appraisal assumed
ownership and 8 market units and 6 AH (social
4 social rented. rented) units. The inspector
preferred the MV submitted by
Infinity Homes. The appellant
used the acquisition price
as an appraisal input so it
was the benchmark. There
was no comment on whether
it disregarded the cost of
planning obligations.
2008 APP/ Lesney Mixed Purchase price was relied upon None. The appeal was dismissed. Too
U5360/ factory, development by the appellant as the land much was paid for site knowing
3 A/07/ Homerton Rd, including 222 value input into the viability planning obligations and the
2059530 London E9. dwellings. appraisal. 50% London-wide AH target.
2008 APP/ Flambard Large, mixed Whether the Not known. EUV was used as the basis for Developer’s profit The The SoS called in the appeal.
R3650/ Way, use residential development the land price. was the output. inspector The inspector allowed the
A/08/ Godalming. (225 flats) and makes dismissed appeal but the SoS dismissed
2063055 commercial sufficient a viability it, confirming an approach to
development. provision for AH model that viability modelling based on
and other POs. was based present market values. The
4 Both parties on projected decision confirmed current
agreed that the values. costs and values as the
appeal scheme appropriate basis.
would not be
sufficiently
viable to allow
AH provision.
2008 APP/ Jericho 54 dwellings Whether the One party The LPA estimated the EUV Developer’s profit With and Using an appraisal model
G3110/ Canalside, (including scheme is used their of the site to be not in excess was the output. without where land cost went in as an
A/08/ Oxford. 18 AH units) sufficiently own Excel- of £300k. Their consultant’s 15% of GDV social input and developer’s profit
2070447 plus canal viable to based appraisal included 50% AH plus (20% of costs) housing was the output, the developer
facilities. provide model. other policy-compliant POs. In was agreed as grant. successfully argued that EUV
50% AH. The one model the purchase price the benchmark. should be based on purchase
appellants (£3,576,000) was input as Both parties price. The inspector accepted
argued that the land value and in another were anchoring that the price paid was relevant
only 35% was the land value was the output to benchmarks if the developer could prove
viable. The local (which, it was argued, if found adopted in area- that it was not excessive or
plan (which to be > EUV+20% then the wide viability over-inflated. Given that the
5 states the 50% development would be regarded appraisals and site was sold by tender and
target) had as viable). The RLV was found other anecdotal other bids were close to the
been adopted to be £1,350,000 (assuming evidence. But purchase price, the inspector
for almost a no social housing grant), which they also both accepted its relevance and
year at the time was considerably higher than state that profit set a contribution of 35%
the site was the EUV. is dependent affordable housing rather than
purchased. on the state of the policy requirement of 50%.
The appellant argued
the market, the So the price paid nine months
(successfully) that EUV should
scheme and site. before appeal was taken into
be based on purchase price and
account when assessing
that this figure should go into
viability.
the appraisal as an input.
continued

rics.org/research
continued

2009 APP/ 67-73 Bath 29 sheltered Whether HCA The LPA benchmarked RLV LPA argued Parties agreed On-site AH
P0119/ Rd, apartments. the scheme Economic against a comparable site value that the not suitable therefore parties
A/08/ Longwell makes suitable Appraisal (even though the development appellant agreed that an off-site
2069226 Green, Bristol. provision Tool. on this site had not started). had inflated contribution was acceptable
for AH. The Inspector placed little costs of the subject to viability. Appellant
Policy target weight on this approach. scheme. stated viability of the proposal
was 33.3% would only allow a contribution
It’s not clear how the appellant
affordable of £115,000 (1 or 2 affordable
estimated EUV but the
housing. units well below the target of
Inspector felt the appellant’s
33.3%). The Council sought
assumptions were reasonable
c£414k based on previous
and evidenced. Purchaser’s
appeal decisions.
acquisition price not relevant.
Difference between RLV and Decision – Purchase price not
6 EUV provides a basis for considered an appropriate land
ascertaining the viability of value input or benchmark. The
contributing POs. appeal decision approved the
methodology of current sales,
costs and land values.
The inspector said “Any
reservations that I may have
about the balance of viability
arguments are outweighed
by what I consider are clear
benefits of the proposal.”
(due to lack of sheltered
housing locally).
2009 APP/ Land off Up to 750 Amount of AH. The LPA produced a two- The LA assumed Appellant The Inspector dismissed the
P165/ Lydney dwellings, Policy was stage appraisal; a landowner a 20% return used appeal and the SoS upheld
A/08/ Bypass and school, 40%. Original appraisal and then a on costs as the current this decision. The High Court
2082407 Highfield infrastructure proposal was house-builder appraisal. The benchmark. costs and subsequently rejected all
Road, Lydney. and open 30%, later landowner appraisal estimates values and grounds of a judicial review.
space. reduced to 13% the value of the serviced site the Council The Inspector decided that, in
given economic having made assumptions forecasted multi-phase strategic sites
conditions but for the costs associated with costs and developable over many years,
rising to 20% taking an unimproved site values. forecasting is reasonable.
if grants could and servicing it in readiness Comment - The unimproved
be arranged. for a house-builder. The land cost was based on
Whether an appraisal adds the cost of market evidence of land
out-turn the unimproved land (ULC), transactions where the land
approach is infrastructure costs (IC), had been allocated for housing
the correct planning obligations (PO) development and the prices
method. (but not affordable housing), paid would have reflected the
land finance costs (LF) and requirement to pay planning
The
landowner’s profit (LP) to obligations.
fundamental
arrive at a figure that must be
difference Also, there seems little point
paid to the landowner to meet
between the in separating a DVA into two
all of these costs of servicing
parties was components. If we assume
the land (SLC). It is a simple
in relation to
7 the financial
equation: (as was the case in the DVS’s
appraisal) that landowner’s
return to the ULC + IC + PO + LF + LP = SLC profit and builder’s profit
landowner/ (Equation 1) are the same percentage
developer. The serviced land cost (the of costs (i.e. that LP and BP
estimated amount that a can be merged into a single
house-builder would pay for profit on costs figure P) and
the serviced land) is then input that finance is available to
into a house-builder appraisal. the landowner and the builder
This is another simple at the same rate (i.e. that LF
equation that balances all of and BF can be merged into a
the house-builder’s costs: single finance cost FC), then
serviced land cost (SLC), substituting equation (2) into
building costs (BC), builder’s (1) we get:
profit (BP), builder’s finance ULC + IC + BC + FC + P + PO*
cost (BF) with house sales = GDV (3)
revenue or gross development
value (GDV). Anything left over *Includes affordable housing
would represent the amount It can be seen that this is the
of money available to pay for standard residual DVA model.
affordable housing (AH). So:
SLC + BF + BP + FC + AH = GDV
(Equation 2).
2009 APP/ Maunsell Change of use Whether the EUV was used as an input. Developer’s profit The Inspector accepted the
G1580/ House, from office to development was the output. principle of EUV+.
The parties agreed on a)
A/08/ 154–160 residential – is policy the RLV with no affordable The Inspector considered a
2084559 Croydon enlargement compliant housing (£2.773 million), b) 20% uplift on a site value was
Road, to comprise concerning the RLV with 35% affordable reasonable in this case.
Beckenham. 55 dwellings the provision housing (£1.9223 million)
including of affordable and c) the EUV of the site
key worker housing or a (£2.482 million). These
and AH. payment in lieu agreed values determine that,
thereof.
8 Uplift in site
without affordable housing,
the scheme will yield less than
value above MV 12% above EUV, 8% below the
in existing use. generally accepted margin
necessary to induce such
development to proceed.
Self-evidently, with a 35%
AH target, such a scheme
must also be, in the view of
the appellant, considered
non-viable.
continued

continued

2009 APP/ 189 Mixed Amount of AH. Three Savills argued that the 20%, of what is None. The Inspector decided that
T5720/ Streatham development Developer paid Dragons benchmark value is derived not made clear. this was an unusual case and
A/08/ Rd, Mitcham. including 14 £1.76m for the Toolkit. from the EUV, the AUV and that no AH should be required.
2087666 dwellings. site under the the purchase price (within The decision considers the
assumption reason) (para 6.4 of the appeal need to be pragmatic in
that it would statement). The appellant paid current depressed market
get PP for 29 £1.6m for the site and Savills conditions to get development
dwellings. At used this figure as the EUV to underway. In this case the
that price, be input into the appraisal. appellant paid too much for
the actual The appellant argued that the site and at a time when
number of the RLV of the site would there was no AH requirement.
dwellings that have to be below £359,000 The reduction in the number of
would be given
9 permission
(compared to a purchase price units that could be built on the
of £1.6m) for some AH to be site, the intro of AH and the fall
(14) means viable. The council argued that in market conditions all meant
that no amount the purchase price was not that the RLV and purchase
of AH was relevant to the AH decision and price were always going to be
viable. Should that EUV/AUV (not acquisition miles apart.
LPA allow price) should be an input. The
development problem in this case is that this
to proceed would still not provide any AH.
without any
AH because
the appellant
overpaid for
the site.
2009 APP/ West of Multi phase Appellant Appellant produced a two- Appellant 22.5% The Council Appeal dismissed and SoS
G1630/ Innsworth strategic proposed 18% stage appraisal similar to thatof costs over a 15 sought to agreed with the Inspector’s
A/09/ Lane & North res dev site AH, Council used in Lydney but reversed. year period. incorporate decision (SoS recovers
2097181 of A40, comprising suggests The house-builder appraisal forecast appeals relating to large
LPA 23.5%
Innsworth, 1,750 25.4% with was undertaken first to growth developments).
on costs in
Gloucester. dwellings plus potential to estimate the cost of serviced in values Inspector recommended
landowner/
education deliver more development land (SLC) given but the a review appraisal during
developer
facilities, when market assumptions regarding all Inspector the development period.
appraisal.
open space, recovers other costs (inc. AH) and rejected this Case supports the Beverley,
etc. (target was GDV. This SLC was then input The LPA also approach. Lydney and HCA documents
35%). into a landowner appraisal to adopted an
requirement to revisit viability
estimate profit. IRR approach,
However in long, phased schemes.
suggesting 15%
one of the LPA approach was to start with to 18% would
complexities the premise that in order for be acceptable
10 of this large the development to get off the and calculated
phased ground in the first place the a return of 13%
development Landowner/ Developer needs over 15 years
is that the to be assured of a reasonable but 36% over 10
Appellant return from the sale of the years.
would provide serviced plots. Starting with
serviced plots the Landowner/ Developer
and house- Appraisal the LPA analysis
builders would shows a return of 23.5% profit
build them out. on costs. This was input into
the Housebuilder Appraisal and
Also returns
it was concluded that 25.4%
over long
affordable housing could
periods an
be achieved on the basis of
issue.
producing a 20% profit level.
2009 APP/ 41-43 Refusal of Whether the Three RLV was the output and was The LPA assumed The The inspector dismissed the
K5600/ Beaufort permission proposal would Dragons benchmarked against EUV. 20% of GDV of appellant's viability modelling undertaken
A/09/ Gardens, to convert a conflict with (GLA) market housing. cost figs by both the parties, saying
The LPA estimated EUV as
2097458 London SW1. hotel into 9 the aim of toolkit. The appellant’s include an “Given the number of uncertain
£8,657,000 using the profits
luxury flats. policy in The assumption element of input values … the inability of
method. The appellant
London Plan was difficult to forecasting the professional witnesses to
estimated EUV between £13-
to secure the discern. The – Both reach agreement on them at
13.6m using a DCF method.
maximum viability appraisal parties the inquiry, and their significant
LPA argued that Appellant’s
reasonable (which calculated tested a cumulative value, I consider
DCF approach to estimating
contribution to developer’s profit number of that … none of the toolkit
EUV was wrong. Other evidence
the provision by inputting scenarios results is sufficiently robust to
compared Appellant’s DCF
of affordable a land cost of (altering the enable any significant weight to
approach with two further
housing (the £15m) generated number of be attached to it in determining
methods; comparison and
11 target is 50%). profits ,which produced
a profit on costs AH units) the provision of affordable
of 6.4% but an and all housing that could be expected
valuations of £13m and
IRR of 10.3% and produced from the appeal proposal”
£13.25m respectively.
an NPV of £1.9m a negative (para 32). The inspector
Without any affordable housing at a finance RLV. therefore overturned the LPA's
in the scheme, the appellant’s rate of 7.8%). decision to refuse permission
RLV was -£7,663,007 Presumably and granted permission – the
(negative) and the Council’s the appellant appeal was allowed. The LPA
was £11,792,000 (positive). re-worked this then appealed against the
The difference arose from wide appraisal to Inspector's decision to the
variation in input values. estimate the High Court, which ruled that
negative RLV in the Inspector's decision be
the Inspector’s quashed.
report.
2009 APP/ Clay Farm and Two sites – Site value Appellent Land costs in at Appellent – Forecasting The Inspector rejected the
Q0505/ Glebe Farm, Clay Farm issue was the £62 m which was the purchase Blended rate used to appellant’s use of historic price
A/09/ Cambridge. site for 2300 use of original which was
price. LPA used a RLV approach some and the resulting protection
2103592 homes plus purchase price made up of
to value the site at £41.6 m as extent. of their 20% profit as it would
& 99 associated in the viability 20% housing,
a residual after 40% affordable transfer all risk to the LPA.
infrastructure against an homes used in calculation. 6% affordable Not the intention of the
and mixed use approach housing and policy. RLV is the appropriate
They argued that the
development, which used RLV 6% commercial approach and with that
developer knew the AH policy
12 Glebe Farm for
300 homes.
to determine
site value.
requirement of 40% when they elements. Equals
15.55% on value
approach the development
is viable. Secretary of state
purchased the land.
Also deferred and 18.42% on rejects appeal.
payment costs. LPA Using
In evidence, appellant expert
obligations GVA model, used
suggested developers usually
to ensure the 16.44% on cost
want between 18%-21%
overall result is and 14.12% on
on GDV. They offered a
financially and value.
minimum acceptable rate
policy neutral). of 20% on cost.
continued

rics.org/research
continued

2009 APP/ Land N of Multi phase Viability SoS review. Multi-phase
E2001/ Flemingate, mixed approach on scheme. Confirming point
V/08/ Beverley. development. multi-phase about larger multi phase
13 1203215 schemes. schemes being looked at for
changing viability through
time.
2009 APP/ Oxford 30 dwellings Issues include EUV + 10% Appeal refused but nothing
D3125/ Street, plus health EUV and to do with viability issues.
A/09/ Woodstock. centre. developer's It would appear that the
2104658, profit. development is not able to
660, 663 produce more than 17% profit
on cost when the inspector
puts the best argued valuation
case together with a land
14 value of EUV plus 10%. As
all of these parameters are
well below most estimates of
reasonable profit and uplift
in EUV, the inspector didn’t
really have to get into any
arguments or decisions on
what is reasonable.
2009 APP/ Field House 19 dwellings Whether Residual Profit at 26% None Dismissed as inappropriate
R1010/ Farm, on a green development of GDV made development.
A/11/ Emmett belt site. is appropriate. up of 15% This case is included in the
2147912 Carr Lane, developers schedule as it has an example
Renishaw, return, 2% of a residual valuation.
South bank interest Appellant’s valuation
15 Yorkshire. and finance,
development
attached puts in a site value
of £735,000 and a profit
company and then gets to residual of
overhead at 7%, £705,000 which they attribute
marketing 2%. to the land costs. It is a bizarre
calculation which does not
get dissected.
2010 APP/ Southmead 65 sheltered Methodology Assessed based on perceived 17% GDV. Appeal allowed. The Council’s
P0119/ Rd & dwellings. for assessing market evidence of land argument that land value
A/07/ Gloucester commuted values. evidence reflected obligation
16 2110646 Rd, Filton. sum. for AH provision and so should
be inflated to allow 100%
market housing value was
rejected.
2010 APP/ Former Roche 207 unit The LPA policy Three Both parties used price paid The parties An escalator Appellant argued land value
C1950/ buildings, residential was a min of Dragons for the site. The Inspector disagreed on mechanism as purchase price to ensure
A/09/ Broadwater scheme with 30% AH and Toolkit repeated that the correct developer’s was delivery, and proposed
2113786 Road, Welwyn affordable 35% in the area approach was current value return (15% of proposed. escalator mechanism for
Garden City. housing. in which the site and not price paid, reiterating GDV assumed in commuted sum in lieu of AH/
Increases in
was located. that the developer carries the 3D Toolkit, 17% s106. Inspector rejected
GDV would
The LPA argued risk, not the local authority. GDV proposed by both- LPA should not carry
be shared
for 67 AH units appellant). the risk of value change over
between
(32%) including time. Inspector reiterated the
The appellants developer
43 social rented current land value is correct
held land value and LPA
and 19 shared approach.
(i.e. price paid for 60:40 with
ownership the site in this the LPA’s Appellant argued that sales
units. The case) constant share values, build costs, overheads,
appellants and the output paid as a finance rate and profit margin
17 submitted an
application
was profit level commuted must all remain confidential.
according to sum Appellant paid £9.5m for the
with 14 social different amounts capped at site in 2007 without PP but
rented units, a of AH. The £1,604,941 with known AH requirements.
s106 financial parties argued LPA also argued that purchase
contribution about internal price is the appropriate input
plus additional overheads for the appraisal and suggests
money via incurred since that a scheme is only unviable
an escalator site purchase, if the appraisal produced a
mechanism interest rate negative land value.
should GDV (7% assumed
increase by 8%. in 3D Toolkit but
9% proposed by
appellant) and
abnormal costs.
2010 APP/ Former Viability Methodology HCA 20%, of what is Appeal allowed. The council
N1215/ Royal Hotel, appraisal not made clear. argued that site-specific
A/09/ Newbury, tool. inputs should be used
2117195 Gillingham. in the appraisal but the
18 Inspector felt that this would
compromise commercial
confidentiality and so generic
inputs should be used.
2010 APP/ 1 Leeming Viability Market Profit level at Appeal dismissed.
G2713/ Lane, evidence & 15% based on
19 A/10/ Leeming Bar, profit levels. market evidence
2127485 Northallerton. accepted.
2010 APP/ Gun Wharf, 141 dwellings Appellant Three The benchmark land value 17% GDV on main Appeal dismissed. The
E5900/ 241 Old plus ancillary proposed Dragons is the point of contention development, inspector felt, under the
A/10/ Ford Road, space. 17% AH (by toolkit. between the parties. The 6% on affordable appellants’ approach, market
2127467 London. habitable appellant’s figure of £9.3m housing. movement was being used to
rooms). During is a deflated adjustment of determine the amount of AH
the appeal the £13m acquisition price, a and this was not acceptable.
20 this changed figure far higher than current The decision confirmed Clay
to a baseline EUV (£3m). When the EUV is Farm & Welwyn Garden City
21% AH up to a used in the Council’s appraisal, appeals approach and that
max 35% with the RLV is £6.3m and 35% AH purchase price was only to
a two-stage is viable. be considered as contextual
cascade information.
mechanism.
continued

continued

2011 Former Not an appeal. Argus Developers paid the equivalent
Victoria and Assessment used by of £23.6 million for the
Eli Lily Sites, for a college of developer residential component in 2007
Kingsclere technology and using assuming 35% AH. Developers
Road, 499 residential residual now estimate that if 25% grant
Basingstoke, units. and also aided AH and £1m other Sec
RG21 6XA. cash flow 106 payments, worth only
function. £18.34 million. Suggested
that the £23.6m was an
21 appropriate benchmark value
as the EUV on purchase. Used
residual to show that it was not
viable to give total amount of
AH. They use 10% of costs and
8.84% on value to show that
if the LPA would agree to
25%, the developer is taking
a hit as well.
2012 APP/ Abbey Residential Appeal against No information but assume Appellant argued Inspector refused to accept
R6830/ Nurseries, development original they used original purchase that existing that the 20% return on cost
Q/11/ Abbey Road, of 38 units – permission price but as profit the residual prices now only at the outset should be used
2163378 Rhuddlan, 10 houses, 8 which asked and the nature of the appeal, enabled them as a benchmark when the
LL18 5RJ. town houses for 1 of the it would have been original to make a profit development was well under
and 2, 10 unit apartment purchase price. of 13.1% if AH way as this one was. Similar to
apartments. units to be AH. provided against the cases that refuse to use
22 Now unviable to an original target price paid in that it transfers
provide the AH. of 20%. LPA risk to the LPA away from the
argued for higher developer.
apartment values
and that it still
gave 17.6%
on costs.
2012 APP/ Runnell Farm, Residential Appeal based Residual Development viability Return on costs Viability is not an issue yet –
J2373/ Chapel Road, development on delay in assessment had been carried and GDV at The appeal was allowed and
A/11/ Blackpool. of 83 LPA coming out. Appealed in 2014 under 20%/25%. permission granted including
23 2166756 dwellings. to a decision. grounds that viability had the provision for Sec 106
changed and valuations payments over £2 million.
produced to that agreed POs
were affordable at the time.
2012 2173598 St Edmund’s Three linked Trying to get Residual. RLV was the output, Appeal granted with no AH
Terrace, residential around the benchmarked against EUV. provision.
London. sites. sliding scale of Finding, as with Poplars The Residual Land Value is
AH by claiming Business Park, that the EUV compared with the benchmark.
the sites much higher than residual site To show a viable development,
separate. Some value. But not clear whether the residual land value needs
discussion of RSV was including or excluding to be above the site value.
AH and viability. policy based obligations.
24 Taking the appellant’s £14.25m
site value, or even a reduction
in this for the uncertainties
discussed in the case, but not
below the £11m figure of the
alternative use value, gives a
negative figure for POs, and by
a significant margin. Affordable
housing provision is not viable.
2012 APP/ Poplar 392 dwellings, Target was 35% LPA used All experts either assumed MV All experts Appeal granted at 20% AH and
E5900/A/ Business 8,000 sqft AH. Appellant the 3D as the benchmark land value assumed 20% SoS agreed.
2178920 Park. light industrial showed that toolkit. set against EUV or just EUV. GDV for MH, one
and 56,000 the scheme Appellant One expert stated that the assumed 10%,
sqft offices could only used comparables for MV must be another 6% and
plus ancillary support 15% ProDev. looked at carefully for the level the third one 7%
space. (by area) AH. Argus was of AH assumed. They then use for AH.
LPA showed also used that evidence to get to a site
that 25% by experts value for the Poplars BP
(measurement
25 unknown) was
of both that doesn’t justify policy
parties. statement levels of AH.
viable. LPA
refused 15%
offer, Appellant
subsequently
offered 28%
(by habitable
rooms) by
lowering their
profit margin.
continued

rics.org/research
continued

2012 APP/ The Manor, 126 dwellings. Amount of LPA expert The LPA estimated EUV/AUV Appellants None The Inspector adopted
X0360/ Shinfield, affordable used Argus to be £2,325,000 and the supported their appellants’ equal split of
A/12/ Reading. housing. LPA Developer. appellants calculated it to calculations from the uplift from EUV (no no
2179141 seeking 40% of be £2,425,000 based on the evidence of six hope value) to RLV (with no
the additional site’s EUV for storage with national house- POs) between landowner
new dwellings no hope value for residential builders, The and developer, representing
to be affordable development. LPA relied upon figures ranged an affordable housing
(in line with a valuation based upon a from a minimum contribution of 2% of the
policy) plus substantial office scheme of 17% to 28% dwellings. The Planning
£2,028,920 on the appeal site. This GDV, usually in the Inspector accepted that a
in developer was based upon the outline range 20-25%. 50% share of the uplift was
contributions. planning permission for offices an appropriate competitive
The appellants on the site in 2003 that was return for the landowner.
asserted that renewed in 2006 but which The AUV calculation was
a maximum has since lapsed. criticised - inspector was
of 2% was
26 viable plus
The appellant sought a TLV of
£4,750,000, which is roughly
concerned that this approach
failed to demonstrate that
£2,312,569
the mid-point between the EUV there is any market for such
in developer
and RLV assuming planning a substantial office
contributions.
permission for housing but no development on this site.
obligations. The LPA considered Inspector utilised appellant
that EUV of £1.865m would evidence on profit margin at
ensure a competitive return. around 20% GDV.
The LPAs estimate of RLV
(assuming policy compliant
POs, i.e 40% AH and £2,185,293
s106 contributions) was
£825,000. The appellant’s
estimate was £2,109,055 less
20% to £1,680,000 to reflect
the risk of purchasing a site
without planning consent.
2013 APP/ Water way, Development What level Inspector adopted an approach Appeared No Appeal allowed. The
C2741/ York. within Classes of affordable that took account of the to accept indication inspector comments on the
A/11/ B1c, C1, C2, housing existing use value which was Appellant’s 20% of any inappropriateness of using
216 C3 and D1 of provision, if assessed at around £1.3 return on costs. forecasting purchase price and the clear
2160459 Use Classes any, would be million and a residual site or sensitivity viability of the site. But it
6756 Order plus appropriate value including 25% AH at analysis. appears despite the finding
parking and were a new around £2.8/£2.9 million. that it is not the job of the
new access planning The inspector concludes planning system to protect
arrangements. permission that the viability assessment the landowner developer
27 to be granted shows that the site is perfectly against market changes, that
to replace capable of delivering 25% AH is precisely what the inspector
the planning and being viable. does in this case because it
permission becomes clear the appellant
granted on will not bring the land forward
appeal. unless he gets some of the
losses back from what appears
to be a straightforward poor
investment decision.
2013 APP/ Former 151 dwellings. AH target Appellant The benchmark land value was Appellant Sensitivity The Inspector suggested
W1145/ Holsworthy 40% promised was 40% but used comparable land sales in the suggested a analysis 18% developer’s return as a
Q/13/ Showground, in 2010; 20.5% parties agreed Argus. locality. developer’s carried out blend of 20% on MH and 6%
2204429 Trewyn Road, now sought the scheme return of 20% on GDV and on AH, which would mean
Holsworthy. under section wasn’t viable on market and building that appellant should build
106BC. at this level AH and the LPA costs. 36 affordable homes. He
now. Appellant 17.5%. also agreed to remove the
proposing requirement for some homes
The 20% GDV
28 20.5%.reducing assumed by
to be in shared ownership.
AH content from the appellant
60 to 31 homes equated to an
and other IRR of 43% (but
amendments. this dropped to
The LPA 26% in a revised
argued for 55 appraisal).
affordable
homes.
2014 2207402 Mast Pond 16 storey 100 AH provision – LPA sought 20 affordable
Wharf, unit proposal zero provision homes in the original
Woolwich. increased by sought under permission. Developer now
7% in 2012 section asking for the complete
to assist 106BC within removal of the affordable
29 affordable redevelopment housing element, which it said
provision. scheme of the would result in a profit margin
South East of ten per cent. The inspector
London Aquatic agreed and removed provision.
Centre site.
continued

continued

2014 2207560 279 Kings Mixed Adequate No idea The LPA assessment of the Appellant – Appeal dismissed. Developer
Road, London use retail contribution from the market value of the site was original DVA must abide by section 106
residential toward appeal based on other comparable adopted a 22.5% agreements. This was a pure
and cinema. affordable report. land transactions in the vicinity, profit on cost valuation dispute on residual
housing based and was clearly compared residential and valuation inputs.
on differences to a commercial investment 15% profit on
within 7 property EUV. cost commercial.
valuation This was updated
model inputs. in December 2013
to 20% on cost
residential and
15% commercial.
The final update
was to 20% on
30 speculative
commercial. LPA
provided evidence
of a cinema-led
scheme at 10%
on cost. LPA
suggested 15%
speculative
commercial,
reducing to 10%
for pre-lets. Both
parties must have
agreed residential
profit level.
2014 2207649 Moss House Viability; Appeal (also Residual Appellant uses land costs to LPA assumes No Inspector allowed the appeal.
Road, Marton erection of relevant to valuation show that residual profit levels 20% profit on forecasting It was agreed that changes
Moss, residential former decision have fallen from 6.66% on GDV GDV/25% on cost or sensitivity in the planning permission
Blackpool, development: Number 21) and 6.69% on costs to 4.7% appropriate. analysis have reduced the viability.
FY4 5JF 584 dwellings. – Application and 4.78% respectively, even Appellant uses in the The two parties agreed a profit
to change the if POs fall from £14,720,000 residual profits valuations. of 16.8% on GDV and inspector
agreed level to £5,441,781 million for Moss to show reduced confirmed that amount.
31 of off-site AH House Road. The land costs viability. Agreed AH content reduced to just
provision due appear to be related to price 16.8% on GDV over £5m.
to reduced paid while the LPA expert uses appropriate.
viability a full profit to determine a RLV
between 2012 of £7.85 million, assuming
permission the original level of planning
and present. obligations.
2014 2209347 King St, Affordable Whether or not Various “Base land value” in dispute. Appeal decision Some The inspector takes the
London housing. the proposed residual Appellant valued it at £12m is silent on profit inflation evidence of the appellant
development and using MV which was EUV with as the main area was allowed which suggests that the base
should include existing no hope value for development. of dispute is the in the land value is market value and
an element use The appellants had purchased market value residential subsequently decides that no
32 of AH. valuation the site for £11.05m in 2013 of the site by sale prices AH is appropriate.
models. and received two offers in 2014 comparison. used.
(£12m and £13.25m). LPA used
RLV assuming 40% AH at £3m.
LPA assessed MV at £7.64m.

rics.org/research
9.0 Acknowledgements
We would like to acknowledge the contribution of
the RICS Research Trust for the major part of the
funding for this project.
We would also like to thank the University of Reading’s
Research Opportunities Programme for providing the
additional funding to enable BSc Real Estate Second Year
student Kiyan Hui to spend two months over the summer
participating in the research full time, helping to plan the
research and collecting and collating evidence and, since
then, being involved in other aspects of the research
helping to bring the project to its conclusion.

Confidence through professional standards
RICS promotes and enforces the highest professional We believe that standards underpin effective markets. With
qualifications and standards in the development and up to seventy per cent of the world’s wealth bound up in land
management of land, real estate, construction and and real estate, our sector is vital to economic development,
infrastructure. Our name promises the consistent helping to support stable, sustainable investment and growth
delivery of standards – bringing confidence to the around the globe.
markets we serve. With offices covering the major political and financial centres
We accredit 118,000 professionals and any individual or firm of the world, our market presence means we are ideally placed
registered with RICS is subject to our quality assurance. Their to influence policy and embed professional standards. We
expertise covers property, asset valuation and real estate work at a cross-governmental level, delivering international
management; the costing and leadership of construction standards that will support a safe and vibrant marketplace
projects; the development of infrastructure; and the in land, real estate, construction and infrastructure, for the
management of natural resources, such as mining, farms and benefit of all.
woodland. From environmental assessments and building We are proud of our reputation and we guard it fiercely, so
controls to negotiating land rights in an emerging economy; clients who work with an RICS professional can have confidence
if our members are involved the same professional standards in the quality and ethics of the services they receive.
and ethics apply.
United Kingdom RICS HQ Ireland Europe Middle East

Parliament Square, London 38 Merrion Square, Dublin 2, (excluding UK and Ireland) Office G14, Block 3,
SW1P 3AD United Kingdom Ireland Rue Ducale 67, Knowledge Village,
t +44 (0)24 7686 8555 t +353 1 644 5500 1000 Brussels, Dubai, United Arab Emirates
f +44 (0)20 7334 3811 f +353 1 661 1797 Belgium t +971 4 446 2808
contactrics@rics.org ricsireland@rics.org t +32 2 733 10 19 f +971 4 427 2498
Media enquiries f +32 2 742 97 48 ricsmenea@rics.org
pressoffice@rics.org ricseurope@rics.org
Africa Americas South America Oceania

PO Box 3400, One Grand Central Place, Rua Maranhão, 584 – cj 104, Suite 1, Level 9,
Witkoppen 2068, 60 East 42nd Street, Suite 2810, São Paulo – SP, Brasil 1 Castlereagh Street,
South Africa New York 10165 – 2811, USA t +55 11 2925 0068 Sydney NSW 2000. Australia
t +27 11 467 2857 t +1 212 847 7400 ricsbrasil@rics.org t +61 2 9216 2333
f +27 86 514 0655 f +1 212 847 7401 f +61 2 9232 5591
ricsafrica@rics.org ricsamericas@rics.org info@rics.org
North Asia ASEAN Japan South Asia

3707 Hopewell Centre, 10 Anson Road, Level 14 Hibiya Central Building, 48 & 49 Centrum Plaza,
183 Queen’s Road East #06-22 International Plaza, 1-2-9 Nishi Shimbashi Minato-Ku, Sector Road, Sector 53,
Wanchai, Hong Kong Singapore 079903 Tokyo 105-0003, Japan Gurgaon – 122002, India
t +852 2537 7117 t +65 6635 4242 t +81 3 5532 8813 t +91 124 459 5400
f +852 2537 2756 f +65 6635 4244 f +81 3 5532 8814 f +91 124 459 5402
ricsasia@rics.org ricssingapore@rics.org ricsjapan@rics.org ricsindia@rics.org
GLOBAL/APRIL 2015/DML/20412/RESEARCH rics.org

Financial Viability Appraisal in Planning Decisions: Theory and Practice

Uploaded by

Copyright:

Available Formats

Financial Viability Appraisal in Planning Decisions: Theory and Practice

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Viability Appraisal in Planning Decisions: Theory and Practice

Uploaded by

Copyright:

Available Formats

What is the purpose of the report?

What is the purpose of the report?

What topics does the report cover?

What topics does the report cover?

Research

Report for Royal Institution

Report written by:

RICS Research team

Published by the Royal Institution of Chartered Surveyors (RICS)

© RICS Research 2015 3

4 © RICS Research 2015

© RICS Research 2015 5

6 © RICS Research 2015

© RICS Research 2015 7

2.2 Viability in site-specific

8 © RICS Research 2015

2.2.1 Estimation of scheme-specific 2.2.2 Handling of development finance

© RICS Research 2015 9

10 © RICS Research 2015

© RICS Research 2015 11

This estimate is the product of a market valuation carried

12 © RICS Research 2015

3.0 Viability appraisals for site-specific

© RICS Research 2015 13

14 © RICS Research 2015

© RICS Research 2015 15

This is not straightforward as paragraph 3.4.6 concedes,

16 © RICS Research 2015

4.0 Viability appraisals in planning appeals

© RICS Research 2015 17

18 © RICS Research 2015

4.5 Landowner’s return Figure 1 Components of development value

© RICS Research 2015 19

20 © RICS Research 2015

Alternative Use value (AUV) is also relevant in development

© RICS Research 2015 21

22 © RICS Research 2015

Figure 3 RLVs for residential, commercial and industrial land uses

Industrial RLV (no CIL) assuming 75% site cover (£/ha)

Office RLV (no CIL) assuming 75% site cover (£/ha)

Figure 4 Components of land value II

Residual land value of site assuming it has planning permission for

Existing land value

© RICS Research 2015 23

24 © RICS Research 2015

© RICS Research 2015 25

26 © RICS Research 2015

Christophers, B. (2014) …Wild Dragons in the City: Urban Political

Brown, G. and Matysiak, G. (2000) Real Estate Investment : A Capital

Coleman, C., Crosby, N., McAllister, P. and Wyatt, P. (2012) Development

DCLG (2008) Planning Policy Statement 12 Local Spatial Planning.

DCLG (2011) Planning Policy Statement 3 Housing. Department for

DCLG (2012) National Planning Policy Framework. Department for

DCLG (2013) Section 106 affordable housing requirements: review and

DETR (1998) Affordable Housing Circular 6/98. Department of Environment,

HCA (2009) Investment and planning obligations: responding to the

Highbury Group on Housing Delivery (2012). Viability in Planning –

IVSC (2013). International Valuation Standards 2013. International Valuation

IVSC (2014). Valuation Uncertainty. Technical Information Paper No 4.